[Federal Register: May 19, 2004 (Volume 69, Number 97)]
[Notices]
[Page 28962-28966]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19my04-92]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49696; File No. SR-ISE-2004-08]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment
Nos. 1 and 2 Thereto by International Securities Exchange, Inc.,
Relating to Trading Options on the S&P MidCap 400 Index
May 13, 2004.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 2, 2004, the International Securities Exchange, Inc.
(``Exchange'' or ``ISE'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') the proposed rule change as
described in Items I, II, and III below, which items have been prepared
by the Exchange. ISE amended its proposal on April 19, 2004.\3\ The
proposal was also amended by ISE on May 13, 2004.\4\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons and is approving the proposal on an
accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Michael J. Simon, Senior Vice President and
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division
of Market Regulation (``Division''), Commission, dated April 16,
2004 (``Amendment No. 1''). In Amendment No. 1, the ISE made
technical corrections to its rule text.
\4\ See letter from Michael J. Simon, Senior Vice President and
General Counsel, ISE, to Nancy Sanow, Assistant Director, Division,
Commission, dated May 13, 2004 (``Amendment No. 2''). In Amendment
No. 2, the ISE provided additional information on the Standard &
Poor's MidCap 400 Index (``S&P MidCap 400'' or ``Index'') and added
two exhibits to the proposed rule change. The first exhibit is a
letter from the Options Price Reporting Authority stating that it
has the capacity to support the trading of options on the Index on
the Exchange. The second exhibit is a document that sets forth
Standard & Poor's criteria for inclusion or exclusion of components
in the Index.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend its rules to trade options on
the Index. The text of the proposed rule change, as amended, appears
below. Additions are italicized; deletions are in [brackets].
* * * * *
Rule 2001. Definitions
((a)-(m) No change).
Supplementary Material to Rule 2001
.01 The reporting authorities designated by the Exchange in respect
of each index underlying an index options contract traded on the
Exchange are as provided in the chart below.
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Underlying index Reporting authority
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S&P SmallCap 600 Index.................... Standard & Poor's.
Morgan Stanley Technology Index........... American Stock Exchange.
S&P MidCap 400 Index...................... Standard & Poor's.
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Rule 2004. Position Limits for Broad-Based Index Options
(a) Rule 412 generally shall govern position limits for broad-based
index options, as modified by this Rule 2004. There may be no position
limit for certain Specified (as provided in Rule 2000) broad-based
index options contracts. All other broad-based index options contracts
shall be subject to a contract limitation fixed by the Exchange, which
shall not be larger than the limits provided in the chart below.
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Standard limit (on
Broad-based underlying index the same side of Restrictions
the market)
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S&P SmallCap 600 Index S&P 100,000 No more than
MidCap 400 Index. contracts45,000 60,000 near-term
contracts. No more than
25,000 near-term.
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((b)-(c) No change).
Rule 2009. Terms of Index Options Contracts
((a)(1)-(3) no change)
(4) ``European-Style Exercise.'' The following European-style index
options, some of which may be A.M.-settled as provided in paragraph
(a)(5), are approved for trading on the Exchange:
(i) S&P SmallCap 600 Index[.]
(ii) Morgan Stanley Technology Index
(iii) S&P MidCap 400 Index
(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
[[Page 28963]]
the Rules and By-Laws of the Clearing Corporation; and
(ii) In the event that the primary market for an underlying
security is open for trading on that day, but that particular security
does not open for trading on that day, the price of that security, for
the purposes of calculating the current index value at expiration,
shall be the last reported sale price of the security.
The following A.M.-settled index options are approved for trading
on the Exchange:
(i) S&P SmallCap 600 Index
(ii) Morgan Stanley Technology Index
(iii) S&P MidCap 400 Index
(b) Long-Term Index Options Series.
((1)(i) and (ii) no change)
(2) Reduced Value Long Term Options Series.
(i) Reduced-value long term options series on the following stock
indices are approved for trading on the Exchange:
(A) S&P SmallCap 600 Index
(B) Morgan Stanley Technology Index
(C) S&P MidCap 400 Index
(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 following classes of index options,
the interval between strike prices will be no less than $2.50:
(i) S&P SmallCap 600, if the strike price is less than $200.00[.]
