Document ID: SEC-2007-0521-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: International Securities Exchange, LLC
Posted Date: 2007-04-10T04:00Z

[Federal Register: April 10, 2007 (Volume 72, Number 68)]
[Notices]               
[Page 17963-17967]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ap07-120]                         

[[Page 17963]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55575; File No. SR-ISE-2006-59]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Amendment No. 2 to and Order Granting 
Accelerated Approval of a Proposed Rule Change as Modified by Amendment 
Nos. 1 and 2 Thereto Relating to Foreign Currency Options

April 3, 2007.

I. Introduction

    On September 29, 2006, the International Securities Exchange, LLC 
(``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 adopt rules for the listing 
and trading of cash-settled rate-modified foreign currency options 
(``FCOs'').\3\ On February 23, 2007, the Exchange filed Amendment No. 1 
to the proposed rule change.\4\ The proposed rule change, as modified 
by Amendment No. 1, was published for comment in the Federal Register 
on March 1, 2007.\5\ The Commission received no comments on the 
proposal. On April 3, 2007, the Exchange filed Amendment No. 2 to the 
proposed rule change.\6\ This order provides notice of Amendment No. 2 
to the proposed rule change and approves the proposed rule change, as 
modified by Amendment Nos. 1 and 2, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that the cash-settled FCOs that ISE 
proposes to list and trade pursuant to this proposed rule change are 
rate-modified. Cash-settled foreign currency options that trade on 
the Philadelphia Stock Exchange (``Phlx'') are not rate-modified. 
See Securities Exchange Act Release No. 54989 (December 21, 2006), 
71 FR 78506 (December 29, 2006) (SR-PHLX-2006-34). See also Phlx 
Rules 1000-1093. Accordingly, the term ``FCO'' used throughout this 
Order refers only to ISE's proposed cash-settled rate-modified 
foreign currency options. FCOs listed and traded by ISE pursuant to 
this proposed rule change will not be fungible with those listed and 
traded by Phlx.
    \4\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \5\ See Securities Exchange Act Release No. 55336 (February 23, 
2007), 72 FR 09364 (``Notice'').
    \6\ The text of Amendment No. 2 is available at the Exchange, on 
the Exchange's Web site (http://www.iseoptions.com), and at the 

Commission's Public Reference Room. In Amendment No. 2, ISE 
clarified its plans to list cross-rate FCOs by specifying the cross-
rate pairs it intends to offer as well as the applicable modifier 
and position limits for each proposed cross-rate pair. ISE also made 
a non-substantive change to the title of the proposed rule text and 
to the text of proposed ISE Rule 2200.
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II. Description of the Proposal

