Federal Register, Volume 78 Issue 75 (Thursday, April 18, 2013)

[Federal Register Volume 78, Number 75 (Thursday, April 18, 2013)]
[Notices]
[Pages 23321-23323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-09065]

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SECURITIES AND EXCHANGE COMMISSION

Release No. 34-69365; File No. SR-ISE-2013-14]

Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Granting Approval of a Proposed Rule Change To List Options
on the Dow Jones FXCM Dollar Index

April 11, 2013.

I. Introduction

On February 13, 2013, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission (the ``Commission''), pursuant to Section 19(b)(1)
of the Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend certain of its rules to
provide for the listing of options on the Dow Jones FXCM Dollar Index.
The proposed rule change was published for comment in the Federal
Register on February 28, 2013.\3\ The Commission received no comment
letters on the proposed rule change. This order approves the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 68971 (February 22,
2013), 78 FR 13717 (``Notice'').
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II. Description

The Exchange proposes to amend its rules to provide for the listing
and trading on the Exchange of options on one foreign currency index--
the Dow Jones FXCM Dollar Index (the ``Dollar Index''). Options on the
Dollar Index will be settled in the same manner as the Exchange's
foreign currency options (``FX Options'') \4\ and will have European-
style exercise provisions. In addition to regular options, the Exchange
proposes also to list long-term options on the Dollar Index.
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\4\ The Commission previously approved the listing of FX Options
on nineteen underlying foreign currencies. See Securities Exchange
Act Release No. 55575 (April 3, 2007), 72 FR 17963 (April 10, 2007)
(SR-ISE-2006-59).
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Index Design and Composition

The Dollar Index is calculated and maintained by Dow Jones Indexes,
a unit of CME Group. The components that comprise the Dollar Index
include a subset of the modified exchange rates \5\ previously approved
by the Commission as the basis for FX Options. Specifically, the Dollar
Index is based on four currency pairs that reflect U.S. dollar
fluctuations against the following currencies: euro, British pound,
Japanese yen, and Australian dollar.
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\5\ The term ``modified exchange rate'' means the price, for the
sale of one foreign currency for another, quoted by various
interbank foreign exchange participants, for immediate delivery
(which generally means delivery two business days following the date
on which the terms of such a sale are agreed upon), as reflected in
the foreign currency price quotations reported by the foreign
currency price quotation dissemination vendor selected by the
Exchange, which is then modified by the Exchange with a modifier of
1, 10 or 100. See ISE Rule 2201(8).
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Spot currency quotes are derived from Thomson Reuters, the same
source that the Exchange currently uses for the underlying values of
its existing FX Options. Each input value is based on the mid-point
between the bid and ask quotes. The Dollar Index has a base date of
January 1, 2011, using closing prices as of December 31, 2010. The base
value of the Dollar Index is 10,000. Spot quotes for each currency pair
on the base date are as follows:

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------------------------------------------------------------------------
EUR/USD................................................... 1.3370
GBP/USD................................................... 1.5601
USD/JPY................................................... 81.21
AUD/USD................................................... 1.0218
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On its base date, the Dollar Index was set to be equally-weighted
such that each constituent currency pair has equal influence on the
overall index value. This method is similar to equally-weighted stock
indexes that calculate the number of shares needed in order for each
stock constituent to have an equal position. The Dollar Index is
designed to reflect spot positions in each currency with the weighting
of each currency set as equal at inception and rebalancing events.
Rebalancing events are not scheduled. The Dollar Index would be
rebalanced if, for example, the value of any position were to fall
below $1,000 (i.e., loses 90 percent of its original $10,000 position
value), or in response to extraordinary events affecting the global
currency market.\6\ At that point, each currency is again set to an
equal position. The Exchange has represented that the total number of
components in the Dollar Index will not decrease from the number of
components in the Dollar Index at the time of its initial listing.\7\
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\6\ See http://www.djindexes.com/mdsidx/downloads/fact_info/Dow_Jones_FXCM_Dollar_Index_Fact_Sheet.pdf.
\7\ See Notice, supra note 3, 78 FR at 13718.
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Index Calculation and Maintenance