(ii) Morgan Stanley Technology Index, if the strike price is less
than $200.00
(iii) S&P MidCap 400 Index, if the strike price is less then
$200.00
((c)(2)-(e) no change)
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the ISE included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change, as
amended. The text of these statements may be examined at the places
specified in Item III below. The ISE has prepared summaries, set forth
in Sections A, B and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The ISE proposes to amend its rules to provide for the listing and
trading on the Exchange of cash-settled, European-style index options
and LEAPS, including reduced value LEAPS, on the S&P MidCap 400.
Options on the Index are currently trading on the American Stock
Exchange LLC (``Amex'').\5\ ISE states that the proposed rule changes
adopt the same standards and product specifications that are currently
applied for options traded on the S&P MidCap 400 on Amex.
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\5\ See Exchange Act Release No. 30290 (February 3, 1992) (order
approving Amex to trade options on the S&P MidCap 400 Index,
hereinafter the ``1992 Order'').
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Index Design and Composition. The S&P MidCap 400 Index measures the
performance of the mid-range sector of the U.S. stock market. The Index
is based on 400 stocks chosen on the basis of market capitalization,
liquidity, and industry group representation. The Index is market value
(capitalization) weighted.\6\ The Index was introduced on June 19,
1991.\7\ The Index is composed of 400 domestic stocks from the ten
market sectors. Following are the ten market sectors along with their
respective weightings in the Index, as of February 26, 2004: Energy
(5.5%); Materials (6.3%); Industrials (14.5%); Consumer Discretionary
(16.3%); Consumer Staples (4.5%); Health Care (9.5%); Financials
(16.5%); Information Technology (19.0%); Telecommunications Services
(0.8%); and Utilities (7.3%). A complete list of the 400 component
stocks in the Index is available at the Exchange, on the Amex website,
and on the S&P Web site.
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\6\ The calculation of a market capitalization-weighted index
involves taking the summation of the product of the price of each
stock in the index and the shares outstanding for each issue. In
contrast, a price-weighted index involves taking the summation of
the prices of the stocks in the index. (See 1992 Order.)
\7\ See Amex--The Standard & Poors MidCap 400 Index Option
Specifications on the Amex Web site at: http://www.amex.com and the S&P Web site at: http://www.standardandpoors.com. The product
specifications and the index components, as well as select data
related to the components, shall be listed on the ISE Web site at
http://www.iseoptions.com.
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As of January 6, 2004, 286 companies in the Index are listed on the
New York Stock Exchange, Inc. (``NYSE''), 112 on the National
Association of Securities Dealers, Inc. (``NASD''), Automated Quotation
System (``Nasdaq''), and 2 on the Amex. All Nasdaq stocks in the Index
are designated as national market system securities by the NASD,
meaning, among other things, that real-time last sale reports are
available for these stocks. As of January 6, 2004, no one stock
comprises more than 1.23% of the Index's total value, and the
percentage weighting of the 5 largest components in the Index accounts
for only 4.66% of the Index's value. Additionally, 344 (86%) of the 400
stocks included in the Index, representing 88.1% of the total weight of
the Index, are the subject of standardized options trading, and many of
the other Index component stocks are eligible for options trading (as
of January 6, 2004).
As of January 6, 2004, the market capitalization of the stocks in
the Index ranged from a high of $11.8 billion to a low of $336.2
million, with the mean and median being $2.4 billion and $2.1 billion,
respectively. The total number of shares outstanding for the stocks in
the Index ranges from a high of 471.4 million shares to a low of 9.5
million shares. The price per share of the stocks in the Index ranges
from a high of $796.51 to a low of $3.55. Finally, the trading volume
of the stocks in the Index ranges from a high of 11,489,282 average
shares per day to a low of 7,605 average shares per day, with the
median and mean being 437,107 and 724,445, respectively.
For the six-month period ending January 6, 2004, 398 of the 400
(99.5%) companies within the Index had an average daily trading volume
greater than 30,000 shares per day. Those companies represent 99.25% of
the market capitalization of the Index. The average daily trading
volume of the 20 most heavily traded companies in the Index,
representing 7.51% of the market capitalization of the Index, was
3,784,032 shares per day.