A. Product Specifications

    The Exchange proposes to adopt rules for the listing and trading of 
FCOs \7\ on the following currencies: The euro, the British pound, the 
Australian dollar, the New Zealand dollar, the Japanese yen, the 
Canadian dollar, the Swiss franc, the Chinese renminbi, the Mexican 
peso, the Swedish krona, the Russian ruble, the South African rand, the 
Brazilian real, the Israeli shekel, the Norwegian krone, the Polish 
zloty, the Hungarian forint, the Czech koruna and the Korean won 
(individually, a ``Currency'' and collectively, the ``Currencies'').\8\ 
The Exchange proposes to list and trade FCOs that include the U.S. 
Dollar on one side of the underlying currency pair, as well as certain 
cross-rate FCOs that include two of the aforementioned Currencies in 
the underlying currency pair (``cross-rate FCOs'').\9\
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    \7\ The Commission notes that ISE refers to these FCO products 
in its marketing literature as ``FX OptionsTM.''
    \8\ The Exchange's existing rules and procedures would also be 
applicable to FCOs, unless such rules are specifically replaced or 
are supplanted by the proposed new rules governing FCOs. See 
Proposed ISE Rule 2200. The Commission notes that futures contracts, 
and options on such futures contracts, are currently traded by the 
Chicago Mercantile Exchange (``CME'') on all of the Currencies.
    \9\ See Amendment No. 2. In other words, a cross-rate FCO would 
not involve the U.S. Dollar on one side of the underlying currency 
pair (e.g., EUR/GBP).
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    The Exchange proposes to list and trade FCOs based on the Reuters 
Composite Currency Rate \10\ as modified by ISE in a way that permits 
the underlying price of the FCO contract to resemble a price level 
similar to that of an index option.\11\ The Exchange proposes to use 
fixed, pre-assigned modifiers of 1, 10, or 100 depending on the 
exchange rate level of the underlying foreign currency.\12\ The 
Exchange would disseminate the current modified exchange rate \13\ at 
least once every fifteen seconds through the Options Price Reporting 
Authority (``OPRA'') or one or more major market data vendors during 
the time FCOs are traded on the Exchange.\14\ FCOs would be quoted in 
U.S. Dollars and would be European-style exercise.
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    \10\ The Reuters data is based on an amalgamation of midpoint 
dealer quotes on its foreign exchange dealing system.
    \11\ See Proposed ISE Rule 2201(8) (defining ``modified exchange 
rate'').
    \12\ For example, if one U.S. Dollar buys .84177 euros, a 
modifier of 100 would be used so that the modified exchange rate 
would become 84.18. Modifiers used for creating underlying values 
will be posted on the Exchange's Web site no later than the first 
day on which FCOs begin trading on ISE. Once a modifier has been 
assigned to a currency pair, it can only be changed upon a filing of 
a proposed rule change with the Commission.
    \13\ See Proposed ISE Rule 2201(8).
    \14\ See Proposed ISE Rule 2207. The Exchange will also 
disseminate FCO quotes and trades through OPRA.
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    FCOs listed by the Exchange would be cleared by The Options 
Clearing Corporation (``OCC''),\15\ and holders of options contracts 
would receive U.S. Dollars representing the difference between the 
modified exchange rate and the exercise price \16\ of the option, which 
would be multiplied by 100. Specifically, upon exercise of an in-the-
money FCO call option, the holder would receive from OCC, U.S. Dollars 
representing the difference between the exercise price and the closing 
settlement value of the FCO contract multiplied by 100. Upon exercise 
of an in-the-money FCO put option, the holder would receive from OCC, 
U.S. Dollars representing the excess of the exercise price over the 
closing settlement value of the cash-settled FCO contract multiplied by 
100. Additionally, FCOs that are in-the-money by any amount on the 
expiration date would be exercised automatically by OCC, while FCOs 
that are out-of-the-money on the expiration date would expire 
worthless.
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    \15\ See File No. SR-OCC-2007-02 (proposing to amend OCC's by-
laws and rules to accommodate the clearance and settlement of ISE's 
FCOs).
    \16\ See Proposed ISE Rule 2201(3) (defining ``exercise 
price'').
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    Minimum Increments. The interval between exercise prices of series 
of FCOs would be no less than $0.10.\17\ Additionally, under the 
Exchange's current rules, the minimum trading increment for a FCO 
contract trading at less than $3.00 would be $0.05, and for a FCO 
contract trading at $3.00 or higher, the minimum trading increment 
would be $0.10.
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    \17\ See Proposed ISE Rule 2206(a)(4).
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    Expirations. The Exchange proposes to permit FCOs to be listed with 
expirations that are the same as the expirations permitted for index 
options,\18\ except that FCOs would be permitted to have expirations 
only up to 36 months.\19\ Accordingly, after a class of options 
contracts involving any of the Currencies has been approved for listing 
and trading, the Exchange could open for trading series of FCOs that 
expire in consecutive monthly intervals, that expire in three or 
``cycle'' month

