[Federal Register: March 10, 2008 (Volume 73, Number 47)]
[Notices]
[Page 12783-12786]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10mr08-107]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57425; File No. SR-ISE-2008-19]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change to Amend the Quarterly Options Series Pilot Program To Permit
the Listing of Additional Series
March 4, 2008.
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 March 3, 2008, the International Securities Exchange, LLC
(``Exchange'' or ``ISE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been substantially prepared by
the Exchange. The Exchange has designated this proposal as non-
controversial under Section 19(b)(3)(A)(iii) of the Act \3\ and Rule
19b-4(f)(6) thereunder,\4\ which renders the proposed rule change
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The ISE proposes to amend Supplementary Material .03 to Rule 504,
Quarterly Options Series Pilot Program, to permit the Exchange to list
strike prices for Quarterly Options Series (``QOS'') in exchange traded
fund (``ETF'') options that fall within a percentage range (30%) above
and below the price of the underlying ETF. Additionally, upon
demonstrated customer interest, the Exchange also will be permitted to
open additional strike prices of QOS in ETF options that are more than
30% above or below the current price of the ETF. Market Makers trading
for their own account will not be considered when determining customer
interest under this provision. In addition to the initial listed
series, the Exchange may list up to sixty (60) additional series per
expiration month for each QOS in ETF options. Further, the proposal
includes a delisting program to be undertaken by the
[[Page 12784]]
Exchange in connection with QOS in ETF options.
The text of the proposed rule change is available on the Exchange's
Web site (http://www.ise.com), at the Exchange's principal office, and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this rule filing is to amend Supplementary Material
.03 to Rule 504, Quarterly Options Series Pilot Program to allow the
Exchange to open additional strike prices of QOS in ETF options that
are within thirty percent (30%) above or below the closing price of the
underlying ETF on the preceding business day. Additionally, upon
demonstrated customer interest, the Exchange also will be permitted to
open additional strike prices of QOS in ETF options that are more than
30% above or below the current price of the underlying ETF. Market
Makers trading for their own account will not be considered when
determining customer interest under this provision. The Exchange will
be permitted to list up to sixty (60) additional series per expiration
month for each QOS in ETF options.
On May 2, 2006, the Exchange filed with the Commission a pilot
program proposal to permit the listing and trading of QOS in options on
indexes or options on ETFs that satisfy the applicable listing criteria
under ISE rules.\5\ QOS trade based on calendar quarters that end in
March, June, September and December. The Exchange lists QOS that expire
at the end of the next consecutive four calendar quarters, as well as
the fourth quarter of the next calendar year. For example, if the
Exchange were trading QOS in iShares Russell 2000 Index Fund (``IWM'')
in the month of April 2008, it would list series at the end of the
second quarter 2008 (June), third quarter 2008 (September), fourth
quarter 2008 (December) and first quarter 2009 (March) and fourth
quarter 2009 (December).
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 54113 (July 7,
2006), 71 FR 39694 (July 13, 2006) (SR-ISE-2006-24) (``Pilot Program
Approval Order''). Under the pilot program, the Exchange lists QOS
in up to five currently listed option classes that are either
options on ETFs or indexes. The Exchange also is permitted to list
QOS in any options class that is selected by other securities
exchanges that employ a similar pilot program under their respective
rules.
---------------------------------------------------------------------------
Currently, the Exchange lists QOS in five ETF options: (1) Nasdaq-
100 Index Tracking Stock (``QQQQ''); (2) IWM; (3) DIAMONDS Trust,
Series 1 (``DIA''); (4) Standard & Poor's Depository Receipts/SPDRs
(``SPY''); and (5) Energy Select SPDR (``XLE''). The average trading
volume and total volume for QOS in IWM options significantly exceeds
the volumes for QOS in other ETF options that are listed and traded on
the Exchange. The chart below provides trading volume figures for the
fourth quarter in 2007, demonstrating that QOS in IWM options are by
far the most popular and heavily traded QOS on the Exchange.
----------------------------------------------------------------------------------------------------------------
October 2007 November 2007 December 2007
QOS -----------------------------------------------------------------------------
ADV Total vol. ADV Total vol. ADV Total vol.
