[Federal Register: May 2, 2003 (Volume 68, Number 85)]
[Notices]
[Page 23507-23517]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02my03-103]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47749; File No. SR-ISE-2003-05]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change, and Amendment No. 1 Thereto, by International Securities
Exchange, Inc., Relating to Rules for Trading Options on Indices
April 25, 2003.
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 February 24, 2003, the International Securities Exchange (``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 prepared by the ISE. The ISE filed
Amendment No. 1 to the proposal on April 17, 2003.\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\ See letter from Katherine Simmons, Vice President and
Associate General Counsel, ISE to Florence Harmon, Senior Special
Counsel, Division of Market Regulation (``Division''), Commission,
dated April 16, 2003. In Amendment No. 1, the ISE submitted a new
Form 19b-4, which replaced the original filing in its entirety.
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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 adopt rules relating to trading options on
indices.
The text of the proposed rule change appears below.\4\ Additions
are italicized; deletions are in [brackets].
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\4\ The Commission notes that it made minor typographical
corrections to the rule text submitted in the proposed rule change.
Telephone conversation between Katherine Simmons, Vice President and
Associate General Counsel, ISE and Tim Fox, Attorney, Division of
Market Regulation (``Division''), Commission on April 17, 2003.
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[[Page 23508]]
Rule 413. Exemptions From Position Limits
* * * * *
(b) Market Maker Exemption. The provisions set forth below apply
only to market makers seeking an exemption to the standard position
limits in all options traded on the Exchange for the purpose of
assuring that there is sufficient depth and liquidity in the
marketplace, and not to confer a right upon the market maker applying
for an exemption.
* * * * *
(3) Generally, an exemption will be granted only to a market maker
who has requested an exemption, who is appointed to the options class
in which the exemption is requested pursuant to Rule 802, whose
positions are near the current position limit and who is significant in
terms of daily volume. The positions must generally be within ten
percent (10%) of the limits contained in Rule 412 for equity options
and twenty percent (20%) of those limits for broad-based index options.
* * * * *
Rule 418. Other Restrictions on Options Transactions and Exercises
(a) The Exchange may impose such restrictions on transactions or
exercises in one or more series of options of any class traded on the
Exchange as the Exchange in its judgment deems advisable in the
interests of maintaining a fair and orderly market in options contracts
or in underlying securities, or otherwise deems advisable in the public
interest or for the protection of investors.
(1) During the effectiveness of such restrictions, no Member shall,
for any account in which it has an interest or for the account of any
customer, engage in any transaction or exercise in contravention of
such restrictions.
(2) Notwithstanding the foregoing, during the ten (10) business
days prior to the expiration date of a given series of options, other
than index options, no restriction on exercise under this Rule may be
in effect with respect to that series of options. With respect to index
options, restrictions on exercise may be in effect until the opening of
business on the last business day before the expiration date.
(3) Exercises of American-style, cash-settled index options shall
be prohibited during any time when trading in such options is delayed,
halted, or suspended, subject to the following exceptions:
(i) The exercise of an American-style, cash-settled index option
may be processed and given effect in accordance with and subject to the
Rules of the Clearing Corporation while trading in the option is
delayed, halted, or suspended if it can be documented, in a form
prescribed by the Exchange, that the decision to exercise the option
was made during allowable time frames prior to the delay, halt, or
suspension;
(ii) Exercises of expiring American-style, cash-settled index
options shall not be prohibited on the last business day prior to their
expiration;
(iii) Exercises of American-style, cash-settled index options shall
not be prohibited during a trading halt that occurs at or after 4:00
p.m. Eastern time. In the event of such a trading halt, exercises may
occur through 4:20 p.m. Eastern time. In addition, if trading resumes
following such a trading halt (such as by closing rotation), exercises
may occur during the resumption of trading and for five (5) minutes
after the close of the resumption of trading. The provisions of this
subparagraph (a)(3)(iii) are subject to the authority of the Board to
impose restrictions on transactions and exercises pursuant to paragraph
(a) of this Rule; and
(iv) An Exchange officer designated by the Board may determine to
permit the exercise of American-style, cash-settled index options while
trading in such options is delayed, halted, or suspended.
* * * * *
Rule 701. Trading Rotations
* * * * *
(c) Rotations After Trading Hours. Normally, the close of trading
for options classes shall occur two (2) minutes after the primary
market on which the underlying stock trades closes for trading.
However, as provided below transactions may be effected in a class of
options after the end of normal trading hours in connection with a
trading rotation.
(1) A trading rotation may be employed whenever the Exchange
concludes that such action is appropriate in the interests of a fair
and orderly market. The factors that may be considered include, but are
not limited to, whether there has been a recent opening or reopening of
trading in the underlying security, a declaration of a ``fast market''
pursuant to Rule 704, or a need for a rotation in connection with
expiring individual stock or index options, an end of the year
rotation, or the restart of a rotation which is already in progress.
* * * * *
Rule 705. Limitation of Liability
(a) The Exchange, its Directors, officers, committee members,
employees, contractors or agents shall not be liable to Members nor any
persons associated with Members for any loss, expense, damages or
claims arising out of the use of the facilities, systems or equipment
afforded by the Exchange, nor any interruption in or failure or
unavailability of any such facilities, systems or equipment, whether or
not such loss, expense, damages or claims result or are alleged to
result from negligence or other unintentional errors or omissions on
the part of the Exchange, its Directors, officers, committee members,
employees, contractors, agents or other persons acting on its behalf,
or from systems failure, or from any other cause within or outside the
control of the Exchange. Without limiting the generality of the
foregoing, the Exchange shall have no liability to any person for any
loss, expense, damages or claims that result from any error, omission
or delay in calculating or disseminating any current or closing index
value or any reports of transactions in or quotations for options or
other securities, including underlying securities.
* * * * *
Rule 803. Obligations of Market Makers
(a) General. Transactions of a market maker should constitute a
course of dealings reasonably calculated to contribute to the
maintenance of a fair and orderly market, and market makers should not
make bids or offers or enter into transactions that are inconsistent
with such a course of dealings. Ordinarily, market makers are expected
to:
(1) Except in unusual market conditions, refrain from purchasing a
call option or a put option at a price more than $0.25 below parity. In
the case of calls, parity is measured by the bid in the underlying
security, and in the case of puts, parity is measured by the offer in
the underlying security.
(2) Not bid more than $1 lower or offer more than $1 higher than
the last preceding transaction price for the particular options
contract, plus or minus the aggregate change in the last sale price of
the underlying security since the time of the last preceding
transaction for the particular options contract. This provision applies
from one day's close to the next day's opening and from one transaction
to the next in intra-day transactions. With respect to inter-day
transaction this provision applies if the closing
[[Page 23509]]
transaction occurred within one hour of the close and the opening
transaction occurred within one hour after the opening. With respect to
intra-day transactions, this provision applies to transactions
occurring within one hour of one another.
