[Federal Register Volume 78, Number 242 (Tuesday, December 17, 2013)]
[Notices]
[Pages 76363-76366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-29890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71034; File No. SR-ISE-2013-69]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change to the Short Term Option Series Program

December 11, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on December 6, 2013, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``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 prepared by 
the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Supplementary Material .02 to Rule 
504 to expand the Short Term Options Program with respect to non-index 
options. The text of the proposed rule change is available on the 
Exchange's Internet Web site at http://www.ise.com, at the principal 
office of the Exchange, 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 self-regulatory organization 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 Exchange is proposing to amend Supplementary Material .02 to 
Rule 504 consistent with a recently approved filing by NASDAQ OMX PHLX, 
LLC (``PHLX'').\3\ In particular, the Exchange proposes to expand the 
Short Term Options (``STO'') Program for non-index options so that the 
Exchange may: change the current thirty option class limitation to 
fifty option classes on which STOs may be opened; match the parameters 
for opening initial and additional STO strikes to what is permissible 
per the Options Listing Procedures Plan (``OLPP''); \4\ open up to

[[Page 76364]]

thirty initial STO series for each expiration date in an STO class; add 
an STO strike price interval of $2.50 or greater where the strike price 
is above $150; and in general harmonize the different parts of the 
Program (e.g., initial listings and additional series).
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    \3\ See Securities Exchange Act Release No. 70682 (October 15, 
2012), 78 FR 62809 (October 22, 2013) (SR-PHLX-2013-101) (notice of 
filing; approval citation pending publication by the Commission).
    \4\ The full name of the OLPP (which is applicable to all option 
exchanges) is Plan For The Purpose of Developing and Implementing 
Procedures Designed to Facilitate the Listing and Trading of 
Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of 
the Securities Exchange Act of 1934. With regard to the listing of 
new series on equity, ETF, or trust issued receipt (``TIRs'') option 
classes, subsection 3.(g)(i) of the OLPP states, in relevant part, 
that the exercise price of each option series listed by an exchange 
that chooses to list a series of options (known as the Series 
Selecting Exchange) shall be fixed at a price per share which is 
reasonably close to the price of the underlying equity security, 
ETF, or TIR at or about the time the Series Selecting Exchange 
determines to list such series. Except as provided in subparagraphs 
(ii) through (iv) of the OLPP, if the price of the underlying 
security is less than or equal to $20, the Series Selecting Exchange 
shall not list new option series with an exercise price more than 
100% above or below the price of the underlying security. If the 
price of the underlying security is greater than $20, the Series 
Selecting Exchange shall not list new option series with an exercise 
price more than 50% above or below the price of the underlying 
security.
    Subsection 3.(g)(i) of the OLPP indicates that an option series 
price has to be reasonably close to the price of the underlying 
security and must not exceed a maximum of 50% or 100%, depending on 
the price, from the underlying. The Exchange's proposal related to 
non-index options, while conforming to the current structure of the 
Exchange's STO rules, is similar in practical effect to the noted 
OLPP subsection.
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    The STO Program, which was initiated in 2010,\5\ is codified in 
Supplementary Material .02 to Rule 504 for non-index options including 
equity, currency, and exchange traded fund (``ETF'') options.\6\ These 
rules currently provide that after an option class has been approved 
for listing and trading on the Exchange, the Exchange may open for 
trading on any Thursday or Friday that is a business day series of 
options on no more than thirty option classes that expire on each of 
the next five consecutive Fridays that are business days.\7\ In 
addition to the thirty-option class limitation, there is also a 
limitation that no more than twenty initial series for each expiration 
date in those classes may be opened for trading; provided, however, 
that the Exchange may open up to 10 additional series 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 exercise price or prices of the series already 
opened.\8\
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    \5\ See Securities Exchange Act Release No. 62444 (July 2, 
2010), 75 FR 39595 (July 9, 2010) (SR-ISE-2010-72) (notice of filing 
and immediate effectiveness of proposed rule change to permanently 
establish the STO Program on the Exchange).
    \6\ The Exchange does not by this filing propose any changes to 
Supplementary Material .01 to Rule 2009 related to the STO Program 
for index options.
    \7\ The Exchange increased the number of option issues that 
could be opened pursuant to the STO Program in 2012. See Securities 
Exchange Act Release No. 66432 (February 21, 2012), 77 FR 11614 
(February 27, 2012) (SR-ISE-2012-08).
    \8\ See Supplementary Material .02(c) and (d) to Rule 504.
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    Furthermore, the strike price of each STO has to be fixed with 
approximately the same number of strike prices being opened above and 
below the value of the underlying security at about the time that the 
