[Federal Register: November 22, 2004 (Volume 69, Number 224)]
[Notices]
[Page 67974-67979]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22no04-136]
[[Page 67974]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50674; File No. SR-ISE-2004-09]
Self-Regulatory Organizations; Notice of Filing of a Proposed
Rule Change and Amendments No. 1 and No. 2 by the International
Securities Exchange, Inc., Relating to the Listing and Trading of
Options on the S&P 1000 Index
November 16, 2004.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 5, 2004, the International Securities Exchange, Inc.
(``Exchange'' or ``ISE'') 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 prepared by the ISE.
The ISE submitted Amendments No. 1 and No. 2 to the proposal on July
16, 2004,\3\ and August 2, 2004, respectively.\4\ 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\ See letter from Michael Simon, Senior Vice President and
General Counsel, ISE, to Nancy J. Sanow, Assistant Director,
Division of Market Regulation (``Division''), Commission, dated July
15, 2004, and accompanying Form 19b-4 (``Amendment No. 1'').
Amendment No. 1 replaced the filing in its entirety.
\4\ See letter from Michael J. Simon, Senior Vice President and
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division,
Commission, dated July 28, 2004 (``Amendment No. 2''). Amendment No.
2 made technical changes clarifying the description of the Index and
the calculation of the Index Settlement Value.
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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 rules to list and trade options
on the Standard & Poor's 1000 Index (``S&P 1000'' or ``Index'').
Specifically, the ISE proposes to list and trade options based on: (i)
One-tenth of the value of the Index (``Reduced Value Index Options'' or
``Reduced Value S&P 1000 Options''); and (ii) one one-hundredth of the
value of the Index (``Micro Index Options'' or ``Micro S&P 1000
Options''). The ISE also proposes to list and trade long-term Reduced
Value Index Options and long-term Micro Index Options (the Reduced
Value Index Options, Micro Index Options, long-term Reduced Value Index
Options, and long-term Micro Index Options may be referred to,
collectively, as the ``Index Options''). The Index Options will be
cash-settled and have European-style exercise provisions. The text of
the proposed rule change appears below; additions are italicized.
* * * * *
Rule 2001. Definitions
* * * * *
Supplementary Material to Rule 2001
.01 The reporting authorities designated by the Exchange in respect
of each index underlying an index options contract traded on the
Exchange are as provided in the chart below.
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Underlying index Reporting authority
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S&P SmallCap 600 Index.................... Standard & Poor's.
Morgan Stanley Technology Index........... American Stock Exchange.
S&P MidCap 400 Index...................... Standard & Poor's.
S&P 1000 Index............................ Standard & Poor's.
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Rule 2004. Position Limits for Broad-Based Index Options
(a) Rule 412 generally shall govern position limits for broad-based
index options, as modified by this Rule 2004. There may be no position
limit for certain Specified (as provided in Rule 2000) broad-based
index options contracts. All other broad-based index options contracts
shall be subject to a contract limitation fixed by the Exchange, which
shall not be larger than the limits provided in the chart below.
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Standard limit (on
Broad-based underlying index the same side of Restrictions
the market)
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S&P SmallCap 600 Index.......... 100,000 contracts. No more than
60,000 near-term.
S&P MidCap 400 Index............ 45,000 contracts.. No more than
25,000 near-term.
Reduced Value S&P 1000 Index.... 50,000 contracts.. No more than
30,000 near-term.
Micro S&P 1000 Index............ 500,000 contracts. No more than
300,000 near-
term.
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* * * * *
Rule 2009. Terms of Index Options Contracts
(a) General.