An Exchange Official designated by the Board may waive the
provisions of subparagraphs (1) and (2) in an index option when the
primary underlying securities market for that index is not trading.
(b) Appointment. With respect to each options class to which a
market maker is appointed under Rule 802, the market maker has a
continuous obligation to engage, to a reasonable degree under the
existing circumstances, in dealings for his own account when there
exists, or it is reasonably anticipated that there will exist, a lack
of price continuity, a temporary disparity between the supply of and
demand for a particular options contract, or a temporary distortion of
the price relationships between options contracts of the same class.
Without limiting the foregoing, a market maker is expected to perform
the following activities in the course of maintaining a fair and
orderly market:
* * * * *
(4) To price options contracts fairly by, among other things,
bidding and offering so as to create differences of no more than $.25
between the bid and offer for each options contract for which the bid
is less than $2, no more than $.40 where the bid is at least $2 but
does not exceed $5, no more than $.50 where the bid is more than $5 but
does not exceed $10, no more than $.80 where the bid is more than $10
but does not exceed $20, and no more than $1 where the bid is $20 or
greater, provided that the Exchange may establish differences other
than the above for one or more options series.
(i) The bid/offer differentials stated in subparagraph (b)(4) of
this Rule [above] shall not apply to in-the-money options series where
the underlying securities market is wider than the differentials set
forth above. For these series, the bid/ask differential may be as wide
as the quotation on the primary market of the underlying security.
(ii) The Exchange or its authorized agent may calculate bids and
asks for various indices for the sole purpose of determining
permissible bid/ask differentials on options on these indices. These
values will be calculated by determining the weighted average of the
bids and asks for the components of the corresponding index. These bids
and asks will be disseminated by the Exchange at least every fifteen
(15) seconds during the trading day solely for the purpose of
determining the permissible bid/ask differential that market-makers may
quote on an in-the-money option on the indices. For in-the-money series
in index options where the calculated bid/ask differential is wider
than the applicable differential set out in subparagraph (b)(4) of this
Rule, the bid/ask differential in the index options series may be as
wide as the calculated bid/ask differential in the underlying index.
The Exchange will not make a market in the basket of stock comprising
the indices and is not guaranteeing the accuracy or the availability of
the bid/ask values.
Rule 1100. Exercise of Options Contracts
* * * * *
(h) Clearing Members must follow the procedures of the Clearing
Corporation when exercising American-style cash-settled index options
contracts issued or to be issued in any account at the Clearing
Corporation. Members must also follow the procedures set forth below
with respect to American-style cash-settled index options:
(1) For all contracts exercised by the Member or by any customer of
the Member, an ``exercise advice'' must be delivered by the Member in
such form or manner prescribed by the Exchange no later than 4:20 p.m.
Eastern time, or if trading hours are extended or modified in the
applicable options class, no later than five (5) minutes after the
close of trading on that day.
(2) Subsequent to the delivery of an ``exercise,'' should the
Member or a customer of the Member determine not to exercise all or
part of the advised contracts, the Member must also deliver an ``advice
cancel'' in such form or manner prescribed by the Exchange no later
than 4:20 p.m. Eastern time, or if trading hours are extended or
modified in the applicable options class, no later than five (5)
minutes after the close of trading on that day.
(3) An Exchange official designated by the Board may determine to
extend the applicable deadline for the delivery of ``exercise advice''
and ``advice cancel'' notifications pursuant to this paragraph (h) if
unusual circumstances are present.
(4) No Member may prepare, time stamp or submit an ``exercise
advice'' prior to the purchase of the contracts to be exercised if the
Member knew or had reason to know that the contracts had not yet been
purchased.
(5) The failure of any Member to follow the procedures in this
paragraph (h) may result in the assessment of a fine, which may include
but is not limited to disgorgement of potential economic gain obtained
or loss avoided by the subject exercise, as determined by the Exchange.
(6) Preparing or submitting an ``exercise advice'' or ``advice
cancel'' after the applicable deadline on the basis of material
information released after such deadline, in addition to constituting a
violation of this Rule, is activity inconsistent with just and
equitable principles of trade.
(7) The procedures set forth in subparagraphs (1)-(2) of this
subparagraph (h) do not apply (i) on the business day prior to
expiration in series expiring on a day other than a business day or
(ii) on the expiration day in series expiring on a business day.
(8) Exercises of American-style, cash-settled index options (and
the submission of corresponding ``exercise advice'' and ``advice
cancel'' forms) shall be prohibited during any time when trading in
such options is delayed, halted, or suspended, subject to the following
exceptions:
(i) The exercise of an American-style, cash-settled index option
may be processed and given effect in accordance with and subject to the
rules of the Clearing Corporation while trading in the option is
delayed, halted, or suspended if it can be documented, in a form
prescribed by the Exchange, that the decision to exercise the option
was made during allowable time frames prior to the delay, halt, or
suspension.
(ii) Exercises of expiring American-style, cash-settled index
options shall not be prohibited on the last business day prior to their
expiration.
(iii) Exercises of American-style, cash-settled index options shall
not be prohibited during a trading halt that occurs at or after 4:00
p.m. Eastern time. In the event of such a trading halt, exercises may
occur through 4:20 p.m. Eastern time. In addition, if trading resumes
following such a trading halt (such as by closing rotation), exercises
may occur during the resumption of trading and for five (5) minutes
after the close of the resumption of trading. The provisions of this
subparagraph (iii) are subject to the authority of the Board to impose
restrictions on transactions and exercises pursuant to Rule 417.
(iv) An Exchange official designated by the Board may determine to
permit the exercise of American-style, cash-settled index options while
trading in such options is delayed, halted, or suspended.
Rule 1407. Short Sales in Nasdaq National Market Securities
* * * * *
[[Page 23510]]
(c) A short sale may be designated as a bid test exempt sale if:
(1) The sale qualifies for an exemption from the short sale bid
test established in NASD rule 3350; or
(2) The short sale is by or for the account of a Primary or
Competitive Market Maker and is an exempt hedge transaction in a
designated Nasdaq National Market security underlying a class of stock
options or included in an index underlying a class of index options to
which a registered ISE market maker is appointed under Rule 803.
