60590 Federal Register / Vol. 70, No. 200 / Tuesday, October 18, 2005 / Notices 

12 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3Amendment No. 1 makes technical corrections 

to the proposal, including revisions that clarify the 

applicability of the market capitalization and 

options eligibility requirements in ISE Rule 2002(d). 

4See Securities Exchange Act Release No. 52084 

(July 20, 2005), 70 FR 43481. 

5Amendment No. 4 revises the proposal to: (1) 

Provide that an index’s component securities must 

be ‘‘NMS stocks’’ rather than ‘‘reported securities;’’

(2) identify the entities or services that will 

disseminate index values; (3) state that the ISE has 

an adequate surveillance program for broad-based 

index options; and (4) clarify that the position 

limits for broad-based index options apply to option 

contracts on the same side of the market. 

6 17 CFR 240.19b–4(e). 

7See Amendment No. 4, supra note 5. Rule 600 

of Regulation NMS defines an ‘‘NMS stock’’ to 

mean ‘‘any NMS security other than an option.’’ An 

‘‘NMS security’’ is ‘‘any security or class of 

securities for which transaction reports are 

collected, processed, and made available pursuant 

to an effective transaction reporting plan, or an 

effective national market system plan for reporting 

transactions in listed options.’’ See 17 CFR 242.600. 

8See Amendment No. 4, supra note 5. 

(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, as amended, 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 e-mail to rulecomments@sec.gov. Please include File 

Number SR–CBOE–2005–60 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–9303. 

All submissions should refer to File 

Number SR–CBOE–2005–60. 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 inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such 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–CBOE–2005–60 and should 

be submitted on or before November 8, 

2005. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.12

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. E5–5728 Filed 10–17–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52578; File No. SR–ISE–

2005–27] 

Self-Regulatory Organizations; 

International Securities Exchange, Inc.; 

Order Approving Proposed Rule 

Change and Amendment No. 1 and 

Notice of Filing and Order Granting 

Accelerated Approval to Amendment 

No. 4 to the Proposed Rule Change 

Relating to Listing Standards for 

Broad-Based Index Options 

October 7, 2005. 

I. Introduction 

On May 19, 2005, the International 

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

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

establish listing and maintenance 

standards and position limits for 

options on broad-based indexes. The 

ISE filed Amendment No. 1 to the 

proposed rule change on July 13, 2005.3

The proposed rule change, as amended 

by Amendment No. 1, was published for 

comment in the Federal Register on July 

27, 2005.4 The Commission received no 

comments regarding the proposal, as 

amended. The ISE filed Amendment No. 

2 to the proposed rule change on 

September 26, 2005, and withdrew 

Amendment No. 2 on September 28, 

2005. The ISE filed Amendment No. 3 

to the proposed rule change on 

September 28, 2005, and withdrew 

Amendment No. 3 on October 6, 2005. 

The ISE filed Amendment No. 4 to the 

proposal on October 6, 2005.5 This 

order approves the proposed rule 

change, as amended. In addition, the 

Commission is publishing notice to 

solicit comments on, and is 

simultaneously approving, on an 

accelerated basis, Amendment No. 4 to 

the proposal. 

II. Description of the Proposed Rule 

Change 

The ISE proposes to adopt ISE Rule 

2002(d) to establish initial listing 

standards for broad-based index 

options. The proposal will allow the ISE 

to list, pursuant to Rule 19b–4(e) under 

the Act,6 broad-based index options that 

meet the listing standards in ISE Rule 

2002(d). The listing standards require, 

among other things, that the underlying 

index be broad-based, as defined in ISE 

Rule 2001(j); that options on the index 

be a.m.-settled; that the index be 

capitalization-weighted, modified 

capitalization-weighted, price-weighted, 

or equal dollar-weighted; and that the 

index be comprised of at least 50 

securities, all of which must be ‘‘NMS 

stocks,’’ as defined in Rule 600 of 

Regulation NMS.7 In addition, ISE Rule 

2002(d) requires that the index’s 

component securities meet certain 

minimum market capitalization and 

average daily trading volume 

requirements; that no single component 

account for more than 10% of the 

weight of the index and that the five 

highest weighed components represent 

no more than 33% of the weight of the 

index; that the index value be widely 

disseminated at least every 15 seconds; 

and that the ISE have written 

surveillance procedures in place with 

respect to the index options. 