[[Page 17964]]

intervals,\20\ or that have up to 36 months to expiration.\21\ The 
expiration date for the consecutive and cycle month options would be 
11:59 p.m. Eastern Time on the Saturday immediately following the third 
Friday of the expiration month.
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    \18\ See ISE Rules 2000 and 2001.
    \19\ See Proposed ISE Rule 2205. While the proposed rules would 
permit the Exchange to list FCOs that have up to 36 months to 
expiration, the Exchange has stated that it does not anticipate 
listing these long-term series initially.
    \20\ Consecutive month and cycle month expirations of a given 
series will never overlap. See Proposed ISE Rule 2205(a)(1).
    \21\ See Proposed ISE Rule 2205; see also Notice, supra note 5 
(describing the proposed provisions governing the listing and 
trading of series of FCOs).
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    Settlement Value. The closing settlement value would be based on 
the Noon Buying Rate (to the extent it is maintained for the applicable 
Currency), as determined by the Federal Reserve Bank of New York, on 
the last trading day during expiration week,\22\ and would be modified 
using the applicable modifier that is used in calculating the 
respective modified exchange rate.\23\ If the Noon Buying Rate is not 
announced by 2 p.m. Eastern Time, the closing settlement value would be 
the most recently announced Noon Buying Rate, as modified by the 
applicable modifier, unless the Exchange determines to apply an 
alternative closing settlement value as a result of extraordinary 
circumstances.\24\ In the event that the Noon Buying Rate is not 
published for an underlying Currency, the Exchange proposes to apply 
the WM/Reuters Closing Spot rate to determine the closing settlement 
value.\25\ Like the Noon Buying Rate, in determining the closing 
settlement value, the WM/Reuters Closing spot rate would be modified 
using the applicable modifier that is used in calculating the 
respective modified exchange rate. The Exchange proposes to post 
closing settlement values on its Web site, but such values would not be 
disseminated through OPRA.\26\
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    \22\ If Friday is an Exchange holiday, the settlement value for 
FCOs would be determined on the preceding trading day, which will 
also be the last trading day for the expiring option.
    \23\ See Proposed ISE Rule 2212; see also supra note 12 and 
accompanying text (discussing rate modifiers).
    \24\ In such cases, the Exchange has stated that it may use the 
WM/Reuters Closing Spot rate.
    \25\ See Notice, supra note 5 (providing a detailed discussion 
of how the WM/Reuters Closing Spot rate is calculated and providing 
a list of the Currencies for which the Federal Reserve Bank of New 
York does not currently publish a Noon Buying Rate). In the event 
the Federal Reserve Bank of New York begins to publish a Noon Buying 
Rate for any of the Currencies for which it currently does not 
publish a Noon Buying Rate, the Exchange would resort to the Noon 
Buying Rate in place of the WM/Reuters Composite Spot rate to 
determine the closing settlement value for the applicable FCO.
    \26\ The Commission notes that, as discussed above, modified 
exchange rates will be disseminated through OPRA, as will FCO quotes 
and trades, while closing settlement values will only be posted on 
the Exchange's Web site. Investors should consult these values when 
trading FCOs.
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    Position Limits. The Exchange proposes to impose the following 
position limits for FCOs involving the U.S. Dollar on the same side of 
the market: 1,200,000 contracts for the euro; 600,000 contracts for the 
Australian dollar, the British pound, the Canadian dollar, the Israeli 
shekel, the Japanese yen, the Swedish krona and the Swiss franc; 
300,000 contracts for the remaining Currencies.\27\ Position limits for 
each of the proposed cross-rate FCOs are specified in proposed ISE Rule 
2008.\28\ Exercise limits for FCOs over any five consecutive business 
days would be equivalent to the position limits prescribed to that 
FCO.\29\
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    \27\ See Proposed ISE Rule 2208. For the purpose of determining 
which positions are on the same side of the market, long call 
positions would be aggregated with short put positions and short 
call positions would be aggregated with long put positions.
    \28\ See Amendment No. 2 and proposed ISE Rule 2208(a).
    \29\ See Proposed ISE Rule 2209.
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    Hours of Trading. The Exchange proposes to permit trading of FCOs 
on the Exchange between the hours of 9:30 a.m. and 4:15 p.m. Eastern 
Time, except that on the last trading day of the week during which a 
FCO is set to expire, trading would cease at 12 p.m. Eastern Time.\30\ 
The opening rotation for FCOs would be held at or as soon as 
practicable after the Exchange's market opens, unless an Exchange 
official determines to delay the opening rotation in the interest of 
maintaining a fair and orderly market.\31\ Trading in FCOs would follow 
the holiday schedule of the U.S. equity markets.
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    \30\ See Proposed ISE Rule 2210(a).
    \31\ See Proposed ISE Rule 2210(b); see also Notice, supra note 
5 (providing further details regarding trading rotations and 
instituting halts and suspensions in the trading of an FCO).
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B. Market Makers

