Federal Register / Vol. 69, No. 24 / Thursday, February 5, 2004 / Notices 5625

8The GSD currently monitors the comparison 

rates of members. Currently, low comparison rates 

can result in a member being placed on Class 1 

surveillance status. Under the rule change, low 

comparison rates may result in a GSD member 

being placed on the ‘‘watch list.’’ Both the GSD and 

the MBSD may monitor for other operational factors 

in the future such as failing to timely submit trade 

data on a frequent basis.

9 15 U.S.C. 78q–1(b)(3)(F).

10 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See letter from Michael Simon, Senior Vice 

President and General Counsel, ISE, to Nancy 

Sanow, Assistant Director, Division of Market 

Regulation (‘‘Division’’), Commission, dated 

January 3, 2002. 

4See letter from Michael Simon, Senior Vice 

President and General Counsel, ISE, to Nancy 

Sanow, Assistant Director, Division, Commission, 

dated June 25, 2002. 

5See letter from Michael Simon, Senior Vice 

President and General Counsel, ISE, to Nancy 

Sanow, Assistant Director, Division, Commission, 

dated January 5, 2004. Amendment No. 3 replaced 

the initial filing and Amendment Nos. 1 and 2 

entirely. The changes proposed in Amendment No. 

3 are incorporated in this notice.

monitoring, such Members may also be 

placed on the ‘‘watch list’’ if they 

experience a financial change that 

presents risk to FICC. Some examples 

include failure to meet minimum 

financial requirements or experiencing a 

significant decrease in equity (for GSD 

members) or net asset value (for MBSD 

members). Members placed on the 

‘‘watch list’’ in this way will also be 

monitored more closely by credit risk 

staff.

The GSD will continue, in accordance 

with its current procedures, to place 

GSD netting members on the ‘‘watch 

list’’ for failure to comply with 

operational standards and 

requirements.8 MBSD expects to 

implement a similar provision, as 

outlined in these rule changes, soon.

III. Discussion 

Section 17A(b)(3)(F) of the Act 

requires that the rules of a clearing 

agency be designed to facilitate the 

safeguarding of securities and funds 

which are in its custody or control or for 

which it is responsible.9 The 

Commission finds that FICC’s proposed 

rule change is consistent with this 

requirement because it will improve 

FICC’s member surveillance process 

which will better enable FICC to 

safeguard the securities and funds 

which are in its custody or control or for 

which it is responsible.

IV. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and in 

particular section 17A of the Act and 

the rules and regulations thereunder. 

It is therefore ordered, pursuant to 

section 19(b)(2) of the Act, that the 

proposed rule change (File No. SR–

FICC–2003–03) be and hereby is 

approved.

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.10

Jill M. Peterson, 

Assistant Secretary.

[FR Doc. 04–2456 Filed 2–4–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–49141; File No. SR–ISE–

2001–22] 

Self-Regulatory Organizations; Notice 

of Filing of Proposed Rule Change and 

Amendment Nos. 1, 2, and 3 Thereto 

by the International Securities 

Exchange, Inc., To Establish a 

Solicited Order Mechanism 

January 28, 2004. 

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 July 26, 

2001, the International Securities 

Exchange, Inc. (‘‘ISE’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been prepared by the Exchange. 

On January 4, 2002, ISE filed 

Amendment No. 1 to the proposed rule 

change.3 On June 26, 2002, ISE filed 

Amendment No. 2 to the proposed rule 

change.4 On January 6, 2004, ISE filed 

Amendment No. 3 to the proposed rule 

change.5 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change, as amended, from 

interested persons.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The ISE is proposing to amend its 

rules regarding solicited orders to 

establish a Solicited Order Mechanism 

for matching a member’s unsolicited 

agency orders with orders the member 

solicits from other broker-dealers. The 

text of the proposed rule change, as 

amended, is set forth below. Brackets 

indicate material to be deleted. Italics

indicate material to be added. 

Rule 716. Block and Solicited Trades

* * * * *

(e) Solicited Order Mechanism. The 

Solicited Order Mechanism is a process 

by which an Electronic Access Member 

can attempt to execute orders of 500 or 

more contracts it represents as agent 

(the ‘‘Agency Order’’) against contra 

orders that it solicited. Each order 

entered into the Solicited Order 

Mechanism shall be designated as allor-none.

