SEC Division of Trading and Markets no-action letter: Boston Stock Exchange, Inc.

April 1, 2005

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

Re:

Extension of 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" ("Linkage Plan")

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 unconditionally or on specified 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 On February 4, 2004, the Commission granted a temporary exemption from Exchange Act Rule 11Aa3-2(d) to permit the Boston Stock Exchange ("BSE") to be a Participant 2 in the Linkage Plan without complying with Sections 4(c)(i)(iv), 5(c)(ii), and 11(b) of the Linkage Plan regarding payment of the new Participant fee thereunder. 3 On October 1, 2004, the Commission extended the exemption for the BSE from complying with those provisions of the Linkage Plan for a period of six months. 4 As discussed below, the Commission is again extending the exemption for the BSE from certain provisions of the Linkage Plan for a period of up to six months.

By your letter dated March 18, 2005, the BSE requests that the Commission extend the exemption for an additional six months to enable the BSE to present further information and facts related to the ongoing dispute between the BSE and the other members of the Options Linkage Authority Operating Committee ("OLAOC") in determining a fair and reasonable new Participant fee. You state in your letter that the BSE and the other members of the OLAOC have held several discussions on the new Participant fee and have been unsuccessful in reaching agreement on a new Participant fee.

Response:

Based on the representations in your letter, the Commission finds that the requested extension of the fee 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 mechanism of, a national market system because it will permit the BSE to remain a Participant in the Linkage Plan and to continue uninterrupted the operation of its facility, the Boston Options Exchange, Inc. ("BOX"), while the BSE and the other Participants determine the appropriate participation fee.

Pursuant to Exchange Act Rule 11Aa3-2(f), the Commission hereby extends the exemption for the BSE from the requirement under Exchange Act Rule 11Aa3-2(d) that the BSE comply with Sections 4(c)(i)(iv), 5(c)(ii), and 11(b) of the Linkage Plan regarding payment of the new Participant fee until October 1, 2005, or such earlier time as the Commission determines is appropriate. This exemption is expressly contingent upon the BSE complying with the following conditions:

continuing to satisfy all of the other requirements to become a Participant in the Linkage Plan as set forth in Sections 4(c)(i)(i)-(iii) of the Linkage Plan;

maintaining the full amount of the participation fee for new Participants requested by the OLAOC in escrow with the Options Clearing Corporation; and

not participating in the portion of any meeting of the OLAOC at which a vote on objective standards for determining a participation fee for new Participants or on the specific participation fee applicable to the BSE is taken.

The Commission urges the BSE and the other members of the OLAOC 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 of the provisions in the Linkage Plan.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority, 5

Robert L.D. Colby Deputy Director

Endnotes

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

2 The term "Participant" is used as defined in the Linkage Plan. See Section 2(24) of the Linkage Plan.

3 See Letter from Robert L.D. Colby, Deputy Director, Division of Market Regulation ("Division"), Commission, to George W. Mann, Jr., Executive Vice President and General Counsel, BSE, dated February 4, 2004.

4 See Letter from Robert L.D. Colby, Deputy Director, Division, Commission, to George W. Mann, Jr., Executive Vice President and General Counsel, BSE, dated October 1, 2004.

5 17 CFR 200.30-3(a)(42).

Incoming Letter:

The Incoming Letter is in Acrobat format.