STOs are initially opened for trading on the Exchange, and with strike 
prices being within thirty percent (30%) above or below the closing 
price of the underlying security from the preceding day. In terms of 
the strike price intervals, the STO Program currently allows the 
interval between strike prices on STOs to be (i) $0.50 or greater where 
the strike price is less than $75, and $1 or greater where the strike 
price is between $75 and $150 for all classes that participate in the 
STO Program; or (ii) $0.50 for option classes that trade in one dollar 
increments, i.e., in the Related non-STO,\9\ and are in the STO 
Program. This proposal retains many of the fundamental limitations of 
the STO Program while proposing specific changes as described below.
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    \9\ Related non-STOs are non-STOs that have similar options with 
longer expiration cycles (e.g., monthly Apple (AAPL) options would 
be Related non-STOs to weekly AAPL options).
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The Proposal
    First, the Exchange proposes to increase the number of STO classes 
that may be opened after an option class has been approved for listing 
and trading on the Exchange. Specifically, the Exchange proposes in 
Supplementary Material .02(a) to Rule 504 that the Exchange may select 
up to fifty currently listed option classes on which STO series may be 
opened. The Exchange also proposes in Supplementary Material .02(c) to 
Rule 504 that for each option class eligible for participation in the 
STO Program, the Exchange may open up to thirty initial STO series for 
each expiration date in that class. Currently ISE rules permit the 
Exchange to list up to twenty initial series, and up to ten additional 
series, for each option class that participates in the STO program.\10\ 
While the ISE may currently list thirty STO series total, the Exchange 
is proposing to increase the number of initial series that it may list 
in order to remain competitive with other exchanges. The Exchange will 
continue to be limited to a total of thirty STO series, including both 
initial and additional series, and is proposing amendments to 
Supplementary Material .02(d) to Rule 504 to reflect the fact that the 
Exchange may only open additional series if it has opened fewer than 
thirty initial series. The Exchange believes that this proposed 
moderate increase in the number of STO classes and initial STO series 
is needed and advisable in light of the demonstrated acceptance and 
popularity of the STO Program among market participants, as discussed 
below.
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    \10\ See Supplementary Material .02(c) and (d) to Rule 504.
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    Second, the Exchange proposes changes to Supplementary Material 
.02(c) and (d) to Rule 504 to indicate that any initial or additional 
strike prices listed by the Exchange shall be reasonably close to the 
price of the underlying equity security and within the following 
parameters: (i) If the price of the underlying security is less than or 
equal to $20, strike prices shall be not more than one hundred percent 
(100%) above or below the price of the underlying security; and (ii) if 
the price of the underlying security is greater than $20, strike prices 
shall be not more than fifty percent (50%) above or below the price of 
the underlying security.\11\ This proposal is in line with the process 
for adding new series of options found in subsection 3.(g)(i) of the 
OLPP, and harmonizes the STO Program internally by adopting consistent 
parameters for opening STOs and listing additional strike prices. The 
Exchange believes that this proposal is a reasonable and desirable 
enhancement to the STO Program.
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    \11\ The price of the underlying security will be calculated 
commensurate with Rule 504A(b)(i) as amended.
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    Third, the Exchange proposes additional changes to Supplementary 
Material .02(d) to indicate that if the Exchange has opened less than 
thirty STO series for an STO expiration date, the Exchange may also 
open additional strike prices of STO series that are more than 50% 
above or below the current price of the underlying security if the 
price is greater than $20, provided that demonstrated customer interest 
exists for such series,\12\ as expressed by institutional, corporate or 
individual customers or their brokers. This is done to further conform 
the additional strike price methodology to the proposed listing 
parameters described above, while retaining demonstrated interest 
language that may be useful in unforeseen circumstances. Furthermore, 
Rule 504A(b)(i) currently states that if the price of the underlying 
security is greater than $20, the Exchange shall not list new option 
series with an exercise price more than 50% above or below the price of 
the underlying security. Immediately before this language, the Exchange 
proposes to also add a carve-out that states: ``Except as provided in 
Supplementary Material .02(d) to Rule 504 . . .''
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    \12\ Market Makers trading for their own account are not 
considered when determining customer interest.
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    Fourth, the Exchange proposes to simplify the delisting language in 
Supplementary Material .02(d) to Rule 504, by removing the current 
range methodology that states, in part, that the Exchange will delist 
certain series ``so as to list series that are at least 10% but not 
more than 30% above or below the current price of the underlying 
security.'' \13\ In the event that the