Index Calculation and Index Maintenance. The S&P MidCap 400 is
calculated continuously,\8\ using the last sale price for each
component stock in the Index, and is disseminated every 15 seconds
throughout the trading day.\9\ To
[[Page 28964]]
calculate the Index, the sum of the market value of the stocks in the
Index is divided by the base period market value (divisor), and the
result is multiplied by 100. In order to provide continuity for the
Index's value, the divisor is adjusted periodically to reflect such
events as changes in the number of common shares outstanding for
component stocks, company additions or deletions, corporate
restructurings, and other capitalization changes.
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\8\ The S&P MidCap 400 is calculated for S&P by Kinetic
Information Systems. Reuters' Bridge Data Division also calculates
the S&P MidCap 400, and its calculation is used in the event that
the Kinetic Information Systems' calculation of the Index value is
unavailable.
\9\ The Index is disseminated by Amex over the Consolidated Tape
Association's Network B. ISE will also disseminate every fifteen
seconds the Index to its members. The Index is published daily in,
among other places, The Wall Street Journal (``WSJ'') and The New
York Times, and is available during trading hours from quotation
vendors such as Reuters and Bloomberg. The Index criteria for
inclusion or exclusion of components from the Index, attached as
Exhibit 2, is included in a document entitled Standard & Poor's U.S.
Indices: the S&P MidCap 400 and S&P SmallCap 600 dated April 8, 2004
available on the S&P Web site at http://www.standardandpoors.com. In
particular, the Standard & Poor's requires that a component be an
``operating company and not a closed-end fund, holding company,
partnership, investment vehicle or royalty trust.'' Also, ``Real
Estate Investment Trusts are eligible for inclusion in [the
Index].''
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The Index value for purposes of settling S&P MidCap 400 options
(``Settlement Value'') is calculated on the basis of opening market
prices on the business day prior to the expiration date of such options
(``Settlement Day'').\10\ The Settlement Day is normally the Friday
preceding ``Expiration Saturday.''\11\ In the event that a component
security in the Index does not trade on Settlement Day, the closing
price from the previous trading day is used to calculate the Settlement
Value. Accordingly, trading in S&P MidCap 400 options will normally
cease on the Thursday preceding an Expiration Saturday.
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\10\ The aggregate exercise value of the option contract is
calculated by multiplying the Index value by the Index multiplier,
which is 100.
\11\ For any given expiration month, the Index Options will
expire on the third Saturday of the month.
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In order to ensure that the S&P MidCap 400 contains a
representative sample of the stocks that represent the performance of
the middle-capitalization segment of the market, S&P selects component
securities based on the following market and economic criteria.\12\
First, the company's market capitalization must be between $1 billion
and $4 billion.\13\ Second, the company must have adequate liquidity
and reasonable price (the ratio of annual dollar value traded to market
capitalization should be 0.3 or greater).\14\ Third, corporate insiders
must not hold stock representing more than 60% of the value of the
company, and the company cannot have 50% or more of its stock held by
other corporations.\15\
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\12\ S&P makes four major weighting adjustments during the year,
usually near the end of a calendar quarter and monitors each S&P
MidCap 400 component stock on a daily basis for individual weighting
adjustments and for corporate actions which may have an impact on
the Index. (See 1992 Order.)
\13\ See S&P's U.S. Indices: the S&P 500, S&P MidCap400 and S&P
SmallCap 600 (November 17, 2003) on the S&P Web site at: http://www.standardandpoors.com
.
\14\ The liquidity ratio is determined by dividing a company's
trading volume for the previous 12 months by the average number of
total common shares outstanding. For example, if a company's average
monthly trading volume over the previous 12 months was 500,000, and
there were 12 million shares outstanding, then the company's
liquidity ratio would be 0.50. (See 1992 Order.)
\15\ S&P, in making the determination as to whether a company
has 50% or more of its stock held by other corporations, includes in
its determination investment companies with greater than 5%
ownership, but does not include broker-dealers holding shares in
``street name.'' (See 1992 Order.)