---

BOSTON
STOCK EXCHANGE
March 18,2005
Ms. Annette Nazareth
Director
Division of Market Regulation
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Dear Ms. Nazareth,
The Boston Stock Exchange ("BSE) is requesting relief from the Commission, by the Division of Market Regulation, pursuant to its delegated authority1, to enable it to present further information and facts related to the on going dispute &tween the BSE and the Options Linkage Authority Operating Committee ("OLAOC") (See ISE Letter of Math 8, 2005) in determining a fair and reasonable "New Participant Fee" ("Fee"). In concert with the BSE's position stated herein2, we believe it would be in the best interests of all participants to grant an additional extension of the exemption from certain provisions of the "Plan for the Purpose of Creating and Operatin that expires April 1,2005 k . an Intermarket Option Linkage" (the "Linkage Plan") to the BSE We would first like to highlight the chronology of events that support our request for relief. Subsequent to the October 1, 2004 letter granting a six-month extension of the Exemption under Exchange Act Rule llAa3-2(f) from certain provisions of the "Linkage Plan" and Annette Nazareth's letter (October 1, 2004) addressed to the OLAOC, the BSE and representatives of the OLAOC have held several discussions on the Fee. We have each presented proposed language to the Linkage Plan intended to establish standards that provide a sufficiently objective basis for determining entrance fees for new participants. These discussions have been unsuccessfu1 in reaching agreement on a Fee, and more importantly, agreement on what standards comport with the suggested criteria in Annette Nazareth's letter of October 1,2004 to the OLAOC. ' 17 CFR 200.30-3(a)(42) See also chronology of correspondence as outlined on the attached ' Letter of October 1,2004 from Robert L. D. Colby to the BSE 100 Frank!~nSrreet Boston, MA 021 10 Tel 617 235 2005 Fax 617.646 0101 gearge mann@bostonstock corn

During the OLAOC meeting of October 20,2004 the Fee was discussed in general and BSE reiterated its position that it would agree to pay a reasonable fee but that the OLAOC's interpretation of a fee was too subjective and included costs attributable to participants' staff time and expense for meetings and discussions of the Linkage Plan itself. Both the BSE and SEC staff have stated that new objective standards are needed. The OLAOC continued their discussion in executive session. The OLAOC met again, November 23, 2004 to discuss further the October 1, 2004 letter from Annette Nazareth which requested, "that the Linkage Plan should be amended to more clearly set forth the methodology for determining new entrant feesw4. It was pointed out in the meeting that if the BSE did not agree with a proposed Linkage Fee provision, then the unanimous vote requirement could not be met. SEC staff, at the meeting, stated that if the OLAOC unanimously agreed to a proposal, in an executive session, then they would review the merits of the proposal with any issues raised by the either the BSE or the Division to resolve the proposed Plan language. The SEC staff also pointed out that the proposed language should be guided by Annette Nazareth's letteJ. The OLAOC adjourned to an executive session. The OLAOC's next proposal was sent to everyone on December 13, 2004 for discussion during the OLAOC meeting scheduled for December 15, 2004. The proposal6 added language to include (See first bullet) "the drafting and adoption of this Plan, including but not limited to, meeting and travel costs;" and (See second bullet) "costs of developing the functional requirements for the Linkage, and administering the process for soliciting and contracting with a Linkage facilities manager to operate the Linkage pursuant to such requirements;" among other provisions. On December 15, 2004, the BSE submitted its amendments to the OLAOC proposal with a cover letter in support of its proposed changes as well as objections to certain OLAOC proposed provisions7. In its cover letter, the BSE pointed to the original Linkage Plan language, "shall reasonably reflect a new Participants' pro rata share of costs of initially developing the Linkage". The OLAOC has been referring to this particular language as entitlement to further interpret and expand these costs to include staff time and travel expenses in drafting the Plan itself. We direct the OLAOC to read their own definition of "Linkage" which states "the systems and data communications network that link electronically the Participants" (NOT the finkage Plan itself). Further reinforcement of BSE's reading of the original Linkage Plan is contained in Annette Nazareth's letter8. We consider goodwill or future benefits to include such things as the Linkage Plan itself, a Plan that a new entrant must ensure its market comply with. See October 1,2004 letter to OLAOC from Annette Nazareth at Page 2 Nazareth letter, at Page 2 -'The Linkage Plan should
not include any subjective criteria, or objective fac designed to compensate for costs of operating the systems prior to the time the new participant joins the Link Plan, or for "goodwill" or any future benefits to the new entrant." See E-Mail agenda proposal, dated December 13,2004, entitled "Amendment No. X-8..." 7 BOXR Memo of December 15,2004with proposed changes 8 Nazareth's letter, at Page 2 - "or for 'goodwill' or any future benefits to the new entrant." 5