    The Exchange proposes to create two new classes of market makers on 
the Exchange that may quote and trade FCOs: FXPMMs (i.e., primary 
market makers) and FXCMMs (i.e., competitive market makers).\32\ The 
Exchange states that such market makers would have similar obligations 
to the PMMs and CMMs on the Exchange's equity and index markets. The 
proposed rule sets forth the rules and the obligations of such market 
makers and the procedures under which an FXPMM and/or FXCMM would be 
able to purchase a trading license from the Exchange.\33\ Market maker 
trading licenses for a calendar year would be sold annually through an 
auction conducted during the fourth quarter of the preceding year.\34\
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    \32\ See Proposed ISE Rule 2213.
    \33\ See Proposed ISE Rule 2213; see also Notice, supra note 5 
(providing a detailed discussion of rules governing market maker 
trading licenses). Under the proposed rules, a firm would not be 
permitted to hold more than four FXPMM trading licenses across all 
currencies or more than one FXCMM trading license per currency pair. 
Additionally, market makers would not be permitted to hold and act 
as both a FXPMM and FXCMM in the same currency pair. Market maker 
trading licenses would generally not be able to be leased or 
transferred, although they would be permitted to be transferred to 
an affiliated Member, or to another qualified Member which continues 
substantially the same business as the Member that currently holds 
the market maker trading license.
    \34\ See Proposed ISE Rule 2213; see also Notice, supra note 5 
(describing the rules governing the auction processes). The Exchange 
proposes to assess market maker trading licenses that are sold 
between annual auctions a premium of ten percent of the price at 
which the market maker trading license was sold during the preceding 
auction.
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    FXPMM. The Exchange proposes to offer one FXPMM trading license per 
currency pair by a sealed bid auction, and prospective FXPMMs would be 
required to submit a bid amount with a market quality commitment using 
parameters similar to those currently used by the Exchange for ETF and 
index options.\35\ An FXPMM's trading license would have a three year 
term,\36\ and at the end of the three year term, the incumbent FXPMM 
would have the right of first refusal to match the highest bid and 
market quality commitment from another bidding firm. An FXPMM that 
continuously fails to meet its stated market quality commitments would 
have its trading license terminated.
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    \35\ See Proposed ISE Rule 2213(f).
    \36\ The proposed rule provides that an FXPMM generally would 
not be permitted to terminate its trading license. In the event a 
FXPMM is unable to fulfill its obligations, a backup FXPMM would be 
designated by the Exchange; however, the FXPMM would be required to 
continue to pay its trading license price until the license expires. 
See Proposed ISE Rule 2213(f)(6).
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    FXCMM. The Exchange proposes to initially sell ten FXCMM trading 
licenses per currency pair, with each trading license having a term of 
one year.\37\ The Exchange proposes to conduct a ``Dutch'' auction to 
sell FXCMM trading licenses.\38\ An FXCMM would have the ability to 
terminate its trading license prior to its scheduled expiration, so 
long as the FXCMM provides the requisite written notice and pays a 
termination fee.\39\
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    \37\ See Proposed ISE Rule 2213(g). Based on market demand, the 
Exchange may increase the number of FXCMM trading licenses available 
at the next regularly scheduled auction.
    \38\ See Proposed ISE Rule 2213(g)(2) (setting forth the manner 
in which the Exchange will conduct the ``Dutch'' auction).
    \39\ See Proposed ISE Rule 2213(g)(4).
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C. Margin

