SEC Division of Trading and Markets no-action letter: London Traded Options Market

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

DIVISION OF
MARKET REGULATION

Davis Polk & Wardwell

1 Chase Manhattan Plaza

New York, New York 10005

Re: pondon Traded 0vtions Market

Dear Mr. Smith:

This responds to your letters, dated June 1, August 15/ and

August 30, 1990, on behalf of The International Stock Exchange of

the United Kingdom and the Republic of Ireland Limited (ggISEgl),

as supplemented by conversations with the staff, in which you

request advice that the Division of Market Regulation

(NDivisionw) will not recommend enforcement action to the

Commission against the ISE under Section 6 of the Securities

Exchange Act of 1934 (ItExchange Actgt), against the ISEgs

wholly-owned subsidiary, the London Options Clearing House

Limited (glLOCHfl), under Section 17A of the Exchange Act, or

against the ISE or ISE members that are members of the ISEgs

London Traded Options Market ("LTOMgg) under Section 15(a) of the

Exchange Act, if the ISE and LTOM members act as described below

to familiarize certain registered broker-dealers and large

financial institutions in the United States with the LTOM,

without the ISE registering with the Commission as a national

securities exchange, without the LOCH registering with the

Commission as a clearing agency, and without the ISE or LTOM

members registering with the Commission as broker-dealers.

We understand the facts to be as follows:

The ISE is an enti'cy organized in the United Kingdom of

Great Britain and Northern Ireland (*#United Kingdomgg or "U,K.")

and registered under the U.K. companies Act, 1985 with limited

liability. It is a long-established stock exchange and is

regulated in the United Kingdom as a Recognized Investment

Exchange under the U.K. Financial Services Act, 1986 (VSA").

The ISE is subject to the jurisdiction of the Securities and

Investments Board established under the FSA. The ISE*s offices,

facilities, and operations are located in London, England, with

branches in various British provincial centers and in Dublin,

Ireland. The ISE is subject to U.K. law and is not registered

under the Exchange Act in any capacity.

The ISE operates several securities markets, one of,which is

the LTOM. The ISE created the LTOM in 1978 for the purpose of

-. Richard B. Smith, Esq. options trading. Trading now occurs in standardized put and call

options, called "UK Equity option^,^' on approximately 70 equity

securities of leading U.K. companies. Trading on the LTOM also

occurs in standardized put and call options, called "FT-SE 100

OptionsfU1on the Financial Times-Stock Exchange 100 ("FT-SE 100")

Index. That index is composed of 100 stocks of leading U.K.

companies listed and traded on the ISE. All the underlying

securities for LTOM options are alpha stocks listed and traded on

the ISE1s Stock Exchange Automated Quotations ("SEAQW) market.

UK Equity Options traded on the LTOM are American-style, in that

they are exercisable at any time before they expire. All FT-SE

100 Options traded on the LTOM also have been American-style,

until the introduction in February, 1990 of an additional FT-SE

100 Option contract that is European-style, and thus exercisable

only on the day when it expires.

LTOM trading takes place on a face-to-face, open-outcry , basis on the trading floor in the ISE Tower building in London.

Only ISE members that are LTOM members may execute transactions

there. All LTOM transactions are settled in pounds sterling in

London. LTOM options are not fungible or interchangeable with

options that are traded on any other market. Thus,.any options

position opened on the LTOM only can be closed on the LTOM or

exercised through its clearing house.

Registration and clearing of all options transactions on the

LTOM are performed by the LOCH, which is located in London. You

describe the LOCH as being comparable in function to a clearing

agency for a U.S. options market. The LOCH is the counterparty

to every LTOM option and maintains a balance of open positions

between all writers and all buyers of LTOM option contracts.

Settlement of LTOM options transactions, and daily mark-to-market

margin payments,for writers of LTOM options, must be made to the

LOCH in London by LOCH clearing members or clearing agents, who

are ISE members. Exercises of LTOM options also must be effected

in London with the LOCH, which randomly assigns exercises to

options writers. Once UK Equity Options are assigned, the

comparison, clearance, and settlement of transactions in the

underlying securities takes place within the ISE's standard

equity settlement system. The FT-SE 100 Options are cash-settled

only.