----------------------------------------------------------------------------------------------------------------
IWM............................... 19,132 440,035 23,529 494,107 28,970 579,399
QQQQ.............................. 7,943 182,689 12,510 262,707 18,856 377,123
SPY............................... 3,740 86,022 15,067 316,399 19,984 399,686
DIA............................... 709 16,314 1,671 35,092 2,202 44,043
XLE............................... 778 17,901 6,141 128,966 1,925 38,507
----------------------------------------------------------------------------------------------------------------
Over time, the Exchange has continually received requests from
market participants to add additional strike prices for QOS in IWM
options that would be outside of the price range for setting strikes as
provided under Supplementary Material .03 to Rule 504 (hereinafter ``+/
-$5 range'').\6\
---------------------------------------------------------------------------
\6\ Supplementary Material .03 to Rule 504 provides that the
Exchange shall list strike prices for a QOS that are within $5 from
the closing price of the underlying on the preceding day.
---------------------------------------------------------------------------
Investors and other market participants have advised the Exchange
that they are buying and selling QOS in IWM options to trade
volatility. In order to adequately replicate the desired volatility
exposure, these market participants need to trade several IWM options
series, many having strike prices that fall outside of the +/-$5 range
currently allowed under the QOS rules.
In addition, other participants have advised the Exchange that
their investment strategies involve trading options tied to a
particular option ``delta,'' \7\ rather than a particular level of the
underlying security or index. At issue is the fact that delta depends
on both the relative difference between the level of the underlying
security or index and the option strike price, and time to expiration.
For example, with IWM trading at $85 per share, the strike price
corresponding to a ``25-delta'' IWM call (i.e., a call option with a
delta of 25) with one month to expiration would be 89. However, the
strike price corresponding to a ``25-delta'' IWM call with 3 months to
expiration would be 93, and the strike price of a ``25-delta'' IWM call
with 1 year to expiration would be 106. In short, ISE has been advised
that the +/-$5 range for QOS in IWM options is insufficient to satisfy
customer demand.
---------------------------------------------------------------------------
\7\ ``Delta'' is a measure of how an option price will change in
response to a $1 price change in the underlying security or index.
For example, an ABC option with a delta of ``50'' can be expected to
change by $0.50 in response to a $1 change in the price of ABC.
---------------------------------------------------------------------------
In order to meet customer demand, the Exchange proposes to amend
Supplementary Material .03 to Rule 504, which governs the Quarterly
Options Series Pilot Program. Specifically, the Exchange proposes to
revise Supplementary Material .03 to Rule 504 to allow the Exchange to
open
[[Page 12785]]
additional strike prices of QOS in ETF options that are within thirty
percent (30%) above or below the closing price of the underlying ETF
Shares as defined in Rule 502(h) on the preceding business day. The
Exchange also will be permitted to open additional strike prices of QOS
in ETF options that are more than 30% above or below the current price
of the underlying ETF, 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 will not be considered when determining customer interest
under this proposed provision. The Exchange will be permitted to list
up to sixty (60) additional series per expiration month for each QOS in
ETF options.
The Exchange also is proposing to add new paragraph (g) to
Supplementary Material .03 to Rule 504, which will set forth a
delisting policy. Specifically, with respect to QOS in ETF options, the
Exchange will, on a monthly basis, review series that are outside a
range of five (5) strikes above and five (5) strikes below the current
price of the underlying ETF, and delist series with no open interest in
both the put and the call series having a: (1) Strike higher than the
highest strike price with open interest in the put and/or call series
for a given expiration month; or (2) strike lower than the lowest
strike price with open interest in the put and/or call series for a
given expiration month.
To illustrate how the proposed delisting program will work, assume
that IWM closed at $70 on the day the Exchange conducts the monthly
review of QOS in ETF options. Series having strike prices above $75 and
below $65 would be reviewed by the Exchange for possible delisting.
Assume that the Exchange lists the following QOS in IWM options that
expire in June 2008:
----------------------------------------------------------------------------------------------------------------
Calls--Jun 08 exp Puts--Jun 08 exp
----------------------------------------------------------------------------------------------------------------
Strike Open Interest? Strike Open Interest?
----------------------------------------------------------------------------------------------------------------
62.................................... No 62....................... No.
63.................................... No 63....................... Yes.
64.................................... Yes 64....................... Yes.
***** ***** ***** *****
76.................................... Yes 76....................... Yes.
77.................................... Yes 77....................... Yes.
78.................................... Yes 78....................... Yes.
79.................................... Yes 79....................... Yes.
80.................................... Yes 80....................... Yes.