* * * * *
(4) ``European-Style Exercise.'' The following European-style index
options, some of which may be A.M.-settled as provided in paragraph
(a)(5), are approved for trading on the Exchange:
(i) S&P SmallCap 600 Index
(ii) Morgan Stanley Technology Index
(iii) S&P MidCap 400 Index
(iv) Reduced Value S&P 1000 Index
(v) Micro S&P 1000 Index
(5) A.M.-Settled Index Options. The last day of trading for A.M.-
settled index options shall be the business day preceding the last day
of trading in the underlying securities prior to expiration. The
current index value at the expiration of an A.M.-settled index option
shall be determined, for all purposes under these Rules and the Rules
of the Clearing Corporation, on the last day of trading in the
underlying securities prior to expiration, by reference to the reported
level of such index as derived from first reported sale (opening)
prices of the underlying securities on such day, except that:
(i) In the event that the primary market for an underlying security
does not open for trading on that day, the price of that security shall
be determined, for the purposes of calculating the current index value
at expiration, as set forth in Rule 2008(g), unless the current index
value at expiration is fixed in accordance with the Rules and By-Laws
of the Clearing Corporation; and
(ii) In the event that the primary market for an underlying
security is open for trading on that day, but that particular security
does not open for trading on that day, the price of that security, for
the purposes of calculating the current index value at expiration,
shall be the last reported sale price of the security.
The following A.M.-settled index options are approved for trading
on the Exchange:
(i) S&P SmallCap 600 Index
(ii) Morgan Stanley Technology Index
(iii) S&P MidCap 400 Index
(iv) Reduced Value S&P 1000 Index
(v) Micro S&P 1000 Index
* * * * *
[[Page 67975]]
(c) Procedures for Adding and Deleting Strike Prices. The
procedures for adding and deleting strike prices for index options are
provided in Rule 504, as amended by the following:
(1) The interval between strike prices will be no less than $5.00;
provided, that in the case of the following classes of index options,
the interval between strike prices will be no less than $2.50:
(i) S&P SmallCap 600, if the strike price is less then $200.00
(ii) Morgan Stanley Technology Index, if the strike price is less
then $200.00
(iii) S&P MidCap 400 Index, if the strike price is less than $200
(iv) Reduced Value S&P 1000 Index, if the strike price is less then
$200.00
(v) Micro S&P 1000 Index, if the strike price is less then $200.00
* * * * *
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 ISE included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change, as
amended. The text of these statements may be examined at the places
specified in item IV below. The ISE 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 ISE proposes to amend its rules to provide for the listing and
trading on the Exchange of cash-settled, European-style Index Options.
Specifically, the Exchange proposes to list and trade Reduced Value
Index Options, Micro Index Options, long-term Reduced Value Index
Options, and long-term Micro Index Options.\5\
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\5\ Under ISE Rule 506, ``Long-Term Options Contracts,'' the ISE
may list long-term options that expire from 12 to 39 months from the
time they are listed.
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Index Design and Composition
The S&P 1000 is a market capitalization-weighted index.\6\ The S&P
1000 is a combination of the S&P MidCap 400 Index and the S&P SmallCap
600 Index. The S&P MidCap 400 Index represents approximately 70% of the
Index and the S&P SmallCap 600 Index represents approximately 30% of
the Index.\7\ The combination is designed to address the needs of
investors who want to allocate assets between large capitalization
stocks, on the one hand, and small and middle capitalization stocks, on
the other hand.\8\ As of February 18, 2004, 607 components in the Index
were listed on the New York Stock Exchange (``NYSE''); 384 were listed
on Nasdaq; and nine were listed on the American Stock Exchange
(``Amex''). All Nasdaq stocks in the Index are designated as national
market system securities by the National Association of Securities
Dealers (``NASD''), meaning, among other things, that real-time last
sale reports are available for these stocks. The Commission previously
approved the Exchange's proposals to list and trade options on the S&P
SmallCap 600 Index and the S&P MidCap 400 Index.\9\
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\6\ The calculation of a market capitalization-weighted index
involves taking the summation of the product of the price of each
stock in the index and the shares outstanding for each issue. In
contrast, a price-weighted index involves taking the summation of
the prices of the stocks in the index.