The ISE wishes to familiarize certain registered broker-

dealers and large financial institutions in the United States

with the LTOM. The ISE, therefore, proposes to take the limited

steps described below with respect only to "Qualified

Broker-Dealersm and "~ualified institution^.^^ To be nQualified,lU

each broker-dealer or financial institution must meet the

following standards:

(1) It must be a "qualified institutional buyerw as

defined in Rule 144A(a)(l) under the Securities Act of

1933 ("Securities Actt@), or an international

organization excluded from the definition of W.S.

personw in Rule 902(0)(7) of Regulation S under the

Securities Act; and,

(2) It must have had prior actual experience with

traded options in the U.S. options markets, and

therefore have received the options disclosure document

for U.S: standardized options required by Rule 9b-1

under the Exchange Act.

LTOM members will be required to take reasonable steps to

assure themselves, before effecting any LTOM options transaction

for or with a customer located in the United States, that the

customer is a Qualified Broker-Dealer or a Qualified Institution,

that the customer is acting for its own account or the account of

another Qualified Broker-Dealer or Qualified Institution or the

managed account of a non-U.S. person (within the meaning of Rule

902(0)(2) of Regulation S under the Securities Act), and that the

customer has received the LTOM disclosure document referred to

below.

Specifically, you represent that the ISE will institute

rules requiring LTOM members to furnish each Qualified Broker-

Dealer or Qualified Institution with an LTOM disclosure document

before accepting an order from that Qualified Broker-Dealer or

Qualified Institution to purchase or sell an LTOM option

contract. You state that these ISE rules also will require each

LTOM member to obtain from each Qualified Broker-Dealer or

Qualified Institution the following written representations,

signed by an appropriate officer of the Qualified Broker-Dealer

or Qualified Institution:

(1) That it is a Qualified Broker-Dealer or Qualified

Institution, and that as such (a) it owns and invests

on a discretionary basis a specified amount of eligible

securities sufficient for it to be deemed a qualified

institutional buyer under Rule 144A under the

Securities Act and, if it is a bank, savings and loan

association, or other thrift institution, that it has a

net worth meeting the requirements of Rule 144A under

the Securities Act, and (b) it has had prior actual

experience in the U.S. traded options markets, and as a

result thereof has received the options disclosure

document entitled "Understanding the Risks and Uses of

Listed Optionsm ("Options Disclosure Documentt@ or

'@ODDu) that is prepared by the Options Clearing

Corporation and U.S. options exchanges;

-. Richard B. Smith, Esq.

(2) That it has received the LTOM disclosure document;

(3) That its transactions in LTOM options are for its own account or the account of another Qualified Broker￾Dealer, another Qualified Institution, or the managed account of a non-U.S. person within the meaning of Rule 902(0)(2) of Regulation S under the Securities Act; (4) That it will not transfer any interest or

participation in an LTOM option contract that it has

purchased or written, to any other U.S. person, or any

person in the United States, that is not a Qualified

Broker-Dealer or Qualified Institution;

(5) That (a) it will cause any disposition of an LTOM,

option contract that it has purchased or written to be'

effected only on the LTOM and to be settled at the LOCH

in London, (b) it understands that any required

payments for premiums, settlement, exercise, or closing

of LTOM option contracts must be made in London and in

pounds sterling, and (c) it understands that, if a

writer of LTOM option contracts, margin must be

provided to LOCH, and maintained, measured in pounds

sterling;

(6) That, if it is a Qualified Broker-Dealer or

Qualified Institution acting on behalf of another

Qualified B,roker-Dealer or Qualified Institution that

is not a managed account, it has obtained from the

other Qualified Broker-Dealer or Qualified Institution

written representations to the same effect as these

representations, and that it will provide those written

representations to the LTOM member on demand; and

(7) That it will notify the LTOM member of any change

in the foregoing representations prior to placing any

future order, and that the foregoing representations

will be deemed to be made with respect to each order

that it gives to the LTOM member.

The ISE also will advise LTOM members that, under U.S. law,

Qualified Institutions only may be dealt with in accordance with

Rule 15a-6 under the Exchange Act, and as provided in paragraph

(a)(3) of the Rule, principally through broker-dealers registered

with the Commission.

An LTOM disclosure document, in the form submitted to and

reviewed by the Division, will be provided only to Qualified

Broker-Dealers and Qualified Institutions. The document provides

an overview of the LTOM and its options, with attention to

significant differences from standardized options in the U.S.

domestic options markets, and sets forth special factors relevant

to U.S. entities trading in LTOM options.