(d) Definitions. For purposes of paragraph (c) of this Rule:
(1) An ``exempt hedge transaction'' shall mean a short sale in a
designated Nasdaq National Market security that was effected to hedge,
and in fact serves to hedge, an existing offsetting options position or
an offsetting options position that was created in one or more
transactions contemporaneous with the short sale, provided that[,]:
(i) In the case of a stock option, when establishing the short
position the market maker receives or is eligible to receive good faith
margin pursuant to Section 220.12 of Regulation T of the Federal
Reserve Board for that transaction[.]; and
(ii) In the case of an index option, (A) the designated Nasdaq
National Market security sold short is a component security of the
index underlying such index option, (B) at least ten percent (10%) of
the value of the index underlying such index option is represented by
one or more designated Nasdaq National Market securities, and (C) the
current aggregate value of the designated Nasdaq National Market
securities sold short does not exceed the aggregate current index value
of the index options position being hedged. Notwithstanding the
foregoing, a transaction unrelated to normal options market making
activity, such as index arbitrage or risk arbitrage that in either case
is independent of a market maker's market making functions, will not be
considered an ``exempt hedge transaction.'' Once an underlying index
has satisfied the ten percent (10%) test in this subparagraph (ii), the
continued qualification of the index shall be reviewed as of the end of
each calendar quarter, and the index shall cease to qualify if the
value of the index represented by one or more designated Nasdaq
National Market securities is less than eight percent (8%) at the end
of any subsequent calendar quarter.
* * * * *
Chapter 20
Index Rules
Rule 2000. Application of Index Rules
The Rules in this Chapter are applicable only to index options
(options on indices of securities as defined below). The Rules in
Chapters 1 through 19 are also applicable to the options provided for
in this Chapter, unless such Rules are specifically replaced or are
supplemented by Rules in this Chapter. Where the Rules in this Chapter
indicate that particular indices or requirements with respect to
particular indices will be ``Specified,'' the Exchange shall file a
proposed rule change with the Commission to specify such indices or
requirements.
Rule 2001. Definitions
(a) The term ``aggregate exercise price'' means the exercise price
of the options contract times the index multiplier.
(b) The term ``American-style index option'' means an option on an
industry or market index that can be exercised on any business day
prior to expiration.
(c) The term ``A.M.-settled index option'' means an index options
contract for which the current index value at expiration shall be
determined as provided in Rule 2009(a)(5).
(d) The term ``call'' means an options contract under which the
holder of the option has the right, in accordance with the terms of the
option, to purchase from the Clearing Corporation the current index
value times the index multiplier.
(e) The term ``current index value'' with respect to a particular
index options contract means the level of the underlying index reported
by the reporting authority for the index, or any multiple or fraction
of such reported level specified by the Exchange. The current index
value with respect to a reduced-value long term options contract is
one-tenth of the current index value of the related index option. The
``closing index value'' shall be the last index value reported on a
business day.
(f) The term ``exercise price'' means the specified price per unit
at which the current index value may be purchased or sold upon the
exercise of the option.
(g) The term ``European-style index option'' means an option on an
industry or market index that can be exercised only on the last
business day prior to the day it expires.
(h) The term ``index multiplier'' means the amount specified in the
contract by which the current index value is to be multiplied to arrive
at the value required to be delivered to the holder of a call or by the
holder of a put upon valid exercise of the contract.
(i) The term ``industry index'' and ``narrow-based index'' mean an
index designed to be representative of a particular industry or a group
of related industries.
(j) The term ``market index'' and ``broad-based index'' mean an
index designed to be representative of a stock market as a whole or of
a range of companies in unrelated industries.
(k) The term ``put'' means an options contract under which the
holder of the option has the right, in accordance with the terms and
provisions of the option, to sell to the Clearing Corporation the
current index value times the index multiplier.
(l) The term ``reporting authority'' with respect to a particular
index means the institution or reporting service designated by the
Exchange as the official source for (1) calculating the level of the
index from the reported prices of the underlying securities that are
the basis of the index and (2) reporting such level. The reporting
authority for each index approved for options trading on the Exchange
shall be Specified (as provided in Rule 2000) in the Supplementary
Material to this Rule 2001.
(m) The term ``underlying security'' or ``underlying securities''
with respect to an index options contract means any of the securities
that are the basis for the calculation of the index.
Rule 2002. Designation of an Index
(a) The component securities of an index underlying an index option
contract need not meet the requirements of Rule 502. Except as set
forth in subparagraph (b) below, the listing of a class of index
options on an industry index requires the filing of a proposed rule
change to be approved by the SEC under Section 19(b) of the Exchange
Act.
(b) The Exchange may trade options on a narrow-based index pursuant
to Rule 19b-4(e) of the Securities Exchange Act of 1934, if each of the
following conditions is satisfied:
(1) The options are designated as A.M.-settled index options;
(2) The index is capitalization-weighted, price-weighted or equal
dollar-weighted, and consists of 10 or more component securities;
(3) Each component security has a market capitalization of at least
$75 million, except that for each of the lowest weighted component
securities in the index that in the aggregate account for no more than
10 percent of the
[[Page 23511]]
weight of the index, the market capitalization is at least $50 million;
(4) Trading volume of each component security has been at least one
million shares for each of the last six months, except that for each of
the lowest weighted component securities in the index that in the
aggregate account for no more than 10 percent of the weight of the
index, trading volume has been at least 500,000 shares for each of the
last six months;
(5) In a capitalization-weighted index, the lesser of the five
highest weighted component securities in the index or the highest
weighted component securities in the index that in the aggregate
represent at least 30 percent of the total number of component
securities in the index each have had an average monthly trading volume
of at least 2,000,000 shares over the past six months;
(6) No single component security represents more than 25 percent of
the weight of the index, and the five highest weighted component
securities in the index do not in the aggregate account for more than
50 percent (60 percent for an index consisting of fewer than 25
component securities) of the weight of the index;
(7) Component securities that account for at least 90 percent of
the weight of the index and at least 80 percent of the total number of
component securities in the index satisfy the requirements of Rule 502
applicable to individual underlying securities;
(8) All component securities are ``reported securities'' as defined
in Rule 11Aa3-1 under the Exchange Act;
(9) Non-U.S. component securities (stocks or ADRs) that are not
subject to comprehensive surveillance agreements do not in the
aggregate represent more than 20 percent of the weight of the index;
(10) The current underlying index value will be reported at least
once every 15 seconds during the time the index options are traded on
the Exchange;
(11) An equal dollar-weighted index will be rebalance at least once
every calendar quarter; and
(12) If an underlying index is maintained by a broker-dealer, the
index is calculated by a third party who is not a broker-dealer, and
the broker-dealer has erected a ``Chinese Wall'' around its personnel
who have access to information concerning changes in and adjustments to
the index.