    The Exchange is also proposing to amend its existing margin 
requirements

[[Page 17965]]

by adopting a provision for FCOs that is substantially similar to the 
Phlx's margin rules for foreign currency options.\40\ Accordingly, FCOs 
would have the same customer margin requirements as are provided in 
Phlx Rule 722, ``Margin Accounts,'' Commentary .16.\41\ The Exchange 
would inform Members and the public of the margin levels for each 
currency option immediately following the quarterly reviews described 
in the proposed rule.
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    \40\ See Proposed ISE Rule 1202(d).
    \41\ Similar to Phlx Rule 722, Commentary .16, the Exchange 
would calculate the margin requirement for customers that assume 
short FCO positions by adding a percentage of the current market 
value of the underlying foreign currency contract to the option 
premium price less an adjustment for the out-of-the-money amount of 
the option contract. On a quarterly calendar basis, ISE would review 
five-day price changes over the preceding three-year period for each 
underlying currency and set the add-on percentage at a level which 
would have covered those price changes at least 97.5% of the time 
(the ``confidence level''). If the results of subsequent reviews 
show that the current margin level provides a confidence level below 
97%, ISE would increase the margin requirement for that individual 
currency up to a 98% confidence level. If the confidence level is 
between 97% and 97.5%, the margin level would remain the same but 
will be subject to monthly follow-up reviews until the confidence 
level exceeds 97.5% for two consecutive months. If during the course 
of the monthly follow-up reviews, the confidence level drops below 
97%, the margin level would be increased to a 98% level and if it 
exceeds 97.5% for two consecutive months, the currency would be 
taken off monthly reviews and will be put back on the quarterly 
review cycle. If the currency exceeds 98.5%, the margin level would 
be reduced to a 98% confidence level during the most recent 3 year 
period. Finally, in order to account for large price movements 
outside the established margin level, if the quarterly review shows 
that the currency had a price movement, either positive or negative, 
greater than two times the margin level during the most recent 3 
year period, the margin requirement would be set at a level to meet 
a 99% confidence level (``Extreme Outlier Test'').
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D. Customer Protection and Surveillance

    The Exchange's existing rules designed to protect public customer 
trading would apply to trading in FCOs. Specifically, ISE Rules 608(a) 
and (b) prohibit Members from accepting a customer order to purchase or 
write an option unless such customer's account has been approved in 
writing by a designated Options Principal of the Member. Additionally, 
ISE Rule 610 regarding suitability provides that options should only be 
sold to customers capable of evaluating and bearing the risks 
associated with trading in this instrument. Further, ISE Rule 611 
permits members to exercise discretionary power with respect to trading 
options in a customer's account only if the Member has received prior 
written authorization from the customer and the account had been 
accepted in writing by a designated Options Principal. ISE Rule 611 
also requires designated Options Principals or Representatives of a 
Member to approve and initial each discretionary order on the day the 
discretionary order is entered. These customer protection rules, as 
well as ISE Rule 609, ``Supervision of Accounts,'' ISE Rule 612, 
``Confirmation to Customers,'' and ISE Rule 616, ``Delivery of Current 
Options Disclosure Documents and Prospectus,'' \42\ would apply to 
trading in FCOs.
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    \42\ The OCC, together with the Exchange, has prepared an 
amendment to the Options Disclosure Document (``ODD''), to include 
characteristics of the Exchange's FCOs and trading examples.
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    FCOs would be covered under the ISE's existing surveillance 
program. Specifically, the Exchange has represented that it has an 
adequate surveillance program in place for FCOs, and intends to apply 
the same program procedures that it applies to the Exchange's index 
options.\43\ The Exchange has also noted that it is a member of the 
Intermarket Surveillance Group (``ISG'') and may obtain trading 
information via the ISG from other exchanges who are members or 
affiliates of the ISG.\44\
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    \43\ See Notice, supra note 5, at 72 FR 9368.
    \44\ See id.
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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 and, in particular, with Section 6(b)(5) of the 
Act,\45\ 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.\46\
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    \45\ 15 U.S.C. 78f(b)(5).
    \46\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    The Commission believes that FCOs may provide investors with 
additional strategic investment and hedging tools. As such, the 
Commission believes that the availability of FCOs may provide investors 
with greater flexibility in meeting their investment objectives. The 
Commission notes that, while ISE's FCOs differ in some respects from 
other foreign currency option products, the Commission has recently 
approved the trading of cash-settled foreign currency options on 
another national securities exchange.\47\ As discussed further below, 
the Commission believes that ISE's proposed rules adequately address 
any concerns raised by the listing and trading of FCOs (e.g., 
transparency, customer protection, surveillance) and provide for 
adequate and proper regulation of the listing and trading of FCOs on 
ISE.
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    \47\ See Securities Exchange Act Release No. 54989 (December 21, 
2006), 71 FR 78506 (December 29, 2006) (SR-PHLX-2006-34); see also 
Phlx Rules 1000-1093. As noted above, ISE's FCOs will be rate-
modified, whereas Phlx lists and trades cash-settled foreign 
currency options that are not rate-modified.
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A. Dissemination of Information

