Document ID: SEC-2006-0697-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: International Securities Exchange, Inc.
Posted Date: 2006-06-01T04:00Z

[Federal Register: June 1, 2006 (Volume 71, Number 105)]
[Notices]               
[Page 31246-31249]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01jn06-123]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53857; File No. SR-ISE-2006-24]

 
Self-Regulatory Organizations; International Securities Exchange, 
Inc.; Notice of Filing of a Proposed Rule Change and Amendment No. 1 
Thereto To Permit the Listing and Trading of Quarterly Options Series

May 24, 2006.
    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 May 2, 2006, 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 substantially prepared by the 
Exchange. The Exchange filed Amendment No. 1 to the proposed rule 
change on May 17, 2006.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, a partial amendment, the Exchange made 
minor modifications to the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend its rules in order to list option series 
that expire at the close of business on the last business day of a 
calendar quarter. This rule change is being proposed on a pilot basis 
for one year. The text of the proposed rule change, as amended, is set 
forth below. Proposed new language is in italics; deletions are in 
[brackets].
* * * * *

Rule 100. Definitions

    (a) The following terms, when used in these Rules, shall have the 
meanings specified in this Chapter 1, unless the context indicates 
otherwise. Any term defined in Article I of the Constitution and not 
otherwise defined in this Chapter shall have the meaning assigned in 
Article I of the Constitution.
    (1) through (34) No change.
    (35) The term ``Quarterly Options Series'' means a series in an 
options class that is approved for listing and trading on the Exchange 
in which the series is opened for trading on any business day and that 
expires at the close of business on the last business day of a calendar 
quarter.
    (35) through (44) Renumbered as (36) through (45).
* * * * *

Rule 504. Series of Options Contracts Open for Trading

    (a) After a particular class of options has been approved for 
listing and trading on the Exchange, the Exchange from time to time may 
open for trading series of options in that class. Only options 
contracts in series of options currently open for trading may be 
purchased or written on the Exchange. Prior to the opening of trading 
in a given series, the Exchange will fix the expiration month, year and 
exercise price of that series. For Short Term Option Series, the 
Exchange will fix a specific expiration date and exercise price, as 
provided in Supplementary Material .02. For Quarterly Options Series, 
the Exchange will fix a specific expiration date and exercise price, as 
provided in Supplementary Material .03.
    (b) through (h) No change.

Supplementary Material to Rule 504

    .01 No change.
    .02 No change.
    .03 Quarterly Options Series Pilot Program: For a one-year pilot 
period, the Exchange may list and trade options series that expire at 
the close of business on the last business day of a calendar quarter 
(``Quarterly Options Series''). The Exchange may list Quarterly Options 
Series for up to five (5) currently listed options classes that are 
either index options or options on exchange traded funds. In addition, 
the Exchange may also list Quarterly Options Series on any options 
classes that are selected by other securities exchanges that employ a 
similar pilot program under their respective rules. The one-year pilot 
will commence the day the Exchange first initiates trading in a 
Quarterly Options Series, which shall be no later than July 24, 2006.
    (a) The Exchange will list series that expire at the end of the 
next consecutive four (4) calendar quarters, as well as the fourth 
quarter of the next calendar year. For example, if the Exchange is 
trading Quarterly Options Series in the month of May 2006, it will list 
series that expire at the end of the second, third and fourth quarters 
of 2006, as well as the

[[Page 31247]]

first and fourth quarters of 2007. Following the second quarter 2006 
expiration, the Exchange will add series that expire at the end of the 
second quarter of 2007.
    (b) The Exchange will not list a Short Term Option Series on an 
options class whose expiration coincides with that of a Quarterly 
Options Series on that same options class.
    (c) The strike price of each Quarterly Options Series will be fixed 
at a price per share, with at least two strike prices above and two 
strike prices below the value of the underlying security at about the 
time that a Quarterly Options Series is opened for trading on the 
Exchange. Additional Quarterly Options Series of the same class may be 
opened for trading on the Exchange when the Exchange deems it necessary 
to maintain an orderly market, to meet customer demand or when the 
market price of the underlying security moves substantially from the 
initial exercise price or prices. The opening of new Quarterly Options 
Series shall not affect the series of options of the same class 
previously opened.
    (d) The interval between strike prices on Quarterly Options Series 
shall be the same as the interval for strike prices for series in that 
same options class that expire in accordance with the normal monthly 
expiration cycle.
* * * * *

