[Federal Register Volume 66, Number 103 (Tuesday, May 29, 2001)]
[Notices]
[Pages 29193-29196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13325]
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SECURITIES AND EXCHANGE COMMISSION
[Docket No. 34-4331; File No. SR-ISE-2001-11]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the
International Securities Exchange LLC To Trade Standardized Equity
Options on Trust Issued Receipts
May 21, 2001.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 20, 2001, the International Securities Exchange LLC (``ISE''
and ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
On May 17, 2001, the ISE submitted Amendment No. 1 to the proposed rule
change.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons and to approve the
proposed rule change 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 to Susie Cho, Division of Market Regulation
(``Division''), SEC, from Michael Simon, Senior Vice President and
General Counsel, ISE, dated May 16, 2001 (``Amendment No. 1''). In
Amendment No. 1, the ISE noted that the trust issued receipts will
be issued upon the deposit of the shares of underlying securities
represented by a round-lot of 100 receipts and that the trust will
cancel, and an investor may obtain, hold, trade or surrender trust
issued receipts in a round-lot and round-lot multiples of 100
receipts. The ISE also added proposed margin requirements for
options on trust issued receipts and corrected a typographical error
in the proposed rule language.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to adopt new listing and maintenance
standards to allow for trading of standardized equity options on trust
issued receipts. The text of the proposed rule change follows. Proposed
new language is in italics.
* * * * *
Rule 502. Criteria for Underlying Securities
* * * * *
(j) Securities deemed appropriate for options trading shall include
shares or other securities (``Trust Issued Receipts'') that are
principally traded on a national securities exchange or through the
facilities of a national
[[Page 29194]]
securities association and reported as a national market security, and
that represent ownership of the specific deposited securities held by a
trust, provided:
(1) the Trust Issued Receipts (i) meet the criteria and guidelines
for underlying securities set forth in paragraph (b) to this Rule; or
(ii) must be available for issuance or cancellation each business day
from the Trust in exchange for the underlying deposited securities, and
(2) not more than 20% of the weight of the Trust Issued Receipt is
represented by ADRs on securities for which the primary market is not
subject to a comprehensive surveillance agreement.
Rule 503. Withdrawal of Approval of Underlying Securities
* * * * *
(j) Absent exceptional circumstances, securities initially approved
for options trading pursuant to paragraph (j) of Rule 502 (such
securities are defined and referred to in that paragraph as ``Trust
Issued Receipts'') shall not be deemed to meet the Exchange's
requirements for continued approval, and the Exchange shall not open
for trading any additional series of option contracts of the class
covering such Trust Issued Receipts, whenever the Trust Issued Receipts
are delisted and trading in the Receipts is suspended on a national
securities exchange, or the Trust Issued Receipts are no longer traded
as national market securities through the facilities of a national
securities association. In addition, the Exchange shall consider the
suspension of opening transactions in any series of options of the
class covering Trust Issued Receipts in any of the following
circumstances:
(1) in accordance with the terms of paragraph (b) this Rule 503 in
the case of options covering Trust Issued Receipts when such options
were approved pursuant to subparagraph (j)(1)(i) under Rule 502;
(2) the Trust has more than 60 days remaining until termination and
there are fewer than 50 record and/or beneficial holders of Trust
Issued Receipts for 30 or more consecutive trading days;
(3) the Trust has fewer than 50,000 receipts issued and
outstanding;
(4) the market value of all receipts issued and outstanding is less
than $1,000,000; or
(5) such other event shall occur or condition exist that in the
option of the Exchange makes further dealing in such options on the
Exchange inadvisable.
(k) For Holding Company Depositary Receipts (HOLDRs), the Exchange
will not open additional series of options overlying HOLDRs (without
prior Commission approval) if:
(1) the proportion of securities underlying standardized equity
options to all securities held in a HOLDRs trust is less than 80% (as
measured by their relative weightings in the HOLDRs trust); or
(2) less than 80% of the total number of securities held in a
HOLDRs trust underlie standardized equity options.