\7\ See S&P 1000 Index description published by Standard &
Poor's (``S&P'') on S&P's Web site at http://www.standardandpoors.com.
\8\ See Amendment No. 2, supra note 4.
\9\ See Exchange Act Release Nos. 48587 (October 2, 2003), 68 FR
58154 (October 8, 2003) (order approving File No. SR-ISE-2003-18)
(approving the listing and trading of options on the S&P SmallCap
600 Index); and 49696 (May 13, 2004), 69 FR 28962 (May 19, 2004)
(order approving File No. SR-ISE-2004-08) (approving the listing and
trading of options on the S&P MidCap 400 Index).
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Although Standard & Poor's (``S&P'') introduced the S&P 1000 in
2003, S&P calculated the Index internally for two years prior to its
introduction. Because the Index is a combination of the S&P MidCap 400
Index and the S&P SmallCap 600 Index, the 1000 components of the Index
consist of the 400 components included in the S&P MidCap 400 Index and
the 600 components included in the S&P SmallCap 600 Index. Stated
differently, when a component is added to (deleted from) either the S&P
MidCap 400 Index or the S&P SmallCap 600 Index, the component is
simultaneously added to (deleted from) the S&P 1000. As a result, the
S&P 1000 does not have its own component inclusion or exclusion
criteria. Rather, the inclusion and exclusion criteria for the S&P
MidCap 400 Index and the S&P SmallCap 600 Index determine the
components of the S&P 1000.
The components of the S&P MidCap 400 Index and the S&P SmallCap 600
Index are chosen on the basis of market capitalization, liquidity and
industry group representation. The criteria for a component to be added
to the S&P MidCap 400 Index and the S&P SmallCap 600 Index (and as a
result, to the S&P 1000 Index) are as follows: The component must (i)
be a U.S. company; (ii) have adequate liquidity and a reasonable
price--the ratio of annual dollar value traded to market capitalization
should be 0.3 or greater (very low stock prices can affect a stock's
liquidity); (iii) have a market capitalization of $1 billion to $4
billion for the S&P MidCap 400 and $300 million to $1 billion for the
S&P SmallCap 600 (these ranges are reviewed from time to time to assure
consistency with market conditions); (iv) have financial viability,
usually measured as four consecutive quarters of positive as-reported
earnings (as-reported earnings are GAAP Net Income excluding
discontinued operations and extraordinary items); (v) have a public
float of at least 40% of the total issued and outstanding shares; (vi)
maintain sector balance for each index as measured by a comparison of
the Global Industry Classification Standard sectors and the relevant
market capitalization ranges for each index; and (vii) be an operating
company and not a closed-end fund, holding company, partnership,
investment vehicle or royalty trust (real estate investment trusts are
eligible for inclusion in the Index).
The following are the criteria for a component to be deleted from
the Index: The component must (i) be involved in a merger, become
acquired or significantly restructured such that it no longer meets the
inclusion criteria; or (ii) substantially violate one or more of the
addition criteria.\10\ Finally, the Index may not contain any component
that is presently a component of the S&P 500 index.
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\10\ See S&P's Web site at http://www.standardandpoors.com under a link
entitled ``Index Methodology, Criteria for Additions to and
Deletions from a U.S. Index.''
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As of March 25, 2004, the Index's components were classified in the
following ten market sectors, along with their respective weightings in
the Index: Energy (6.37%); Materials (4.32%); Industrials (13.96%);
Consumer Discretionary (18.52%); Consumer Staples (4.45%); Health Care
(12.15%); Financials (18.15%); Information Technology (16.06%);
Telecommunications Services (0.51%); and Utilities (5.51%).\11\ A
complete list of the 1000 component stocks in the Index is available at
the Exchange, on the Exchange's Web site, and on S&P's Web site.
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\11\ These calculations are based on the index descriptions of
the S&P MidCap 400 and the S&P SmallCap 600 on S&P's Web site at
http://www.standardandpoors.com.
