[Federal Register Volume 76, Number 56 (Wednesday, March 23, 2011)]
[Notices]
[Pages 16464-16466]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6786]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64091; File No. SR-ISE-2011-04]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Approving a Proposed Rule Change To Establish New Classes of
Market Makers for Index Options
March 17, 2011.
I. Introduction
On January 12, 2011, the International Securities Exchange, LLC
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend its rules to establish
two new classes of market makers for index options traded on the
Exchange. The proposed rule change was published for comment in the
Federal Register on January 31, 2011.\3\ The Commission received no
comments regarding the proposal. This order approves the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 63761 (January 25,
2011), 76 FR 5412 (``Notice'').
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II. Description of the Proposal
The Exchange proposed to amend its rules to establish the following
new classes of market makers for certain index options traded on the
Exchange: Index Options Primary Market Makers (``IXPMM'') \4\ and Index
Options Competitive Market Makers (``IXCMM''),\5\ collectively referred
to as IXMMs.
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\4\ An IXPMM is defined in new ISE Rule 2013(a) as a primary
market maker in Eligible Index Options traded on the Exchange
pursuant to new ISE Rule 2013.
\5\ An IXCMM is defined in new ISE Rule 2013(a) as a competitive
market maker in Eligible Index Options traded on the Exchange
pursuant to new ISE Rule 2013.
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The Exchange's proposal to separate out and introduce a new class
of market maker trading licenses that are specific to index options is
intended to allow an opportunity for additional market
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participants, who are not currently maker makers on the Exchange's
First Market, to trade new index options as index-specific market
makers.\6\
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\6\ See Notice, supra note 3, 76 FR at 5412. An IXMM license, by
itself, would not allow the holder thereof to trade in equity or ETF
options traded on the Exchange.
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Because the Exchange's proposal primarily focuses on newly-listed
index products, the proposal describes how the existing 28 cash-settled
indexes traded on the Exchange will be treated. Specifically, index
options listed on the Exchange prior to December 31, 2010 (``Legacy
Index Options'') already have an PMM assigned. The proposal does not
affect those assignments, and such PMMs will simply continue to
function as PMMs (i.e., as an IXPMM) in its currently-assigned index
option(s). In addition, except as provided above, the proposal provides
that all current and future First Market PMMs and CMMs may trade (as an
IXCMM) all existing and future index products, including both Legacy
Index Options and Eligible Index Options without having to purchase a
separate IXCMM trading license. Market participants that are not
currently a PMM or CMM on the Exchange's First Market will be required
to purchase a new IXMM license in order to trade in index options on
the Exchange.\7\
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\7\ IXMM trading licenses will not represent ownership of any
equity interest in the Exchange.
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Eligible Index Options. New ISE Rule 2013(c) defines ``Eligible
Index Options'' as: (i) Index options that have a 6-month average daily
volume of less than 10,000 contracts in the US market; and (ii) index
options that have a trading history of less than 6 months, in which
case the eligibility threshold would be prorated proportionately over
the time that an index was listed in the US market.\8\ Prior to the
listing of an Eligible Index Option, the Exchange will conduct a one-
time eligibility test to determine whether an index product is an
Eligible Index Option. The Exchange will conduct the eligibility test
when an index product is qualified for listing under ISE rules and
prior to its certification with the Options Clearing Corporation.\9\
The following index products are not Eligible Index Options: Russell
2000 Index (``RUT''), the NASDAQ-100 Index (``NDX''), and the Mini-
NASDAQ-100 Index (``MNX'').\10\
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\8\ For example, if an index has a trading history for just
three months in the US market, the prorated eligibility threshold
applied by ISE would be 20,000 ADV.
\9\ The Exchange currently follows this process with regards to
the listing of all equity (including ETF) and index option products
traded on the Exchange.
\10\ See new ISE Rule 2013(c)(2).
