[Federal Register Volume 66, Number 103 (Tuesday, May 29, 2001)]
[Notices]
[Pages 29193-29196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13325]


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SECURITIES AND EXCHANGE COMMISSION

[Docket No. 34-4331; File No. SR-ISE-2001-11]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the 
International Securities Exchange LLC To Trade Standardized Equity 
Options on Trust Issued Receipts

May 21, 2001.
    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 April 20, 2001, the International Securities Exchange LLC (``ISE'' 
and ``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 Exchange. 
On May 17, 2001, the ISE submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons and to approve the 
proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter to Susie Cho, Division of Market Regulation 
(``Division''), SEC, from Michael Simon, Senior Vice President and 
General Counsel, ISE, dated May 16, 2001 (``Amendment No. 1''). In 
Amendment No. 1, the ISE noted that the trust issued receipts will 
be issued upon the deposit of the shares of underlying securities 
represented by a round-lot of 100 receipts and that the trust will 
cancel, and an investor may obtain, hold, trade or surrender trust 
issued receipts in a round-lot and round-lot multiples of 100 
receipts. The ISE also added proposed margin requirements for 
options on trust issued receipts and corrected a typographical error 
in the proposed rule language.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt new listing and maintenance 
standards to allow for trading of standardized equity options on trust 
issued receipts. The text of the proposed rule change follows. Proposed 
new language is in italics.
* * * * *

Rule 502.  Criteria for Underlying Securities

* * * * *
    (j) Securities deemed appropriate for options trading shall include 
shares or other securities (``Trust Issued Receipts'') that are 
principally traded on a national securities exchange or through the 
facilities of a national

[[Page 29194]]

securities association and reported as a national market security, and 
that represent ownership of the specific deposited securities held by a 
trust, provided:
    (1) the Trust Issued Receipts (i) meet the criteria and guidelines 
for underlying securities set forth in paragraph (b) to this Rule; or 
(ii) must be available for issuance or cancellation each business day 
from the Trust in exchange for the underlying deposited securities, and
    (2) not more than 20% of the weight of the Trust Issued Receipt is 
represented by ADRs on securities for which the primary market is not 
subject to a comprehensive surveillance agreement.

Rule 503.  Withdrawal of Approval of Underlying Securities

* * * * *
    (j) Absent exceptional circumstances, securities initially approved 
for options trading pursuant to paragraph (j) of Rule 502 (such 
securities are defined and referred to in that paragraph as ``Trust 
Issued Receipts'') shall not be deemed to meet the Exchange's 
requirements for continued approval, and the Exchange shall not open 
for trading any additional series of option contracts of the class 
covering such Trust Issued Receipts, whenever the Trust Issued Receipts 
are delisted and trading in the Receipts is suspended on a national 
securities exchange, or the Trust Issued Receipts are no longer traded 
as national market securities through the facilities of a national 
securities association. In addition, the Exchange shall consider the 
suspension of opening transactions in any series of options of the 
class covering Trust Issued Receipts in any of the following 
circumstances:
    (1) in accordance with the terms of paragraph (b) this Rule 503 in 
the case of options covering Trust Issued Receipts when such options 
were approved pursuant to subparagraph (j)(1)(i) under Rule 502;
    (2) the Trust has more than 60 days remaining until termination and 
there are fewer than 50 record and/or beneficial holders of Trust 
Issued Receipts for 30 or more consecutive trading days;
    (3) the Trust has fewer than 50,000 receipts issued and 
outstanding;
    (4) the market value of all receipts issued and outstanding is less 
than $1,000,000; or
    (5) such other event shall occur or condition exist that in the 
option of the Exchange makes further dealing in such options on the 
Exchange inadvisable.
    (k) For Holding Company Depositary Receipts (HOLDRs), the Exchange 
will not open additional series of options overlying HOLDRs (without 
prior Commission approval) if:
    (1) the proportion of securities underlying standardized equity 
options to all securities held in a HOLDRs trust is less than 80% (as 
measured by their relative weightings in the HOLDRs trust); or
    (2) less than 80% of the total number of securities held in a 
HOLDRs trust underlie standardized equity options.
* * * * *