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As set forth in Exhibit B to the proposal, as of February 18, 2004,
the
[[Page 67976]]
Index had the following characteristics: (i) The total capitalization
of all of the components in the Index was $1.474 trillion; (ii)
regarding component capitalization, (a) the highest capitalization of a
component was $11.801 billion (Gilead Sciences Corp.), (b) the lowest
capitalization of a component was $72.109 million (Huffy Corp.), (c)
the mean capitalization of the components was $1.474 billion, (d) and
the median capitalization of the components was $1.019 billion; (iii)
regarding component price per share, (a) the highest price per share of
a component was $910.04 (Washington Post Co.), (b) the lowest price per
share of a component was $3.40 (Milacron Inc.), (c) the mean price per
share of the components was $30.76, (d) and the median price per share
of the components was $27.61; (iv) regarding component weightings, (a)
the highest weighting of a component was 0.80% (Gilead Sciences Corp.),
(b) the lowest weighting of a component was 0.005% (Huffy Corp.), (c)
the mean weighting of the components was 0.10%, (d) the median
weighting of the components was 0.07%, and (e) the total weighting of
the top five highest weighted components (Gilead Sciences Corp., M&T
Bank Corp., New York Community Bancorp Inc., Coach Inc., and D.R.
Horton Inc.) was 3.14%; (v) regarding component available shares
(public float), (a) the most available shares of a component was 416.90
million shares (Amtel Corp.), (b) the least available shares of a
component is 3.3 million shares (Haggar Corp.), (c) the mean available
shares of the components was 45.78 million shares, (d) and the median
available shares of the components was 32.80 million shares; (vi)
regarding the six-month average daily volumes of the components, (a)
the highest six-month average daily volume of a component was 12.326
million shares (Rf Micro Devices Inc.), (b) the lowest six month-
average daily volume of a component was 6,910 shares (Green Mountain
Power Corp.), (c) the mean six-month average daily volume of the
components was 466,190 shares, (d) the median six-month average daily
volume of the components was 252,180 shares, (e) the six-month average
daily volumes of the five most heavily traded components was 7.479
million shares (Rf Micro Devices Inc. (12.326 million shares), Amtel
Corp. (8.69 million shares), 3Com Corp. (5.76 million shares), Sandisk
Corp. (5.50 million shares), E*Trade Financial Corp. (5.11 million
shares)), and (f) 93.6%, or 936 out of 1000, of the Index's components
had a six-month average daily volume of at least 50,000 shares; (vii)
regarding options eligibility, (a) 98.95% of the Index's components
were options eligible, as measured by weighting, and (b) 98.4% of the
Index's components were options eligible, as measured by number.
The S&P 1000 Index is presently a ``full'' market capitalization-
weighted index. That is, the value of the Index is calculated by
multiplying, for each component, the total number of shares outstanding
by the price per share, adding these values together, and dividing the
result by the Index divisor. However, on March 1, 2004, S&P announced
that it would shift the S&P 500 Index, S&P MidCap 400 Index, S&P
SmallCap 600 Index, and its other U.S. indexes to ``float-adjusted''
market capitalization weighting.\12\ After the transition to float-
adjusted market capitalization weighting, the value of the Index will
be calculated by multiplying, for each component, the number of shares
in the public float of the component by the price per share, adding
these values together, and dividing the result by the Index divisor.
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\12\ See S&P's press release dated March 1, 2004, (``Press
Release'') on S&P's Web site at http://www.standardandpoors.com. As
indicated below, the ISE expects S&P's float adjustment to adjust
for cross-holdings and insider holdings.