The OLAOC has not complied with either the spirit or the letter of the expressed concerns raised by the Commission on more than one occasion and the BSE in numerous letters. They have chosen to ignore these objections and simply draft new provisions that create subjective standards that are speculative and for the most part undocumented. Further, we asked for clarification in our footnote 1 to explain how they could further interpret the (See third bullet) facilities manager's costs with respect to production and or operating costs that are not appropriate costs for the new participarit fee. The Committee stood by their original proposed Plan language. At the next OLAOC meeting held on January 24, 2005 the agenda included the OLAOC proposal, characterized as "the unanimous agreement of the AMIX, CBOE, ISE, PCX, and PHLX as a response to the letter of Annette Nazareth dated October 1, 2004'". This "response" contained the exact same language that the Committee had discussed at the December 15,2004 meeting without addressing arty of the proposed changes submitted by the BSE. The BSE objected to this strategy of ignoring the BSE's proposed changes1' and in our opinion, did respond at all to the primary issues raised in Annette Nazareth's letter. Also at this meeting, Elizabeth King discussed the Division's view that the fee should cover only the actual costs of the technical implementation of the Linkage, and should ngt cover such areas as the drafting of the Plan. The Committee again adjourned to its executive session.

• We now have the letter of March 8, 2005, from the OLAOC again proposing the same
  language from the earlier meetings of December 15, 2004 and January 24,2005. Further, the letter purports to present a proposal responsive to your letter of October 1, 2004. We again echo our objections to a proposal that does little more than add the same speculative criteha that had been the basis of the OLAOC's own interpretation of the original Plan. We are at a stand still. This letter proposes new arguments that elaborate on the prior interpretations of the Committee. The new criteria incorporates expenses for meetings to discuss the "legal and business infrastructure to govern the routing of linkage orders, ..." or to state it differently, things that are typically discussed during a meeting that involves changes to the Linkage Plan. We do not disagree with the arguments raised, that time and costs were incurred in drafting the Linkage Plan. These are typical of all the National Plans that were developed over the last 204- years. We all contribute varying degrees of time and expense in developing changes to the National Plans. Each participants' commitment is, for the most part, based on a competitive self interest in order to ensure that any new development or amendment to a Plan will consider their own market model without major consequences. It,generaIly takes the form of a negotiation process to seek the most effective but least disruptive alternative. This process often includes changes that impact the business infrastructure as well as the regulatory and legal areas. In the past, some participants have brought along their own outside counsel 9 See E-Mail agenda proposal submitted on January 13,2005 by M. Simon to the OLAOC 10 See E-Mail response submitted January 20,2005 by A. Kim to the OLAOC

where matters could become complex. None of the participants ever look back for reimbursement of these extra costs for their time spent in meetings, plan development, drafting or changes to the Plan. The proposed Plan amendment submitted by the OLAOC would reincorporate the very same elements that have created the guestimates of cost. Costs that are SO speculative and undocumented, that simply adding the words to expand the meaning of "Initial Development Costs" to include "the drafting and adoption of this Plan, including, but not lidte meeting and travel costs;" does not make it any more transparent or less speculative. The BSE and the Division agree that the Fee "should be transparent to ensure fairness to potential new participants and to address potential anti~ompetitive concern^"'^. A methodology that is well documented and easily understood should result in a fair and reasonable process to determine a proper fee for new participants. The BSE respectfully requests an extension of the exemption for an additional six-month period, during which time it agrees to leave the current deposit of $439,377 with QCC as a further condition of this request. We would also urge the Division to provide further input to the process in order to help the participants work within more clearly defined objective standards that do not include speculative or undocumented costs. The BSE originally proposed a lower figure of $63,660 that represents its share of the OCC costs. As a measure of good faith we added $100,000 to this offer without requiring all the documentation we had previously asked for. The current spread is $163,660 offered by BSE and $439,377 proposed by the OLAOC. If the required objective standards as proposed by the BSE were adopted we think the $163,660 would be lower. It is obvious from our lack of progress that the OLAOC would benefit financially by rehsing to negotiate further. We are open to suggestions for resolving this matter. Please feel free to contact me if you need further details or have questions. Very truly yours, CC: Michael Altabef Peter Armstrong Michael Biclcford Edward Provost Michael Simon Elizabeth King Deborah Lassman Flynn Nazareth letter, at Page 2