As noted above, the Dollar Index will be maintained and calculated
by Dow Jones. The level of the Dollar Index will reflect the current
exchange rates of the four underlying currency pairs. The Dollar Index
will be updated on a real-time basis beginning at 6:15 p.m. each day
and ending at 5:00 p.m. (New York time) the following day from Sunday
through Friday. If the value of a component's exchange rate is not
available, the last known exchange rate will be used in the
calculation.
The Exchange represents that values of the Dollar Index will be
disseminated every 15 seconds during the Exchange's regular trading
hours to market information vendors such as Bloomberg and Thomson
Reuters.\8\ In the event the Dollar Index ceases to be maintained or
calculated, or its values are not disseminated every 15 seconds by a
widely available source, the Exchange would not list any additional
series for trading and would limit all transactions in such options to
closing transactions only for the purpose of maintaining a fair and
orderly market and protecting investors.\9\
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\8\ See id.
\9\ See id.
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As part of this proposal, the Exchange also is making a clarifying
change to ISE Rule 2003(b) by replacing the word ``stocks'' with
``components'' because index options listed by the Exchange are no
longer limited to having stocks as their underlying components; with
this proposed rule change, the Exchange also will list options on
indexes that have currencies as their underlying components.

Exercise and Settlement Value

Options on the Dollar Index will expire on the Saturday following
the third Friday of the expiration month. Trading in expiring options
on the Dollar Index will normally cease at

[[Page 23322]]

12:00 p.m. (New York time) on the Friday preceding an expiration
Saturday. The exercise and settlement value will be calculated using
the WM Intra-day Spot rate corresponding to 12:00 p.m. New York time.
The exercise-settlement amount is equal to the difference between the
settlement value and the exercise price of the option, multiplied by
$1. Exercise will result in the delivery of cash on the business day
following expiration.

