[Federal Register Volume 75, Number 192 (Tuesday, October 5, 2010)]
[Notices]
[Pages 61533-61536]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24882]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63002; File No. SR-ISE-2010-81]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Granting Approval of Proposed Rule Change Relating to
Trading Options on a Reduced Value of the DAX Index, Including Long-
Term Options
September 28, 2010.
I. Introduction
On August 3, 2010, the International Securities Exchange, Inc. (the
``Exchange'' or the ``ISE'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Act''),\1\ a proposed rule
[[Page 61534]]
change to amend its rules to trade options on a reduced value DAX
Index. The proposed rule change was published for comment in the
Federal Register on August 18, 2010.\2\ The Commission received no
comment letters on the proposed rule change. This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ See Securities Exchange Act Release No. 62703 (August 12,
2010), 75 FR 51134.
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II. Description
The Exchange proposes to amend certain of its rules to allow the
listing and trading of options on the Mini DAX, which represents \1/10\
of the full value of the DAX Index. In addition to options on the Mini
DAX, the Exchange proposes to list long-term options on the Mini DAX
(the ``Mini DAX LEAPS'').\3\ Options on the Mini DAX will be A.M. cash-
settled and will have European-style exercise provisions.
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\3\ Under ISE Rule 2009(b), ``Long-Term Index Options Series,''
the Exchange may list long-term options that expire from 12 to 60
months from the date of issuance.
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Index Design and Composition
The DAX Index is a capitalization-weighted index where the weight
of any individual component is proportional to its respective share in
the total market capitalization of all the components. The DAX Index
consists of the 30 most highly liquid and capitalized German stocks
ranked by float-adjusted market capitalization.\4\ The management board
of Deutsche B[ouml]rse AG (``DBAG'') decides whether changes are to be
made to the composition of the index on an annual basis in September
but also performs quarterly reviews of the components' free float.
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\4\ Float-adjusted market capitalization (as opposed to an
unadjusted methodology) refers to the number of free-float shares
available multiplied by the share price. A ``free-float'' index
methodology usually excludes shares held by strategic investors by
way of cross ownership, government ownership, private ownership and
restricted share ownership.
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Index Calculation and Index Maintenance
Index levels for options on the Mini DAX will be calculated by DBAG
or its agent, and disseminated by ISE every 15 seconds during the
Exchange's regular trading hours to market information vendors via the
Options Price Reporting Authority (``OPRA'').\5\ The level of the DAX
Index reflects the float-adjusted market value of the component stocks
relative to a particular base period and is computed by dividing the
total market value of the companies in each index by its respective
index divisor.\6\
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\5\ The Exchange shall also disseminate these values to its
members.
\6\ A divisor is an arbitrary number chosen at the starting date
of an index to fix the index starting value. The divisor is adjusted
periodically when capitalization amendments are made to the
constituents of the index in order to allow the index value to
remain comparable over time. Without a divisor the index value would
change when corporate actions took place and would not reflect the
true value of an underlying portfolio based upon the index.
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The DAX Index is calculated using the last traded price of the
component securities. If a component security does not open for
trading, the price of that security at the close or the index on the
previous day is used in the calculation.\7\
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\7\ The DAX Index is published daily and is available real-time
on ThomsonReuters, Bloomberg, and other market information systems
which disseminate information on a real time basis.
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The DAX Index is currently updated on a real-time basis from 9 a.m.
to 5:45 p.m. (Frankfurt time), which generally corresponds to 3 a.m. to
11:45 a.m. (New York time). The Exchange, or its agent, shall
disseminate Mini DAX Index values via OPRA or major market data vendors
between 3 a.m. and 11:45 a.m. (New York time). After 11:45 a.m. (New
York time), the Exchange, or its agent, shall disseminate a static
value of the Mini DAX until the close of trading each day.
The DAX Index is monitored and maintained by DBAG. DBAG makes all
necessary adjustments to the indexes to reflect component deletions,
share changes, stock splits, stock dividends (other than an ordinary
cash dividend), and stock price adjustments due to restructuring,
mergers, or spin-offs involving the underlying components.
The DAX Index is subject to a full review and, if necessary,
ordinary adjustments are made once a year in September, where all
components are screened for eligibility and ranked based on liquidity
and market capitalization. Quarterly reviews are also performed in
March, June, September and December, where components' free float
levels are reviewed and extraordinary adjustments may be made. If a
component company is deleted from the DAX Index between reviews as a
result of a merger, takeover or other corporate action, the highest
ranking company will replace it in the index.
The Exchange has represented that it will monitor the DAX Index on
a quarterly basis. The Exchange will notify the staff of the Division
of Trading and Markets of the Commission by filing a proposed rule
change pursuant to Rule 19b-4 and will cease to list any additional
series for trading, if, with respect to the DAX Index: (i) The number
of securities in the DAX Index drops by \1/3\ or more; (ii) 10% or more
of the weight of the DAX Index is represented by component securities
having a market value of less than [euro]50 million; (iii) 10% or more
of the weight of the DAX Index is represented by component securities
trading less than 20,000 shares per day; or (iv) the largest component
security accounts for more than 15% of the weight of the DAX Index or
the largest five components in the aggregate account for more than 50%
of the weight of the DAX Index.