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

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

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

1. Purpose
    The purpose of the proposed rule change is to provide for the 
trading of options on trust issued receipts.\4\ The Exchange believes 
that the listing and maintenance criteria proposed in its new rule are 
consistent with the options listing and maintenance criteria for trust 
issued receipts currently used by the American Stock Exchange LLC 
(``Amex''), the Chicago Board Options Exchange, Inc. (``CBOE'') and the 
Pacific Exchange, Inc. (``PCX''),\5\ Trust issued receipts are 
exchange-listed securities representing beneficial ownership of the 
specific deposited securities represented by the receipts. They are 
negotiable receipts issued by a trust representing securities of 
issuers that have been deposited and are held on behalf of the holders 
of the trust issued receipts. Trust issued receipts, which trade in 
round-lots of 100, and multiples thereof, may be issued after their 
initial offering through a deposit with the trustee of the required 
number of shares of common stock of the underlying issuers. This 
characteristic of trust issued receipts is similar to that of exchange-
traded fund shares, which also may be created on any business day upon 
deposit of the requisite securities comprising a creation unit.\6\ The 
trust will only issue receipts upon the deposit of the shares of 
underlying securities that are represented by a round-lot of 100 
receipts. Likewise, the trust will cancel, and an investor may obtain, 
hold, trade or surrender trust issued receipts in a round-lot and 
round-lot multiples of 100 receipts.
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    \4\ The Exchange is not proposing at this time to list FLEX 
options on trust issued receipts.
    \5\ See Securities Exchange Act Release No. 44138 (March 30, 
2001), 66 FR 19593 (April 16, 2001) (approving SR-PCX-2001-15); 
Securities Exchange Act Release No. 43043 (July 17, 2000), 65 FR 
46520 (July 28, 2000) (approving SR-CBOE-00-25); and Securities 
Exchange Act Release No. 42947 (June 15, 2000), 65 FR 39211 (June 
23, 2000) (approving SR-Amex-99-37).
    \6\ The Exchange received approval to trade options on exchange-
traded fund shares on February 28, 2001. See Securities Exchange Act 
Release No. 44037 (March 2, 2001), 66 FR 14613 (March 13, 2001).
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    Generally, options on trust issued receipts are proposed to be 
traded to the Exchange pursuant to the same rules and procedures that 
apply to trading in options on equity securities. The Exchange will 
list option contracts covering 100 trust issued receipts, the minimum 
required round-lot trading size for the underlying receipts. Strike 
prices for trust issued receipts will be set to bracket the trust 
issued receipts at the same intervals that apply to other equity 
options under ISE Rule 504 (i.e., 2\1/2\ point intervals for underlying 
equity values up to $25; 5 point intervals for underlying equity values 
greater than $25 up to $200; and 10 point intervals for underlying 
equity values greater than $200). The proposed position and exercise 
limits for trust issued receipts would be the same as those established 
for other equity options, as set forth in ISE Rules 412 and 414, 
respectively. The Exchange anticipates that most options on trust 
issued receipts will initially qualify for the lowest position limit. 
However, as with other equity options, applicable position limits will 
be increased for options if the volume of trading in the trust issued 
receipts increases to the extent needed to permit a higher limit.
    The listing and maintenance standards proposed for options on trust 
issued receipts are set forth respectively in proposed paragraph (j) 
under ISE Rule 502, and in proposed paragraphs (j) and (k) under ISE 
Rule 503. Pursuant to the proposed initial listing standards, the 
Exchange will list options only on trust issued receipts that are 
principally traded on a national securities exchange or through the 
facilities of a national securities association and reported as 
national market securities. In addition,

[[Page 29195]]