Contract Specifications

The Dollar Index is a foreign currency index, as defined in
proposed Rule 2001(h). Options on the Dollar Index are European-style
and cash-settled.\10\ The Exchange's standard trading hours for FX
Options (7:30 a.m. to 4:15 p.m., New York time) will also apply to the
Dollar Index. The Exchange proposes to apply margin requirements for
the purchase and sale of options on the Dollar Index that are identical
to those applied for individual FX Options. Accordingly, per proposed
ISE Rule 1202(e), the margin level required for trading options on the
Dollar Index will be identical to the highest margin required for a
component foreign currency as determined in accordance with ISE Rule
1202(d).
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\10\ The Exchange will calculate a settlement value for the
Dollar Index using the settlement values for the individual
component currencies. The settlement value for each individual
component currency is determined using the WM Intra-day Spot rate.
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The trading of options on the Dollar Index will be subject to the
trading halt procedures applicable to index options traded on the
Exchange.\11\ Options on the Dollar Index will be quoted and traded in
U.S. dollars.\12\ Accordingly, all Exchange and Options Clearing
Corporation members will be able to accommodate trading, clearance, and
settlement of the Dollar Index.
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\11\ See ISE Rule 2008(c).
\12\ See ISE Rule 2009(a)(1).
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The Exchange proposes to list options on the Dollar Index that may
expire at three-month intervals or in consecutive months. The Exchange
also may list up to six expiration months at any one time. The Exchange
proposes to set strike price intervals for options on the Dollar Index
at minimum intervals of 2\1/2\ points, if the strike price is less than
two hundred dollars ($200), in accordance with ISE Rule 2009(c)(1).
Further, when new series of options on the Dollar Index with a new
expiration date are opened for trading, or when additional series of
options on the Dollar Index in an existing expiration date are opened
for trading, as the current value of the Dollar Index moves
substantially from the exercise prices of series already opened, the
exercise prices of such new or additional series will be reasonably
related to the current value of the underlying index at the time such
series are first opened for trading.\13\
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\13\ See ISE Rule 2009(c)(3). The term ``reasonably related to
the current index value of the underlying index'' means that the
exercise price is within thirty percent (30%) of the current index
value, as defined in ISE Rule 2009(c)(4).
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The Exchange may open for trading additional series of the same
class of options on the Dollar Index as the current value of the
underlying index moves substantially from the exercise price of those
options on the Dollar Index that already have been opened for trading
on the Exchange. The Exchange also may open for trading additional
series of options on the Dollar Index that are more than thirty percent
(30%) away from the current index value, provided that demonstrated
customer interest exists for such series, as expressed by
institutional, corporate, or individual customers or their brokers. The
Exchange will not consider Market makers trading for their own account
when determining customer interest under this provision.\14\
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\14\ See ISE Rule 2009(c)(4).
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The Exchange proposes to adopt the minimum tick size of $0.01 for
options on the Dollar Index. Accordingly, the Exchange proposes to
amend Supplementary Material .02 to ISE Rule 710 to permit options on
the Dollar Index to be quoted and traded in one-cent increments. The
Exchange believes that this trading increment will result in narrower
spreads for options on the Dollar Index than if traditional trading
increments are used because options on the individual foreign currency
pairs that make up the Dollar Index are quoted in $0.01 increments.\15\
The Exchange further believes that permitting the Dollar Index to be
quoted and traded in one-cent increments will promote the adoption of
trading FX-linked products on a listed and regulated market.\16\
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\15\ See Notice, supra note 3, 78 FR at 13719. See also
Securities Exchange Act Release No. 57019 (December 20, 2007), 72 FR
73937 (December 28, 2007) (SR-ISE-2007-120).
\16\ See Notice, supra note 3, 78 FR at 13719.
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For options on the Dollar Index, the Exchange proposes to establish
aggregate position limits at 600,000 contracts on the same side of the
market, provided no more than 300,000 of such contracts are in the
nearest expiration month series. The Exchange notes that the proposed
positions limits for the Dollar Index are equal to or lower than the
position limits for individual FX options on the four currency pairs
comprising the Dollar Index.\17\ The same limits that apply to position
limits will apply equally to exercise limits for options on the Dollar
Index.\18\
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\17\ See id. See also ISE Rule 2208.
\18\ See ISE Rule 2007.
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The Exchange proposes to list options on the Dollar Index 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.\19\
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\19\ See Rule 2009(a)(3).
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The trading of options on the Dollar Index will be subject to the
same rules that presently govern the trading of Exchange index options,
including sales practice rules, margin requirements, trading rules, and
position and exercise limits. In addition, long-term option series
having up to sixty months to expiration may be traded.\20\ The trading
of long-term options on the Dollar Index will be subject to the same
rules that govern the trading of all the Exchange's index options,
including sales practice rules, margin requirements, and trading rules.
Further, pursuant to Supplementary Material .01 and .02 to ISE Rule
2009, the Exchange also may list Short Term Option Series and Quarterly
Options Series, respectively, on the Dollar Index. Chapter 6 of the
Exchange's rules (Doing Business with the Public) applies to trading in
options on the Dollar Index.\21\ Finally, a trading license issued by
the Exchange will be required for all market makers to effect
transactions as a market maker in the

[[Page 23323]]

Dollar Index in accordance with ISE Rule 2013.
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\20\ See Rule 2009(b)(1).
\21\ Specifically, ISE Rules 608(a) and (b) prohibit Members
from accepting a customer order to purchase or write an option,
including options on the Dollar Index, unless such customer's
account has been approved in writing by a designated Options
Principal of the Member. Additionally, ISE's Rule 610 regarding
suitability is designed to ensure that options, including options on
the Dollar Index, are only sold to customers capable of evaluating
and bearing the risks associated with trading in this instrument.
Further, ISE Rule 611 permits members to exercise discretionary
power with respect to trading options, including options on the
Dollar Index, in a customer's account only if the Member has
received prior written authorization from the customer and the
account had been accepted in writing by a designated Options
Principal. ISE Rule 611 also requires designated Options Principals
or Representatives of a Member to approve and initial each
discretionary order, including discretionary orders for options on
the Dollar Index, on the day the discretionary order is entered.
Finally, ISE Rule 609, Supervision of Accounts, Rule 612,
Confirmation to Customers, and Rule 616, Delivery of Current Options
Disclosure Documents and Prospectus, will also apply to trading in
options on the Dollar Index.
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Surveillance and Capacity