    The Commission notes that the underlying value of ISE's proposed 
FCOs are intended to ``look and feel'' like index options. To achieve 
this, ISE will base each FCO on a modified exchange rate (i.e., ISE 
will multiply the Reuters Composite Currency Rate by a pre-determined, 
fixed amount of 1, 10, or 100).\48\ The purpose of the modifier is to 
bring the underlying value of an FCO up to a level that more closely 
resembles the value an investor would customarily see for an index 
option. Accordingly, dissemination of the modified exchange rates by 
ISE is essential to inform investors' trading of FCOs. In this respect, 
ISE will disseminate current modified exchange rates for each FCO at 
least once every fifteen seconds over OPRA or one or more major market 
data vendors for all the currency rates on which it intends to list 
options.\49\
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    \48\ See supra note 12 and accompanying text (discussing the use 
of rate modifiers).
    \49\ See Proposed ISE Rule 2207. The Exchange will also 
disseminate FCO quotes and trades over OPRA.
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    With respect to the underlying components that make up an FCO, the 
Commission notes that an investor can access a list of the modifiers 
that are used in creating each of the modified exchange rates upon 
which the FCOs are based by consulting ISE's Web site. Further, the 
Commission believes that sufficient venues exist for obtaining reliable 
information on the Currencies so that investors in FCOs can monitor the 
underlying spot market in the Currencies. These foreign exchange rates 
are widely available via public Web sites, broker Web sites, as well as 
in print publications.\50\
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    \50\ For example, Web sites such as Bloomberg.com, Reuters.com, 
Yahoo! Finance, CNBC.com, OANDA.com, and Nasdaq.com provide free 
currency data. In addition, Investors Business Daily, Wall Street 
Journal, and the New York Times all provide currency data as part of 
their daily coverage.

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[[Page 17966]]

    The Commission also notes that investors can readily obtain 
information regarding futures trading on the Currencies, as the 
Exchange proposes to trade FCOs only on those Currencies whose futures 
contracts, and options on such futures contracts, are currently traded 
on the CME.

B. Settlement Value

    An FCO's closing settlement value will be the Noon Buying Rate or 
the WM/Reuters Closing Spot rate, as applicable,\51\ on the trading day 
prior to expiration,\52\ as modified by the applicable modifier. 
Settlement values will be posted on the Exchange's Web site, and will 
be publicly available to all visitors to the ISE's Web site. The 
Commission believes that the Exchange's procedures and the competitive 
nature of the spot market for the Currencies should help to ensure that 
the settlement values for FCO contracts will accurately reflect the 
spot price for foreign currencies.
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    \51\ See Proposed ISE Rule 2212. As noted above, in the event 
that the Federal Reserve Bank of New York does not maintain or 
publish a Noon Buying Rate for an underlying Currency, the Exchange 
will apply the WM/Reuters Closing Spot rate to determine the closing 
settlement value for a particular FCO.
    \52\ If the Noon Buying Rate is not announced by 2 p.m. Eastern 
Time, the closing settlement value would be the most recently 
announced Noon Buying Rate, as modified by the applicable modifier, 
unless the Exchange determines to apply an alternative closing 
settlement value as a result of extraordinary circumstances. The WM/
Reuters Closing Spot rate would be one of the alternative closing 
settlement values available to ISE for use in such a situation.
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C. Customer Protection