The Exchange will also notify the staff of the Division of Trading
and Markets of the Commission immediately in the event DBAG ceases to
maintain and calculate the DAX Index, or in the event values of the DAX
Index are not disseminated every 15 seconds by a widely available
source. In such cases, the Exchange will not list any additional series
for trading and will limit all transactions in the options to closing
transactions for the purpose of maintaining a fair and orderly market
and protecting investors.
Contract Specifications
The Mini DAX is a broad-based index. Options on the Mini DAX are
European-style and A.M. cash-settled. The Exchange's standard trading
hours for broad-based 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 the trading of
options on the Mini DAX.
The Exchange proposes to list options on the Mini DAX in the three
consecutive near-term expiration months, plus up to three successive
expiration months in the March cycle. For example, consecutive
expirations of January, February, March, plus June, September, and
December expirations would be listed.\8\
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\8\ See Rule ISE 2009(a)(3).
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The Exchange proposes to set minimum strike price intervals for
Mini DAX options at 1 point intervals. The minimum tick size for series
trading below $3 shall be $0.05, and for series trading at or above $3
shall be $0.10.
Exercise and Settlement Value
Options on the Mini DAX will expire on the Saturday following the
third Friday of the expiration month. Trading in options on the Mini
DAX will normally cease at 4:15 p.m. (New York time) on the Thursday
preceding an expiration Saturday. The index value for exercise of the
Mini DAX options will be calculated by DBAG based on the Xetra intra-
day auction prices for each of the component companies. That value is
also used as the basis for
[[Page 61535]]
settlement of DAX Index futures and options contracts traded on Eurex.
The intra-day auction occurs between 1 p.m. and 1:05 p.m. (German
time) on the third Friday of the expiration month, which generally
corresponds to 7 a.m. to 7:05 a.m. (New York time). Therefore, because
trading in the expiring contract months will normally cease on a
Thursday at 4:15 p.m. (New York time), the index value for exercise
will be determined the day after trading has ceased, i.e., during the
Friday afternoon Xetra trading session, or generally by 7:05 a.m. (New
York time). If no price is established for a component company during
the Xetra intraday auction, then the next available price is used. If
no price is available by the end of the Xetra trading session then the
last price available is used for calculation. When the auction is
finished, the index values are disseminated as the settlement values.
The settlement values are widely disseminated through major market data
vendors including ThomsonReuters and Bloomberg.
If the Frankfurt Stock Exchange is closed on the Friday before
expiration, but the ISE remains open, then the last trading day for
expiring Mini DAX options will be moved earlier to Wednesday as if the
ISE had had a Friday holiday. The settlement index value used for
exercise will be calculated during Xetra's intra-day auction on
Thursday morning.
Position Limits
For options on the Mini DAX, the Exchange proposes to establish
aggregate position limits at 250,000 contracts on the same side of the
market, provided no more than 150,000 of such contracts are in the
nearest expiration month series. Additionally, under ISE Rule 2006, an
index option hedge exemption for public customers may be available
which may expand the position limit up to an additional 750,000
contracts.\9\ Furthermore, proprietary accounts of members may receive
an exemption of up to 500,000 contracts for the purpose of facilitating
public customer orders.\10\
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\9\ The same limits that apply to position limits shall apply to
exercise limits for these
products.
\10\ See ISE Rule 413(c).
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Exchange Rules Applicable
Exchange rules that are applicable to the trading of options on
broad-based indexes will also apply to the trading of Mini DAX
options.\11\ Specifically, the trading of Mini DAX options will be
subject to, among others, Exchange rules governing margin requirements
and trading halt procedures for index options.
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\11\ See ISE Rules 2000 through 2012.
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The Exchange proposes to apply broad-based index margin
requirements for the purchase and sale of options on the Mini DAX.
Accordingly, purchases of put or call options with nine months or less
until expiration must be paid for in full. Writers of uncovered put or
call options must deposit/maintain 100% of the option proceeds, plus
15% of the aggregate contract value (current index level x $100), less
any out-of-the-money amount, subject to a minimum of the option
proceeds plus 10% of the aggregate contract value for call options and
a minimum of the option proceeds plus 10% of the aggregate exercise
price amount for put options.
The trading of options on the Mini DAX shall be subject to the same
rules that presently govern the trading of Exchange index options,
including sales practice rules, margin requirements, trading rules, and
position and exercise limits. In addition, long-term option series
having up to sixty months to expiration may be traded.\12\ The trading
of long-term Mini DAX options shall also be subject to the same rules
that govern the trading of all the Exchange's index options, including
sales practice rules, margin requirements, and trading rules.
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\12\ See Rule 2009(b)(1). The Exchange is not listing reduced
value LEAPS on the Mini DAX pursuant to Rule 2009(b)(2).