The ISE also proposes to adopt ISE 

Rule 2002(e), which establishes 

maintenance standards for broad-based 

index options listed pursuant to ISE 

Rule 2002(d). In addition, the ISE 

proposes to amend ISE Rule 2004(a) to 

establish a position limit of 25,000 

contracts on the same side of the market 

for broad-based index options listed 

pursuant to ISE Rule 2002(d).8

Federal Register / Vol. 70, No. 200 / Tuesday, October 18, 2005 / Notices 60591 

9 15 U.S.C. 78f(b)(5). 

10When relying on Rule 19b–4(e), the SRO must 

submit Form 19b–4(e) to the Commission within 

five business days after the SRO begins trading the 

new derivative securities product. See Securities 

Exchange Act Release No. 40761 (December 8, 

1998), 63 FR 70952 (December 22, 1998) (File No. 

S7–13–98). 

11See Amendment No. 4, supra note 5. Under ISE 

Rule 2007, the exercise limits for index options are 

equivalent to the position limits prescribed for 

option contracts with the nearest expiration in ISE 

Rule 2004 or ISE Rule 2005. 

12See Amendment No. 4, supra note 5. 

13The 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. All 

of the registered national securities exchanges and 

the National Association of Securities Dealers, Inc., 

are members of the ISG. In addition, futures 

exchanges and non-U.S. exchanges and associations 

are affiliate members of the ISG. 

14However, such non-U.S. index components, as 

‘‘NMS stocks,’’ would be registered under Section 

12 of the Act and listed and traded on a national 

securities exchange or Nasdaq, where there is last 

sale reporting. 

15 ISE Rule 2001(j) defines ‘‘broad-based index’’ to 

mean ‘‘an index designed to be representative of a 

stock market as a whole or of a range of companies 

in unrelated industries.’’

16See Amendment No. 4, supra note 5. The 

Commission notes, however, that if the ISE 

designated a data vendor, on an exclusive basis, to 

disseminate index values on behalf of the ISE, such 

vendor would be an ‘‘exclusive processor’’ under 

Section 3(a)(22)(B) of the Act and, absent an 

exemption, would be required to register as a 

securities information processor under Section 

11A(b)(1) of the Act. 

17See, e.g., Securities Exchange Act Release No. 

30944 (July 21, 1992), 57 FR 33376 (July 28, 1992) 

(order approving a Chicago Board Options 

Exchange, Incorporated proposal to establish 

opening price settlement for S&P 500 Index 

options). 

III. Discussion 

After careful review, the Commission 

finds that the proposed rule change, as 

amended, is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities exchange. In 

particular, the Commission finds that 

the proposed rule change, as amended, 

is consistent with Section 6(b)(5) of the 

Act,9 which requires, among other 

things, that the rules of a national 

securities exchange be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system and, in 

general, to protect investors and the 

public interest. 

To list options on a particular broadbased index, the ISE currently must file 

a proposed rule change with the 

Commission pursuant to Section 

19(b)(1) of the Act and Rule 19b–4 

thereunder. However, Rule 19b–4(e) 

provides that the listing and trading of 

a new derivative securities product by a 

self-regulatory organization (‘‘SRO’’) 

will not be deemed a proposed rule 

change pursuant to Rule 19b–4(c)(1) if 

the Commission has approved, pursuant 

to Section 19(b) of the Act, the SRO’s 

trading rules, procedures, and listing 

standards for the product class that 

would include the new derivative 

securities product, and the SRO has a 

surveillance program for the product 

class. 