    The Commission believes that a regulatory system designed to 
protect public customers must be in place before the trading of 
sophisticated financial instruments, such as ISE's proposed FCOs, can 
commence trading on a national securities exchange. The Commission 
believes that this goal has been satisfied by the application of ISE's 
existing customer protection rules to FCOs.\53\ As noted above, the 
Exchange's customer protection rules regarding customer suitability, 
discretionary accounts, supervision of accounts, confirmation to 
customers, and delivery of the ODD, among others, will extend to the 
trading of FCOs. The Commission also notes that the ODD is being 
amended to include characteristics and trading examples of the 
Exchange's FCOs and that the Exchange plans to deliver a circular to 
its members describing the specific risks associated with FCOs. 
Accordingly, the Commission believes that ISE has provided adequate 
safeguards to help ensure the protection of investors in FCOs.
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    \53\ See supra Section II.D (Customer Protection and 
Surveillance).
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D. Surveillance

    The Commission notes that ISE will integrate FCOs into its existing 
market surveillance program and that it intends to apply the same 
program procedures to FCOs that it applies to the Exchange's index 
options. Further, ISE will have the ability to obtain trading 
information via the ISG from other exchanges who are members or 
affiliates of the ISG.\54\ In addition, the major futures exchanges are 
affiliate members of the ISG, which will allow ISE to obtain 
surveillance information regarding potential intermarket trading abuses 
from futures exchanges (such as the CME). Therefore, the Commission 
believes that ISE should have the tools necessary to allow it to 
adequately surveil trading in FCOs.
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    \54\ The members of the ISG include all of the U.S. registered 
stock and options markets.
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E. Position and Exercise Limits and Margin Requirements

    The Commission believes that the position and exercise limits 
proposed by the Exchange for FCOs are reasonably designed to protect 
the options and related markets from disruptions or manipulation.\55\ 
At the same time, the Commission believes that such position and 
exercise limits should not hamper the depth and liquidity of the market 
for FCOs. The Commission also notes that the margin requirements that 
ISE proposes to adopt for FCOs are substantially similar to Phlx's 
margin requirements for foreign currency options, which has been 
approved by the Commission.\56\ Accordingly, the Commission believes 
that the proposed position and exercise limits and margin requirements 
are appropriate and consistent with the Act.
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    \55\ See Proposed ISE Rules 2208 and 2209.
    \56\ See supra notes 40 and 41 and accompanying text (discussing 
the proposed margin requirements).
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F. Market Maker Trading Licenses

    The Commission believes that the provisions governing the two new 
classes of market makers that will be permitted to trade FCOs on the 
Exchange, FXPMMs and FXCMMs, are consistent with the Act. The 
Commission notes that FXPMMs and FXCMMs will be bound by similar 
obligations as the PMMs and CMMs of the Exchange's equity markets.\57\ 
In addition, the Commission notes that, in order to obtain a trading 
license, FXPMMs will be required provide the Exchange with market 
quality commitments along with a bid.\58\ If an FXPMM continuously 
fails to meet its stated market quality comments, it will have its 
trading license terminated by the Exchange.\59\
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    \57\ See Notice, supra note 5.
    \58\ See Proposed ISE Rule 2213(f)(2).
    \59\ See Proposed ISE rule 2213(f)(4).
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    The Commission believes that the procedures under which the 
Exchange proposes to offer market maker trading licenses are reasonably 
calculated to provide fair access to the Exchange. Specifically, the 
Commission believes that the provisions governing the Dutch auction, by 
which FXCMM trading licenses will be sold, are designed to ensure that 
market maker trading licenses are widely available.\60\ For example, 
the proposed rule permits the Exchange to increase the number of FXCMM 
trading licenses available at the next regularly scheduled auction 
based on market demand; specifies a reasonable minimum Reserve Price; 
limits the number of market maker trading licenses that may be bid by a 
single Member; and gives the Exchange the ability to sell additional 
unsold market maker trading licenses during the year at a 10% 
premium.\61\ In addition, the Commission believes that the proposed 
sealed bid auction for FXPMM trading licenses is reasonably calculated 
to award trading licenses in a fair and reasonable manner and provide 
fair access to the Exchange.\62\ The requirement that bidders provide a 
quality market commitment in addition to their bid will allow the 
Exchange to grant FXPMM trading licenses in an objective manner without 
awarding a trading license solely based on the highest bid.
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    \60\ See Proposed ISE Rule 2213(g).
    \61\ Id.
    \62\ See Proposal ISE Rule 2213(f).
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G. Other Rules