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Chapter Six of the Exchange's rules is designed to protect public
customer trading and shall apply to the trading of options on the Mini
DAX. Specifically, ISE Rules 608(a) and (b) prohibit Members from
accepting a customer order to purchase or write an option unless such
customer's account has been approved in writing by a designated Options
Principal of the Member.\13\ Additionally, ISE's Rule 610 regarding
suitability is designed to ensure that options are only sold to
customers capable of evaluating and bearing the risks associated with
trading in this instrument. Further, ISE Rule 611 permits members to
exercise discretionary power with respect to trading options in a
customer's account only if the Member has received prior written
authorization from the customer and the account had been accepted in
writing by a designated Options Principal. ISE Rule 611 also requires
designated Options Principals or Representatives of a Member to approve
and initial each discretionary order on the day the discretionary order
is entered. Finally, ISE Rule 609, Supervision of Accounts, Rule 612,
Confirmation to Customers, and ISE Rule 616, Delivery of Current
Options Disclosure Documents and Prospectus, will also apply to trading
in of options on the Mini DAX.
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\13\ Pursuant to ISE Rule 602, Representatives of a Member may
solicit or accept customer orders for FCOs.
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Capacity
The Exchange has represented that it has the necessary systems
capacity to support new options series that will result from the
introduction of options on the Mini DAX, including LEAPS.
Surveillance
The Exchange has represented that it has an adequate surveillance
program in place for options traded on the Mini DAX. Index products and
their respective symbols are integrated into the Exchange's existing
surveillance system architecture and are thus subject to the relevant
surveillance processes. Further, both ISE and the Frankfurt Stock
Exchange, operated by DBAG, are members of the Intermarket Surveillance
Group (``ISG''). Through its membership in the ISG, ISE may obtain
trading information via the ISG from other exchanges who are members or
affiliates of the ISG.
III. Discussion
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.\14\
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\15\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, 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 the public interest.
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\14\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation.
\15\ 15 U.S.C. 78f(b)(5).
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As a national securities exchange, the ISE is required, under
Section 6(b)(1) of the Act,\16\ to enforce compliance by its members,
and persons associated with its members, with the provisions of the
Act, Commission rules and regulations thereunder, and its own rules. In
addition, brokers that trade Mini DAX options will also be subject to
best
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execution obligations and FINRA rules.\17\ Applicable exchange rules
also require that customers receive appropriate disclosure before
trading Mini DAX options.\18\ Furthermore, brokers opening accounts and
recommending options transactions must comply with relevant customer
suitability standards.\19\
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\16\ 15 U.S.C. 78f(b)(1).
\17\ See NASD Rule 2320.
\18\ See ISE Rule 616.
\19\ See ISE Rule 610. See also ISE Rulebook Chapter Six for
rules designed to protect public customer trading that shall apply
to the trading of options on the Mini DAX.
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The trading of options on the Mini DAX will be subject to the same
rules that currently govern the trading of Exchange index options, as
will the trading of long-term Mini DAX options. The Commission believes
that the listing rules proposed by ISE are consistent with the Act. One
point strike price intervals for Mini DAX options should provide
investors with flexibility in the trading of Mini DAX options and
further the public interest by allowing investors to establish
positions that are better tailored to meet their investment objectives.
The listing of options on a reduced value should provide an opportunity
for investors to hedge, or speculate on, the market risk associated
with the stocks comprising the DAX Index, and with the reduction in the
value of the DAX Index, investors will be able to use this trading
vehicle while extending a smaller outlay of capital. This may attract
additional investors, and, in turn, create a more active and liquid
trading environment.
The Commission notes that index levels for options on the Mini DAX
will be calculated by DBAG, or its agent, and updated on a real time
basis, and will be disseminated by ISE at 15-second intervals to market
information vendors via OPRA.
The Commission believes that the Exchange's proposed position and
exercise limits for Mini DAX Options are appropriate and consistent
with the Act. The Commission also notes that ISE has represented that
it has an adequate surveillance program to monitor trading of Mini DAX
Options and intends to apply its existing surveillance program to
support the trading for these options.
Finally, the Commission believes that the proposal strikes a
reasonable balance between the Exchange's desire to offer a wider array
of products with the need to avoid unnecessary proliferation of options
series and the corresponding increase in quotes. In approving the
proposed rule change, the Commission has relied on the Exchange's
representation that it has the necessary systems capacity to support
the new options series that will be listed under this proposal. This
approval order is conditioned on ISE's adherence to this
representation. The Commission expects the Exchange to continue to
monitor for options with little or no open interest and trading
activity and to act promptly to delist such options. In addition, the
Commission expects that ISE will monitor the trading volume associated
with the additional options series listed as a result of this proposal
and the effect of these additional series on market fragmentation and
on the capacity of the Exchange's, OPRA's, and vendors' automated
systems.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-ISE-2010-81) be, and hereby
is, approved.
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\20\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-24882 Filed 10-4-10; 8:45 am]
BILLING CODE 8010-01-P