As described more fully above, the 

ISE proposes to establish listing 

standards for broad-based index 

options. The Commission’s approval of 

the ISE’s listing standards for broadbased index options will allow options 

that satisfy the listing standards to begin 

trading pursuant to Rule 19b–4(e), 

without constituting a proposed rule 

change within the meaning of Section 

19(b) of the Act and Rule 19b–4, for 

which notice and comment and 

Commission approval is necessary.10

The ISE’s ability to rely on Rule 19b–

4(e) to list broad-based index options 

that meet the requirements of ISE Rule 

2002(d) potentially reduces the time 

frame for bringing these securities to the 

market, thereby promoting competition 

and making new broad-based index 

options available to investors more 

quickly. 

The Commission notes that the ISE 

has represented that it has adequate 

trading rules, procedures, listing 

standards, and surveillance program for 

broad-based index options. ISE’s 

existing index option trading rules and 

procedures will apply to broad-based 

index options listed pursuant to ISE 

Rule 2002(d). Other existing ISE rules, 

including provisions addressing sales 

practices and margin requirements, also 

will apply to these options. In addition, 

the ISE proposes to establish position 

and exercise limits of 25,000 contracts 

on the same side of the market for 

broad-based index options listed 

pursuant to ISE Rule 2002(d).11 The 

Commission believes that the proposed 

position and exercise limits should 

serve to minimize potential 

manipulation concerns. 

The ISE represents that it has 

adequate surveillance procedures for 

broad-based index options and that it 

intends to apply its existing surveillance 

procedures for index options to monitor 

trading in broad-based index options 

listed pursuant to ISE Rule 2002(d).12 In 

addition, because ISE Rule 2002(d) 

requires that each component of an 

index be an ‘‘NMS stock,’’ as defined in 

Rule 600 of Regulation NMS under the 

Act, each index component must trade 

on a registered national securities 

exchange or through Nasdaq. 

Accordingly, the ISE will have access to 

information concerning trading activity 

in the component securities of an 

underlying index through the 

Intermarket Surveillance Group 

(‘‘ISG’’).13 ISE Rule 2002(d) also 

provides that non-U.S. index 

components that are not subject to a 

comprehensive surveillance sharing 

agreement between the ISE and the 

primary market(s) trading the index 

components may comprise no more 

than 20% of the weight of the index.14

The Commission believes that these 

requirements will help to ensure that 

the ISE has the ability to monitor 

trading in broad-based index options 

listed pursuant to ISE Rule 2002(d) and 

in the component securities of the 

underlying indexes. 

The Commission believes that the 

requirements in ISE Rule 2002(d) 

regarding, among other things, the 

minimum market capitalization, trading 

volume, and relative weightings of an 

underlying index’s component stocks 

are designed to ensure that the markets 

for the index’s component stocks are 

adequately capitalized and sufficiently 

liquid, and that no one stock dominates 

the index. In addition, ISE Rule 2002(d) 

requires that the underlying index be 

‘‘broad-based,’’ as defined in ISE Rule 

2001(j).15 The Commission believes that 

these requirements minimize the 

potential for manipulating the 

underlying index. 

The Commission believes that the 

requirement in ISE Rule 2002(d) that the 

current index value be widely 

disseminated at least once every 15 

seconds by the Options Price Reporting 

Authority, the Consolidated Tape 

Association, the Nasdaq Index 

Dissemination Service or by one or more 

major market data vendors during the 

time an index option trades on the ISE 

should provide transparency with 

respect to current index values and 

contribute to the transparency of the 

market for broad-based index options.16

In addition, the Commission believes, as 

it has noted in other contexts, that the 

requirement in ISE Rule 2002(d) that an 

index option be settled based on the 

opening prices of the index’s 

component securities, rather than on 

closing prices, could help to reduce the 

potential impact of expiring index 

options on the market for the index’s 

component securities.17

Accelerated Approval of Amendment 

No. 4 

The Commission finds good cause for 

approving Amendment No. 4 to the 

60592 Federal Register / Vol. 70, No. 200 / Tuesday, October 18, 2005 / Notices 

18 15 U.S.C. 78s(b)(2). 