(1) Upon entry of both orders into the 

Solicited Order Mechanism at a 

proposed execution price, a broadcast 

message will be sent to Crowd 

Participants, which will be given an 

opportunity to enter Responses with the 

prices and sizes at which they would be 

willing to participate in the execution of 

the Agency Order.

(2) At the end of the period given 

Crowd Participants to enter Responses, 

the Agency Order will be automatically 

executed in full or cancelled.

(i) If at the time of execution there is 

insufficient size to execute the entire 

Agency Order at an improved price (or 

prices), the Agency Order will be 

executed against the solicited order at 

the proposed execution price so long as, 

at the time of execution: (A) the 

execution price is equal to or better than 

the best bid or offer on the ISE, and (B) 

there are no Public Customer orders on 

the Exchange that are priced equal to 

the proposed execution price. If there 

are Public Customer orders on the 

Exchange on the opposite side of the 

Agency Order at the proposed execution 

price and there is sufficient size to 

execute the entire size of the Agency 

Order, the Agency Order will be 

executed against the bid or offer, and 

the solicited order will be cancelled. The 

aggregate size of all orders, quotes and 

Responses at the bid or offer will be 

used to determine whether the entire 

Agency Order can be executed. Both the 

solicited order and Agency Order will be 

cancelled if an execution would take 

place at a price that is inferior to the 

best bid or offer on the ISE, or if there 

is a Public Customer on the book at the 

proposed execution price but there is 

insufficient size on the Exchange to 

execute the entire Agency Order.

(ii) If at the time of execution there is 

sufficient size to execute the entire 

Agency Order at an improved price (or 

prices), the Agency Order will be 

executed at the improved price(s), 

subject to the condition in (i)(A), and 

the solicited order will be cancelled. The 

aggregate size of all orders, quotes and 

Responses at each price will be used to 

determine whether the entire Agency 

Order can be executed at an improved 

price (or prices).

(iii) When executing the Agency Order 

against the bid or offer in accordance 

with paragraph (i) above, or at an 

improved price in accordance with 

5626 Federal Register / Vol. 69, No. 24 / Thursday, February 5, 2004 / Notices 

6See Commentary .03 to American Stock 

Exchange Rule 950(d); Chicago Board Options 

Exchange Rule 6.9; Pacific Exchange Rule 6.49; and 

Philadelphia Stock Exchange Rule 1064(c).

7Although orders solicited from public customers 

are not subject to the exposure requirement of Rule 

717(a), they would be permitted to be entered into 

the Solicited Order Mechanism should Exchange 

members choose this alternative.

8 In another proposed rule change on file with the 

Commission, the Exchange proposes to allow all 

members, rather than the more limited Crowd 

Participants, to participate in Block and Facilitation 

Mechanism trades. See Securities Exchange Act 

Release No. 49056 (January 12, 2004), 69 FR 2798 

(January 20, 2004) (concerning File No. SR–ISE–

2003–07). The Exchange notes that if that proposal 

is approved prior to the approval of the instant 

proposed rule change, the Exchange will amend the 

instant proposed rule change so that all members 

may similarly participate in trades executed 

through the Solicited Order Mechanism.

9The ISE notes that the Commission previously 

determined that a ten second exposure period in the 

ISE’s electronic marketplace is sufficient to provide 

participants with an opportunity to respond to 

orders entered into the Facilitation Mechanism. See

Securities Exchange Act Release No. 46514 

(September 18, 2002), 67 FR 60267 (September 25, 

2002). The ISE states that the same technology 

would be used by the Solicitation Mechanism, and 

members would be able to respond in exactly the 

same manner as they do to orders executed through 

the Facilitation Mechanism.

paragraph (ii) above, Public Customer 

orders will be executed first. NonCustomers participate in the execution 

of the Agency Order based upon the 

percentage of the total number of 

contracts available at the best price that 

is represented by the size of the NonCustomer interest.

(3) Prior to entering Agency Orders 

into the Solicited Order Mechanism on 

behalf of a customer, EAMs must deliver 

to the customer a written notification 

informing the customer that its order 

may be executed using the ISE’s 

Solicited Order Mechanism. Such 

written notification must disclose the 

terms and conditions contained in this 

Rule and must be in a form approved by 

the Exchange.