* * * * *
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 the proposed rule change is to provide for the
trading of options on trust issued receipts.\4\ The Exchange believes
that the listing and maintenance criteria proposed in its new rule are
consistent with the options listing and maintenance criteria for trust
issued receipts currently used by the American Stock Exchange LLC
(``Amex''), the Chicago Board Options Exchange, Inc. (``CBOE'') and the
Pacific Exchange, Inc. (``PCX''),\5\ Trust issued receipts are
exchange-listed securities representing beneficial ownership of the
specific deposited securities represented by the receipts. They are
negotiable receipts issued by a trust representing securities of
issuers that have been deposited and are held on behalf of the holders
of the trust issued receipts. Trust issued receipts, which trade in
round-lots of 100, and multiples thereof, may be issued after their
initial offering through a deposit with the trustee of the required
number of shares of common stock of the underlying issuers. This
characteristic of trust issued receipts is similar to that of exchange-
traded fund shares, which also may be created on any business day upon
deposit of the requisite securities comprising a creation unit.\6\ The
trust will only issue receipts upon the deposit of the shares of
underlying securities that are represented by a round-lot of 100
receipts. Likewise, the trust will cancel, and an investor may obtain,
hold, trade or surrender trust issued receipts in a round-lot and
round-lot multiples of 100 receipts.
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\4\ The Exchange is not proposing at this time to list FLEX
options on trust issued receipts.
\5\ See Securities Exchange Act Release No. 44138 (March 30,
2001), 66 FR 19593 (April 16, 2001) (approving SR-PCX-2001-15);
Securities Exchange Act Release No. 43043 (July 17, 2000), 65 FR
46520 (July 28, 2000) (approving SR-CBOE-00-25); and Securities
Exchange Act Release No. 42947 (June 15, 2000), 65 FR 39211 (June
23, 2000) (approving SR-Amex-99-37).
\6\ The Exchange received approval to trade options on exchange-
traded fund shares on February 28, 2001. See Securities Exchange Act
Release No. 44037 (March 2, 2001), 66 FR 14613 (March 13, 2001).
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Generally, options on trust issued receipts are proposed to be
traded to the Exchange pursuant to the same rules and procedures that
apply to trading in options on equity securities. The Exchange will
list option contracts covering 100 trust issued receipts, the minimum
required round-lot trading size for the underlying receipts. Strike
prices for trust issued receipts will be set to bracket the trust
issued receipts at the same intervals that apply to other equity
options under ISE Rule 504 (i.e., 2\1/2\ point intervals for underlying
equity values up to $25; 5 point intervals for underlying equity values
greater than $25 up to $200; and 10 point intervals for underlying
equity values greater than $200). The proposed position and exercise
limits for trust issued receipts would be the same as those established
for other equity options, as set forth in ISE Rules 412 and 414,
respectively. The Exchange anticipates that most options on trust
issued receipts will initially qualify for the lowest position limit.
However, as with other equity options, applicable position limits will
be increased for options if the volume of trading in the trust issued
receipts increases to the extent needed to permit a higher limit.
The listing and maintenance standards proposed for options on trust
issued receipts are set forth respectively in proposed paragraph (j)
under ISE Rule 502, and in proposed paragraphs (j) and (k) under ISE
Rule 503. Pursuant to the proposed initial listing standards, the
Exchange will list options only on trust issued receipts that are
principally traded on a national securities exchange or through the
facilities of a national securities association and reported as
national market securities. In addition,
[[Page 29195]]
the initial listing standards require that either: (i) The trust issued
receipts meet the uniform options listing standards in paragraph (b) of
ISE Rule 502, which include criteria covering the minimum public float,
trading volume, and share price of the underlying security in order to
list the option; \7\ or (ii) the trust issued receipts must be
available for issuance or cancellation each business day from the trust
in exchange for the underlying deposited securities.
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\7\ Specifically, paragraph (b) of ISE Rule 502 requires the
underlying security to have a public float of 7,000,000 shares,
2,000 holders, trading volume of 2,400,000 shares in the preceding
12 months, a share price of $7.50 for the majority of the business
days during the three calendar months preceding the date of the
selection, and that the issuer of the underlying security is in
compliance with the Act.
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In addition, listing standards for options on trust issued receipts
will require that any American Depository Receipts (``ADRs'') in the
portfolio on which the Trust is based for which the securities
underlying the ADRs' primary markets are in countries that are not
subject to comprehensive surveillance agreements will not in the
aggregate represent more than 20 percent of the weight of the
portfolio.
