George W. Mann, Jr.
Executive Vice President
and General Counsel
Boston Stock Exchange
100 Franklin Street
Boston, MA 02110

Re: Exemption Under Exchange Act Rule 11Aa3-2(f) from Certain Provisions of the "Plan for the Purpose of Creating and Operating an Intermarket Option Linkage" (the "Linkage Plan") and the "Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options Submitted Pursuant to Section 11A(a)(3)(B) of the Securities Exchange Act of 1934" ("OLPP").

Dear Mr. Mann:

Rule 11Aa3-2(f) under the Securities Exchange Act of 1934 ("Exchange Act") provides that the Securities and Exchange Commission ("Commission") may exempt from the provisions of that Rule, either conditionally or on specific terms and conditions, any self-regulatory organization, member thereof, or specified security, if the Commission determines that such exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and perfection of the mechanisms of, a national market system.¹ As discussed below, the Commission is exempting the Boston Stock Exchange ("BSE") from certain provisions of the Linkage Plan and the OLPP.

A. Exemption from Certain Provisions of the Linkage Plan

The Linkage Plan is a national market system plan approved by the Commission pursuant to Section 11A of the Exchange Act and Rule 11Aa3-2.² The exchanges that currently participate in the Plan are the American Stock Exchange ("Amex"), the Chicago Board Options Exchange ("CBOE"), the International Securities Exchange ("ISE"), the Pacific Exchange ("PCX"), and the Philadelphia Stock Exchange ("Phlx")(collectively, the "Participants"). On January 13, 2004, the Commission approved the BSE's proposal to establish options trading rules and conditioned the effectiveness of these rules on, among other things, BSE becoming a participant in the Linkage Plan.³

1. Exemption from the Requirement to Pay the New Participant Fee

We understand that BSE has attempted to become a participant in the Linkage Plan for its facility the Boston Options Exchange ("BOX"), but that BSE and the Participants have been unable to agree on the amount that should be paid by BSE as the new participant fee. In your letter, dated February 2, 2004, you request that the Commission, pursuant to Rule 11Aa3-2(f) under the Exchange Act, temporarily exempt the BSE from paying the participation fee required in Sections 4(c)(iv), 5(c)(ii) and 11(b) of the Linkage Plan.

Specifically, Section 4(c) of the Linkage Plan allows an Eligible Exchange (as defined in the Plan) to become a participant (as defined in the Plan) upon:

"(i) executing a copy of the Plan, as then in effect; (ii) providing each then-current Participant with a copy of such executed Plan; (iii) effecting an amendment to the Plan as specified in Section 5(c) of the Plan; and (iv) paying the then-current fee applicable to new Participants, as specified in Section 11(b) of the Plan."

Section 5(c)(ii) of the Plan provides the process by which an Eligible Exchange may effect an amendment to the plan as follows:

Exchange Act Rule 11Aa3-2(d) requires each self-regulatory organization to comply with the terms of any effective national market system plan of which it is a participant. Because BSE and the Participants have been unable to agree on a figure for the new participant fee, you have requested that the Commission, pursuant to Exchange Act Rule 11Aa3-2(f), exempt BSE from the requirement in Rule 11Aa3-2(d) that the BSE comply with Sections 4(c)(i)(iv), 5(c)(ii), and 11(b) of the Plan regarding payment of the participation fee. You have also represented that you are willing to place in escrow with the Options Clearing Corporation ("OCC") the full amount of the participation fee requested by the Options Linkage Authority Operating Committee until the fee dispute is resolved.

Response:

On the basis of the representations and facts presented in your letter, the Commission grants an exemption to BSE, pursuant to Exchange Act Rule 11Aa3-2(f), from the requirements of Exchange Act Rule 11Aa3-2(d), with regard to paying the participation fee set forth in Sections 4(c)(i)(iv), 5(c)(ii), and 11(b) of the Plan. The grant of this exemption is expressly conditioned upon BSE:

(1) satisfying all of the other requirements to become a Participant as set forth in Sections 4(c)(i)(i)-(iii) of the Linkage Plan, other than the requirement that BSE be an Eligible Exchange (see discussion in Exemptions from "Eligible Exchange" Requirements below);

(2) placing the full amount of the participation fee requested by the Options Linkage Authority Operating Committee in escrow with the OCC; and

(3) not participating in any portion of any meeting of the Operating Committee at which a vote on the participation fee is taken.

This exemption will terminate on October 1, 2004, or at such earlier time as the Commission determines is appropriate. The Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets, and the removal of impediments to, and the perfection of the mechanisms of a national market system because it will permit BSE to become a participant in the Linkage Plan while the BSE and the Participants determine the appropriate participation fee.

The Commission strongly supports the inclusion of new participants in the Linkage Plan and the expansion of options intermarket communications and linkage between the various options markets. While the concept of a participation fee is a reasonable requirement to distribute fairly the costs in developing the linkage system, a fee disagreement should not be a barrier to entering into the Linkage Plan. The Commission urges the Linkage Plan Participants and BSE to continue their discussion on the appropriate standards for setting a participation fee in good faith, maintaining the objective of the fair distribution of development costs, and to agree on an appropriate participation fee, prior to the expiration of this exemption.