A wholly-owned U.S. subsidiary of the ISE located in New

York City, The International Stock Exchange (London) Inc. ("New

York Officeg1), wilf act as a representative office of the ISE in

the United States. A representative in the New York Office may

be available to respond to inquiries concerning the LTOM from

Qualified Broker-Dealers and Qualified Institutions. He or she

may make personal calls on and correspond with entities that he

or she reasonably believes to be Qualified Broker-Dealers and

Qualified Institutions to familiarize them with the existence and

operations of the LTOM. Any Qualified Broker-Dealer or Qualified

Institution will be provided with the LTOM disclosure document

upon the first visit, communication, or inquiry, whether

initiated by the representative or the Qualified Broker-Dealer or

Institution. The representative office will maintain a

reasonable supply of that document, and of the most recently

published annual report of the ISE, for distribution upon request

to Qualified ~roker-~ealers'and Qualified Institutions. The

representative also may participate in programs and seminars in

the United States.

The representative will not provide investment advice or

make any recommendations regarding specific LTOM options, nor

will he or she solicit, take, or direct orders, recommend

particular LTOM members to Qualified Broker-Dealers or Qualified

Institutions, or refer Qualified Broker-Dealers or Qualified

Institutions to particular LTOM members. If requested by a

~ualified Broker-Dealer or a Qualified Institution, the

representative office may make available to the requester a list

of all LTOM members and any registered U.S. broker-dealer

affiliates of LTOM members. The ISE will not engage in any

general advertisement or general solicitation concerning LTOM

" options in the United States.

The ISE and the London International Financial Futures

Exchange (vgLIFFEw) recently have announced that they will merge

the LTOM with the LIFFE by the end of 1990, but no final

decisions on details of the merger have been made yet. You

1 Formerly known as TOPIC Services Inc., the New York Office previously obtained separate no-action treatment from the Division regarding the dissemination of ISE market makersv quotations through electronic terminals to U.S. subscribers. Letter from Robert L.D. Colby, Chief Counsel, Division of Market Regulation, SEC, to Richard B. Smith, Esq., Davis Polk & Wardwell (Oct. 4, 1989).

represent that, whatever the outcome, the resulting options

market and any separate clearing house will be required to be

regulated in the United Kingdom as recognized or authorized

entities pursuant to the FSA. Upon consummation of the merger,

the ISE will inform the Commission and appropriate changes will

be made in the LTOM disclosure document,

You represent that the LTOM will continue to.be an organized

securities exchange operating and regulated abroad, and that in

making the LTOM known to a particular sophisticated segment of

the U.S. financial community, the ISE will not be altering this

status. You also represent that the ISE has placed on its

proposed activities the limitations described above, in order to

secure compliance with applicable U.S. securities laws. You

maintain that making information concerning the LTOM available in

the United States as described above will serve to increasezthe

availability of information concerning an important and growing

marketplace in Europe, which you believe will benefit appropriate

U.S. investment professionals.

Finally, you also ask the Division to confirm (1) that

provision of the LTOM disclosure document by the New York Office,

an LTOM member, or a Qualified Broker-Dealer to a Qualified

Broker-Dealer or Qualified Institution will satisfy the

obligation of an LTOM member or a Qualified Broker-Dealer under

Rule 9b-l(d) to furnish an options disclosure document before

accepting an order from a customer to purchase or sell an LTOM

option contract, and (2) that neither the provision of the LTOM

disclosure document by the New York Office to a Qualified

Broker-Dealer or Qualified Institution, nor the provision of the

LTOM disclosure document by an LTOM member to a Qualified

Broker-Dealer or, in response to an unsolicited inquiry

concerning options, to a Qualified Institution, will constitute

solicitation or a research report for purposes of Rule 15a-6.

