[Federal Register Volume 75, Number 219 (Monday, November 15, 2010)]
[Notices]
[Pages 69726-69729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28686]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63271; File No. SR-ISE-2010-107]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To List and Trade Options on Leveraged Exchange-Traded Notes and 
To Broaden the Definition of ``Futures-Linked Securities''

November 8, 2010.
    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 October 29, 2010, 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 its Rule 502(k) to: (a) Permit 
trading options on leveraged (multiple or inverse) exchange-traded 
notes, and (b) broaden the definition of ``Futures-Linked Securities.'' 
The text of the proposed rule change is available on the Exchange's Web 
site 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 proposes to amend ISE Rule 502(k) to: (a) Permit 
trading options on leveraged (multiple or inverse) exchange-traded 
notes (``ETNs''), and (b) broaden the definition of ``Futures-Linked 
Securities.'' ETNs are also known as ``Index-Linked Securities,'' which 
are designed for investors who desire to participate in a specific 
market segment by providing exposure to one or more identifiable 
underlying securities, commodities, currencies, derivative instruments 
or market indexes of the foregoing. Index-Linked Securities are the 
non-convertible debt of an issuer that have a term of at least one (1) 
year but not greater than thirty (30) years. Despite the fact that 
Index-Linked Securities are linked to an underlying index, each trade 
as a single, exchange-listed security. Accordingly, rules pertaining to 
the listing and trading of standard

[[Page 69727]]