The Exchange represents that it has an adequate surveillance
program in place for options traded on the Dollar Index, and intends to
apply those same program procedures that it applies to the Exchange's
other options products.\22\ Further, options on the Dollar Index will
be covered by the Exchange's existing surveillance system architecture
and processes. Additionally, the Exchange will have access to
information sharing resources in its capacity as a member of the
Intermarket Surveillance Group. The Exchange represents that it has the
necessary system capacity to support additional quotations and messages
that will result from the listing and trading of options on the Dollar
Index.\23\
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\22\ See Notice, supra note 3, 78 FR at 13720.
\23\ See id.
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III. Discussion and Commission Findings

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.\24\
Specifically, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\25\ which requires, among
other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system and, in general, to protect investors and the public
interest.
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\24\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation.
\25\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the listing and trading of options on
the Dollar Index will provide additional trading opportunities for
investors in an index that reflects U.S. Dollar fluctuations against a
basket of four highly liquid currencies (the euro, British pound,
Japanese yen, and the Australian dollar). Investors will be able to
trade this product through their existing broker-dealer on the Exchange
and will be able to benefit from any investor safeguards incorporated
into the Exchange's rules.
In addition, the Commission believes that allowing options on the
Dollar Index to trade in penny ($0.01) increments is appropriate and
consistent with the Act.\26\ First, the spot currencies on which the
Dollar Index is based are quoted in small increments, often less than a
penny. Furthermore, there is a considerable amount of liquidity in the
spot foreign currency markets for the individual currency pairs, and
those markets generally exhibit low volatility both for the individual
currency pairs as well as the Dollar Index. These factors support
allowing options on the Dollar Index to be quoted and traded in penny
increments. Quoting in penny increments may allow market makers to
quote more competitively and with narrower spreads than they otherwise
might be able to do with an artificially larger minimum increment,
which could benefit investors.
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\26\ Though options on the Dollar Index fall under the
Exchange's index options rules and not its FX Options rules, the
Commission notes that options on the Exchange's FX Options are
quoted in penny increments on the Exchange.
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The Exchange has represented that it has an adequate surveillance
program in place for options on the Dollar Index and intends to apply
the same procedures for surveillance that it applies to its other index
options.\27\ The options also will be subject to the trading halt
procedures applicable to index options traded on the Exchange.\28\ The
Commission notes the Exchange's representations that it has the
necessary systems capacity to support the trading of options on the
Dollar Index.\29\
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\27\ See supra note 22.
\28\ See supra note 11.
\29\ See supra note 23.
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The proposed listing standards require the current value of the
Dollar Index to be widely disseminated at least once every 15 seconds
by one or more major market data vendors during the time options on the
index are traded on the Exchange. The Exchange, moreover, has
represented that the total number of components in the Dollar Index
will not decrease from the number of components in the Dollar Index at
the time of its initial listing.\30\
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\30\ See supra note 7.
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The Commission notes that the Exchange proposes to apply its
existing index rules regarding the listing of new series and additional
series to options on the Dollar Index. Specifically, exercise prices
will be required to be reasonably related to the value of the
underlying index and generally must be within 30% of the current index
value.\31\
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\31\ See ISE Rule 2009(c)(3) and (4).
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In addition, the Exchange has stated that options on the Dollar
Index would be subject to the same rules that govern all Exchange index
options, including rules that are designed to protect public customer
trading.\32\
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\32\ See supra note 21.
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The Commission believes that the Exchange's proposed position and
exercise limits, strike price intervals, margin, and other aspects of
the proposed rule change are appropriate and consistent with the Act.
The Commission notes that the proposed position limits for the Dollar
Index are equal to or lower than the position limits for individual
foreign currency options on the four currency pairs comprising the
Dollar Index.\33\ In addition, the margin level required for trading
options on the Dollar Index is identical to the highest margin required
for a component foreign currency as determined in accordance with ISE
Rule 1202(d).\34\
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\33\ See supra note 17. The same limits that apply to positions
limits apply equally to
exercise limits for options on the Dollar Index. See supra note
18.
\34\ See ISE Rule 1202(e).
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IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\35\ that the proposed rule change (SR-ISE-2013-14), be, and hereby
is, approved.
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\35\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-09065 Filed 4-17-13; 8:45 am]
BILLING CODE 8011-01-P