the initial listing standards require that either: (i) The trust issued 
receipts meet the uniform options listing standards in paragraph (b) of 
ISE Rule 502, which include criteria covering the minimum public float, 
trading volume, and share price of the underlying security in order to 
list the option; \7\ or (ii) the trust issued receipts must be 
available for issuance or cancellation each business day from the trust 
in exchange for the underlying deposited securities.
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    \7\ Specifically, paragraph (b) of ISE Rule 502 requires the 
underlying security to have a public float of 7,000,000 shares, 
2,000 holders, trading volume of 2,400,000 shares in the preceding 
12 months, a share price of $7.50 for the majority of the business 
days during the three calendar months preceding the date of the 
selection, and that the issuer of the underlying security is in 
compliance with the Act.
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    In addition, listing standards for options on trust issued receipts 
will require that any American Depository Receipts (``ADRs'') in the 
portfolio on which the Trust is based for which the securities 
underlying the ADRs' primary markets are in countries that are not 
subject to comprehensive surveillance agreements will not in the 
aggregate represent more than 20 percent of the weight of the 
portfolio.
    The Exchange's proposed maintenance standards provide that if a 
particular series of trust issued receipts should cease to trade on an 
exchange or as national market securities in the over the-counter 
market, there will be no opening transactions in the options on the 
trust issued receipts, and all such options will trade on a 
liquidation-only basis (i.e., only closing transactions to permit the 
closing of outstanding open options positions will be permitted). In 
addition, the Exchange will consider the suspension of opening 
transactions in any series of options of the class covering trust 
issued receipts if: (i) For options on trust issued receipts that were 
listed pursuant to the equity option listing standards in paragraph 
(j)(1)(i) of ISE Rule 502, the options fail to meet the option 
maintenance standards in paragraph (b) of ISE Rule 503; \8\ (ii) the 
trust has more than 60 days remaining until termination and there are 
fewer than 50 record and/or beneficial holders of trust issued receipts 
for 30 or more consecutive trading days; (iii) the trust has fewer than 
50,000 receipts issued and outstanding; (iv) the market value of all 
receipts issued and outstanding is less than $1,000,000; or (v) such 
other event shall occur or condition exists that, in the opinion of the 
Exchange, makes further dealing in such options on the Exchange 
inadvisable. Furthermore, the Exchange will not open additional series 
of options on any Holding Company Depositary Receipts (``HOLDRs''), a 
type of trust issued receipt, without prior Commission approval, if: 
(i) The proportion of securities underlying standardized equity options 
to all securities held in a HOLDRs trust is less than 80 percent (as 
measured by the relative weightings in the HOLDRs trust); \9\ or (ii) 
less than 80 percent of the number of securities held by a HOLDR trust 
underlie standardized options.
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    \8\ Specifically, paragraph (b) of ISE Rule 503 provides that an 
underlying security will not meet the Exchange's requirements for 
continued listing when, among other things: (i) There are fewer than 
6,300,000 publicly-held shares; (ii) there are fewer than 1,600 
holders; (iii) trading volume was less than 1,800,000 shares in the 
preceding twelve months; or (iv) the share price of the underlying 
security closed below $5 on a majority of the business days during 
the preceding six months.
    \9\ The Exchange represents that the weight of each security in 
a HOLDR trust will be determined by calculating the sum of the 
number of shares of each security (represented in a single HOLDR) 
and underlying options multiplied by its respective share price 
divided by the sum of the number of shares of all securities 
(represented in a single HOLDR) multiplied by their respective share 
prices.
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    Options on trust issued receipts will be physically settled and 
will have the American-style exercise feature used on all equity 
options, and not the Europeans-style feature.\10\ The proposed margin 
requirements for options on trust issued receipts are at the same 
levels that apply to options generally under ISE Rule 1202,\11\ except, 
with respect to trust issued receipts based on a broad-based portfolio, 
minimum margin must be deposited and maintained equal to 100% of the 
current market value of the option plus 15% of the market value of 
equivalent units of the underlying security value. Trust issued 
receipts that hold securities based upon a narrow-based portfolio must 
have options margin that equals at least 100% of the current market 
value of the contract plus 20% of the market value of equivalent unit 
of the underlying security value. In this respect, the margin 
requirements proposed for options on trust issued receipts are 
comparable to margin requirements that currently apply to broad-based 
and narrow-based index options on the NYSE and CBOE.\12\ Also, holders 
of options on trust issued receipts that exercise and receive the 
underlying trust issued receipts must receive a product description or 
prospectus, as appropriate.
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    \10\ An American-style option may be exercised at any time prior 
to its expiration, while a European-style option may be exercised 
only at its expiration date.
    \11\ The Exchange's margin rules cross-reference the rules of 
the CBOE and the New York Stock Exchange, Inc (``NYSE'')
    \12\ The Exchange agrees to modify its margin rules to reflect 
the proposed margin requirements for options on trust issued 
receipts based on broad-based and narrow-based indexes. See 
Amendment No. 1, supra note 3.
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    Lastly, the Exchange believes it has the necessary system capacity 
to support the additional series of options that would result from the 
trading of options on trust issued receipts, and it has been advised 
that the Options Price Reporting Authority (``OPRA'') also will have 
the capacity to support these additional series.
2. Statutory Basis
    The ISE believes that the proposed rule change is consistent with 
Section 6(b)(5) of the Act.\13\ Section 6(b)(5) requires that exchange 
rules be 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 public interest.
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    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The ISE 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.