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In addition, S&P considers industry group representation in
selecting stocks for the S&P MidCap 400. Moreover, in order to avoid
``overweighting'' of utility and financial stocks, electric utilities
and regional bank stocks are selected on the basis of their geographic
representation as well as the above criteria.\16\ Finally, any stocks
already in the S&P 500 Stock Index are excluded from the S&P MidCap
400. Then, the components selected are weighted by market
capitalization.\17\
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\16\ In addition, some potential companies are eliminated from
inclusion in the S&P MidCap 400 for various reasons. For example,
investment companies, such as closed-end mutual funds, are not
included in the Index because their equity performance reflects the
performance of a portfolio of securities rather than industry or
company specific fundamentals. In addition, foreign companies are
not included in the Index, except for some Canadian industrial
companies which conduct a significant proportion of their business
within the U.S. market and for which the majority of trading
activity occurs on U.S. exchanges. Moreover, S&P excludes real
estate investment companies and other investment trusts that allow
investors to participate indirectly in the performance of real
assets such as commercial or residential property. Finally, S&P
excludes limited partnerships because their ownership and
capitalization structure exposes investors to liabilities and tax
treatment not found in corporate equity securities. (See 1992
Order.)
\17\ Telephone Conversation between Joseph Ferraro, ISE, and
Florence Harmon, Senior Special Counsel, Division, Commission, on
April 15, 2004.
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The Exchange shall notify the Market Regulation Division of the
Commission immediately in the event S&P determines to cease maintaining
or calculating the Index. In the event the Index ceases to be
maintained or calculated, the Exchange may determine not to list any
additional series for trading or limit all transactions in such options
to closing transactions only for the purpose of maintaining a fair and
orderly market and protecting investors.
Contract Specifications. The Exchange states that the S&P MidCap
400 is a broad-based index, as defined in ISE Rule 2001(j). The
Exchange proposes that the contract specifications for Index options
listed on the Exchange will be identical to the contract specifications
for the Index options listed on Amex. Accordingly, Exchange rules that
are applicable to the trading of options on broad-based indexes will
apply to the trading of options on the Index.\18\ Specifically, among
others, Exchange rules governing margin requirements and trading halt
procedures that are applicable to the trading of broad-based index
options will apply to options traded on the Index. In addition, the
Exchange shall establish position limits of 45,000 contracts on the
same side of the market, provided no more than 25,000 of such contracts
are in the nearest expiration month series and no more than 25,000 of
such contracts are used for index arbitrage. The product specifications
of the options on the Index proposed to be traded on the Exchange will
be identical to the product specifications of the options on the Index
traded on Amex. Specifically, options on the Index are European-style
and cash-settled. The Exchange's standard trading hours for index
options (9:30 a.m. to 4:15 p.m., New York time), as set forth in ISE
Rule 2008(a), will apply to Index options. Index options listed on Amex
also trade from 9:30 a.m. to 4:15 p.m., New York time.
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\18\ See Exchange Rules 2000 through 2012.
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The minimum customer margin for uncovered writers shall be 100% of
the market value of the option plus 15% of the aggregate Index value
less any out-of-the-money amount, subject to a minimum of 100% of the
market value of the option plus 10% of the aggregate Index value.
The Exchange proposes to use strike price intervals of 2\1/2\
points for certain near-the-money series in near-term expiration months
when the Index is at a level below 200, and 5 point strike price
intervals for other options series with expirations up to one year, and
25 to 50 point strike price intervals for longer-term options. The
Exchange also proposes to list S&P MidCap 400 options in the four
consecutive near-term expiration months plus two successive expiration
months in the March cycle. For example, consecutive expirations of
January, February, March and April plus June and September expirations
would be listed. In addition, longer-term option series having up to
thirty-six months to expiration may be traded. In lieu of such long-
term options based on the full-value of the Index, the Exchange may
instead list long-term, reduced-value put and call options based on
one-tenth (\1/10\th) of the Index's full value. In either event, the
interval between expiration months for either a full-value or reduced-
value long-term Index option will not be less than six
[[Page 28965]]
months. The trading of any long-term Index options will be subject to
the same rules which govern the trading of all the Exchange's index
options, including sales practice rules, margin requirements, and
trading rules. Position limits on reduced-value long-term Index options
will be equivalent to the position limits for regular (full-value)
Index options and will be aggregated with such options. For example, if
the position limit for the full-value options on the Index is 45,000
contracts on the same side of the market (as they currently are on
Amex), then the position limit for the reduced-value options will be
450,000 contracts on the same side of the market.