Response:
Based on the facts and representations set forth above, the

Division will not recommend enforcement action to the Commission

against the ISE or LTOM members under Section 15(a) of the

Exchange Act if the ISE acts as you describe to familiarize

Qualified Broker-Dealers and Qualified Institutions in the United

States with UK Equity Options and FT-SE 100 Options traded on the

LTOM, without the ISE or LTOM members registering with the

Commission as broker-dealers under Section 15(b) of the Exchange

Act, Also, the Division will not recommend enforcement action to

the Commission against the ISE or LTOM members under Section

15(a) of the Exchange Act if, solely in connection with the

satisfaction of an LTOM member's obligation under Exchange Act

Rule 9b-l(d) and under the limited circumstances set forth above,

(1) the New York Office or an LTOM member provides the LTOM

disclosure document for UK Equity Options and FT-SE 100 Options

to a Qualified Broker-Dealer, and the LTOM member effects

transactions in UK Equity Options or FT-SE 100 Options traded on

the LTOM with or for that Qualified Broker-Dealer pursuant to

Rule 15a-6(a)(4), or (2) the New York Office provides the LTOM

disclosure document for UK Equity Options and FT-SE 100 Options

to a Qualified Institution, or an LTOM member provides the LTOM

disclosure document for UK Equity Options and FT-SE 100 Options

to a Qualified Institution in response to an otherwise

unsolicited inquiry concerning UK Equity Options or FT-SE 100

Options, and the LTOM member effects transactions in UK Equity

Options or FT-SE 100 Options traded on the LTOM with or for that

Qualified Institution pursuant to Rule 15a-6(a)(l).

Based on the foregoing, the Division also will not recbmmend

that the Commission take enforcement action against the LOCH

under Section 17A of the Exchange Act if the LOCH operates solely

in the manner described above for UK Equity Options and FT-SE 100

Options traded on the LTOM, without registering with the

Commission as a clearing agency. In addition, the Division will

not recommend that the Commission take enforcement action against

the ISE or the LTOM under Section 5 of the Exchange Act if the

ISE and the LTOM operate solely in the manner described above

with respect to UK Equity Options and FT-SE 100 Options traded on

the LTOM, without registering with the Commission as a national

securities exchange under Section 6 of the Exchange Act.

Finally, the Division has reviewed the proposed LTOM

disclosure document for UK Equity Options and FT-SE 100 Options,

as last amended on August 15, 1990. Based on our review of that

document, the Division wishes to advise you that it will not

recommend that the Commission take enforcement action against a

Qualified Broker-Dealer or an LTOM member under Rule 9b-l(d)

under the Exchange Act, if the Qualified Broker-Dealer, LTOM

member, or New York Office furnishes the LTOM disclosure document

for UK Equity Options and FT-SE 100 Options to a ~ualified

Broker-Dealer or Qualified Institution before the ~ualifieg

Broker-Dealer or Qualified Institution effects a transaction in

UK Equity Options or FT-SE 100 Options traded on the LTOM,

subject to the following conditions:

(1) The Qualified Broker-Dealer or Qualified

Institution previously has received the ODD;

(2) The ISE requires that LTOM members, before

effecting a transaction with or for a Qualified Broker-

Dealer or Qualified Institution in UK Equity Options or

FT-SE 100 Options traded on the LTOM, determine as

described above that the Qualified Broker-Dealer or

~ualified Institution has received the ODD and the LTOM

disclosure document for UK Equity Options and FT-SE 100

Options, and maintain a record of that determination;

and

(3) The ISE furnishes the Division, at least 30 days

prior to the date definitive copies are furnished to

~ualified Broker-Dealers or Qualified Institutions,

with a copy of any amendment made to the LTOM

disclosure document for UX Equity Options and FT-SE 100

Options because the information contained in that

document becomes or will become materially inaccurate

or incomplete, or because there is or will be an

omission of material information necessary to make that

document not misleading.

These positions of the Division concern enforcement action

only and do not represent conclusions on the applicability of

statutory or regulatory provisions of the federal securities

laws. The Division has taken these positions based, in part, on

the fact that the i om mission has entered into a Memorandum of

Understanding with the U.K. Department of Trade and21ndustry

regarding the sharing of investigative information, and that

foreign broker-dealers, including LTOM members, electing to deal

with U.S. institutional investors under Rule 15a-6(8)(3) are

required to provide directly to the Commission, upon request,

information, documents, testimony,' and assistance in taking the

evidence of persons that relate to transactions under Rule 15a-

6(a)(3). These positions also are based on the representations

that you have made; any different facts or conditions might

require a different response, and these positions are subject to

Memorandum of Understanding on Exchange of Information Between the United States Securities and Exchange Commission and the United Kingdom Department of Trade and Industry in Matters Relating to Securities and Between the United States Commodity Futures Trading Commission and the United Kingdom Department of Trade and Industry in Matters Relating to Futures (Sept. 23,
1986) ("U.K. MOUw). The U.K. Securities and Investments Board
became a party to the U.K. MOU on November 22, 1988.

