CBOE's Comments on International Securities Exchange (ISE) Rule Filing

On Friday, CBOE submitted to the Securities and Exchange Commission (SEC) its formal comments on the application of the International Securities Exchange LLC ("ISE") to register as a national securities exchange under Section 6 of the Securities Exchange Act of 1934 ("Exchange Act"). Under the Exchange Act, the Commission is charged with determining whether approval of the application would be consistent with the requirements of the Exchange Act. Many of you have asked about this matter, and we wanted to take this opportunity to provide you with an update. CBOE's comment letter to the SEC (which is available to members in the 4th floor library or on the CBOE web site) expresses our belief in the benefits of competition, which has stimulated the growth of our industry, but also insists that the rules of competition be fairly applied. We raised concerns that if problems arise at any U.S. options exchange as a result of inadequacies in rules or procedures that are perceived as unfair or harmful to investors, the entire listed options market would be tarnished, and CBOE's own reputation and business would be harmed. CBOE's comment letter cites a number of specific deficiencies in ISE's application and its proposed rules, chief among them that the ISE application does not provide any explanation of the basic operation of its system and very little explanation for the meaning and rationale of its proposed rules. Our letter contrasted the relative lack of detailed explanation provided in the ISE application with what the SEC has required historically of CBOE and the other exchanges. Even with respect to routine rule filings, far more information has been required of CBOE than is found in the application with which ISE proposes to operate the first privately owned, electronic options market. CBOE's comment letter observes another general deficiency of the ISE filing resulting from the fact that the rules proposed by ISE are copied virtually unchanged from the CBOE rule book, but without benefit of CBOE's regulatory circulars, which contain substantive provisions concerning their application. CBOE's letter also points out that many of the proposed rules copied from CBOE were intended to apply to the trading of options on a physical trading floor and ISE has failed to explain how these rules would be adapted to the kind of electronic market it proposes to operate. Before commencing with the detailed and specific comments regarding the application (which are outlined below), CBOE's letter implores the SEC to withhold its consideration of the ISE application until the application has been amended to provide a more complete and understandable description of how ISE will operate and be regulated. Once a completed amended application has been submitted, we believe it must be republished to provide an opportunity for public comment. That said, the specific concerns stated in the CBOE comment letter fell into the following areas: 1. Adequacy of regulation and investor protection; 2. Concerns regarding unfair competitive advantages over existing options exchanges. For instance, a number of proposed rules would provide ISE officials with an enhanced degree of discretion that is not allowed by the SEC in existing exchanges; 3. Issues regarding restriction of access to the ISE system; 4. Capacity issues. Serious questions regarding capacity have not been addressed by ISE; 5. The ramifications of ISE's "for-profit" status. Even though the ISE would be the first proposed for-profit, self-regulating exchange, there are not any provisions in its governance structure to assure that profit motives do not interfere with regulation; 6. Many of the proposed rules provide ISE with so much discretion, or are so indefinite, that it is unclear how they will be applied. We had numerous and detailed issues of concern within each of these areas of the ISE application. Again, if you would like to read the comment letter in its entirety it is available in the members' library or on our web site. In the meantime, we will keep you apprised of any new developments