(c) The following maintenance listing standards shall apply to each
class of index options originally listed pursuant to paragraph (b)
above:
(1) The requirements stated in subparagraphs (b)(1), (3), (6), (7),
(8), (9), (10), (11) and (12) must continue to be satisfied, provided
that the requirements stated in subparagraph (b)(6) must be satisfied
only as of the first day of January and July in each year;
(2) The total number of component securities in the index may not
increase or decrease by more than 33\1/3\ percent from the number of
component securities in the index at the time of its initial listing,
and in no event may be less than nine component securities;
(3) Trading volume of each component security in the index must be
at least 500,000 shares for each of the last six months, except that
for each of the lowest weighted component securities in the index that
in the aggregate account for no more than 10 percent of the weight of
the index, trading volume must be at least 400,000 shares for each of
the last six months; and
(4) In a capitalization-weighted index, the lesser of the five
highest weighted component securities in the index or the highest
weighted component securities in the index that in the aggregate
represent at least 30 percent of the total number of stocks in the
index each have had an average monthly trading volume of at least
1,000,000 shares over the past six months. In the event a class of
index options listed on the Exchange fails to satisfy the maintenance
listing standards set forth herein, the Exchange shall not open for
trading any additional series of options of that class unless such
failure is determined by the Exchange not to be significant and the SEC
concurs in that determination, or unless the continued listing of that
class of index options has been approved by the SEC under Section
19(b)(2) of the Exchange Act.
Rule 2003. Dissemination of Information
(a) The Exchange shall disseminate, or shall assure that the
current index value is disseminated, after the close of business and
from time-to-time on days on which transactions in index options are
made on the Exchange.
(b) The Exchange shall maintain, in files available to the public,
information identifying the stocks whose prices are the basis for
calculation of the index and the method used to determine the current
index value.
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 limits Specified (as provided in Rule 2000) in
this paragraph.
(b) Index options contracts shall not be aggregated with options
contracts on any stocks whose prices are the basis for calculation of
the index.
(c) Positions in reduced-value index options shall be aggregated
with positions in full-value indices. For such purposes, ten reduced-
value contracts shall equal one contract.
Rule 2005. Position Limits for Industry Index Options
(a)(1) Rule 412 generally shall govern position limits for industry
index options, as modified by this Rule 2005. Options contracts on an
industry index shall, subject to the procedures specified in
subparagraph (3) of this rule, be subject to the following position
limits:
(i) 18,000 contracts if the Exchange determines, at the time of a
review conducted pursuant to subparagraph (2) of this paragraph (a),
that any single underlying stock accounted, on average, for thirty
percent (30%) or more of the index value during the thirty (30) -day
period immediately preceding the review; or
(ii) 24,000 contracts if the Exchange determines, at the time of a
review conducted pursuant to subparagraph (2) of this paragraph (a),
that any single underlying stock accounted, on average, for twenty
percent (20%) or more of the index value or that any five (5)
underlying stocks together accounted, on average, for more than fifty
percent (50%) of the index value, but that no single stock in the group
accounted, on average, for thirty percent (30%) or more of the index
value, during the thirty (30)-day period immediately preceding the
review; or
(iii) 31,500 contracts if the Exchange determines that the
conditions specified above which would require the establishment of a
lower limit have not occurred.
(2) The Exchange shall make the determinations required by
subparagraph (1) of this paragraph (a) with respect to options on each
industry index at the commencement of trading of such options on the
Exchange and thereafter review the determination semi-annually on
January 1 and July 1.
(3) If the Exchange determines, at the time of a semi-annual
review, that the position limit in effect with respect to
[[Page 23512]]
options on a particular industry index is lower than the maximum
position limit permitted by the criteria set forth in paragraph (1) of
this paragraph (a), the Exchange may effect an appropriate position
limit increase immediately. If the Exchange determines, at the time of
a semi-annual review, that the position limit in effect with respect to
options on a particular industry index exceeds the maximum position
limit permitted by the criteria set forth in subparagraph (1) of this
paragraph (a), the Exchange shall reduce the position limit applicable
to such options to a level consistent with such criteria; provided,
however, that such a reduction shall not become effective until after
the expiration date of the most distantly expiring options series
relating to the industry index that is open for trading on the date of
the review; and provided further that such a reduction shall not become
effective if the Exchange determines, at the next semi-annual review,
that the existing position limit applicable to such options is
consistent with the criteria set forth in subparagraph (1) of this
paragraph (a).
(b) Index options contracts shall not be aggregated with options
contracts on any stocks whose prices are the basis for calculation of
the index.
(c) Positions in reduced-value index options shall be aggregated
with positions in full-value index options. For such purposes, ten (10)
reduced-value options shall equal one (1) full-value contract.
Rule 2006. Exemptions From Position Limits
(a) Broad-based Index Hedge Exemption. The broad-based index hedge
exemption is in addition to the other exemptions available under
Exchange Rules, interpretations and policies. The following procedures
and criteria must be satisfied to qualify for a broad-based index hedge
exemption:
(1) The account in which the exempt options positions are held
(``hedge exemption account'') must have received prior Exchange
approval for the hedge exemption specifying the maximum number of
contracts that may be exempt under this Rule. The hedge exemption
account must have provided all information required on Exchange-
approved forms and must have kept such information current. Exchange
approval may be granted on the basis of verbal representations, in
which event the hedge exemption account shall within two business days,
or such other time period designated by the Exchange, furnish the
Exchange with appropriate forms and documentation substantiating the
basis for the exemption. The hedge exemption account may apply from
time to time for an increase in the maximum number of contracts exempt
from the position limits.
(2) A hedge exemption account that is not carried by a Member must
be carried by a member of a self-regulatory organization participating
in the Intermarket Surveillance Group.
(3) The hedge exemption account maintains a qualified portfolio, or
will effect transactions necessary to obtain a qualified portfolio
concurrent with or at or about the same time as the execution of the
exempt options positions, of:
(i) A net long or short position in common stocks in at least four
industry groups and contains at least twenty (20) stocks, none of which
accounts for more than fifteen percent (15%) of the value of the
portfolio or in securities readily convertible, and additionally in the
case of convertible bonds economically convertible, into common stocks
which would comprise a portfolio; or
(ii) A net long or short position in index futures contracts or in
options on index futures contracts, or long or short positions in index
options or index warrants, for which the underlying index is included
in the same margin or cross-margin product group cleared at the
Clearing Corporation as the index options class to which the hedge
exemption applies.
To remain qualified, a portfolio must at all times meet these
standards notwithstanding trading activity.
(4) The exemption applies to positions in broad-based index options
dealt in on the Exchange and is applicable to the unhedged value of the
qualified portfolio. The unhedged value will be determined as follows:
(i) The values of the net long or short positions of all qualifying
products in the portfolio are totaled;
(ii) For positions in excess of the standard limit, the underlying
market value (A) of any economically equivalent opposite side of the
market calls and puts in broad-based index options, and (B) of any
opposite side of the market positions in stock index futures, options
on stock index futures, and any economically equivalent opposite side
of the market positions, assuming no other hedges for these contracts
exist, is subtracted from the qualified portfolio; and
(iii) The market value of the resulting unhedged portfolio is
equated to the appropriate number of exempt contracts as follows: the
unhedged qualified portfolio is divided by the correspondent closing
index value and the quotient is then divided by the index multiplier or
100.