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S&P will implement the transition from full market capitalization
weighting to float-adjusted market capitalization weighting over an 18-
month period. In September 2004, S&P began publishing procedures and
float adjustment factors and will begin calculating provisional float
adjusted indexes. The float adjustment factors include, among other
things, information regarding the adjustments that will be made to each
component to determine what each component's float will be. At that
time, S&P will begin calculating provisional indexes alongside of the
regular indexes so that passive indexers (institutional investors that
model their portfolio construction and weighting according to S&P
indexes) can control the timing of adjustments.
In March 2005, the official index series for S&P's U.S. indexes
will shift to partial float adjustment, using float adjustment factors
that represent half of the total adjustment, based on the information
published in September 2004. In September 2005, the shift to float
adjustment will be completed, the official indexes will be fully float-
adjusted, and the provisional indexes will be discontinued. Float
adjustment factors will be reviewed annually in September.\13\
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\13\ See Press Release, supra note 12.
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The Exchange does not intend to trade options on any provisional
index calculated during the transition period. Further, based on
conversations with S&P, the Exchange does not expect that any
securities or futures exchange will trade products on any provisional
index during the transition period. S&P has stated that,
notwithstanding the simultaneous calculation of provisional indexes,
there will still be only one official set of S&P indexes.
During the transition period, S&P will adjust the divisor of the
indexes to maintain continuity across the adjustments. Therefore, as a
result of the divisor adjustments, the Index value will maintain
continuity immediately following both adjustments (in March 2005 and
September 2005). Because the Index value will maintain continuity, the
value of options traded on the Index will not change as a direct result
of the float adjustment. S&P does not expect any companies to be
removed from the Index as a result of the adjustments. Adjusting the
divisor ensures that the Index level is affected by the performance of
individual components, rather than by share changes or component
replacements.
The Exchange expects S&P's float adjustment to adjust for cross-
holdings and insider holdings. The Exchange will provide a link on its
Internet Web site to the page on S&P's Web site page where float
adjustment information will be displayed.
According to the ISE, changes to the indexes have already been
widely discussed. Major broker-dealers, including Merrill Lynch, Morgan
Stanley, Lehman Brothers, JP Morgan, and others, have performed
research and published material regarding the changes. Attached as
Exhibit E to the proposal are copies of some of that research. S&P
intends to publish more detailed procedures for the adjustments in
September 2004, well before it begins making its first set of changes
in March 2005. S&P also intends to announce all related information by
press release and to post that information to its Web site. Due to
current and anticipated coverage, the Exchange does not believe that
the adjustment will surprise investors.
On March 18, 2004, the Index value was 3,370.88. The Exchange
believes that this level is too high for successful options trading.
Accordingly, the Exchange proposes to base trading in Index options on
fractions of the Index value. In particular, the Exchange proposes to
list (i) Reduced Value S&P 1000 Options that are based on one-tenth of
the value of the Index, and (ii) Micro S&P 1000 Options that are based
on one one-hundredth of the value of
[[Page 67977]]
the Index.\14\ The Exchange believes that listing options on reduced
values of the Index will attract a greater source of customer business
than if options were based on the full value of the Index. The Exchange
also believes that listing options on reduced values of the Index will
provide an opportunity for investors to hedge, or speculate on, the
market risk associated with the stocks comprising the Index. Further,
by reducing the values of the Index, the ISE notes that investors will
be able to utilize this trading vehicle, while extending a smaller
outlay of capital. The Exchange believes that this should attract
additional investors, and, in turn, create a more active and liquid
trading environment.\15\
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\14\ As noted above, the ISE also proposes to list long-term
Reduced Value S&P 1000 Options and long-term Reduced Value Micro S&P
1000 Options.
\15\ The concept of listing reduced value options on an index is
not a novel one. See, e.g., Securities Exchange Act Release Nos.