Rule 2001. Definitions

    (a) through (k) No change.
    (l) The term ``Quarterly Options Series'' means, for the purposes 
of Chapter 20, a series in an index options class that is approved for 
listing and trading on the Exchange in which the series is opened for 
trading on any business day and that expires at the close of business 
on the last business day of a calendar quarter.
    (l) through (n) Renumbered as (m) through (o).
* * * * *

Rule 2004. Position Limits for Broad-Based Index Options

    (a) through (c) No change.
    (d) Positions in Short Term Option Series and Quarterly Options 
Series shall be aggregated with positions in options contracts on the 
same index.
* * * * *

Rule 2005. Position Limits for Industry Index Options

    (a) through (c) No change.
    (d) Positions in Short Term Option Series and Quarterly Options 
Series shall be aggregated with positions in options contracts on the 
same index.
* * * * *

Rule 2009. Terms of Index Options Contracts

    (a) through (e) No change.

Supplementary Material to Rule 2009

    .01 No change.
    .02 Quarterly Options Series Pilot Program: Notwithstanding the 
restriction in Rule 2009(a)(3), for a one-year pilot period, the 
Exchange may list and trade options series that expire at the close of 
business on the last business day of a calendar quarter (``Quarterly 
Options Series''). The Exchange may list Quarterly Options Series for 
up to five (5) currently listed options classes that are either index 
options or options on exchange traded funds. In addition, the Exchange 
may also list Quarterly Options Series on any options classes that are 
selected by other securities exchanges that employ a similar pilot 
program under their respective rules. The one-year pilot will commence 
the day the Exchange first initiates trading in a Quarterly Options 
Series, which shall be no later than July 24, 2006.
    (a) The Exchange will list series that expire at the end of the 
next consecutive four (4) calendar quarters, as well as the fourth 
quarter of the next calendar year. For example, if the Exchange is 
trading Quarterly Options Series in the month of May 2006, it will list 
series that expire at the end of the second, third and fourth quarters 
of 2006, as well as the first and fourth quarters of 2007. Following 
the second quarter 2006 expiration, the Exchange will add series that 
expire at the end of the second quarter of 2007.
    (b) The Exchange will not list a Short Term Option Series on an 
options class whose expiration coincides with that of a Quarterly 
Options Series on that same options class.
    (c) Quarterly Options Series shall be P.M. settled.
    (d) The strike price of each Quarterly Options Series will be fixed 
at a price per share, with at least two strike prices above and two 
strike prices below the value of the underlying security at about the 
time that a Quarterly Options Series is opened for trading on the 
Exchange. The Exchange may open for trading additional Quarterly 
Options Series of the same class if the current index value of the 
underlying index moves substantially from the exercise price of those 
Quarterly Options Series that already have been opened for trading on 
the Exchange. The exercise price of each Quarterly Options Series 
opened for trading on the Exchange shall be reasonably related to the 
current index value of the underlying index to which such series 
relates at or about the time such series of options is first opened for 
trading on the Exchange. The term ``reasonably related to the current 
index value of the underlying index'' means that the exercise price is 
within thirty percent (30%) of the current index value. The Exchange 
may also open for trading additional Quarterly Options Series that are 
more than thirty percent (30%) away from the current index value, 
provided that demonstrated customer interest exists for such series, as 
expressed by institutional, corporate, or individual customers or their 
brokers. Market-makers trading for their own account shall not be 
considered when determining customer interest under this provision.
    (e) The interval between strike prices on Quarterly Options Series 
shall be the same as the interval for strike prices for series in that 
same options class that expire in accordance with the normal monthly 
expiration cycle.
* * * * *