Footnote 2
BSE Options Linkage Plan -"New Participant Fee" Chronology of Correspondence 02/07/03 BSE letter to OLOAC 07/02/03 OLAOC letter to BSE 09/15/03 OLAOC letter to BSE 10124103 BSg letter to OLAOC 11/10/03 OLAOC letter to BSE 12/05/03 BSE letter to OLAOC 12/23/03 OLAOC letter to BSE lW3 1/03 BSE letter to OLAOC 02/02/04 BSE fetter to SEC 02/04/04 SEC letter to BSE 09130104 BSE letter to SEC 10/01/04 SEC letter to BSE 10/01/04 SEC letter to OLAOC

• 121 13/04 OLAOC agenda
  proposal * 121 15/04 BSE agenda proposal
• 0111 3/05 OLAOC agenda
  proposal * 01/20/05 BSE agenda response
  03/08/05 OLAOC letter to SEC
  03/18/05 BSE Ietter to SEC
• Attached for convenience
  Request for interim access with $100,000deposit Proposed cost &ate of Fee -BSE Share - $545,860 Adjusted cost estimateof Fee -BSE share - $439,377 . BSE responsre to 712 & 9/lS/O3Proposal -Counter offer $63,660 Response to BSE proposal of 10124103 -No change to $439,377

Response to 1 111 0103 letter -Escrow proposal and counter offer $163,660 Response to 12/5/03letter -No change to $439,377 Response to 12/23/03letter -Offer to escrow $439,377 BSE request for exemption @om fee!with escrow $439,377

SEC approval of exemption and escrow until 10/1/04 - BSE request for extension of exemption for 6 mnths . SEC approval of extensian of exemption until 4/1/05 SEC request to OLAOC to amd Fee provision standards Draft proposal of Fee provision to all :- Response to OLAOC Fee proposal and new BSE proposal OLAOC proposal to amend Plan BSE objection to proposed Plan Amendment Response to SEC letter of 10/1/04and proposed Plan Amendment Request for additional extension and objection to OLAOC letter of 3/8/05and proposed Amendment

Agenda Item for 12115 Meeting Page 1 of 1
From: mann, george [george.rnann@bostonstock.com] Sent: Friday, March 18, 2005 2:09 PM TO: tierney, kristin Subject: RN:Agenda Item for 12/15 Meeting -----Original Message----- From: Simon, Michael 3. [maPto:MSiman@lseoptions.com] Sent: Monday, December 13, 2004 11:30 AM TO:Amy Lawson; Angelo Evangelou (E-mail); Annah Kim; Charles Rogers (E-mail); Dave Sullivan; David Gordon (E-mail); Debomh Lassman Flynn (E-mail); Edward Provost (E-mail); Elizabeth K. King (E-mail); George Mann; Geri Love; Jeffrey Burns (E-mail); Jennifer Colihan (E-mail); John Dayton (E-mail); Kathryn L. Beck (E-mail); Mal Shiver (E-mail); Mark Baumgardner (E-mail); Michael Attabd (E-mail); Michael Bickford (E-mail); Paul Stevens (E-mail); Peter Armstrong (E￾mail); Ralph Rafaniello (E-mail); Rhonda Jones; Richard Rudolph (E-mail); Tim Fox (E-mail); Tim Watkins (E-mail); . Wendy Hoffman; William Quinn (E-mail) Subject: Agenda Item for 12/15 Meeting Attached is a draft Plan amendment that the ISE, Arnex. CBOE, PCX and Phlx have been considering in executive session regarding the Participation Fee. This if for discussion on Wednesday with the whale group. Mike Simon ISE <<Amendment Number X-8 (Participant Fee Criteria).doc>>