    The Commission believes that the other rule changes proposed by ISE 
to accommodate the trading of FCOs also are consistent with the Act. 
Further, the Commission notes that the Exchange has represented that it 
has the necessary systems capacity to support the additional quotations 
and messages that will result from listing and trading of FCOs.\63\
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    \63\ See Letter from Michael Simon, General Counsel, ISE, to 
John Roeser, Assistant Director, Commission, dated February 23, 
2007.
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    In particular, the Commission believes that it is reasonable and 
consistent with the Act for the Exchange to apply its current minimum 
trading increment requirements to FCOs, so that the minimum trading 
increment for an FCO trading at less than $3.00 will be $0.05 and the 
minimum trading

[[Page 17967]]

increment for an FCO trading at $3.00 or higher will be $0.10.\64\ In 
addition, the Commission believes that it is reasonable for the 
Exchange to list exercise prices of series at intervals no less than 
$0.10.\65\ Further, the Exchange believes that it appropriate for the 
Exchange to list FCOs with expirations that are the same as the 
expirations currently permitted for index options, with the exception 
that FCO long-term series will only have expirations up to 36 
months.\66\
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    \64\ See ISE Rule 710.
    \65\ See Proposed ISE Rule 2206(a)(4).
    \66\ See Proposed ISE Rule 2205.
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    The Commission also notes that, consistent with the Act, the 
proposed rules provide that the Exchange will have the ability to 
withdraw approval of the trading of a FCO if advisable in the public 
interest or for the protection of investors,\67\ and an Exchange 
official will have the authority to halt or suspend trading in an FCO 
under certain circumstances in the interest of a fair and orderly 
market.\68\
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    \67\ See Proposed ISE Rule 2204.
    \68\ See Proposed ISE Rule 2210.
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H. Accelerated Approval

    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after publishing notice 
of Amendment No. 2 in the Federal Register. The Commission notes that 
the proposal, as modified by Amendment No. 1, was published for notice 
and comment,\69\ and that the Commission received no comment letters on 
the proposal. Amendment No. 2 proposes to amend the proposed rules to 
specify the 47 cross-rate FCOs that ISE proposes to list and trade, as 
well as specify the position and exercise limits and the applicable 
rate modifiers for each proposed cross-rate FCO. The Commission notes 
that the Exchange expressed its intention to list cross-rate FCOs in 
its Exhibit 3 to the original proposed rule change, and that Amendment 
No. 2 provided the additional clarification necessary to allow the 
Exchange to do so. The Commission also notes that the proposed cross-
rate FCOs are based on the same Currencies set forth in the original 
proposal, as modified by Amendment No. 1 and published in the Federal 
Register, and they are subject to the same rules and requirements as 
other FCOs. As such, the Commission believes that Amendment No. 2 does 
not raise any new or novel issues. Accordingly, the Commission finds 
good cause, consistent with Section 19(b)(2) of the Act,\70\ to approve 
the proposal, as modified by Amendment Nos. 1 and 2, on an accelerated 
basis.
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    \69\ See Notice, supra note 5.
    \70\ 15 U.S.C. 78s(b)(2).
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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

     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-2006-59 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2006-59. 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 the 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-2006-59 and should be submitted on or before May 1, 2007.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\71\ that the proposed rule change (SR-ISE-2006-59), as modified by 
Amendment Nos. 1 and 2, be, and hereby is, approved on an accelerated 
basis.
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    \71\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\72\
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    \72\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-6655 Filed 4-9-07; 8:45 am]

BILLING CODE 8010-01-P