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 Exchange proposes to amend its rules to accommodate the listing 
of option series that would expire at the close of business on the last 
business day of a calendar quarter (``Quarterly Options Series''). 
Specifically, Quarterly Options Series could be opened in any approved 
option class \4\ on a business day (``Quarterly Options Opening Date'') 
and would expire at the close of business on the last business day of a 
calendar quarter (``Quarterly Options Expiration Date''). Specifically, 
the Exchange would list series that expire at the end of the next four 
consecutive calendar quarters, as well as the fourth

[[Page 31248]]

quarter of the next calendar year. For example, if the Exchange were 
trading Quarterly Options Series in the month of May 2006, it would 
list series that expire at the end of the second, third and fourth 
quarters of 2006, as well as the first and fourth quarters of 2007. 
Following the second quarter 2006 expiration, the Exchange would add 
series that expire at the end of the second quarter of 2007.
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    \4\ Quarterly Options Series may be opened in options on indexes 
or options on Exchange Traded Fund (``ETFs'') that satisfy the 
applicable listing criteria under ISE rules.
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    Quarterly Options Series listed on currently approved option 
classes would be P.M. settled and, in all other respects, would settle 
in the same manner as do the monthly expiration series in the same 
option class.
    The proposed rule change would allow the Exchange to open up to 
five currently listed option classes that are either index options or 
options on ETFs. The strike price for each series would be fixed at a 
price per share, with at least two strike prices above and two strike 
prices below the value of the underlying security at about the time 
that a Quarterly Options Series is opened for trading on the Exchange. 
The proposal would permit the Exchange to open for trading additional 
Quarterly Options Series of the same class if the current index value 
of the underlying index moves substantially from the exercise price of 
those Quarterly Options Series already opened for trading on the 
Exchange. The exercise price of each Quarterly Options Series opened 
for trading on the Exchange would be required to be reasonably related 
to the current index value of the underlying index to which such series 
relates at or about the time such series of options were first opened 
for trading on the Exchange. The term ``reasonably related to the 
current index value of the underlying index'' means that the exercise 
price is within thirty percent of the current index value. The Exchange 
would also be permitted to open for trading additional Quarterly 
Options Series that are more than thirty percent away from the current 
index value, provided that demonstrated customer interest exists for 
such series, as expressed by institutional, corporate, or individual 
customers or their brokers. Market-makers trading for their own account 
would not be considered when determining customer interest under this 
provision.
    Because monthly option series expire on the third Friday of their 
expiration month, a Quarterly Options Series, which would expire on the 
last business day of the quarter, could never expire in the same week 
in which a monthly option series in the same class expires. The same, 
however, is not the case for Short Term Option Series. Quarterly 
Options Series and Short Term Option Series on the same option class 
could potentially expire concurrently under the proposal.\5\ Therefore, 
to avoid any confusion in the marketplace, the proposal stipulates that 
the Exchange may not list a Short Term Option Series that expires at 
the end of the day on the same day as a Quarterly Options Series in the 
same option class expires. In other words, the proposed rules would not 
permit the Exchange to list a P.M.-settled Short Term Option Series on 
an ETF or an index that would expire on a Friday that is the last 
business day of a calendar quarter if a Quarterly Options Series on 
that ETF or index were scheduled to expire on that day.
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    \5\ The Exchange currently does not have any Short Term Option 
Series listed for trading.
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    However, the proposed rules would permit the Exchange to list an 
A.M.-settled Short Term Option Series and a P.M.-settled Quarterly 
Options Series in the same option class that both expire on the same 
day (i.e., on a Friday that is the last business day of the calendar 
quarter). The Exchange believes that the concurrent listing of an A.M.-
settled Short Term Option Series and a P.M.-settled Quarterly Options 
Series on the same underlying ETF or index that expire on the same day 
would not tend to cause the same confusion as would P.M.-settled short 
term and quarterly series in the same option class, and would provide 