Supplementary Material to Rule 716

.02 The time given to Crowd 

Participants to enter Responses under 

paragraph (c)(1) shall be thirty (30) 

seconds[,]. The time given to Crowd 

Participants to enter [and for] 

Indications [entered] under paragraph 

(d)(1) and Responses under paragraph 

(e)(1) shall be ten (10) seconds. 

.03 Under paragraph (e) above, 

Members may enter contra orders that 

are solicited. The Solicited Order 

Mechanism provides a facility for 

Members that locate liquidity for their 

customer orders. Members may not use 

the Solicited Order Mechanism to 

circumvent Exchange Rule 717(d) 

limiting principal transactions. This 

may include, but is not limited to, 

Members entering contra orders that are 

solicited from (1) affiliated brokerdealers, or (2) broker-dealers with which 

the Member has an arrangement that 

allows the Member to realize similar 

economic benefits from the solicited 

transaction as it would achieve by 

executing the customer order in whole 

or in part as principal.

Rule 717. Limitations on Orders

* * * * *

(e) Solicitation Orders. 

Electronic Access Members [must 

expose] may not execute orders they 

represent as agent on the Exchange [for 

at least thirty (30) seconds before such 

orders may be executed in whole or in 

part by] against orders solicited from 

Members and non-member brokerdealers to transact with such orders 

unless (i) the unsolicited order is first 

exposed on the Exchange for at least 

thirty (30) seconds, or (ii) the Member 

utilizes the Solicited Order Mechanism 

pursuant to Rule 716(e).

* * * * *

Rule 400. Just and Equitable Principles 

of Trade

* * * * *

Supplemental Material to Rule 400

.02 It may be considered conduct 

inconsistent with just and equitable 

principles of trade for any person 

associated with a Member who has 

knowledge of all material terms and 

conditions of: 

(i) An order and a solicited order, 

(ii) An order being facilitated, or 

(iii) Orders being crossed;

the execution of which are imminent, to 

enter, based on such knowledge, an 

order to buy or sell an option for the 

same underlying security as any option 

that is the subject of the order, or an 

order to buy or sell the security 

underlying such class, or an order to 

buy or sell any related instrument until 

(i) the terms of the order and any 

changes in the terms of the order of 

which the person associated with the 

Member has knowledge are disclosed to 

the trading crowd, or (ii) the trade can 

no longer reasonably be considered 

imminent in view of the passage of time 

since the order was received. The terms 

of an order are ‘‘disclosed’’ to the 

trading crowd on the Exchange when 

the order is entered into the System, [or 

into] the Facilitation or Solicited Order

Mechanisms.

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 

ISE 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 

Under ISE Rule 717(e), an Electronic 

Access Member (‘‘EAM’’) is required to 

expose an unsolicited agency order (the 

‘‘Agency Order’’) for at least 30 seconds 

before crossing it against an order that 

it has solicited from other brokerdealers. Currently, an EAM can comply 

with this requirement only by entering 

the Agency Order on the Exchange, 

waiting 30 seconds, and then entering 

the solicited order. The Exchange states 

that, due to this 30-second exposure 

requirement, EAMs have no level of 

assurance that they will be able to pair 

solicited orders against Agency Orders 

for execution, and thus they take this 

type of business to the other options 

exchanges, which permit these trades to 

be executed without a 30-second 

exposure requirement.6

To better compete for solicited 

transactions, the ISE has developed a 

Solicited Order Mechanism. The 

proposed rule change would implement 

this functionality, allowing EAMs to 

enter both sides of a proposed solicited 

cross, where one of the sides was 

solicited.7 Such trades would be 

required to be for at least 500 contracts 

and would be executed only if the price 

is at or between the ISE best bid or offer 

(‘‘BBO’’). Both orders entered into the 

Solicited Order Mechanism would be 

required to be all-or-none limit orders.

When a proposed solicited cross is 

entered into the Mechanism, the 

Exchange would send a message to the 

Crowd Participants,8 giving them ten 

seconds to respond with a price that 

would improve the execution price for 

the Agency Order.9 The proposed 

matched trade will be executed unless 

there is sufficient size to execute the 

entire Agency Order at a better price 

than the proposed cross price, or there 

is a Public Customer order on the book 

at the proposed cross price. In the case 

where there is one or more Public 

Customer orders on the book at the 

proposed execution price on the 

opposite side of the Agency Order, the 

Federal Register / Vol. 69, No. 24 / Thursday, February 5, 2004 / Notices 5627

10When the Agency Order is executed at an 

improved price or at the proposed execution price 

against the book, Public Customer orders are given 

priority in the execution, and then all other nonprofessional interest at the same price would 

participate pro-rata based on size.