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Legacy Index Options. ISE defines Legacy Index Options as index
options listed on the Exchange prior to December 31, 2010.\11\ New ISE
Rule 2013(c)(3) provides that the current First Market PMM that has an
allocation as PMM in a particular Legacy Index Option will be deemed to
be the IXPMM for Legacy Index Options and, accordingly, will not need
to purchase an IXPMM license to continue to trade as an IXPMM in that
Legacy Index Option. In the event a Legacy Index Option is de-listed
and subsequently re-listed, ISE will allocate the IXPMM license for
that index through the auction process described in Rule 2013.\12\
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\11\ As of December 31, 2010, the following indexes are Legacy
Index Options: Mini FTSE 100 (symbol, UKX); ISE Semiconductors
(BYT); ISE Electronic Trading (DMA); ISE-Revere Natural Gas (FUM);
ISE Water (HHO); ISE Homeland Security (HSX); ISE Long Gold (HVY);
ISE 250 (IXZ); ISE U.S. Regional Banks (JLO); ISE Oil and Gas
Services (OOG); ISE Integrated Oil and Gas (PMP); ISE Bio-
Pharmaceuticals (RND); ISE Homebuilders (RUF); ISE SINdex (SIN); ISE
Nanotechnology (TNY); ISE Revere Wal-Mart Supplier (WMX); KBW Bank
Index (BKX); KBW Mortgage Finance Index (MFX); Morgan Stanley
Technology Index (MSH); Morgan Stanley Retail Index (MVR); Nasdaq Q-
50 Index (NXTQ); Mini-Russell 2000 (RMN); Russell 1000 Index (RUI);
S&P Mid Cap 400 Index (MID); Standard & Poor's Small Cap 600 Index
(SML).
\12\ In other words, the delisting of a Legacy Index Option
terminates its status as a Legacy Index Option for purposes of new
ISE Rule 2013.
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There will be one IXPMM per each Eligible Index Option and Legacy
Index Option.\13\ IXPMM trading licenses shall be permanently granted
as long as the IXPMM meets its stated market quality commitments.\14\
By contrast, all IXCMM trading licenses will be for a term of one year.
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\13\ See new ISE Rule 2013(c)(3) and (e)(1).
\14\ See new ISE Rule 2013(e)(1). The Board or designated
committee, however, may suspend or terminate any trading license of
a market maker whenever, in the Board's or designated committee's
judgment, the interests of a fair and orderly market are best served
by such action. See new ISE Rule 2013(e)(1).
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Allocations Generally. Traditionally, new index products on the
Exchange have been allocated as part of the general allocation to ISE's
``First Market,'' which is the general market for higher-volume equity,
ETF and index options. The Exchange states that it will offer IXMM
trading licenses in a manner similar to how it offers foreign currency
(``FX'') options trading licenses to FX market makers.\15\ IXPMM
allocations will be based on the same methodology ISE currently uses
for FXPMMs in its FX products, which is based, in part, on market
quality commitments.
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\15\ See Securities Exchange Act Release No. 55575 (April 3,
2007), 72 FR 17963, 17964 (April 10, 2007) (SR-ISE-2006-59).
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IXPMM Allocations for Eligible Index Options. Current and future
First Market PMMs/CMMs may acquire an IXPMM trading license by
participating in an auction, which involves the submission of a
monetary bid and market quality commitments.
IXPMM trading licenses will be sold by means of a sealed bid
auction conducted by the Exchange. A separate auction would be
conducted for each index option for which ISE seeks to allocate an
IXPMM. The ``winning'' bid at which an IXPMM trading license is sold is
referred to as the ``Auction Price.'' Together with its bid, a member
seeking an IXPMM trading license must provide, at a minimum, market
quality commitments regarding: (1) The average quotation size it will
disseminate in an Eligible Index Option; and (2) the maximum quotation
spread it will disseminate in such product at least 90% of the time. At
the end of the auction, the Exchange will determine the winning bidder
for an IXPMM trading license based on bid amount and market quality
commitment, and may reject a bid if the Exchange deems a market quality
commitment to be unrealistic or significantly inferior to market
quality commitments submitted by other bidding members. In an auction
for a trading right for an Eligible Index Option, ISE will give
preferred consideration to a First Market PMM/CMM where bid and quality
commitments are equal to those submitted by a new member who is not a
First Market PMM/CMM.
Once allocated, the IXPMM may change its market quality commitment
only to the extent that the new commitments are an improvement to its
existing commitment. Under new Rule 2013(e)(4), the Exchange will
review and assess market quality commitments on a quarterly basis to
ensure IXPMMs are in compliance with their stated commitments. At the
discretion of the Exchange and subject to the procedural protections
provided under the rules of the Exchange,\16\ failure to meet stated
commitments may result in ISE terminating an allocation and conducting
an auction to reallocate the failing IXPMM's index option.\17\
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\16\ See Chapter 17 of ISE Rules.