32893 (September 14, 1993), 58 FR 49070 (September 21, 1993) (order
approving File No. SR-CBOE-93-12) (approving the listing and trading
of options based on one-tenth the value of the S&P 500 Index); 43000
(June 30, 2000), 65 FR 42409 (July 10, 2000) (notice of filing and
immediate effectiveness of File No. SR-CBOE-00-15) (listing and
trading of options based on one-tenth of the value of the Nasdaq 100
Index); and 48681 (October 22, 2003), 68 FR 62337 (November 3, 2003)
(order approving File No. SR-CBOE-2003-14) (approving the listing
and trading of options based on one-tenth of the value of the NYSE
Composite Index).
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Index Calculation and Index Maintenance
The values of the Reduced Value S&P 1000 Index and the Micro S&P
1000 Index will each be calculated continuously, using the last sale
price for each component stock in the Index, and will be disseminated
every 15 seconds throughout the trading day.\16\ To calculate the full
Index value, the sum of the market value of the stocks in the Index is
divided by the base period market value (divisor), and the result is
multiplied by 100. To calculate the value of the Reduced Value S&P
1000, the full Index value is divided by ten. To calculate the value of
the Micro S&P 1000, the full Index value is divided by 100. To provide
continuity for the Index's value, the divisor is adjusted periodically
to reflect such events as changes in the number of common shares
outstanding for component stocks, company additions or deletions,
corporate restructurings and other capitalization changes.
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\16\ The values of the Reduced Value S&P 1000 and the Micro S&P
1000 will be calculated by S&P and disseminated to Reuters. The
Exchange will receive those values from Reuters and disseminate them
every 15 seconds between the hours of 9:30 a.m. and 4:15 p.m. to the
Options Price Reporting Authority (``OPRA'') and to its members. The
Index is published daily in, among other places, The Wall Street
Journal and The New York Times, and is available during trading
hours from quotation vendors such as Reuters. Telephone conversation
between Joseph W. Ferraro III, Assistant General Counsel, ISE, and
Florence Harmon, Senior Special Counsel, Division, Commission
(November 9, 2004).
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S&P will calculate the settlement value for purposes of settling
Reduced Value S&P 1000 Options (``Reduced Value Settlement Value'') and
Micro S&P 1000 Options (``Micro Settlement Value'') on the basis of
opening market prices on the business day prior to the expiration date
of such options (``Settlement Day'').\17\ The Settlement Day is
normally the Friday preceding ``Expiration Saturday.'' \18\ In the
event that a component security in the Index does not trade on
Settlement Day, the closing price from the previous trading day is used
to calculate the Settlement Value. Accordingly, trading in Reduced
Value S&P 1000 Options and Micro S&P 1000 Options will normally cease
on the Thursday preceding an Expiration Saturday. S&P will calculate,
and the Exchange will disseminate, both the Reduced Value Settlement
Value and the Micro Settlement Value.\19\
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\17\ The aggregate exercise value of the option contract is
calculated by multiplying the Index value by the Index multiplier,
which is 100.
\18\ For any given expiration month, the Index Options will
expire on the third Saturday of the month.
\19\ See Amendment No. 2, supra note 4.
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S&P will monitor and maintain the S&P 1000. S&P is responsible for
making all necessary adjustments to the Index to reflect component
deletions, share changes, stock splits, stock dividends (other than an
ordinary cash dividend), and stock price adjustments due to
restructuring, mergers, or spin-offs involving the underlying
components. Some corporate actions, such as stock splits and stock
dividends, require simple changes to the available shares outstanding
and the stock prices of the underlying components. Other corporate
actions, such as share issuances, change the market value of the Index
and would require a change in the Index divisor to effect adjustments.
Although the Exchange is not involved in the maintenance of the
Index, the Exchange represents that it will monitor the Index on a
quarterly basis and will notify the staff in the Commission's Division
of Market Regulation (``Division''), pursuant to filing a proposed rule
change pursuant to Rule 19b-4,\20\ if: (i) The number of securities in
the Index drops by \1/3\ or more; (ii) 10% or more of the weight of the
Index is represented by component securities having a market value of
less than $75 million; (iii) less than 80% of the weight of the Index
is represented by component securities that are eligible for options
trading pursuant to ISE Rule 502; (iv) 10% or more of the weight of the
Index is represented by component securities trading less than 20,000
shares per day; or (v) the largest component security accounts for more
than 15% of the weight of the Index or the largest five components in
the aggregate account for more than 50% of the weight of the Index.