investors with an additional hedging mechanism.
    Finally, the interval between strike prices on Quarterly Options 
Series would be the same as the interval for strike price for series in 
the same option class that expires in accordance with the normal 
monthly expiration cycles.
    The Exchange believes that Quarterly Options Series would provide 
investors with a flexible and valuable tool to manage risk exposure, 
minimize capital outlays, and be more responsive to the timing of 
events affecting the securities that underlie options contracts. At the 
same time, the Exchange is cognizant of the need to be cautious in 
introducing a product that can increase the number of outstanding 
strike prices. For that reason, the Exchange proposes to employ a 
limited pilot program (``Pilot Program'') for Quarterly Options Series. 
Under the terms of the Pilot Program, the Exchange could select up to 
five option classes on which Quarterly Options Series may be opened on 
any Quarterly Options Opening Date. The Exchange would also be allowed 
to list those Quarterly Options Series on any option class that is 
selected by another securities exchange with a similar Pilot Program 
under its rules. The Exchange believes that limiting the number of 
option classes in which Quarterly Options Series may be opened would 
help to ensure that the addition of the new series through this Pilot 
Program would have only a negligible impact on the Exchange's and 
Option Price Reporting Authority's (``OPRA'') quoting capacity. Also, 
limiting the term of the Pilot Program for a period of one year will 
allow the Exchange and the Commission to determine whether the Pilot 
Program should be extended, expanded, and/or made permanent.
    If the Exchange were to propose an extension or an expansion of the 
Pilot Program, or were the Exchange to propose to make the Pilot 
Program permanent, the Exchange would submit, along with any filing 
proposing such amendments to the Pilot Program, a Pilot Program Report 
(``Report'') that will provide an analysis of the Pilot Program 
covering the entire period during which the Pilot Program was in 
effect. The Report would include, at a minimum: (1) Data and written 
analysis on the open interest and trading volume in the classes for 
which Quarterly Options Series were opened; (2) an assessment of the 
appropriateness of the option classes selected for the Pilot Program; 
(3) an assessment of the impact of the Pilot Program on the capacity on 
ISE, OPRA and on market data vendors (to the extent data from market 
data vendors is available); (4) any capacity problems or other problems 
that arose during the operation of the Pilot Program and how ISE 
addressed such problems; (5) any complaints that ISE received during 
the operation of the Pilot Program and how ISE addressed them; and (6) 
any additional information that would assist the Commission in 
assessing the operation of the Pilot Program. The Exchange must submit 
the Report to the Commission at least sixty days prior to the 
expiration date of the Pilot Program.
    Alternately, at the end of the Pilot Program, if the Exchange 
determines not to propose an extension or an expansion of the Pilot 
Program, or if the Commission determines not to extend or expand the 
Pilot Program, the Exchange would no longer list any additional 
Quarterly Options Series and would limit all existing open interest in 
Quarterly Options Series to closing transactions only.
    Finally, the Exchange represents that it has the necessary systems 
capacity to support the new option series that would result from the 
introduction of Quarterly Options Series. The Exchange has provided to 
the Commission information in a confidential

[[Page 31249]]

submission that supports its system capacity representations.
2. Statutory Basis
    The Exchange believes that the introduction of Quarterly Options 
Series will attract order flow to the Exchange, increase the variety of 
listing options available to investors, and provide investors with a 
valuable hedging tool. Accordingly, the Exchange believes the proposed 
rule change is consistent with Section 6(b) of the Act \6\ in general, 
and furthers the objectives of Section 6(b)(5) of the Act \7\ in 
particular, in that it is designed to promote just and equitable 
principles of trade and, in general, to protect investors and the 
public interest.
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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 Exchange does not believe that the proposed rule change would 
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 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, 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 rule-comments@sec.gov. Please include 

File Number SR-ISE-2006-24 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-ISE-2006-24. 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-ISE-2006-24 and should be submitted on or before June 
22, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E6-8435 Filed 5-31-06; 8:45 am]

BILLING CODE 8010-01-P