11 15 U.S.C. 78f(b)(5).

12 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b-4.

3 17 CFR 240.19b-4(f)(6).

4 17 CFR 240.19b-4(f)(6)(iii).

Agency Order would be executed 

against the book if there is sufficient 

size available at the bid or offer to 

execute the entire size of the Agency 

Order.10 If there is insufficient size to 

execute the entire Agency Order, the 

proposed cross would not be executed 

and would be cancelled. Similarly, the 

transaction would be cancelled if the 

execution price would be inferior to the 

BBO on the Exchange.

The proposed rule also would require 

members to deliver to customers a 

written document describing the terms 

and conditions of the Solicited Order 

Mechanism prior to executing Agency 

Orders using the Solicited Order 

Mechanism. Such written document 

would be required to be in a form 

approved by the Exchange. 

Finally, the proposed rule change 

specifies in new Supplemental Material 

to Rule 716 that members would be 

prohibited from using the Solicited 

Order Mechanism to circumvent Rule 

717(d) limiting principal transactions. 

The proposed rule change also adds a 

reference to the Solicited Order 

Mechanism in the Supplemental 

Material to Rule 400 (Just and Equitable 

Principles of Trade) that prohibits 

anticipatory hedging activities prior to 

the entry of an order on the Exchange. 

2. Statutory Basis 

The basis under the Act for the 

proposed rule change is the requirement 

under section 6(b)(5) of the Act 11 that 

an exchange have rules that are 

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 for a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest. The 

Exchange states that the implementation 

of the Solicited Order Mechanism will 

allow the Exchange to better compete 

for solicited transactions, while 

providing an opportunity for price 

improvement for Agency Orders and 

assuring that public customers on the 

book are protected.

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

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. 

The proposed rule change will allow the 

Exchange to better compete for solicited 

transactions. 

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 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the Exchange consents, 

the Commission will: 

(A) By order approve such proposed 

rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be 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. 

Persons making written submissions 

should file six copies thereof with the 

Secretary, Securities and Exchange 

Commission, 450 Fifth Street, NW., 

Washington, DC 20549–0609. 

Comments may also be submitted 

electronically at the following e-mail 

address: rule-comments@sec.gov. All 

comment letters should refer to File No. 

SR–ISE–2001–22. 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, comments 

should be sent in hardcopy or by e-mail 

but not by both methods. 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 the filing will also be 

available for inspection and copying at 

the principal offices of the ISE. All 

submissions should refer to File No. 

SR–ISE–2001–22 and should be 

submitted by February 26, 2004.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.12

Jill M. Peterson, 

Assistant Secretary.

[FR Doc. 04–2329 Filed 2–4–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–49149; File No. SR–ISE–

2004–02] 

Self-Regulatory Organizations; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change by the 

International Securities Exchange, Inc. 

Relating to the Extension of the Pilot 

Program for Quotation Spreads 

January 29, 2004. 

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 January 

22, 2004, the International Securities 

Exchange, Inc. (‘‘ISE’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘SEC’’ or ‘‘Commission’’) 

the proposed rule change as described 

in items I and II below, which items 

have been prepared by the ISE. The 

proposed rule change has been filed by 

the ISE under Rule 19b-4(f)(6) of the 

Act.3 The Commission is publishing this 

notice to solicit comments on the 

proposed rule change from interested 

persons.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The ISE proposes to extend until 

March 31, 2004, a pilot program 

permitting the allowable quotation 

spread for options on up to 50 equity 

securities to be $5, regardless of the 

price of the bid (‘‘Pilot Program’’). The 

ISE proposes no substantive changes to 

the Pilot Program other than extending 

its operation through March 31, 2004. 

Pursuant to Rule 19b-4(f)(6) under the 

Act, the ISE requests that the 

Commission waive the 30-day preoperative requirement contained in Rule 

19b-4(f)(6)(iii).4