[Federal Register: February 1, 2007 (Volume 72, Number 21)]
[Notices]
[Page 4753-4754]
[DOCID:fr01fe07-100]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55175; File No. SR-ISE-2007-07]

Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change and Amendment No. 1 Thereto Relating to a Pilot Program for
Position and Exercise Limits for Options on the iShares[supreg] Russell
2000[supreg] Index Fund

January 25, 2007.
    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 January 22, 2007, the International Securities Exchange, LLC
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been substantially prepared by
ISE. On January 22, 2007, ISE submitted Amendment No. 1 to the proposed
rule change. ISE has filed the proposal pursuant to Section 19(b)(3)(A)
of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the
proposal effective upon filing with the Commission. The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend Rule 412 to exempt options on the
iShares[supreg] Russell 2000[supreg] Index Fund (``IWM'') from the
position and exercise limits provided for under the Rule 412 Pilot
Program and to increase the standard position and exercise limits for
IWM as part of a six-month pilot (``Rule 412 IWM Pilot Program''). The
text of the proposed rule change is available at ISE, the Commission's
Public Reference Room, and http://www.iseoptions.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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. The
text of these statements may be examined at the places specified in
Item IV below. 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 Exchange proposes to amend Supplementary Material .01 to Rule
412 on a six-month pilot basis to exempt options on IWM from the Rule
412 Pilot Program. Under the Rule 412 Pilot Program, the position and
exercise limits for IWM would be reduced on January 22, 2007 from
500,000 to 250,000 contracts. The Exchange now proposes to allow
position and exercise limits for options on IWM to remain at 500,000
contracts on a pilot basis, from January 22, 2007 through July 22,
2007.
    In June 2005, as a result of a 2-for-1 stock split, the position
limit for IWM options was temporarily increased from 250,000 contracts
(covering 25,000,000 shares) to 500,000 contracts (covering 50,000,000
shares). At the time of the split, the furthest IWM option expiration
date was January 2007. Therefore, the temporary increase of the IWM
position limit will revert to the pre-split level (as provided for in
connection with the Rule 412 Pilot Program) of 250,000 contracts after
expiration in January 2007, or on January 22, 2007.
    The Exchange believes that a position limit of 250,000 contracts is
too low and may be a deterrent to the successful trading of IWM
options. Importantly, options on IWM are 1/10th the size of options on
the Russell 2000[supreg] Index (``RUT''), which has a position limit of
50,000 contracts.\5\ Traders who trade IWM options to hedge positions
in RUT options are likely to find a position limit of 250,000 contracts
in IWM options too restrictive and insufficient to properly hedge. For
example, if a trader held 50,000 RUT options and wanted to hedge that
position with IWM options, the trader would, at a minimum, need 500,000
IWM options to properly hedge the position. Therefore, the Exchange
believes that a position limit of 250,000 contracts is too low and may
adversely affect market participants' ability to provide liquidity in
this product.
---------------------------------------------------------------------------

    \5\ See ISE Rule 2004(a).
---------------------------------------------------------------------------

    Additionally, IWM options have grown to become one of the largest
options contracts in terms of trading volume. For example, the volume
in options on IWM set a new single-day record on June 8, 2006, when
760,803 contracts (120,229 calls and 640,574 puts) traded on that day.
This record level volume beat the previous single-day high of 727,521
contracts on May 17, 2006. Further, over the previous six months, the
average daily ISE trading volume of IWM options has been 87,121
contracts and a total of 11,064,353 contracts have traded on the
Exchange.
    As a result, the Exchange proposes that options on IWM be subject
to position and exercise limits of 500,000 contracts on a pilot basis
to run from January 22, 2007 through July 22, 2007.\6\ The Exchange
believes that increasing position and exercise limits for IWM options
will lead to a more liquid and more competitive market environment for
IWM options that will benefit customers interested in this product.
---------------------------------------------------------------------------

    \6\ Pursuant to ISE Rule 414, the exercise limit established
under Rule 414 for IWM options shall be equivalent to the position
limit prescribed for IWM options in Supplementary Material .01 to
Rule 412. The increased exercise limits would only be in effect
during the pilot period, to run from January 22, 2007 through July
22, 2007. See Amendment No. 1 to the proposed rule change.
---------------------------------------------------------------------------

    The Exchange would require that each member or member organization
that maintains a position on the same side of the market in excess of
10,000 contracts in the IWM option class, for its own account or for
the account of a customer report certain information.\7\ This data
would include, but would not be limited to, the option position,
whether such position is hedged and if so, a description of the hedge,
and if applicable, the collateral used to carry the position. Exchange
market-makers would continue to be exempt from this reporting
requirement as market-maker information can be accessed through the
Exchange's market surveillance systems. In addition, the general
reporting requirement for customer accounts that maintain a position in
excess of 200 contracts will remain at this level for IWM options.\8\
---------------------------------------------------------------------------

    \7\ See ISE Rule 415(b).
    \8\ See ISE Rule 415(a).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with and furthers the objectives of Section 6(b)(5) of the Act,\9\ in
that it is 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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).

---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Because the forgoing rule change does not: (1) Significantly affect
the protection of investors or the public interest; (2) impose any
significant burden on competition; and (3) become operative for 30 days
after the date of this filing, or such shorter time as the Commission
may designate, it has become effective pursuant to Section 19(b)(3)(A)
of the Act \10\ and Rule 19b-4(f)(6) thereunder.\11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    A proposed rule change filed under 19b-4(f)(6) normally may not
become operative prior to 30 days after the date of filing.\12\
However, Rule 19b-4(f)(6)(iii) \13\ permits the Commission to designate
a shorter time if such action is consistent with the protection of
investors and the public interest. The Exchange has requested that the
Commission waive the 30-day operative delay. The Commission believes
that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest because such waiver
would permit position and exercise limits for options on IWM to remain
at 500,000 option contracts for a six-month pilot period. For this
reason, the Commission designates the proposed rule change to be
effective and operative upon filing with the Commission.\14\
---------------------------------------------------------------------------

    \12\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to
the Commission written notice of its intent to file the proposed
rule change, along with a brief description and text of the proposed
rule change, at least five business days prior to the date of filing
of the proposed rule change, or such shorter time as designated by
the Commission. The Commission has decided to waive the five-day
pre-filing notice requirement.
    \13\ Id.
    \14\ For the purposes only of waiving the 30-day operative
delay, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule
change the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors or otherwise in
furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number SR-ISE-2007-07 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-ISE-2007-07. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments,

all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of the
filing also will be available for inspection and copying at the
principal office of ISE. 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-2007-07 and should be submitted on or before February 22, 2007.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-1581 Filed 1-31-07; 8:45 am]

BILLING CODE 8011-01-P