[[Page 76365]]

underlying security has moved such that there are no series that are at 
least 10% above or below the current price of the underlying security, 
the Exchange will continue to delist any series with no open interest 
in both the call and the put series having a: (i) Strike higher than 
the highest price with open interest in the put and/or call series for 
a given expiration week; and (ii) strike lower than the lowest strike 
price with open interest in the put and/or the call series for a given 
expiration week.\14\ New series added after delisting will not be 
constrained by the prior range methodology. The Exchange believes that, 
like its other proposals, the delisting proposal will add clarity and 
certainty to the STO process on the Exchange.
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    \13\ Currently, the delisting language states: ``In the event 
that the underlying security has moved such that there are no series 
that are at least 10% above or below the current price of the 
underlying security, the Exchange will delist any series with no 
open interest in both the call and the put series having a: (i) 
Strike higher than the highest strike price with open interest in 
the put and/or call series for a given expiration month; and (ii) 
strike lower than the lowest strike price with open interest in the 
put and/or the call series for a given expiration month, so as to 
list series that are at least 10% but not more than 30% above or 
below the current price of the underlying security. In the event 
that the underlying security has moved such that there are no series 
that are at least 10% above or below the current price of the 
underlying security and all existing series have open interest, the 
Exchange may list additional series, in excess of the 30 allowed 
under this Supplementary Material .02, that are between 10% and 30% 
above or below the price of the underlying security.'' Supplementary 
Material .02(d) to Rule 504. See Securities Exchange Act Release No. 
68318 (November 29, 2012), 77 FR 72426 (December 5, 2012) (SR-ISE-
2012-90) (notice of filing and immediate effectiveness of proposed 
rule change to delist series and open up to five consecutive weekly 
expirations of STOs).
    \14\ The Exchange notes that the delisting language in 
Supplementary Material .02(d) to Rule 504 incorrectly refers to 
expiration months rather than weeks. With this filing the Exchange 
also proposes to clarify that the exchange will delist series for 
given expiration weeks in accordance with the criteria discussed in 
this rule.
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    Fifth, the Exchange proposes to add $2.50 strike price intervals to 
the STO Program. Specifically, the Exchange proposes in Supplementary 
Material .12 to Rule 504 to indicate that the interval between strike 
prices on STOs may be $2.50 or greater where the strike price is above 
$150. This proposed change complements the current STO strike price 
intervals of $0.50 or greater where the strike price is less than $75 
(or for STO classes that trade in one dollar increments in the Related 
non-STO), and $1 or greater where the strike price is between $75 and 
$150. The proposed $2.50 strike price interval addresses the issue that 
above a $150 strike price STO strike price intervals must generally be 
an exceedingly wide $5 or greater.\15\
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    \15\ See, e.g., Rule 504(d).
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    The principal reason for the proposed expansion is market demand 
for additional STO classes and series and a desire to make the STO 
Program more effective. There is continuing strong customer demand for 
having the ability to execute hedging and trading strategies via STOs, 
particularly in the current fast and volatile multi-faceted trading and 
investing environment that extends across numerous markets and 
platforms,\16\ and includes market moving events such as significant 
market volatility, corporate events, or large market, sector, or 
individual issue price swings. The Exchange has been requested by 
traders and other market participants to expand the STO Program to 
allow additional STO offerings and increased efficiency.
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    \16\ These include, without limitation, options, equities, 
futures, derivatives, indexes, ETFs, exchange traded notes, 
currencies, and over the counter instruments.
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    In order that the Exchange not exceed the current thirty option 
class and twenty initial option series restriction, the Exchange has on 
occasion had to turn away STO customers (traders and investors) because 
it could not list, or had to delist, STOs or could not open adequate 
STO series because of restrictions in the STO Program. This has 
negatively impacted investors and traders, particularly retail 
investors, who have continued to request that the Exchange add, or not 
remove, STO classes, or have requested that the Exchange expand the STO 
Program so that additional STO classes and series could be opened that 
would allow the market participants to execute trading and hedging 
strategies. There are, as discussed, substantial benefits to market 
participants having the ability to trade eligible option classes within 
the STO Program. Furthermore, the Exchange supports the objective of 
responding to customer need to enhance successful programs to make them 
more efficient for hedging and trading purposes. The Exchange notes 
that the STO Program has been well-received by market participants, in 
particular by retail investors. The Exchange believes that weekly 
expiration options will continue to grow in importance for all market 
participants, including institutional and retail investors.\17\ The 
proposed revisions to the STO Program will permit the Exchange to meet 
customer demand for weekly expiration options by providing a reasonable 
expansion to the program, and will further allow the Exchange to 
harmonize STO Program rules with the OLPP as well as internally.
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    \17\ The current STO Program, which is similar across all 
options markets that have weeklies programs, is in its current 
formulation one of the more challenging industry-wide listings 
program to administer. Recognizing the importance of the Program, 
the Exchange is seeking to improve the Program for non-index STOs by 
making it more uniform and logical.
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    With regard to the impact of this proposal on system capacity, the 
Exchange has analyzed its capacity and represents that it and the 
Options Price Reporting Authority (``OPRA'') have the necessary systems 
capacity to handle any potential additional traffic associated with 
this current amendment to the STO Program. The Exchange believes that 
its members will not have a capacity issue as a result of this 
proposal. The Exchange represents that it will monitor the trading 
volume associated with the additional STO classes and series listed as 
a result of this proposal and the effect (if any) of these additional 
STO classes and series on market fragmentation and on the capacity of 
the Exchange's automated systems.
 2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \18\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \19\ in particular, in that it is designed 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. Expanding the classes and additional series that can be 
opened in the STO Program, simplifying the delisting process, and 
allowing $2.50 strike price intervals will result in a continuing 
benefit to investors by giving them more flexibility to closely tailor 
their investment and hedging decisions in greater number of securities. 
In addition, correcting the delisting language, which currently refers 
to ``expiration months'' instead of weeks will clarify the Exchange's 
rules and reduce investor confusion.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    The STO Program has been well-received by market participants, and 
in particular by retail investors, and has seen increasing trading 
volume. The Exchange believes that the current proposed revisions to 
the STO Program will permit the Exchange to meet customer demand for 
weekly expiration options by providing a reasonable expansion to the 
program, and will further allow the Exchange to harmonize STO Program 
rules with the OLPP as well as internally to the benefit of investors, 
market participants, and the marketplace.
    With regard to the impact of this proposal on system capacity, the 
Exchange believes that it and OPRA have the necessary systems capacity 
to handle any potential additional traffic associated with this current 
amendment