(5) Positions in broad-based index options that are traded on the
Exchange are exempt from the standard limits to the extent Specified
(as provided in Rule 2000) in this subparagraph (a)(5).
(6) Only the following qualified hedging transactions and positions
are eligible for purposes of hedging a qualified portfolio (i.e.
stocks, futures, options and warrants) pursuant to this Rule:
(i) Long put(s) used to hedge the holdings of a qualified
portfolio;
(ii) Long call(s) used to hedge a short position in a qualified
portfolio;
(iii) Short call(s) used to hedge the holdings of a qualified
portfolio; and
(iv) Short put(s) used to hedge a short position in a qualified
portfolio. The following strategies may be effected only in conjunction
with a qualified stock portfolio for non-P.M. settled, European style
index options only:
(v) A short call position accompanied by long put(s), where the
short call(s) expires with the long put(s), and the strike price of the
short call(s) equals or exceeds the strike price of the long put(s) (a
``collar''). Neither side of the collar transaction can be in-the-money
at the time the position is established. For purposes of determining
compliance with Rule 411 and this Rule 2006, a collar position will be
treated as one contract;
(vi) A long put position coupled with a short put position
overlying the same broad-based index and having an equivalent
underlying aggregate index value, where the short put(s) expires with
the long put(s), and the strike price of the long put(s) exceeds the
strike price of the short put(s) (a ``debit put spread position''); and
(vii) A short call position accompanied by a debit put spread
position, where the short call(s) expires with the puts and the strike
price of the short call(s) equals or exceeds the strike price of the
long put(s). Neither side of the short call, long put transaction can
be in-the-money at the time the position is established. For purposes
of determining compliance with Rule 412 and this Rule 2006, the short
call and long put positions will be treated as one contract.
(7) The hedge exemption account shall:
(i) Liquidate and establish options, stock positions, their
equivalent or other qualified portfolio products in an orderly fashion;
not initiate or liquidate positions in a manner calculated to cause
unreasonable price fluctuations or unwarranted price changes; and not
initiate or liquidate a stock position or its equivalent with an
equivalent index options position with a view toward
[[Page 23513]]
taking advantage of any differential in price between a group of
securities and an overlying stock index option;
(ii) Liquidate any options prior to or contemporaneously with a
decrease in the hedged value of the qualified portfolio which options
would thereby be rendered excessive; and
(iii) Promptly notify the Exchange of any material change in the
qualified portfolio which materially affects the unhedged value of the
qualified portfolio.
(8) If an exemption is granted, it will be effective at the time
the decision is communicated. Retroactive exemptions will not be
granted.
(9) The hedge exemption account shall promptly provide to the
Exchange any information requested concerning the qualified portfolio.
(10) Positions included in a qualified portfolio that serve to
secure an index hedge exemption may not also be used to secure any
other position limit exemption granted by the Exchange or any other
self regulatory organization or futures contract market.
(11) Any Member that maintains a broad-based index options position
in such Member's own account or in a customer account, and has reason
to believe that such position is in excess of the applicable limit,
shall promptly take the action necessary to bring the position into
compliance. Failure to abide by this provision shall be deemed to be a
violation of Rules 412 and this Rule 2006 by the Member.
(12) Violation of any of the provisions of this Rule, absent
reasonable justification or excuse, shall result in withdrawal of the
index hedge exemption and may form the basis for subsequent denial of
an application for an index hedge exemption hereunder.
(13) Each member (other than Exchange market-makers) that maintains
a broad-based index options position on the same side of the market in
excess of a Specified (as provided in Rule 2000) number of contracts
for its own account or for the account of a customer, shall report
information as to whether the positions are hedged and provide
documentation as to how such contracts are hedged, in the manner and
form required by the Exchange. The Exchange may impose other reporting
requirements.
(14) Whenever the Exchange determines that additional margin is
warranted in light of the risks associated with an under-hedged options
position in Specified (as provided in Rule 2000) broad-based indices,
the Exchange may impose additional margin upon the account maintaining
such under-hedged position pursuant to its authority under Rule 1204.
The clearing firm carrying the account also will be subject to capital
charges under Rule 15c3-1 under the Exchange Act to the extent of any
margin deficiency resulting from the higher margin requirements.
(b) Industry Index Hedge Exemption. The industry (narrow-based)
index hedge exemption is in addition to the other exemptions available
under Exchange Rules, interpretations and policies, and may not exceed
twice the standard limit established under Rule 2005. Industry index
options positions may be exempt from established position limits for
each options contract ``hedged'' by an equivalent dollar amount of the
underlying component securities or securities convertible into such
components; provided that, in applying such hedge, each options
position to be exempted is hedged by a position in at least seventy-
five percent (75%) of the number of component securities underlying the
index. In addition, the underlying value of the options position may
not exceed the value of the underlying portfolio. The value of the
underlying portfolio is: (1) the total market value of the net stock
position; and (2) for positions in excess of the standard limit,
subtract the underlying market value of: (i) any offsetting calls and
puts in the respective index option; (ii) any offsetting positions in
related stock index futures or options; and (iii) any economically
equivalent positions (assuming no other hedges for these contracts
exist). The following procedures and criteria must be satisfied to
qualify for an industry index hedge exemption:
(1) The hedge exemption account must have received prior Exchange
approval for the hedge exemption specifying the maximum number of
contracts that may be exempt under this Interpretation. The hedge
exemption account must have provided all information required on
Exchange-approved forms and must have kept such information current.
Exchange approval may be granted on the basis of verbal
representations, in which event the hedge exemption account shall
within two business days, or such other time period designated by the
Exchange, furnish the Exchange with appropriate forms and documentation
substantiating the basis for the exemption. The hedge exemption account
may apply from time to time for an increase in the maximum number of
contracts exempt from the position limits.
(2) A hedge exemption account that is not carried by a Member must
be carried by a member of a self-regulatory organization participating
in the Intermarket Surveillance Group.
(3) The hedge exemption account: shall liquidate and establish
options, stock positions, or economically equivalent positions in an
orderly fashion; shall not initiate or liquidate positions in a manner
calculated to cause unreasonable price fluctuations or unwarranted
price changes; and shall not initiate or liquidate a stock position or
its equivalent with an equivalent index options position with a view
toward taking advantage of any differential in price between a group of
securities and an overlying stock index option. The hedge exemption
account shall liquidate any options prior to or contemporaneously with
a decrease in the hedged value of the portfolio which options would
thereby be rendered excessive. The hedge exemption account shall
promptly notify the Exchange of any change in the portfolio which
materially affects the unhedged value of the portfolio.