equity options apply to Index-Linked Securities.
Leveraged ETN Options
    The Exchange proposes to amend Rule 502(k) to permit the listing of 
options on leveraged (multiple or inverse) ETNs. Multiple leveraged 
ETNs seek to provide investment results that correspond to a specified 
multiple of the percentage performance on a given day of a particular 
Reference Asset. Inverse leveraged ETNs seek to provide investment 
results that correspond to the inverse (opposite) of the percentage 
performance on a given day of a particular Reference Asset by a 
specified multiple. Multiple leveraged ETNs and inverse leveraged ETNs 
differ from traditional ETNs in that they do not merely correspond to 
the performance of a given Reference Asset, but rather attempt to match 
a multiple or inverse of a Reference Asset's performance.
    The Barclays Long B Leveraged S&P 500 TR ETN (``BXUB''), the 
Barclays Long C Leveraged S&P 500 TR ETN (``BXUC'') and the UBS AG 2x 
Monthly Leveraged Long Exchange Traded Access Securities (``E-TRACS'') 
linked to the Alerian MLP Infrastructure Index due July 9, 2040 
(``MLPL'') currently trade on the NYSE Arca Stock Exchange and are 
examples of multiple leveraged ETNs. In addition, the Barclays ETN + 
Inverse S&P 500 VIX Short-Term Futures ETN (``XXV'') currently trades 
on the NYSE Arca Stock Exchange and is an example of an inverse 
leveraged ETN. The NYSE Arca Stock Exchange also lists several other 
inverse leveraged ETNs for trading.\3\
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    \3\ These ETNs include: The Barclays Short B Leveraged Inverse 
S&P 500 TR ETN (``BXDB''), the Barclays Short C Leveraged Inverse 
S&P 500 TR ETN (``BXDC'') and the Barclays Short D Leveraged Inverse 
S&P 500 TR ETN (``BXDD'').
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    Currently, ISE Rule 502(k) provides that securities deemed 
appropriate for options trading shall include shares or other 
securities (``Equity Index-Linked Securities,'' ``Commodity-Linked 
Securities,'' ``Currency-Linked Securities,'' ``Fixed Income Index-
Linked Securities,'' ``Futures-Linked Securities,'' and ``Multifactor 
Index-Linked Securities,'' collectively known as ``Index-Linked 
Securities'') that are principally traded on a national securities 
exchange and an ``NMS Stock'' (as defined in Rule 600 of Regulation NMS 
under the Securities Exchange Act of 1934), and represent ownership of 
a security that provides for the payment at maturity, as described 
below:
    <bullet> Equity Index-Linked Securities are securities that provide 
for the payment at maturity of a cash amount based on the performance 
of an underlying index or indexes of equity securities (``Equity 
Reference Asset'');
    <bullet> Commodity-Linked Securities are securities that provide 
for the payment at maturity of a cash amount based on the performance 
of one or more physical commodities or commodity futures, options on 
commodities, or other commodity derivatives or Commodity-Based Trust 
Shares or a basket or index of any of the foregoing (``Commodity 
Reference Asset'');
    <bullet> Currency-Linked Securities are securities that provide for 
the payment at maturity of a cash amount based on the performance of 
one or more currencies, or options on currencies or currency futures or 
other currency derivatives or Currency Trust Shares (as defined in ISE 
Rule 502(h), or a basket or index of any of the foregoing (``Currency 
Reference Asset'');
    <bullet> Fixed Income Index-Linked Securities are securities that 
provide for the payment at maturity of a cash amount based on the 
performance of one or more notes, bonds, debentures or evidence of 
indebtedness that include, but are not limited to, U.S. Department of 
Treasury securities (``Treasury Securities''), government-sponsored 
entity securities (``GSE Securities''), municipal securities, trust 
preferred securities, supranational debt and debt of a foreign country 
or a subdivision thereof or a basket or index of any of the foregoing 
(``Fixed Income Reference Asset'');
    <bullet> Futures-Linked Securities are securities that provide for 
the payment at maturity of a cash amount based on the performance of an 
index of (a) futures on Treasury Securities, GSE Securities, 
supranational debt and debt of a foreign country or a subdivision 
thereof, or options or other derivatives on any of the foregoing; or 
(b) interest rate futures or options or derivatives on the foregoing in 
this subparagraph (b); or (c) CBOE Volatility Index (VIX) futures 
(``Futures Reference Asset''); and
    <bullet> Multifactor Index-Linked Securities are securities that 
provide for the payment at maturity of a cash amount based on the 
performance of any combination of two or more Equity Reference Assets, 
Commodity Reference Assets, Currency Reference Assets, Fixed Income 
References Assets, or Futures Reference Assets (``Multifactor Reference 
Asset'').
    For purposes of ISE Rule 502(k), Equity Reference Assets, Commodity 
Reference Asset, Currency Reference Assets, Fixed Income Reference 
Assets, Futures Reference Assets together with Multifactor Reference 
Assets, collectively are referred to as ``Reference Assets.''
    In addition, Index-Linked Securities must meet the criteria and 
guidelines for underlying securities set forth in Rule 502(b); or (ii) 
the Index-Linked Securities must be redeemable at the option of the 
holder at least on a weekly basis through the issuer at a price related 
to the applicable underlying Reference Asset. In addition, the issuing 
company is obligated to issue or repurchase the securities in 
aggregation units for cash, or cash equivalents, satisfactory to the 
issuer of Index-Linked Securities which underlie the option as 
described in the Index-Linked Securities prospectus.
    The Exchange proposes to amend ISE Rule 502(k) to expand the type 
of Index-Linked Securities that may underlie options to include 
leveraged (multiple or inverse) ETNs. To affect this change, the 
Exchange proposes to amend ISE Rule 502(k) by adding the phrase, ``or 
the leveraged (multiple or inverse) performance'' to each of the 
subparagraphs ((i) through (vi)) in that section which set forth the 
different eligible Reference Assets.
    The Exchange's current continuing listing standards for ETN options 
will continue to apply. Specifically, under ISE Rule 503(k), ETN 
options shall not be deemed to meet the Exchange's requirements for 
continued approval, and the Exchange shall not open for trading any 
additional series or option contracts of the class covering such 
Securities whenever the underlying Securities are delisted and trading 
in the Securities is suspended on a national securities exchange, or 
the Securities are no longer an ``NMS Stock'' (as defined in Rule 600 
of Regulation NMS under the Securities Exchange Act of 1934). In 
addition, the Exchange shall consider the suspension of opening 
transactions in any series of options of the class covering Index-
Linked Securities in any of the following circumstances: (1) The 
underlying Index-Linked Security fails to comply with the terms of ISE 
Rule 502(k); (2) in accordance with the terms of ISE Rules 503(a) and 
(b), in the case of options covering Index-Linked Securities when such 
options were approved pursuant to ISE Rule 502(k), except that, in the 
case of options covering Index-Linked Securities approved pursuant to 
ISE Rule 502(k)(3) that are redeemable at the option of the holder at 
least on a weekly basis, then option contracts of the class covering 
such Securities may only continue to be open for trading as long as the 
Securities are listed on a national securities exchange and are ``NMS'' 
stock as defined in Rule 600 of Regulation NMS; (3) in the case of any 
Index-Linked Security trading pursuant to ISE Rule

[[Page 69728]]