Surveillance and Capacity. The Exchange has an adequate
surveillance program in place for Index options and intends to apply
those same program procedures that it applies to the Exchange's other
index options (at present, options on the S&P SmallCap 600 Index and
Morgan Stanley Technology Index). Additionally, the Exchange is a
member of the Intermarket Surveillance Group (``ISG'') under the
Intermarket Surveillance Group Agreement (dated June 20, 1994). The
members of the ISG include all of the U.S. registered stock and options
markets: the Amex, the Boston Stock Exchange, Inc. (``BSE''), the
Chicago Board Options Exchange, Inc. (``CBOE''), the Chicago Stock
Exchange, Inc. (``CHX''), the Cincinnati Stock Exchange, Inc.
(``CSE''), the NASD, the NYSE, the Pacific Exchange, Inc. (``PSE'') and
the Philadelphia Stock Exchange, Inc. (``PHLX''). The ISG members work
together to coordinate surveillance and investigative information
sharing in the stock and options markets. In addition, the major
futures exchanges are affiliated members of the ISG, which allows for
the sharing of surveillance information for potential intermarket
trading abuses.
The Exchange states that it has the necessary systems capacity to
support new series that will result from the introduction of S&P MidCap
400 Index options. ISE has also been informed that the Options Price
Reporting Authority believes that it has the capacity to support such
new series.
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,\19\ in that it is designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions 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. In particular, ISE states that the proposed rule change will
permit trading in options based on the S&P MidCap 400 pursuant to rules
designed to prevent fraudulent and manipulative acts and practices and
promote just and equitable principals of trade.
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\19\ 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. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:
Electronic comments:
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml
); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-ISE-2004-08 on the subject line.
Paper comments:
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-ISE-2004-08. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Section, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal office of the
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-
2004-08 and should be submitted on or before June 9, 2004.
IV. Commission's Findings and Order Granting Approval of the Proposed
Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of section 6(b)(5).\20\ The Commission
finds that the trading of options on the Index, including full-value
and reduced-value Index LEAPS, will permit investors to participate in
the price movements of the 400 securities on which the Index is based.
The Commission also believes that the trading of options on the Index
will allow investors holding positions in some or all of the underlying
securities in the Index to hedge the risks associated with their
portfolios more efficiently and effectively. Accordingly, the
Commission believes MidCap 400 options will provide investors with an
important trading and hedging mechanism that should reflect accurately
the overall movement of stocks in the middle-capitalization range of
U.S. equity securities.
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\20\ 15 U.S.C. 78f(b)(5) (1988).
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The trading of MidCap 400 options, however, raises several issues,
namely, issues related to index classification, index design,
surveillance, and market impact. The Commission believes, for the
reasons discussed below, that the ISE has adequately addressed these
issues.
A. Broad-Based Index
The Commission finds that classifying the Index as broad-based,
and, thus,
[[Page 28966]]
permitting Exchange rules applicable to the trading of broad-based
index options to apply to MidCap 400 options is appropriate.
Specifically, the Commission believes it is consistent with the Act to
designate the Index as broad-based because the MidCap 400 reflects a
substantial segment of the U.S. equities market, in general, and mid-
level capitalized U.S. securities, in particular. The Index consists of
400 of the most actively traded middle-capitalized securities in the
United States.\21\ In addition, as of January 6, 2004, the total
capitalization of the Index was approximately $962.075 billion. The
MidCap 400 also includes stocks of companies from ten market sectors,
no one of which dominates the Index.\22\ Moreover, the Index represents
a broad cross-section of domestic mid-level capitalized stocks, with no
single stock comprising more than 1.23% of the Index's total value (as
of January 6, 2004). The percentage weighting of the five largest
components in the Index also accounts for only 4.66% of the Index's
value. Finally, 344 (86%) of the 400 stocks included in the Index,
representing 88.1% of the total weight of the Index, are the subject of
standardized options trading, and many of the other Index component
stocks are eligible for options trading (as of January 6, 2004).
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\21\ Specifically, the mean and median capitalization for the
400 companies, as of January 6, 2004, was $ 2.4 billion and $ 2.1
billion, respectively.
\22\ Specifically, as of February 26, 2004, the ten market
sectors along with their respective weighting in the Index was as
follows: (1) energy, 5.5%; (2) materials, 6.3%; (3) industrials,
14.5%; (4) consumer discretionary, 16.3%; (5) consumer staples,
4.5%; (6) health care, 9.5%; (7) financials, 16.5%; (8) information
technology, 19%; (9) telecommunications services, 0.8%; and (10)
utilities, 7.3%.