(4) If an exemption is granted, it will be effective at the time
the decision is communicated. Retroactive exemptions will not be
granted.
(5) The hedge exemption account shall promptly provide to the
Exchange any information requested concerning the portfolio.
(6) Positions included in a portfolio that serve to secure an index
hedge exemption may not also be used to secure any other position limit
exemption granted by the Exchange or any other self regulatory
organization or futures contract market.
(7) Any Member that maintains an industry index options position in
such Member's own account or in a customer account, and has reason to
believe that such position is in excess of the applicable limit, shall
promptly take the action necessary to bring the position into
compliance. Failure to abide by this provision shall be deemed to be a
violation of Rule 412 and this Rule 2006 by the Member.
(8) Violation of any of the provisions of this Rule 2006, absent
reasonable justification or excuse, shall result in withdrawal of the
index hedge exemption and may form the basis for subsequent denial of
an application for an index hedge exemption hereunder.
Rule 2007. Exercise Limits
(a) In determining compliance with Rule 414, exercise limits for
index options contracts shall be equivalent to the position limits
prescribed for options contracts with the nearest expiration date in
Rule 2004 or 2005. There may be no exercise limits for
[[Page 23514]]
Specified (as provided in Rule 2000) broad-based index options.
(b) For a market-maker granted an exemption to position limits
pursuant to Rule 413(b), the number of contracts that can be exercised
over a five business day period shall equal the market-maker's exempted
position.
(c) In determining compliance with exercise limits applicable to
stock index options, options contracts on a stock index group shall not
be aggregated with options contracts on an underlying stock or stocks
included in such group, options contracts on one stock index group
shall not be aggregated with options contracts on any other stock index
group.
(d) With respect to index options contracts for which an exemption
has been granted in accordance with the provisions of Rule 2006(a), the
exercise limit shall be equal to the amount of the exemption.
Rule 2008. Trading Sessions
(a) Days and Hours of Business. Except as otherwise provided in
this Rule or under unusual conditions as may be determined by the
President or his designee, transactions in index options may be
effected on the Exchange between the hours of 9:30 a.m. and 4:15 p.m.
Eastern time. With respect to options on foreign indexes, an Exchange
official designated by the Board shall determine the days and hours of
business.
(b) Trading Rotations. The opening rotation for index options shall
be held at or as soon as practicable after 9:30 a.m. Eastern time. An
Exchange official designated by the Board may delay the commencement of
the opening rotation in an index option whenever in the judgment of
that official such action is appropriate in the interests of a fair and
orderly market. Among the factors that may be considered in making
these determinations are: (1) Unusual conditions or circumstances in
other markets; (2) an influx of orders that has adversely affected the
ability of the Primary Market Maker to provide and to maintain fair and
orderly markets; (3) activation of opening price limits in stock index
futures on one or more futures exchanges; (4) activation of daily price
limits in stock index futures on one or more futures exchanges; (5) the
extent to which either there has been a delay in opening or trading is
not occurring in stocks underlying the index; and (6) circumstances
such as those which would result in the declaration of a fast market
under Rule 804(d).
(c) Instituting Halts and Suspensions. Trading on the Exchange in
any index option shall be halted or suspended whenever trading in
underlying securities whose weighted value represents more than twenty
percent (20%), in the case of a broad based index, and ten percent
(10%) for all other indices, of the index value is halted or suspended.
An Exchange official designated by the Board also may halt trading in
an index option when, in his or her judgment, such action is
appropriate in the interests of a fair and orderly market and to
protect investors. Among the facts that may be considered are the
following:
(1) Whether all trading has been halted or suspended in the market
that is the primary market for a plurality of the underlying stocks;
(2) Whether the current calculation of the index derived from the
current market prices of the stocks is not available;
(3) The extent to which the rotation has been completed or other
factors regarding the status of the rotation; and
(4) Other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present, including, but
not limited to, the activation of price limits on futures exchanges.
(d) Resumption of Trading Following a Halt or Suspension. Trading
in options of a class or series that has been the subject of a halt or
suspension by the Exchange may resume if an Exchange official
designated by the Board determines that the interests of a fair and
orderly market are served by a resumption of trading. Among the factors
to be considered in making this determination are whether the
conditions that led to the halt or suspension are no longer present,
and the extent to which trading is occurring in stocks underlying the
index. Upon reopening, a rotation shall be held in each class of index
options unless an Exchange official designated by the Board concludes
that a different method of reopening is appropriate under the
circumstances, including but not limited to, no rotation, an
abbreviated rotation or any other variation in the manner of the
rotation.
(e) Circuit Breakers. Rule 703 applies to index options trading
with respect to the initiation of a marketwide trading halt commonly
known as a ``circuit breaker.''
(f) Special Provisions for Foreign Indices. When the hours of
trading of the underlying primary securities market for an index option
do not overlap or coincide with those of the Exchange, all of the
provisions as described in paragraphs (c), (d) and (e) above shall not
apply except for (c)(4).
(g) Pricing When Primary Market Does Not Open. When the primary
market for a security underlying the current index value of an index
option does not open for trading on a given day, the price of that
security shall be determined, for the purposes of calculating the
current index value at expiration, based on the opening price of that
security on the next day that its primary market is open for trading.
This procedure shall not be used if the current index value at
expiration is fixed in accordance with the Rules and By-Laws of the
Clearing Corporation.
Rule 2009. Terms of Index Options Contracts
(a) General.
(1) Meaning of Premium Bids and Offers. Bids and offers shall be
expressed in terms of dollars and cents per unit of the index.
(2) Exercise Prices. The Exchange shall determine fixed-point
intervals of exercise prices for call and put options.
(3) Expiration Months. Index options contracts may expire at three
(3)-month intervals or in consecutive months. The Exchange may list up
to six (6) expiration months at any one time, but will not list index
options that expire more than twelve (12) months out.
(4) ``European-Style Exercise.'' Specified (as provided in Rule
2000) European-style index options, some of which may be A.M.-settled
as provided in paragraph (a)(5), may be approved for trading on the
Exchange.
(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
[[Page 23515]]
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.
A.M.-settled index options that are approved for trading on the
Exchange shall be Specified (as provided in Rule 2000) in this
subparagraph (a)(5).
(b) Long-Term Index Options Series.
(1) Notwithstanding the provisions of Paragraph (a)(3), above, the
Exchange may list long-term index options series that expire from
twelve (12) to sixty (60) months from the date of issuance.
(i) Index long term options series may be based on either the full
or reduced value of the underlying index. There may be up to ten (10)
expiration months, none further out than sixty (60) months. Strike
price interval, bid/ask differential and continuity Rules shall not
apply to such options series until the time to expiration is less than
twelve (12) months.