502(k), the value of the Reference Asset is no longer calculated; or 
(4) such other event shall occur or condition exist that in the opinion 
of the Exchange make further dealing in such options on the Exchange 
inadvisable. Expanding the eligible types of ETNs for options trading 
under ISE Rule 502(k) will not have any effect on the rules pertaining 
to position and exercise limits \4\ or margin.\5\
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    \4\ See ISE Rules 412, Position Limits and 414, Exercise Limits.
    \5\ See ISE Rules 1200-1204, the Exchange's rules governing 
margin.
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    This proposal is necessary to enable the Exchange to list and trade 
options on shares of the BXUB, BXUC, XXV, BXDB, BXDC, BXDD and the 
MLPL. The Exchange believes the ability to trade options on leveraged 
(multiple or inverse) ETNs will provide investors with greater risk 
management tools. The proposed amendment to the Exchange's listing 
criteria for options on ETNs is necessary to ensure that the Exchange 
will be able to list options on the above listed leveraged (multiple 
and inverse) ETNs as well as other leveraged (multiple and inverse) 
ETNs that may be introduced in the future.
    The Exchange represents that its existing surveillance procedures 
applicable to trading in options are adequate to properly monitor the 
trading in leveraged (multiple and inverse) ETN options.
    It is expected that The Options Clearing Corporation will seek to 
revise the Options Disclosure Document (``ODD'') to accommodate the 
listing and trading of leveraged (multiple and inverse) ETN options.
Broaden the Definition of ``Futures-Linked Securities''
    The second change being proposed by this filing is to amend the 
definition of ``Future [sic]-Linked Securities'' set forth in ISE Rule 
502(k)(1)(v). Currently, the definition of ``Futures-Linked 
Securities'' is limited to securities that provide for the payment at 
maturity of a cash amount based on the performance of an index of (a) 
Futures on Treasury Securities, GSE Securities, supranational debt and 
debt of a foreign country or a subdivision thereof, or options or other 
derivatives on any of the foregoing; or (b) interest rate futures or 
options or derivatives on the foregoing in this subparagraph (b); or 
(c) CBOE Volatility Index (VIX) futures.
    ISE Rule 502 sets forth generic listing criteria for securities 
that may serve as underlyings for listed options trading. The Exchange 
believes that the current definition of ``Futures-Linked Securities'' 
is unnecessarily restrictive and requires the Exchange to submit a 
filing to amend the definition each time a new ETN is issued that 
tracks the performance of an index of futures/options on futures that 
is not enumerated in the existing rule. To address this issue, the 
Exchange is proposing to revise the definition of ``Futures-Linked 
Securities'' to provide that they are securities that for the payment 
at maturity of a cash amount based on the performance or the leveraged 
(multiple or inverse) performance of an index or indexes of futures 
contracts or options or derivatives on futures contracts (``Futures 
Reference Asset''). The Exchange notes that all ETNs eligible for 
options trading must be principally traded on a national securities 
exchange and must be an ``NMS Stock.'' As a result, the Exchange 
believes that broadening the definition of ``Futures-Linked 
Securities'' by no longer specifically listing the types of futures and 
options on futures contracts that may be tracked by an ETN is 
appropriate.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \6\ of the Securities Exchange Act of 1934 (the 
``Act'') and the rules and regulations under the Act, in general, and 
furthers the objectives of Section 6(b)(5),\7\ in particular, in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and to remove impediments to and perfect 
the mechanisms of a free and open market and a national market system, 
and, in general, to protect investors and the public interest. The 
Exchange believes that the proposed rules applicable to trading 
pursuant to generic listing and trading criteria serve to foster 
investor protection.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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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.

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 foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 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.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange requests that the Commission waive 
the 30-day operative delay so that the Exchange can list and trade 
options on leveraged (multiple or inverse) ETNs and implement the 
amended definition of ``Futures-Linked Securities'' immediately. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\10\ The Commission notes the proposal is substantively 
identical a proposal that was recently approved by the Commission, and 
does not raise any new regulatory issues.\11\ For these reasons, the 
Commission designates the

[[Page 69729]]

proposed rule change as operative upon filing.
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    \10\ 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).
    \11\ See Securities Exchange Act Release No. 63202 (October 28, 
2010), 75 FR 67794 (November 3, 2010) (SR-CBOE-2010-080).
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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.

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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#2351564f460e404c4e4e464d5750635046400d444c55"><span class="__cf_email__" data-cfemail="5a282f363f77393537373f342e291a293f39743d352c">[email protected]</span></a>. Please include 
File Number SR-ISE-2010-107 on the subject line.

Paper Comments

    <bullet> 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-2010-107. 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 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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange.\12\ 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-2010-107 and should be 
submitted on or before December 6, 2010.
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    \12\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov.
    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-28686 Filed 11-12-10; 8:45 am]
BILLING CODE 8011-01-P


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