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B. Index Design and Structure
The broad diversification, large capitalization, and liquid markets
of the Index's component stocks significantly minimizes the potential
for manipulation of the Index. First, as discussed above, the Index
represents a broad cross-section of domestic mid-level capitalized
stocks, with no single industry group or stock dominating the Index.
Second, the overwhelming majority of the stocks that comprise the Index
are actively traded, with a mean and median average daily trading
volume of 437,107 and 724,445 shares, respectively.\23\
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\23\ For the six-month period ending January 2004, 398 of the
400 (99.5%) companies within the Index had an average daily trading
volume greater than 30,000 shares per day. Those companies represent
99.25% of the market capitalization of the Index. The average daily
trading volume of the 20 most heavily traded companies in the Index,
representing 7.51% of the market capitalization of the Index, was
3,784,032 shares per day.
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Third, S&P has developed procedures and criteria designed to ensure
that the Index maintains its broad representative sample of stocks in
the middle-capitalization range of securities.\24\ Accordingly, the
Commission believes it is unlikely that attempted manipulations of the
prices of a small number of issues would affect significantly the
Index's value.
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\24\ See supra notes 11-14 and accompanying text.
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C. Surveillance
The Exchange represents that it has an adequate surveillance
program in place for the Exchange's other index options (at present,
options on the S&P SmallCap 600 Index) and intends to apply those same
program procedures to the options on the Index. Additionally, the
Exchange is a member of the Intermarket Survelliance Group (``ISG''),
which allows for the sharing of surveillance information for potential
intermarket trading abuses pursuant to the Intermarket Surveillance
Group Agreement (the ``Agreement'').\25\ The members of the ISG include
all of the U.S. registered stock and options markets. The Commission
believes that a surveillance sharing agreement between an exchange
proposing to list a stock index derivative product and the exchanges
trading the stocks underlying the derivative product is an important
measure for surveillance of the derivative and underlying securities
markets. Such agreements ensure the availability of information
necessary to detect and deter potential manipulations and other trading
abuses, thereby making the stock index product less readily susceptible
to manipulation.
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\25\ ISG was formed on July 14, 1983, among other things, to
coordinate more effectively surveillance and investigative
information sharing arrangements in the stock and options markets.
See Intermarket Surveillance Group Agreement, July 14, 1983. The
participation of exchanges within the ISG and their sharing of
surveillance information is governed by the Agreement. The most
recent amendment to the Agreement, which incorporates the original
agreement and all amendments made thereafter, was signed by members
January 29, 1990. See Second Amendment to Intermarket Surveillance
Group Agreement, January 29, 1990.
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D. Market Impact
The Commission believes that the listing and trading of MidCap 400
options, including LEAPS and reduced-value LEAPS, on the Exchange will
not adversely impact the underlying securities markets. First, as
described above, the Index is broad-based and no one stock or industry
group dominates the Index. Second, as noted above, the stocks contained
in the Index have large capitalizations and are actively traded. Third,
existing ISE stock index options rules and surveillance procedures will
apply to MidCap 400 options. Fourth, the Exchange has established
position and exercise limits for the MidCap 400 options that will serve
to minimize potential manipulation and market impact concerns. Fifth,
the risk to investors of contra-party non-performance will be minimized
because the Index options and Index LEAPS will be issued and guaranteed
by the Options Clearing Corporation just like other standardized
options traded in the United States.
Finally, the Commission believes that the ISE's other proposed rule
changes to accommodate the trading of S&P MidCap 400 options, such as
strike price intervals, are consistent with the Act. Based on
representations from the ISE, the Commission also believes that the
Exchange will have sufficient capacity to accommodate the anticipated
order flow. The Commission also believes the Amex's proposed expiration
cycle for the S&P MidCap 400 options is reasonable because it provides
investors sufficient flexibility to establish their desired options
positions.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\26\ that the proposed rule change, as amended, (SR-ISE-2004-08) is
hereby approved on an accelerated basis.
\26\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-11308 Filed 5-18-04; 8:45 am]
BILLING CODE 8010-01-P