(ii) When a new Index long term options series is listed, such
series will be opened for trading either when there is buying or
selling interest, or forty (40) minutes prior to the close, whichever
occurs first. No quotations will be posted for such options series
until they are opened for trading.
(2) Reduced-Value Long Term Options Series.
(i) Reduced-value long term options series may be approved for
trading on Specified (as provided in Rule 2000) indices.
(ii) Expiration Months. Reduced-value long term options series may
expire at six-month intervals. When a new expiration month is listed,
series may be near or bracketing the current index value. Additional
series may be added when the value of the underlying index increases or
decreases by ten (10) to fifteen (15) percent.
(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 certain Specified (as provided in
Rule 2000) classes of index options, the interval between strike prices
will be no less than $2.50.
(2) New series of index options contracts may be added up to the
fifth business day prior to expiration.
(3) When new series of index options with a new expiration date are
opened for trading, or when additional series of index options in an
existing expiration date are opened for trading as the current value of
the underlying index to which such series relate moves substantially
from the exercise prices of series already opened, the exercise prices
of such new or additional series shall be reasonably related to the
current value of the underlying index at the time such series are first
opened for trading. In the case of all classes of index options, the
term ``reasonably related to the current value of the underlying
index'' shall have the meaning set forth in Paragraph (c)(4) below.
(4) Notwithstanding any other provision of this paragraph (c), the
Exchange may open for trading additional series of the same class of
index options as the current index value of the underlying index moves
substantially from the exercise price of those index options that
already have been opened for trading on the Exchange. The exercise
price of each series of index options 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 series of index options 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.
(d) Index Level on the Last Day of Trading. The reported level of
the underlying index that is calculated by the reporting authority on
the last day of trading in the underlying securities prior to
expiration for purposes of determining the current index value at the
expiration of an A.M.-settled index option may differ from the level of
the index that is separately calculated and reported by the reporting
authority and that reflects trading activity subsequent to the opening
of trading in any of the underlying securities.
(e) Index Values for Settlement. The Rules of the Clearing
Corporation specify that, unless the Rules of the Exchange provide
otherwise, the current index value used to settle the exercise of an
index options contract shall be the closing index for the day on which
the index options contract is exercised in accordance with the Rules of
the Clearing Corporation or, if such day is not a business day, for the
most recent business day.
Rule 2010. Debit Put Spread Cash Account Transactions
Debit put spread positions in European-style, broad-based index
options traded on the Exchange (hereinafter ``debit put spreads'') may
be maintained in a cash account as defined by Federal Reserve Board
Regulation T Section 220.8 by a Public Customer, provided that the
following procedures and criteria are met:
(a) The customer has received Exchange approval to maintain debit
put spreads in a cash account carried by an Exchange member
organization. A customer so approved is hereinafter referred to as a
``spread exemption customer.''
(b) The spread exemption customer has provided all information
required on Exchange-approved forms and has kept such information
current.
(c) The customer holds a net long position in each of the stocks of
a portfolio that has been previously established or in securities
readily convertible, and additionally in the case of convertible bonds
economically convertible, into common stocks which would comprise a
portfolio. The debit put spread position must be carried in an account
with a member of a self-regulatory organization participating in the
Intermarket Surveillance Group.
(d) The stock portfolio or its equivalent is composed of net long
positions in common stocks in at least four industry groups and
contains at least twenty (20) stocks, none of which accounts for more
than fifteen percent (15%) of the value of the portfolio (hereinafter
``qualified portfolio''). To remain qualified, a portfolio must at all
times meet these standards notwithstanding trading activity in the
stocks.
(e) The exemption applies to European-style broad-based index
options dealt in on the Exchange to the extent the underlying value of
such options position does not exceed the unhedged value of the
qualified portfolio. The unhedged value would be determined as follows:
(1) The values of the net long or short positions of all qualifying
products in the portfolio are totaled; (2) for positions in excess of
the standard limit, the underlying market value (A) of any economically
equivalent opposite side of the market calls and puts in broad-based
index options, and (B) of any opposite side of the market positions in
stock index futures, options on stock index futures,
[[Page 23516]]
and any economically equivalent opposite side of the market positions,
assuming no other hedges for these contracts exist, is subtracted from
the qualified portfolio; and (3) the market value of the resulting
unhedged portfolio is equated to the appropriate number of exempt
contracts as follows `` the unhedged qualified portfolio is divided by
the correspondent closing index value and the quotient is then divided
by the index multiplier or 100.
(f) A debit put spread in Exchange-traded broad-based index options
with European-style exercises is defined as a long put position coupled
with a short put position overlying the same broad-based index and
having an equivalent underlying aggregate index value, where the short
put(s) expires with the long put(s), and the strike price of the long
put(s) exceeds the strike price of the short put(s). A debit put spread
will be permitted in the cash account as long as it is continuously
associated with a qualified portfolio of securities with a current
market value at least equal to the underlying aggregate index value of
the long side of the debit put spread.
(g) The qualified portfolio must be maintained with either a
Member, another broker-dealer, a bank, or securities depository.
(h) The spread exemption customer shall agree promptly to provide
the Exchange any information requested concerning the dollar value and
composition of the customer's stock portfolio, and the current debit
put spread positions.
(1) The spread exemption customer shall agree to and any Member
carrying an account for the customer shall:
(i) Comply with all Exchange Rules and regulations;
(ii) liquidate any debit put spreads prior to or contemporaneously
with a decrease in the market value of the qualified portfolio, which
debit put spreads would thereby be rendered excessive; and
(iii) promptly notify the Exchange of any change in the qualified
portfolio or the debit put spread position which causes the debit put
spreads maintained in the cash account to be rendered excessive.
(i) If any Member carrying a cash account for a spread exemption
customer with a debit put spread position dealt in on the Exchange has
a reason to believe that as a result of an opening options transaction
the customer would violate this spread exemption, and such opening
transaction occurs, then the Member has violated this Rule 2010.
(j) Violation of any of these provisions, absent reasonable
justification or excuse, shall result in withdrawal of the spread
exemption and may form the basis for subsequent denial of an
application for a spread exemption hereunder.
Rule 2011. Disclaimers
(a) Applicability of Disclaimers. The disclaimers in paragraph (b)
below shall apply to the reporting authorities identified in the
Supplemental Material to Rule 2001.