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

    The Exchange did not solicit or receive comments on the proposed 
rule change.

III. 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. 
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 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. Copies of such filing will also be

[[Page 29196]]

available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to the File No. SR-ISE-2001-11 
and should be submitted by June 19, 2001.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    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, and in 
particular, with the requirements of Section 6(b)(5).\14\ The 
Commission notes that it has previously approved similar listing 
standards proposed by the Amex, CBOE, and PCX for options on trust 
issued receipts, and it believes that the ISE's proposal contains 
adequate safeguards, matching those previously approved.\15\ As the 
Commission found in its previous approvals of the listing standards 
proposed by the other exchanges, the listing and trading of options 
should give investors a better means to hedge their positions in the 
underlying trust issued receipts. The Commission also believes that 
pricing of the underlying trust issued receipts may become more 
efficient, and market makers in these shares, by virtue of enhanced 
hedging opportunities, may be able to provide deeper and more liquid 
markets. In sum, the Commission believes that options on trust issued 
receipts likely will engender the same benefits to investors and the 
marketplace that exist with respect to options on common stock, thereby 
serving to promote the public interest, to remove impediments to a free 
and open securities market, and to promote efficiency, competition, and 
capital formation.\16\
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    \14\ 15 U.S.C. 78f(b)(5).
    \15\ See supra note 5.
    \16\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    The Commission finds that the Exchange's listing and delisting 
criteria for options on trust issued receipts are adequate. The 
proposed listing and maintenance requirements should ensure that there 
exist adequate supplies of the underlying trust issued receipts in case 
of the exercise of an option, and a minimum level of liquidity to 
control against manipulation and to allow for the maintenance of fair 
and orderly markets. The ISE's additional requirements for opening 
additional series of options on HOLDRs will also ensure that the 
underlying securities are options eligible, and for the most part will 
satisfy minimum thresholds previously approved by the Commission.
    The Commission also believes that the surveillance standards 
developed by the ISE for options on trust issued receipts are adequate 
to address the concerns associated with the listing and trading of such 
securities. The ISE's proposal to limit the weight of the portfolio 
that may be composed of ADRs whose primary markets are in countries 
that are not subject to comprehensive surveillance agreements is 
similar to that previously approved by the Commission.\17\ As to 
domestically traded trust issued receipts themselves and the domestic 
stocks in the underlying portfolio, the Intermarket Surveillance Group 
(``ISG'') Agreement will be applicable to the trading of options on 
trust issued receipts.\18\
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    \17\ See supra note 5.
    \18\ ISG was formed on July 14, 1983, to, among other things, 
coordinate more effectively surveillance and investigative 
information sharing arrangements in the stock and options markets.
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    Finally, the Commission believes that the ISE's proposed margin 
requirements, which mirror those of the CBOE, are appropriate.\19\ The 
Commission notes that they are comparable to margin requirements that 
currently apply to broad-based and narrow-based index options, and to 
those previously approved for use at the Amex, CBOE, and PCX.\20\
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    \19\ See supra note 5.
    \20\ The Commission also notes that the ISE will file a proposed 
rule change to amend its margin rules, if necessary. See Amendment 
No. 1, supra note 3.
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    The Commission finds good cause for approving the proposed rule 
change (SR-ISE-2001-11) prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register under Section 
19(b)(2) of the Act.\21\ As noted above, the trading requirement for 
options on trust issued receipts at the ISE will be substantially 
similar to those at the Amex, CBOE, and PCX, which the Commission has 
approved.\22\ The Commission does not believe that the proposed rule 
change raises novel regulatory issues that were not already addressed 
and should benefit holders of trust issued receipts by permitting them 
to use options to manage the risks of their positions in the receipts. 
Accordingly, the Commission finds that there is good cause, consistent 
with Section 6(b)(5) of the Act,\23\ to approve the proposal on an 
accelerated basis.
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    \21\ 15 U.S.C. 78s(b)(2).
    \22\ See supra note 5.
    \23\ 15 U.S.C. 78f(b)(5).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-ISE-2001-11) is hereby 
approved on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13325 Filed 5-25-01; 8:45 am]
BILLING CODE 8010-01-M