The Exchange's proposed maintenance standards provide that if a
particular series of trust issued receipts should cease to trade on an
exchange or as national market securities in the over the-counter
market, there will be no opening transactions in the options on the
trust issued receipts, and all such options will trade on a
liquidation-only basis (i.e., only closing transactions to permit the
closing of outstanding open options positions will be permitted). In
addition, the Exchange will consider the suspension of opening
transactions in any series of options of the class covering trust
issued receipts if: (i) For options on trust issued receipts that were
listed pursuant to the equity option listing standards in paragraph
(j)(1)(i) of ISE Rule 502, the options fail to meet the option
maintenance standards in paragraph (b) of ISE Rule 503; \8\ (ii) the
trust has more than 60 days remaining until termination and there are
fewer than 50 record and/or beneficial holders of trust issued receipts
for 30 or more consecutive trading days; (iii) the trust has fewer than
50,000 receipts issued and outstanding; (iv) the market value of all
receipts issued and outstanding is less than $1,000,000; or (v) such
other event shall occur or condition exists that, in the opinion of the
Exchange, makes further dealing in such options on the Exchange
inadvisable. Furthermore, the Exchange will not open additional series
of options on any Holding Company Depositary Receipts (``HOLDRs''), a
type of trust issued receipt, without prior Commission approval, if:
(i) The proportion of securities underlying standardized equity options
to all securities held in a HOLDRs trust is less than 80 percent (as
measured by the relative weightings in the HOLDRs trust); \9\ or (ii)
less than 80 percent of the number of securities held by a HOLDR trust
underlie standardized options.
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\8\ Specifically, paragraph (b) of ISE Rule 503 provides that an
underlying security will not meet the Exchange's requirements for
continued listing when, among other things: (i) There are fewer than
6,300,000 publicly-held shares; (ii) there are fewer than 1,600
holders; (iii) trading volume was less than 1,800,000 shares in the
preceding twelve months; or (iv) the share price of the underlying
security closed below $5 on a majority of the business days during
the preceding six months.
\9\ The Exchange represents that the weight of each security in
a HOLDR trust will be determined by calculating the sum of the
number of shares of each security (represented in a single HOLDR)
and underlying options multiplied by its respective share price
divided by the sum of the number of shares of all securities
(represented in a single HOLDR) multiplied by their respective share
prices.
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Options on trust issued receipts will be physically settled and
will have the American-style exercise feature used on all equity
options, and not the Europeans-style feature.\10\ The proposed margin
requirements for options on trust issued receipts are at the same
levels that apply to options generally under ISE Rule 1202,\11\ except,
with respect to trust issued receipts based on a broad-based portfolio,
minimum margin must be deposited and maintained equal to 100% of the
current market value of the option plus 15% of the market value of
equivalent units of the underlying security value. Trust issued
receipts that hold securities based upon a narrow-based portfolio must
have options margin that equals at least 100% of the current market
value of the contract plus 20% of the market value of equivalent unit
of the underlying security value. In this respect, the margin
requirements proposed for options on trust issued receipts are
comparable to margin requirements that currently apply to broad-based
and narrow-based index options on the NYSE and CBOE.\12\ Also, holders
of options on trust issued receipts that exercise and receive the
underlying trust issued receipts must receive a product description or
prospectus, as appropriate.
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\10\ An American-style option may be exercised at any time prior
to its expiration, while a European-style option may be exercised
only at its expiration date.
\11\ The Exchange's margin rules cross-reference the rules of
the CBOE and the New York Stock Exchange, Inc (``NYSE'')
\12\ The Exchange agrees to modify its margin rules to reflect
the proposed margin requirements for options on trust issued
receipts based on broad-based and narrow-based indexes. See
Amendment No. 1, supra note 3.
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Lastly, the Exchange believes it has the necessary system capacity
to support the additional series of options that would result from the
trading of options on trust issued receipts, and it has been advised
that the Options Price Reporting Authority (``OPRA'') also will have
the capacity to support these additional series.
2. Statutory Basis
The ISE believes that the proposed rule change is consistent with
Section 6(b)(5) of the Act.\13\ Section 6(b)(5) requires that exchange
rules be designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and public interest.