modification or revocation if the facts and representations set forth above are altered. Very truly yours,

Richard G. Ketchum

Director

DAVISPOLK& WARDWELL
488 -nu AVCWUC
I CHASEMANHATTANPLAZA NCW yon*, - N. Y. lWU 1300 1 STREET. N. W. WSMINQIDW. o.C. zooos

• I ~)cDcIICK'S PLACE
  LONDON CUR @A8
  TOKIO UIJO SUILOING SMlNSAN
  -s. MAIIUNOUCMI I-CYOML
  CMIYOOA-MU. TOMYO 100
  June 1, 1990
  ,,n%yi&-ioil oi fiariret Regulation Securities and Exchange Commission 450 5th Street, N.W. Judiciary Plaza Washington, D.C. 20549 Attention: Robert L.D. Colby, Chief Counsel Re: ISEOs London Traded Option Market Dear Sirs:
  On behalf of The International Stock Exchange of United Kingdom and the Republic of Ireland Limited ("ISE"), we request your advice that, based on the circumstances stated in this letter, the Division will not recommend to the Commission any enforcement action against the ISE under
  Section 6 or Section 15 of the Securities Exchange Act of
  1934 as amended (the "Actw), by reason of its not registering under the Act as a securities exchange or a broker-dealer, or against the ISE's wholly-owned subsidiary London Options Clearing House Limited (t8LX)CHN)under Section 17A of the Act, by reason of its not registering under the Act as a clearing tgsncy. Thin 16tter describes the manner in which the ISE intends to familiarize certain registered broker-dealers and large financial institutions in the United States with its London Traded Options Market (nLTOHm). The ISE is an entity organized in the United King￾dom of Great Britain and Northern Ireland (the wU.K.n) and registered under the U.K..Companies Act 1985 with limited liability. It is a long-established stock exchange and is regulated in the U.K. as a Recognized Investment Exchange under the U.K. Financial Services Act 1986. The ISE is

Division of Market Regulation - 2 - June 1, 1990 subject to the juri~dictio~ ofthe Securities and Investments

Board established under that, datute. The ISERs offices,

facilities and operations are located in London, England with

branches in various British provincial centers and Dublin.

The ISE, subject to U.K. law, is not registered under the Act

in any capacity.

The ISE operates several markets, one of which is the LTOM. The ISE created the LTOM in 1978 for the purpose of options trading. Trading now occurs in standardized put and call options, called UK Equity Options, on approximately 70 equity securities of leading U.K. companies. All the underlying securities for LTOM options are alpha stocks lisLeC'arb6 L~cde; .tr.r Icir; XSZ'S SEAQ liial'kft. 'Zr-~3ir.g=;Ithe LTOM also occurs in standardized put and call options on the FT-SE 100 Index. That index is composed of one hundred alpha stocks of leading U.K. companies listed and traded on the ISE. All options traded on the LTOM are American-style in that they are exercisable at any time prior to expiration, except certain of the FT-SE 100 Options which are European￾style. (Foreign currency options have also been traded on the LTOM but are not available to U.S. investors; trading in currency options on LTOM will cease on June 30, 1990.) LTOM trading takes place on a face-to-face open-

outcry basis on the trading floor in the ISE Tower building

in London. Only ISE members of the LTOM may execute transac-

tions there. All LTOM transactions are settled in pounds

sterling iri London. LTOM options are not fungible or inter-

changeable with options that are traded on any other market.

Thus, any LTOM option position opened can be closed only on

the LTOM or exercised through its clearing house.

Registration and clearing of all options transac￾tions on the LTOM is performed by tho Undon Option Clearing House Ltd (aII)CHa), a wholly-owned subsidiary of the ISE locctcd in London, Comparable in function to a clearing agency for a U.S. options market, IDCH is the counterparty to every LTOM option and maintain. a balance of open positions between all writers and all buyer. of LTOM option contracts. Settlement of option transaction., and daily mark-to-market margin payments for writer., must be made to II)CX in London by UCH clearing members or clearing agents, who are ISE member.. Exerciuem muot aluo be effectod in London with LOCH, which randomly assign. oxorcimom to vritors. Once UK Equity Options are asmigned, tho comparison, cloaranco and settlement of tho transaction in the underlying mocurity takes placo within tho ISE'm standard equity settlement system. The FT-SE 100 Option. are cash settled only.

