[Federal Register Volume 74, Number 91 (Wednesday, May 13, 2009)]
[Notices]
[Pages 22611-22613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-11122]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59877; File No. SR-ISE-2007-121]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of a Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to ISE's Margin Rule

May 6, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 24, 2007, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission the proposed rule change as described in Items I, 
II, and III below, which items have been substantially prepared by the 
self-regulatory organization. On April 29, 2009, ISE filed Amendment 
No. 1. The Commission is publishing this notice, as amended, 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 ISE is proposing to amend its margin requirements to 
facilitate, under certain circumstances, the ability of account holders 
to use vested and currently exercisable compensatory employee stock 
options (``Vested Employee Options'') issued by publicly traded 
companies as collateral for writing call options that have the same 
underlying security as the Vested Employee Options. The text of the 
proposed rule change is available on the ISE's Web site (http://www.iseoptions.com), at the principal office of the ISE, 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 its margin requirements to 
facilitate, under certain circumstances, the ability of account holders 
to use Vested Employee Options issued by publicly traded companies 
(``Issuers'') as collateral for writing call options that have the same 
underlying security as the Vested Employee Options. Specifically, the 
proposal would allow account holders to sell, as a hedge, listed equity 
call options on the same underlying security as the account holder's 
Vested Employee Options without the requirement of margin (the 
``Transactions'').\3\ The proposal would implement a concept developed 
by iOptions Group, LLC (``iOptions''), a Chicago-based organization 
founded in 1999 by former listed equity options traders. The proposal 
would permit account holders to engage in the Transactions using their 
Vested Employee Options as collateral. Currently, such Transactions 
would be deemed ``naked'' for purposes of the margin rules and subject 
to a deposit of cash margin, effectively making the strategies cost 
prohibitive and impractical. iOptions and ISE have been collaborating 
on the proposal since early 2000 and the Exchange believes that the 
concept developed by iOptions--that is, enabling employees who hold 
Vested Employee Options to generate income and liquidity on their 
otherwise illiquid asset through the listed options markets--will 
benefit investors by providing greater transparency and liquidity.
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    \3\ Absent relief from the Commission, broker-dealers would need 
to take a capital charge for the amount of unsecured margin debt.
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    Under Section 220.12(f)(1) of Regulation T,\4\ the Exchange, as a 
registered national securities exchange, is permitted to recognize the 
type of transactions described below as eligible for margin treatment 
subject to the approval of the Commission.
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    \4\ Section 220.12(f)(1) of Regulation T (12 CFR 220), 
Supplement: Margin Requirements, grants authority to registered 
national securities exchanges to promulgate rules relating to call 
and put margin requirements.
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    There appears to be precedent to create liquidity for holders of 
Vested Employee Options, as indicated by initiatives by Google Inc. 
(``Google'') and Credit Suisse First Boston (``CSFB''). Specifically, 
in the second quarter of 2007, Google implemented a program that 
enables certain of its employees to sell their Vested Employee Options 
to financial institutions that bid for their Vested Employee Options 
through a competitive auction.\5\ Additionally, in March 2004, the 
SEC's Division of Corporation Finance provided CSFB a no-action letter 
(the ``CSFB No-Action Letter'') \6\ with respect to CSFB's plan to 
enable persons subject to Section 16 of the Securities Exchange Act of 
1934 (the ``Exchange Act''), e.g., directors, officers and 10-percent 
shareholders (``Section 16 insiders''), with substantially in-the-money 
vested employee stock options to use over-the-counter derivatives to 
limit their exposure to fluctuations in the trading price of the 
underlying common stock. Under CSFB's program, Section 16 insiders sell 
CSFB a call option and buy from CSFB a put option on common stock 
underlying their stock options. The exercise prices of the call and put 
options (together, a ``collar'') are determined so as to provide the 
Section 16 insiders a measure of protection against a fall in the 
market value of the common stock during the collar's term in return for 
diminishing the ability of the Section 16 insiders to profit from a 
strong performance of the common stock during such period.
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    \5\ See http://www.google.com/intl/en/press/pressrel/ir_20061212.html.
    \6\ Credit Suisse First Boston, SEC No-Action Letter, 2004 WSB 
0712200401 (March 18, 2004).
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    Unlike Google's program, which will generally truncate the 
remaining term of Google Vested Employee Options to two years upon 
their sale (resulting in holders forfeiting any time value of their 
Vested Employee Options beyond the two-year period), the ISE's proposal 
would allow holders of Vested Employee Options to monetize the entire 
remaining time value of their Vested Employee Options because the term 
of the Vested Employee Options would be unaffected by the listed call 
option.

[[Page 22612]]

    Unlike CSFB's program, the ISE's proposal would make it possible 
for not only Section 16 insiders (who would generally be able to meet 
existing listed option margin deposit requirements) but also ``paper 
rich/cash poor'' holders to monetize the value of their Vested Employee 
Options. Also unlike CSFB's program, the proposal would permit account 
holders to sell call options against their Vested Employee Options in 
the listed options markets, which generally provide more liquidity and 
transparency than the over-the-counter markets.