19 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

proposed rule change prior to the 

thirtieth day after the date of 

publication of notice of filing thereof in 

the Federal Register. Amendment No. 4 

strengthens and clarifies the proposal by 

revising the proposal to: (1) Provide that 

an index’s component securities must 

be ‘‘NMS stocks’’ rather than ‘‘reported 

securities;’’ (2) identify the entities or 

services that will disseminate index 

values; (3) state that the ISE has an 

adequate surveillance program for 

broad-based index options; and (4) 

clarify that the position limits for broadbased index options apply to option 

contracts on the same side of the 

market. Accordingly, the Commission 

finds that it is consistent with Sections 

6(b)(5) and 19(b) of the Act to approve 

Amendment No. 4 on an accelerated 

basis. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning Amendment No. 

4, including whether Amendment No. 4 

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 e-mail to rulecomments@sec.gov. Please include File 

Number SR–ISE–2005–27 on the subject 

line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

100 F Street NE., Washington, DC 

20549–9303. 

All submissions should refer to File 

Number SR–ISE–2005–27. 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 inspection and copying in 

the Commission’s Public Reference 

Section, 100 F Street, NE., Washington, 

DC 20549. Copies of such filing also will 

be available for inspection and copying 

at the principal office of the ISE. 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–2005–27 and should be 

submitted on or before November 8, 

2005. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,18 that the 

proposed rule change (SR–ISE–2005–

27), as amended, is approved. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.19

Jill M. Peterson, 

Assistant Secretary. 

[FR Doc. 05–20775 Filed 10–17–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52581; File No. SR–NASD–

2005–101] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Notice of Filing of 

Proposed Rule Change Relating to 

Expansion of OATS Reporting 

Requirements to OTC Equity Securities 

October 11, 2005. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 2 thereunder, 

notice is hereby given that on August 

25, 2005, the National Association of 

Securities Dealers, Inc. (‘‘NASD’’) filed 

with the Securities and Exchange 

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

the proposed rule change as described 

in Items I, II and III below, which Items 

have been prepared by NASD. 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 

NASD is proposing to amend NASD 

Rules 6951 and 6952 to require 

members to record and report to the 

Order Audit Trail System (‘‘OATS’’) 

order information relating to OTC equity 

securities. Below is the text of the 

proposed rule change. Proposed new 

language is in italics; proposed 

deletions are in brackets. 

* * * * * 

6950. Order Audit Trail System 

6951. Definitions 

For purposes of Rules 6950 through 

6957: 

(a) through (i) No change. 

(j) ‘‘Order’’ shall mean any oral, 

written, or electronic instruction to 

effect a transaction in a Nasdaq Stock 

Market equity security or OTC equity 

security that is received by a member 

from another person for handling or 

execution, or that is originated by a 

department of a member for execution 

by the same or another member, other 

than any such instruction to effect a 

proprietary transaction originated by a 

trading desk in the ordinary course of a 

member’s market making activities. 

(k) ‘‘Order Audit Trail System’’ shall 

mean the automated system owned and 

operated by the Association that is 

designed to capture order information 

reported by members for integration 

with trade [information reported to the 

Nasdaq Market Center] and quotation 

information [disseminated by members 

in order] to provide the Association 

with an accurate time sequenced record 

of orders and transactions. 

(l) ‘‘OTC equity security’’ shall mean: 

(1) any equity security that is not 

listed on The Nasdaq Stock Market or a 

national securities exchange; 

(2) any equity security that is listed on 

one or more regional stock exchanges 

and does not qualify for dissemination 

of transaction reports via the facilities of 

the Consolidated Tape; or 

(3) any Direct Participation Program 

as defined in Rule 6910 that is not listed 

on The Nasdaq Stock Market or a 

national securities exchange. 

[(l)] (m) ‘‘Program Trade’’ shall mean 

a trading strategy involving the related 

purchase or sale of a group of 15 or 

more securities having a total market 

value of $1 million or more, as further 

defined in New York Stock Exchange 

Rule 80A. 

[(m)] (n) ‘‘Reporting Agent’’ shall 

mean a third party that enters into any 

agreement with a member pursuant to 

which the Reporting Agent agrees to 

fulfill such member’s obligations under 

Rule 6955. 

[(n)] (o) ‘‘Reporting Member’’ shall 

mean a member that receives or 

originates an order and has an 

obligation to record and report 

information under Rules 6954 and 6955.