Division of Market Regulation - 3 - June 2, 1990 The ISE wishes to famiiiarize certain registered

broker-dealers and large financial institutions in the U.S.

with the LTOH. To do this it proposes to take the limited

steps described below with respect only to t8Qualified Broker-

Dealersn and ttQualified Institutionsw. To be Qualified, each

such entity must meet the following standards:

(a) it must be a Itqualified institutional

buyertt as defined in Rule 144A, or an international organization excluded from the definition of ttU.S. persontt in Rule 902 (0) (7), and (b) it must have had prior actual experience

with traded options in the United States

options market (and, therefore, would

have received the disclosure document

for U.S. standardized options called for

by Rule 9b-1).

Members of the LTOM will be required to take reasonable steps

to assure themselves, before effecting any LTOM options

transaction for or with a customer located in the United

States, that the customer is a Qualified Broker-Dealer or a

Qualified Institution, that the customer is acting for its

own account or the account of another Qualified Broker-Dealer

or Qualified Institution or the managed account of a non-U.S.

person (within the meaning of Rule 902(0)(2)), and that the

customer has received the LTOM disclosure document referred

to below. The ISE will advise members of the LTOX that under

U.S. law Qualified Institutions may be dealt with only in

accordance with Rule 15a-6, principally through U.S.

registered broker-dealers as provided in the Rule.

An LTOX disclosure document, in the form submitted tc and reviewed by the ~ivision, will be provided only to Qualified Broker-Dealers and Qualified Institutions. The document provides an overview of the LTOM and its options, with attention to significant differences from standardized option8 in the U.S. domestic options market, and sets forth special factor. relevant to U.S. entities transacting in LTOW option.. A wholly-owned U.S. subsidiary located in New York

City, The International Stock Exchange (London) Inc.

(formerly named TOPIC Services Inc.), will act a8 a repre-

sentative office of the ISE in the U.S. (This subsidiary

previously obtained separate no-action treatment with respect

Division of Market Regulation - 4 - June 1, 1990 to the dissemination of ISE market-maker quotations through

electronic terminals to U.S. subscribers.) A representative

in the uubsidiary8s office may br available to respond to

inquiries concerning the LTOH from Qualified Broker-Dealers

and Qualified Institutions. Hr or shr may make personal

calls on and correspond with entities that he or she

reasonably believes to be Qualified Broker-Dealers and

Qualified Institutions to familiarize them with the existence

and operations of the LTOH. Any Qualified Broker-Dealer or

Qualified Institution would be provided, upon first visit,

communication or inquiry, with the LTOM disclosure document.

The representative office will maintain a reasonable supply

of that document, and of the most recently published annual

report of the IS=, to rosue~dLY iequc~tb ~~~czcCOZfrom

Qualified Broker-Dealers and Qualifiec! Institutions. The

representative may also participate ir' programs and seminars

in the U.S. The representative will not givm investment

advice or make any recommendations with respect to specific

LTOM options, nor will he or she solicit, take, or direct

orders, nor recommend or refer particular LTOM members. If

requested by a Qualified Broker-Dealer or Qualified Institu-

tion, the representative office may make available to the

requester a list of all LTOM members and any registered U.S.

broker-dealer affiliates of LTOM members.

The ISE will not engage in any general advertise￾ment concerning LTOM options in the United States. . The ISE recently announced its intention to place

LTOM in a separate corporation. It was anticipated that the

ISE would retain a controlling role in the newly formed

entity, which would remain subject to regulation in the UK

under the Pinancial Services Act, either as an adjunct of the

ISE or as a separate Recognized Investment Exchange. At the

instigation of the Bank of England, the ISE and LIFFE (London

International Pinancial Futures Exchange) are currently

exploring proposals to merge me two markets (LTOEIand LIFFE)

in an as yet undefined way. It is ne0ertheiess clear that

whatever forr a reorganization or merger eventually takes,

the same or equivalent U.K. regulatory oversight will apply

to either the oeparate or any merged exchange in the UK. In

the event of such a reorganization or merger, the ISE will

inform the Commission and appropriate changes will be made in

the LTOW disclosure document.