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\13\ 15 U.S.C. 78f(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 will 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 did not solicit or receive comments on the proposed
rule change.
III. 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. 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 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 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Room. Copies of such filing will also be
[[Page 29196]]
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to the File No. SR-ISE-2001-11
and should be submitted by June 19, 2001.
IV. Commission's Findings and Order Granting Accelerated Approval
of 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, with the requirements of Section 6(b)(5).\14\ The
Commission notes that it has previously approved similar listing
standards proposed by the Amex, CBOE, and PCX for options on trust
issued receipts, and it believes that the ISE's proposal contains
adequate safeguards, matching those previously approved.\15\ As the
Commission found in its previous approvals of the listing standards
proposed by the other exchanges, the listing and trading of options
should give investors a better means to hedge their positions in the
underlying trust issued receipts. The Commission also believes that
pricing of the underlying trust issued receipts may become more
efficient, and market makers in these shares, by virtue of enhanced
hedging opportunities, may be able to provide deeper and more liquid
markets. In sum, the Commission believes that options on trust issued
receipts likely will engender the same benefits to investors and the
marketplace that exist with respect to options on common stock, thereby
serving to promote the public interest, to remove impediments to a free
and open securities market, and to promote efficiency, competition, and
capital formation.\16\
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\14\ 15 U.S.C. 78f(b)(5).
\15\ See supra note 5.
\16\ In approving this rule, the Commission notes that it has
also considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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The Commission finds that the Exchange's listing and delisting
criteria for options on trust issued receipts are adequate. The
proposed listing and maintenance requirements should ensure that there
exist adequate supplies of the underlying trust issued receipts in case
of the exercise of an option, and a minimum level of liquidity to
control against manipulation and to allow for the maintenance of fair
and orderly markets. The ISE's additional requirements for opening
additional series of options on HOLDRs will also ensure that the
underlying securities are options eligible, and for the most part will
satisfy minimum thresholds previously approved by the Commission.
The Commission also believes that the surveillance standards
developed by the ISE for options on trust issued receipts are adequate
to address the concerns associated with the listing and trading of such
securities. The ISE's proposal to limit the weight of the portfolio
that may be composed of ADRs whose primary markets are in countries
that are not subject to comprehensive surveillance agreements is
similar to that previously approved by the Commission.\17\ As to
domestically traded trust issued receipts themselves and the domestic
stocks in the underlying portfolio, the Intermarket Surveillance Group
(``ISG'') Agreement will be applicable to the trading of options on
trust issued receipts.\18\
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\17\ See supra note 5.
\18\ ISG was formed on July 14, 1983, to, among other things,
coordinate more effectively surveillance and investigative
information sharing arrangements in the stock and options markets.
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Finally, the Commission believes that the ISE's proposed margin
requirements, which mirror those of the CBOE, are appropriate.\19\ The
Commission notes that they are comparable to margin requirements that
currently apply to broad-based and narrow-based index options, and to
those previously approved for use at the Amex, CBOE, and PCX.\20\
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\19\ See supra note 5.
\20\ The Commission also notes that the ISE will file a proposed
rule change to amend its margin rules, if necessary. See Amendment
No. 1, supra note 3.
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The Commission finds good cause for approving the proposed rule
change (SR-ISE-2001-11) prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register under Section
19(b)(2) of the Act.\21\ As noted above, the trading requirement for
options on trust issued receipts at the ISE will be substantially
similar to those at the Amex, CBOE, and PCX, which the Commission has
approved.\22\ The Commission does not believe that the proposed rule
change raises novel regulatory issues that were not already addressed
and should benefit holders of trust issued receipts by permitting them
to use options to manage the risks of their positions in the receipts.
Accordingly, the Commission finds that there is good cause, consistent
with Section 6(b)(5) of the Act,\23\ to approve the proposal on an
accelerated basis.
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\21\ 15 U.S.C. 78s(b)(2).
\22\ See supra note 5.
\23\ 15 U.S.C. 78f(b)(5).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-ISE-2001-11) is hereby
approved on an accelerated basis.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13325 Filed 5-25-01; 8:45 am]
BILLING CODE 8010-01-M