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\20\ Telephone conversation between Joseph W. Ferraro III,
Assistant General Counsel, ISE, and Florence Harmon, Senior Special
Counsel, Division, Commission (November 9, 2004).
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The Exchange will notify the Division immediately in the event S&P
determines to cease maintaining or calculating the Index or in the
event the Index values are not disseminated every 15 seconds by a
widely available source. In the event the Index ceases to be maintained
or calculated, or disseminated every 15 seconds by a widely available
source, the Exchange agrees not to list any additional series for
trading and agrees to limit all transactions in such options to closing
transactions only for the purpose of maintaining a fair and orderly
market and protecting investors.\21\
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\21\ 21 Id.
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Contract Specifications
The contract specifications for both Reduced Value S&P 1000 Options
and Micro S&P 1000 Options are set forth in Exhibit C to the proposal.
The ISE proposes to characterize the Index as a broad-based index, as
defined in ISE Rule 2001(j).\22\ Options on the Index are European-
style and A.M. cash-settled. The Exchange's standard trading hours for
index options (9:30 a.m. to 4:15 p.m., New York time), as set forth in
ISE Rule 2008(a), will apply to Index Options. Exchange rules that are
applicable to the trading of options on broad-based indexes will apply
to the trading of Index Options.\23\ Specifically, among others,
Exchange rules governing margin requirements and trading halt
procedures that are applicable to the trading of broad-based index
options will apply to Index Options.
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\22\ ISE Rule 2001(j) defines a ``market index'' or a ``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.
\23\ See ISE Rules 2000 through 2012.
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The Exchange proposes to establish aggregate position limits for
options on the Reduced Value S&P 1000 Index at 50,000 Reduced Value S&P
1000 contracts on the same side of the market, provided no more than
30,000 of such Reduced Value S&P 1000 contracts are in the nearest
expiration month series. The Exchange also
[[Page 67978]]
proposes to establish aggregate position limits for options on the
Micro S&P 1000 Index at 500,000 Micro S&P 1000 contracts on the same
side of the market, provided that no more than 300,000 of the S&P 1000
Index contracts are in the nearest expiration month series. Reduced
Value S&P 1000 contracts will be aggregated with Micro S&P 1000
contracts, where 10 Micro S&P 1000 contracts equal one Reduced Value
S&P 1000 contract. These limits are similar to the limits applicable to
options on the Russell 2000 Index, a similarly capitalized index.\24\
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\24\ The same limits that apply to position limits shall apply
to exercise limits for these products. Telephone conversation
between Joseph W. Ferraro III, Associate General Counsel, ISE,
Florence Harmon, Senior Special Counsel, and A. Michael Pierson,
Attorney, Division, Commission (November 16, 2004).
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The Exchange proposes to apply broad-based index margin
requirements for the purchase and sale of Index Options. Accordingly,
purchases of put or call Index Options with nine months or less until
expiration must be paid for in full. Writers of uncovered put or call
Index Options must deposit/maintain 100% of the option proceeds, plus
15% of the aggregate contract value (current Index level x $100), less
any out-of-the-money amount, subject to a minimum of the option
proceeds plus 10% of the aggregate contract value.
The Exchange proposes to set strike price intervals at 2\1/2\
points for certain near-the-money series in near-term expiration months
when the Index is at a level below 200, and 5-point strike price
intervals for other Index Options series with expirations up to one
year, and 25-to 50-point strike price intervals for longer-term Index
Options. Accordingly, because the current Reduced Value S&P 1000 level
is 337.1, the Exchange will set strike price intervals at five points
for Reduced Value S&P 1000 Options. Because the current Micro S&P 1000
level is 33.71, the Exchange will set strike price intervals at 2\1/2\
points for Micro S&P 1000 Options. The minimum tick size for series
trading below $3 will be 0.05, and for series trading at or above $3
the minimum tick size will be 0.10.