81.................................... Yes 81....................... Yes.
82.................................... Yes 82....................... Yes.
83.................................... No 83....................... No.
84.................................... No 84....................... No.
85.................................... No 85....................... Yes.
86.................................... Yes 86....................... No.
87.................................... Yes 87....................... Yes.
88.................................... Yes 88....................... Yes.
89.................................... Yes 89....................... No.
90.................................... Yes 90....................... No.
91.................................... No 91....................... No.
92.................................... No 92....................... No.
93.................................... No 93....................... No.
----------------------------------------------------------------------------------------------------------------
The Exchange would delist the first series listed above, as well as
the last three: $62, $91, $92 and $93. The Exchange would not, however,
delist the $83 and $84 series because there are series having open
interest with strike prices higher than these two series. In addition,
the Exchange would not delist the $63 series because there is open
interest in the put series.
Notwithstanding the proposed delisting policy, customer requests to
add strikes and/or maintain strikes in QOS in ETF options in series
eligible for delisting shall be granted.
Further, in connection with the proposed delisting policy, if the
Exchange identifies series for delisting, the Exchange shall notify
other options exchanges with similar delisting policies regarding
eligible series for listing, and shall work with such other exchanges
to develop a uniform list of series to be delisted, so as to ensure
uniform series delisting of multiply listed QOS in ETF options. It is
expected that all options exchanges that have a QOS Pilot Program will
adopt the proposed delisting policy.
The Exchange represents that it has the necessary systems capacity
to support new options series that will result from this proposal.
Further, as proposed, the Exchange notes that this rule change will
become part of the pilot program and, going forward, will be considered
by the Commission when the Exchange seeks to renew or make permanent
the pilot program in the future.\8\
---------------------------------------------------------------------------
\8\ To the extent the Commission views the proposed rule change
as an expansion of the pilot program, thus triggering the
requirement under the terms of the Pilot Program Approval Order that
the Exchange submit a pilot program report, the Exchange notes that
it submitted a report on June 27, 2007, in connection with its
filing to extend the pilot program through July 10, 2008. See
Securities Exchange Act Release No. 56031 (July 9, 2007), 72 FR
38637 (July 13, 2007) (Notice of Filing and Immediate Effectiveness
of SR-ISE-2007-53).
---------------------------------------------------------------------------
2. Statutory Basis
Because the additional new series can be added without presenting
capacity problems and because the Exchange has proposed a delisting
policy with respect to QOS in ETF options, the Exchange believes the
proposed rule change is consistent with the Act and the rules and
regulations thereunder. Specifically, the Exchange believes the
proposed rule change is consistent with Section 6(b)(5)\9\ of the Act's
requirements that the rules of a national securities exchange be
designed to promote just and equitable principles of trade, to prevent
fraudulent and manipulative acts and, in general, to protect investors
and the public interest.
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78(f)(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change does not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has designated the proposed rule change as one that:
(1) Does not significantly affect the protection of investors or the
public interest; (2) does not impose any significant burden on
competition; and (3) does not become operative for 30 days from the
date of filing, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest.
Therefore, the foregoing rule change has become effective pursuant to
Section 19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule
19b-4 thereunder.\11\ The Exchange notes that the proposed rule change
is based on a similar proposal recently approved by the Commission.\12\
The Exchange has asked the Commission to waive the operative delay to
permit the proposed
[[Page 12786]]
rule change to become operative prior to the 30th day after filing.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to provide the Commission
with written notice of its intent to file the proposed rule change,
along with a brief description and text of the proposed rule change,
at least five business days prior to the date of filing of the
proposed rule change, or such shorter time as designated by the
Commission. The Exchange has fulfilled this requirement.
\12\ See Securities Exchange Act Release No. 34-57410 (March 3,
2008) (SR-CBOE-2007-96).
---------------------------------------------------------------------------
The Commission has determined that waiving the 30-day operative
delay of the Exchange's proposal is consistent with the protection of
investors and the public interest and will promote competition because
such waiver will allow the Exchange to list additional series in
Quarterly Options at the same time as other exchanges.\13\ Therefore,
the Commission designates the proposal operative upon filing.
---------------------------------------------------------------------------
\13\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate the rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-ISE-2008-19 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2008-19. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ISE-2008-19 and should be
submitted on or before March 31, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-4599 Filed 3-7-08; 8:45 am]
BILLING CODE 8011-01-P