This exemption is conditioned solely on the facts and representations presented in your letter. In the event that any material change occurs with respect to any of the facts or representations presented, the exemption will expire and BOX must immediately cease operating except in accordance with all the provisions in the Linkage Plan. The Commission expresses no view with respect to other questions that BSE may raise, including the applicability of other provisions of the Linkage Plan to BOX.

2. Exemption from "Eligible Exchange" Requirements

In addition to the foregoing exemption, the Commission has determined to exempt BSE, pursuant to Exchange Act Rule 11Aa3-2(f), from the requirements of Exchange Act Rule 11Aa3-2(d), with regard to the requirements that a national securities exchange must satisfy to be an "Eligible Exchange" under the Linkage Plan.

Section 4(c) of the Linkage Plan states that an "Eligible Exchange" may become a Participant in the Plan upon the satisfaction of certain requirements as described above. Section 2(6) of the Linkage Plan defines an "Eligible Exchange" as a national securities exchange that is (a) a "Participant Exchange" in OCC⁴ and (b) a "party" to the Options Price Reporting Authority ("OPRA") Plan.⁵ In the Approval Order, the Commission conditioned the effectiveness of BSE's options trading rules upon, among other things, BSE joining OPRA. In addition, OCC's By-Laws require that a participant in OCC have effective options trading rules.⁶

To facilitate the BSE's ability to satisfy the conditions in the Approval Order, the Commission grants an exemption to BSE, pursuant to Exchange Act Rule 11Aa3-2(f), from the requirement of Exchange Act Rule 11Aa3-2(d) that BSE comply with the Linkage Plan requirements to be a "Participant Exchange" in OCC and a "party" to the OPRA Plan to be an Eligible Exchange as set forth in Sections 2(6)(a) and (b) of the Linkage Plan. The grant of this exemption is expressly conditioned on BSE becoming a Participant Exchange in OCC prior to commencing the trading of options. The Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets, and the removal of impediments to, and the perfection of the mechanisms of a national market system because it will permit BSE to undertake the requirements set forth in Section 4(c) of the Linkage Plan to become a participant and, thereby, satisfy a condition to the effectiveness of BSE's options trading rules.

B. Exemption from the Definition of Eligible Exchange under the OLPP

The OLPP is a national market system plan approved by the Commission pursuant to Section 11A of the Exchange Act and Rule 11Aa3-2.⁷ The self-regulatory organizations that currently participate in the OLPP are Amex, CBOE, ISE, PCX, Phlx, and OCC. In the order approving BSE's option trading rules, the Commission conditioned the effectiveness of those rules upon, among other things, BSE becoming a participant in the OLPP. Section 7 of the OLPP permits any Eligible Exchange to become a Plan Sponsor by executing a copy of the OLPP, providing the current Plan Sponsors with a copy of the executed OLPP, and effecting an amendment to the OLPP. An "Eligible Exchange" is defined in the OLPP as a registered national securities exchange that (a) has effective rules for the trading of option contracts issued and cleared by OCC approved in accordance with the provisions of the Exchange Act and the rules and regulation thereunder, and (b) is a party to the OPRA Plan. As noted above, the Approval Order expressly conditioned the effectiveness of the BSE's rules for the trading of options contracts upon, among other things, BSE joining the OLPP and OPRA.

To facilitate the BSE's ability to satisfy the conditions in the Approval Order, the Commission grants an exemption to BSE, pursuant to Exchange Act Rule 11Aa3-2(f), from the requirement of Exchange Act Rule 11Aa3-2(d) that BSE comply with the OLPP requirements to have effective rules for the trading of options and be a party to the OPRA Plan to be considered an Eligible Exchange under the OLPP. The Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets, and the removal of impediments to, and the perfection of the mechanisms of a national market system because it will permit BSE to undertake the requirements set forth in Section 7 of the OLPP to become a Plan Sponsor, and thereby, satisfy a condition to the effectiveness of BSE's options trading rules.

¹ The Division of Market Regulation has delegated authority to grant an exemption pursuant to 17 CFR 200.30-3(a)(42).

² See Securities Exchange Act Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000) (Commission order approving the Linkage Plan).

³ See Securities Exchange Act Release No. 49068, 69 FR 2775 (January 20, 2004) ("Approval Order").

⁴ As such term is defined in the OCC By-Laws, Section VII

⁵ As such term is described in the OPRA Plan, Section 1.

⁶ See OCC By-Laws, Art.7B, Section 1(i).

⁷ See Securities Exchange Act Release No. 44521 (July 6, 2001), 66 FR 36809 (July 13, 2001).

⁸ 17 CFR 200.30-3(a)(42).

Incoming Letter:

The Incoming Letter is in PDF format.

http://www.sec.gov/divisions/corpfin/cf-noaction/bse020404.htm