Description of the Transactions

    The proposal would permit account holders to sell listed call 
options on the same security that underlies their Vested Employee 
Options without the requirement of margin. Given the uncertificated 
nature of employee stock options, in order to secure the account 
holder's obligations under the Transactions, the proposal would 
require:
    1. The account holder to (A) pledge the Vested Employee Options to 
the broker-dealer and (B) provide the broker-dealer with an irrevocable 
power-of-attorney authorizing the broker-dealer to exercise the Vested 
Employee Options on the account holder's behalf if the listed call 
options are assigned or if the broker-dealer determines it is 
necessary. The irrevocable power-of-attorney may also be used in the 
event the account holder wishes to close the listed option position 
prior to its expiration and instructs the broker-dealer to exercise 
that number of Vested Employee Options necessary to cover the cost of 
the closing purchase (the account holder will also have the option of 
depositing additional cash in the account holder's account to cover the 
cost of the closing purchase).
    2. In the event any Vested Employee Options are exercised between 
the date of the Transaction in the listed call options (the 
``Commencement Date'') and the date the Transaction is closed (the 
``Closing Date''), the shares issued upon exercise will be pledged to 
the broker-dealer (thereby replacing the Vested Employee Options that 
had been pledged prior to exercise). For example, during the time a 
Transaction is pending, the account holder may resign from the account 
holder's employment with the Issuer and may be required to exercise the 
Vested Employee Options within a certain timeframe following the 
account holder's departure. In such a scenario, the account holder 
would ask the broker-dealer to exercise the Vested Employee Options and 
the stock issued pursuant to the exercise would be pledged to the 
broker-dealer.
    3. The Issuer will promptly deliver the stock upon payment or 
receipt of the exercise notice from the broker-dealer.\7\ The Issuer 
will also agree prior to the Commencement Date to waive any forfeiture 
conditions that otherwise might apply to the Vested Employee Options 
(e.g., upon a termination of the account holder's employment with the 
issuer) as well as any transfer restrictions that would preclude pledge 
of the Vested Employee Options to the broker-dealer. In addition, the 
Issuer will represent that the Vested Employee Options are covered by 
an effective registration statement on Form S-8. If the registration 
statement becomes ineffective the Issuer will notify the broker-dealer 
immediately.
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    \7\ The Exchange will proscribe a set delivery period, which is 
expected to be no later than three business days following 
assignment of the listed options.
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    4. Because it is essential that the account holder, broker-dealer 
and Issuer cooperate and are each fully informed, agree to and 
acknowledge their own and each other's responsibilities, all 
Transactions will be governed by an agreement (the ``Agreement'') 
entered into by the account holder, Issuer and broker-dealer prior to 
the Commencement Date of the first transaction. The Agreement would 
generally set forth each party's obligations, representations and 
acknowledgements and the terms and conditions governing the 
Transactions and must be in a form acceptable to the Exchange.\8\
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    \8\ In this regard, the Exchange intends to recognize the Master 
Vested Stock Option Monetization Agreement created by iOptions as 
one acceptable agreement.
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    5. Such other terms and conditions proscribed by the Exchange in 
accordance with such form, formats and procedures as may be established 
by the Exchange from time to time. In this regard, upon approval of the 
proposed rule change and for a period of one year, the Exchange will 
require that, prior to the Commencement Date, a legal opinion with 
respect to the account holder's and Issuer's legal right to enter into 
the Transactions under the terms of the Issuer's employee stock option 
plan and related documents (the ``Legal Opinion'') be obtained in a 
form acceptable to the Exchange. During the one-year time period, the 
Exchange may determine that such legal opinion is no longer necessary 
and will revise its established forms, formats and procedures 
accordingly.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) 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 believes that this new order type will offer 
market participants new trading opportunities on the Exchange and 
enhance the Exchange's competitive position.

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

    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 self-regulatory organization 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. Specifically the Commission requests 
comment on the following topics:
    <bullet> Are there other alternative steps that could be taken that 
would enhance a broker-dealer's legal authority to exercise the Vested 
Employee Options and receive the underlying stock? Please

[[Page 22613]]

describe any such alternatives and why those alternatives may be more 
consistent with the Act.
    <bullet> If no margin is required for a Transaction, what steps, if 
any, should be taken regarding liquidity or operational risks arising 
from the Transactions? Should the margin rule include a minimum margin 
requirement?
    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#89fbfce5eca4eae6e4e4ece7fdfac9faeceaa7eee6ff"><span class="__cf_email__" data-cfemail="89fbfce5eca4eae6e4e4ece7fdfac9faeceaa7eee6ff">[email protected]</span></a>. Please include 
File No. SR-ISE-2007-121 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-2007-121. 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 Commissions 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, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. 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-2007-121 and should be submitted on 
or before June 3, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harman,
Deputy Secretary.
[FR Doc. E9-11122 Filed 5-12-09; 8:45 am]
BILLING CODE 8010-01-P


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