It is clear from the foregoing that the ISE's LTOH

will continue to be an organized securities exchange operat-

ing and regulated abroad, and that in making itnelf known to

a particular sophisticated segment of the U.S. financial

Division of Market Regulation - 5 -- June 1, 1990 . - community it will not be altering this fact. 1t~isalso apparent that careful limitations have been placed on steps to be taken in order to assure to the extent feasible com￾pliance with applicable U.S. securities laws. Making infor￾mation concerning the LTOM available in the United States as described in this letter will serve to increase, in a respon￾sible manner, information concerning an important and growing marketplace in Europe that will be of benefit to appropriate U.S. professionals. We, therefore, request on behalf of the ISE that yuu advise us you will not recommend that the Commission take enforcement action against the ISE or LTOM under Section 6 or 15 of the Act, by mason of its not registering under the Act as a securities exchange or a broker-dealer, or against LOCH under Section 17A of the Act, by reason of its not register￾ing as a clearing agency. We also request that you advise us (a) that fur￾nishing of the LTOM disclosure document by the ISE U.S. representative office, an LTOM member or a Qualified Broker￾Dealer to a Qualified Broker-Dealer or Qualified Institution will satisfy any obligation of a broker or dealer under Rule 9b-l(d) to furnish an options disclosure document before accepting an order from a customer to purchase or sell an LTOM option contract, and (b) that neither the ISE repre￾sentative office's furnishing to a Qualified Broker-Dealer or Qualified Institution, nor an LTOX member's furnishing to a Qualified Broker-Dealer or, in response to an unsolicited inquiry concerning options, to a Qualified Institution, will constitute soliciting or a research report as those terms are used in Rule l5a-6 (a). If you need any further information concerning this request, please call me collect. Very truly yours,

489 MIK AVENUE
NEW YOIK.-
N. Y. 10022
August 15, 1990

RICHARD B. SMITH .-I. YUUNOUCC(1 I-CHOMO ~U-SJO-~O~~ CC(I00 -KU. TOKYO 100 Mr. Howard Kramer

Assistant Director, Exchange and

Options

Office of Self-Regulatory Oversight

and Market Structure

Division of Market Regulation

Securities and Exchange Commission

450 5th Street, N.W.

Washington, DC 20549

Re: LTOM Options

Dear Mr. Xramer:

This is to confirm to you that the ISE will

institute rules requiring LTOM members to furnish to Qualifed

Broker-Dealers and Qualified Institutions an LTOM disclosure

document before accepting an order from such entity to pur-

chase or sell an LTOM option contract. The rules will also

require the LTOM member to obtain from the Qualified Broker-

Dealer or Qualified Institution a written representation,

signed by an appropriate officer, to the following effects:

1. It is a qualified Broker-Dealer or

Qualified Institution and as such it (i) owns and

invests on a discretionary basis a specified amount

of eligible securities sufficient to be a qualified

institutional buyer under SEC Rule 144A (and if a

bank, SLL, or other thrift institution, has a net

worth meeting-the requirements of Rule 144A), and

(ii) has had prior actual experience in the US

traded options market. t
2. It has received the LTOM disclosure docu-

ment.

3. Its transactions in LTOM options are for

its own account or for the account of another

Qualified Broker-Dealer or Qualified Institution or

Mr. Howard Kramer -2- ,August 15, 1990

for the managed account of a non-US person within

the meaning of SEC Rule 902(0) (7).

4. It will not transfer any interest or

participation in an LTOM option it has purchased or

written to any other US person who is not a

Qualified Broker-Dealer or Qualified Institution.

5. It will cause any disposition of an LTOM
   option that it has purchased or written to be effected only on the LTOM and to be settled at LOCH in London. It understands that any required pay￾ments for premium, settlement, exercise or closing of LTOM options must be made in London and in pounds sterling. It also understands that, if a writer, margin must be maintained measured in pounds sterling.
6. If it is a Qualified Broker-Dealer or

Qualified Institution acting on behalf of another

Qualified Broker-Dealer or Qualified Institution

that is not a managed account, it has obtained from

the other written .representations to the same

effect as these representations and will provide it

to the LTOM member upon demand.

7. It will notify the LTOM member of any
   change in the foregoing representations prior to placing any future order, and the foregoing repre￾sentations will be deemed to be made with respect to each order it gives to the LTOM member. If you require any further information or have any

questions concerning the foregoing, do not hesitate to call

me.

Very truly yours,

Richard B. Smith

cc: Robert L.D. Colby, Chief Counsel,

Division of Market Regulation

Abigail Anus, Deputy Chief Counsel,

Division of Corporation Finance