[[Page 76366]]

to the STO Program. The Exchange believes that its members will not 
have a capacity issue as a result of this proposal. As explained above, 
this proposal will afford significant benefits to market participants, 
and the market in general, in terms of significantly greater 
flexibility and increases in efficient trading and hedging options. It 
will also allow the Exchange to compete on equal footing with STO 
Programs adopted by other options exchanges, and in particular PHLX, 
which has recently been granted approval to adopt substantially similar 
rules to those proposed here.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. To the contrary, the 
Exchange believes the proposal is pro-competitive. The proposed rule 
change is a competitive response to a recently approved filing by the 
PHLX,\20\ which the Exchange believes is necessary to permit fair 
competition among the options exchanges with respect to STO Programs. 
The Exchange believes that the proposed rule change will result in 
additional investment options and opportunities to achieve the 
investment objectives of market participants seeking efficient trading 
and hedging vehicles, to the benefit of investors, market participants, 
and the marketplace in general.
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    \20\ See supra note 3.
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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

    Because the proposed rule change does not (i) significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(6) 
thereunder.\22\
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the 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.
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Exchange stated that it would be at a competitive 
disadvantage if it were not allowed to adopt the proposed rule changes 
contemporaneously with those recently approved for PHLX. The Exchange 
also stated that the proposal will promote fair competition among 
exchanges by allowing the Exchange to offer a more efficient STO 
Program that is harmonized internally and externally with the OLPP, and 
to meet customer demand for a greater number of STO classes and strike 
price intervals, in the same manner as other exchanges. For these 
reasons, the Commission believes that the proposed rule change presents 
no novel issues, and waiver will allow the Exchange to remain 
competitive with other exchanges. Therefore, the Commission designates 
the proposed rule change to be operative upon filing.\23\
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    \23\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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 summarily may temporarily suspend such 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

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 email to [email protected]. Please include 
File Number SR-ISE-2013-69 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2013-69. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the 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-2013-69 and should be 
submitted on or before January 7, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29890 Filed 12-16-13; 8:45 am]
BILLING CODE 8011-01-P