The Exchange proposes to list both Reduced Value S&P 1000 Options
and Micro S&P 1000 Options in the three consecutive near-term
expiration months plus up to three successive expiration months in the
March cycle. For example, consecutive expirations of January, February,
March, plus June, September, and December expirations would be
listed.\25\ In addition, long-term Index Options series having up to 39
months to expiration may be traded.\26\ The interval between expiration
months for Reduced Value S&P 1000 Index Options or Micro S&P 1000 Index
Options will not be less than six months. The trading of any long-term
Reduced Value S&P 1000 Options and Micro S&P 1000 Options will be
subject to the same rules that govern the trading of all the Exchange's
index options, including sales practice rules, margin requirements, and
trading rules.
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\25\ See ISE Rule 2009(a)(3).
\26\ See ISE Rule 2009(b)(1). The Exchange is not listing
reduced value LEAPS on either of the Reduced Value S&P 1000 Indexes
or Reduced Value Micro S&P 1000 Indexes pursuant to ISE Rule
2009(b)(2). Telephone conversation between Joseph W. Ferraro III,
Associate General Counsel, ISE, Florence Harmon, Senior Special
Counsel, and A. Michael Pierson, Attorney, Division, Commission
(November 16, 2004).
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Except for the further reduced value given to the Micro S&P 1000
Options, all of the specifications and calculations for the Micro S&P
1000 Options will be the same as those used for the Reduced Value S&P
1000 Options. The Micro S&P 1000 Options will trade independently of
and in addition to the Reduced Value S&P 1000 Options, and both
products will be subject to the same rules that presently govern the
trading of Exchange index options, including sales practice rules,
margin requirements, trading rules, and position and exercise limits.
Surveillance and Capacity
The Exchange represents that it has an adequate surveillance
program in place for Index Options and intends to apply those same
program procedures that it applies to the Exchange's other index
options. Additionally, the Exchange is a member of the Intermarket
Surveillance Group (``ISG'') under the Intermarket Surveillance Group
Agreement, dated June 20, 1994. The members of the ISG include all of
the U.S. registered stock and options markets: the Amex, the Boston
Stock Exchange, the Chicago Board Options Exchange, the Chicago Stock
Exchange, the National Stock Exchange, the NASD, the NYSE, the Pacific
Stock Exchange and the Philadelphia Stock Exchange. The ISG members
work together to coordinate surveillance and investigative information
sharing in the stock and options markets. In addition, the major
futures exchanges are affiliated members of the ISG, which allows for
the sharing of surveillance information for potential intermarket
trading abuses.
The Exchange represents that it has the system capacity to
adequately handle all series that would be permitted to be added by
this proposal (including LEAPS). The Exchange provided to the
Commission information in a confidential submission that supports its
system capacity representations.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\27\ in general, and furthers the
objectives of Section 6(b)(5),\28\ in particular, in that it will
permit trading in both Reduced Value S&P 1000 Options and Micro S&P
1000 Options pursuant to rules designed to prevent fraudulent and
manipulative acts and practices and promote just and equitable
principals of trade.
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\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(5).
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A. Self-Regulatory Organization's Statement on Burden on Competition
The ISE believes that the proposed rule change does not impose any
burden on competition.
B. 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 Exchange 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
[[Page 67979]]
Send e-mail to rule-comments@sec.gov. Please include File
Number SR-ISE-2004-09 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-ISE-2004-09. 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, 450 Fifth
Street, NW., 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-
2004-09 and should be submitted on or before December 13, 2004.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3274 Filed 11-19-04; 8:45 am]
BILLING CODE 8010-01-P