\17\ See supra note 14.
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IXCMM Allocations. Current and future First Market PMMs may
request, and if requested will be allocated, an IXCMM trading license
without having to pay any additional fee. A member who is not a First
Market PMM/CMM will be required to purchase an IXCMM trading license to
trade as an IXCMM on the Exchange. IXCMM trading licenses will be
available for purchase at any
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time during a calendar year.\18\ All IXCMM trading licenses will expire
at the end of the calendar year in which they are issued but, upon
request by a PMM or CMM, will be renewed for subsequent years on an
annual basis.\19\
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\18\ IXCMM trading licenses sold during a calendar year will be
prorated to reflect the number of trading days in the year. See new
ISE Rule 2013(f)(2).
\19\ See Notice, supra note 3, 76 FR at 5414.
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IXMM Duties and Privileges. By amending ISE Rule 802(b) to permit
the allocation of Eligible Index Options, subject to new Rule 2013, ISE
is subjecting market makers in Eligible Index Options to the
obligations imposed on Exchange market makers under Chapter 8 of the
Exchange's rules. Accordingly, once an IXPMM obtains a trading license
in an Eligible Index Option, the IXPMM will have all of the
responsibilities and privileges of a PMM under the Exchange's
rules.\20\ Similarly, once an IXCMM obtains a trading license in an
Eligible Index Option, the IXCMM will have all the responsibilities and
privileges under the Exchange's rules.
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\20\ For example, IXPMMs will enjoy privileges that include,
among other things, participation rights and small order execution
preference while accepting responsibilities that include, among
other things, the obligation to provide continuous quotations in an
Eligible Index Option for which it has been allocated, to conducting
the opening rotation on a daily basis for as long as the IXPMM
retains an allocation in an Eligible Index Option.
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After an IXPMM has purchased a trading license, the IXPMM may
terminate its status as IXPMM in an index option if the IXPMM is unable
to meet its obligations, provided the IXPMM gives at least 60 days
prior written notice to the Exchange of such termination. In the event
the Exchange is unable to re-allocate the IXPMM's index option product
within the notice period and the index option product is singly listed
on ISE, then the IXPMM will be required to continue to fulfill its
obligations in that product until all open interest has been closed. An
IXCMM may terminate its trading license prior to its scheduled
expiration by providing at least 10 days prior written notice to the
Exchange.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act,\21\ which
requires, among other things, that the rules of a national securities
exchange 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 the public interest.
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\21\ 15 U.S.C. 78f(b)(5). In approving this proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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The Commission believes that the provisions governing the two new
classes of market makers that will be permitted to trade Eligible Index
Options and Legacy Index Options on the Exchange, IXPMMs and IXCMMs,
are consistent with the Act. The Commission notes that IXPMMs and
IXCMMs will be subject to identical obligations that correspond to the
market making obligations applicable to First Market PMMs and CMMs,
respectively.\22\ The Commission notes that, to obtain a trading
license, IXPMMs will be required to provide the Exchange with market
quality commitments \23\ and, if an IXPMM continuously fails to meet
its stated market quality commitments, the Exchange may terminate its
IXPMM allocation.\24\
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\22\ See supra note 20.
\23\ See new ISE Rule 2013(e)(3).
\24\ See new ISE Rule 2013(e)(4).
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The Commission believes that the procedures under which the
Exchange proposes to offer IXMM licenses are reasonably designed to
award such allocations in a fair and reasonable manner. In particular,
the Commission believes that provisions governing IXCMM trading
licenses are designed to ensure that market maker trading licenses will
be widely available because the Exchange will make an unlimited amount
of IXCMM licenses available for purchase by members who are not PMMs or
CMMs on the Exchange's First Market.\25\ In addition, the requirement
that bidders provide market quality commitment in addition to their bid
for an IXPMM allocation will allow the Exchange to grant IXPMM trading
licenses in an objective manner without awarding a trading license
solely based on the highest bid.
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\25\ See new ISE Rule 2013(f).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-ISE-2011-04) be, and hereby
is, approved.
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\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6786 Filed 3-22-11; 8:45 am]
BILLING CODE 8011-01-P