(b) Disclaimer. No reporting authority, and no affiliate of a
reporting authority (each such reporting authority, its affiliates, and
any other entity identified in this Rule are referred to collectively
as a ``Reporting Authority''), makes any warranty, express or implied,
as to the results to be obtained by any person or entity from the use
of an index it publishes, any opening, intra-day or closing value
therefor, or any data included therein or relating thereto, in
connection with the trading of any options contract based thereon or
for any other purpose. The Reporting Authority shall obtain information
for inclusion in, or for use in the calculation of, such index from
sources it believes to be reliable, but the Reporting Authority does
not guarantee the accuracy or completeness of such index, any opening,
intra-day or closing value therefor, or any date included therein or
related thereto. The Reporting Authority hereby disclaims all
warranties of merchantability or fitness for a particular purpose or
use with respect to such index, any opening, intra-day, or closing
value therefor, any data included therein or relating thereto, or any
options contract based thereon. The Reporting Authority shall have no
liability for any damages, claims, losses (including any indirect or
consequential losses), expenses, or delays, whether direct or indirect,
foreseen or unforeseen, suffered by any person arising out of any
circumstance or occurrence relating to the person's use of such index,
any opening, intra-day or closing value therefor, any data included
therein or relating thereto, or any options contract based thereon, or
arising out of any errors or delays in calculating or disseminating
such index.
Rule 2012. Exercise of American-Style Index Options
No Member may prepare, time stamp or submit an exercise instruction
for an American-style index options series if the Member knows or has
reason to know that the exercise instruction calls for the exercise of
more contracts than the then ``net long position'' of the account for
which the exercise instruction is to be tendered. For purposes of this
Rule: (i) The term ``net long position'' shall mean the net position of
the account in such option at the opening of business of the day of
such exercise instruction, plus the total number of such options
purchased that day in opening purchase transactions up to the time of
exercise, less the total number of such options sold that day in
closing sale transactions up to the time of exercise; (ii) the
``account'' shall be the individual account of the particular customer,
market-maker or ``non-customer'' (as that term is defined in the By-
Laws of the Clearing Corporation) who wishes to exercise; and (iii)
every transaction in an options series effected by a market-maker in a
market-maker's account shall be deemed to be a closing transaction in
respect of the market-maker's then positions in such options series. No
Member may adjust the designation of an ``opening transaction'' in any
such option to a ``closing transaction'' except to remedy mistakes or
errors made in good faith.
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, as
amended, 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 seeks to adopt rules necessary to allow the Exchange to
list and trade options on indices. The proposed rules include listing
and maintenance criteria for options on underlying indices, rules on
dissemination of index values, position and exercise limits for index
options, exemptions from the limits, and terms of index options
contracts. All of the proposed rules and changes to existing Exchange
Rules are based on the existing rules of the other four options
exchanges.\5\
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\5\ See, e.g. CBOE Rules 4.11, 4.16, 6.2, 6.7, 8.7, 11.1, 15.10,
and 24.1 through 24.20, PCX Rules 7.11 and 13.2, Amex Rule 905C, and
Phlx Rule 1033A.
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Because the rules related to trading options on indices are product
specific in many areas, the Exchange will need
[[Page 23517]]
to file additional proposed rule changes with the Commission when the
Exchange identifies specific products. For purposes of this proposed
rule change, certain rules indicate that they apply to ``specified''
indices. ISE Rules 2001(l), 2004(a), 2006(a), 2007(a), 2009, and 2011
all contain provisions that are dependant upon the Exchange identifying
specific index products in the rule. Accordingly, ISE Rule 2000 states
that where the rules in Chapter 20 indicate that particular indices or
requirements with respect to particular indices will be ``Specified,''
the ISE shall file a proposed rule change with the Commission pursuant
to Section 19 of the Act \6\ and Rule 19b-4 thereunder \7\ to specify
such indices or requirements.
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\6\ 15 U.S.C 78s.
\7\ 17 CFR 240.19b-4.
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The ISE proposes to add a new Chapter 20 to the Exchange rules, as
well as conforming changes to certain existing ISE rules. The following
are the specific rule changes:
Proposed ISE Rule 2000: This proposed rule specifies that Chapter
20 is applicable only to index options, and that the rules in Chapters
1 through 19 also apply to index options unless they are replaced by
the new rules or the context otherwise requires.
Proposed ISE Rule 2001: This proposed rule contains the necessary
definitions for index options trading.
Proposed ISE Rule 2002: This proposed rule contains the general
listing standards for index option.
Proposed ISE Rule 2003: This proposed rule requires the
dissemination of index values as a condition to the trading of options
on an index.
Proposed ISE Rules 2004 through 2007: These proposed rules contain
the standard position limit and exercise limits for index options, as
well as exemption standards and the procedures for requesting
exemptions from those proposed rules.
Proposed ISE Rule 2008: This proposed rule provides that index
options will trade until 4:15 p.m. Eastern Time, the same as on other
exchanges. The proposed rule also contains procedures for trading
rotations, as well as trading halts and suspensions.
Proposed ISE Rules 2009 and 2010: Proposed ISE Rule 2009 outlines
the terms of index options contracts, while proposed ISE Rule 2010
applies to debit put spreads.
Proposed ISE Rule 2011: This proposed rule disclaims liability for
index reporting authorities.
Proposed ISE Rule 2012: This proposed rule contains standards for
exercising American-style index options.
Amendment to ISE Rule 413: This proposed amendment adds broad-based
index options to the market maker exemption from position limits.
Amendments to ISE Rules 418 and 1100: In conjunction with proposed
ISE Rule 2012, this proposed rule will govern the exercise of American-
style, cash settled index options.
Amendment to ISE Rule 701: This proposed amendment applies the
trading rotation rule to index options.
Amendment to ISE Rule 705: In conjunction with ISE Rule 2011, this
proposed rule would limit liability regarding the dissemination of
index information.
Amendment to ISE Rule 803: This proposed amendment provides the
Exchange with greater flexibility on applying market making obligations
when the primary underlying securities market is not open for trading.
It would apply only to the trading of options on non-U.S. indices.
Amendment to ISE Rule 1407: This proposed amendment would apply an
exemption from the Nasdaq short sale rule to Nasdaq NMS securities
underlying index options.
2. Statutory Basis
The ISE believes that the proposed rule change, as amended, is
consistent with and furthers the objectives of section 6(b)(5) of the
Act,\8\ in that it is designed to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transaction in
securities, to remove impediments to and perfect the mechanism for a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\8\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The ISE does not believe that the proposed rule change, as amended,
will result in 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
No written comments were solicited or received with respect to the
proposed rule change, as amended.
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 ISE consents, the Commission will:
(A) By order approve such proposed rule change, as amended; or
(B) Institute proceedings to determine whether the proposed rule
change, as amended, 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. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change, as
amended, that are filed with the Commission, and all written
communications relating to the proposed rule change, as amended,
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 filings will also be available
for inspection and copying at the principal office of ISE. All
submissions should refer to File No. SR-ISE-2003-05 and should be
submitted by May 23, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-10822 Filed 5-1-03; 8:45 am]
BILLING CODE 8010-01-P