Amendment No. X-8 to Plan for the Purpose of Creating and Operating an Intermarket Option Linkage Undem indicates additions; [brackets] indicate deletions.
Section 11 - Financial Matters
@velomnt and %era& Costs
The Participants shall share equally in the costs of developing and operating the Linkage. However, each Participant shall assume sole responsibility md costs for any modi6cations to its Exchange Systems necessary to achieve the efficient operation of the Linkage. Few Participants Any Eligible Exchange that seeks to become a new Participant shall be required to pay a participation fee, The Operating Committee shall establish the participation fee no less fi-equently than once a calendar year. The participation fee shall reasonably reflect:
(i)ent Cgsts. Tbis shaJli4cXudr:a new Participant's pro rata share of the followiqg costs of initially developing the Linkage[,]:
The initial Particioants'g- . .. .%!? .wb~e.and .. . . . . . . . bnpIementiri~ that &dm throueh the draftine arid adontion of this ]plan. including. but not limited to. meetiner and mvel costs; .. @@ of develo~iag the fiunc tional reauirements for the Lme. and cess for S&X&E and co-P wth a facilities msnaeer to o m tbe Ligkarze vwsuant to sucb reauirements: and The facilities manager's costs charged to the Partici~ants with respect to commencing initial o~eration of the Linkage: and liil Additional Develwment Costs. This shall include a new Part&&@'$ ~ro rata sban: of the follow& [as well as any] additionai development costs the Participants -incurd in maintaining and enhancing the Linkage:

• Costs of develoaing. expandine and maintainiae the Laage to the
  WOU~ d b e ma ted as capital e e the five vears urecedina the admission of the new Participant: aa

o Costs of rnadifih~the LiIIka~eto accommodate thenew Partickant but w. only to the exteat that sucbcosts-gg nat otherwise muiredto be 'd ' Upon payment., suchfee shall be distributed$q*py tqthe ti!en-current Participants1 .-- -.- . -.P@cimts dete-rmia~. that.wa~.xxre.tb~F! .of, ..distrib~$*l! . . . . . :o# be,... . . .. .._ more *-. eauitable, . . . . . . .---.---

, ,Agenda Item for 12115 Meeting Page 1of 1
From: mann, george [george.mann@bostonstock.com] Sent: Friday, March 18, 2005 2:10 PM To: tiemey, kristin Subject: FW:Agenda Item for 12115 Meeting Importance: High -----Original Message----- From: Kim, Annah Sent: Wednesday, December 15, 2004 9:41 AM TO: 'Simon, Michael 3.'; Amy Lawson; Angelo Evangelou (E-mail); Kim, Annah; Charles Rogers (E-mail); Dave S~NlvafY David Gordon (E-mail); Deborah Lassman Flynn (E-mail); Edward Provost (E-mail); Elizabeth K. King (E-mail); Eefi Lm; Jeffrey Burns (E-mail); Jennifer Colihan (E-mail); John Dayton (E-mail); Kathryn L. Beck (E-mail); Mai Shiver (E-mail); Mark Baumgardner (E-mail); Michael Altabef (E-mail); Michael Bickford (E-mail); Paul Stevens (E-mail); Peter Armstrong (E-mail); Ralph Rafanlello (E-mail); Rhonda Jones; Richard Rudolph (E-mall); Tim Fox (E-mail); Tim Watkins (E-mail); Wendy Hoffman; William Quinn (E-mail) Cc: mann, george Subject: RE: Agenda Item for 12/15 Meeting Importance: High BOX respectfully submits for your review and consideration a redline version of the Plan amendment along with its position as it relates to the application of fees to new participants. rd to your comments and this morning's discussion Annah Kim -----Original Message----- From: Simon, Michael J. [mailto:MSimon@'~eoptions.com] Sent: Monday, December 13,2004 1150 AM To: Amy Lawson; Angelo Evangelou (E-mail); Annah Kim; Charles Rogers (E-mail); Dave Sullivan; David Gordon (E-mail); Deborah tassman Flynn (E-mail); Edward Provost (E-mail); Elizabeth K. King (E-mail); George Mann; Geri Love; Jeffrey Burns (E-mail); Jenntfer Colihan (E-mail); John Dayton (E-mail); Kathryn L. Beck (E-mail); Mai Shiver (E-mail); Mark Baumgardner (E-mail); Michael Altabef (E-mail); Michael Bickfbrd (E-mail); Paul Stevens (E-mail); Peter Armstrong (E-mail); Ralph Rafaniella (E-mail); Rhonda Jones; Richard Rudolph (E-mail); Tim Fox (E-mail); Tim Watkins (E-mail); Wendy Hoffman; William Quinn (E-mail) Subject: Agenda Item for 12/15 Meeting Attached is a draft Plan amendment that the ISE, Amex. CBOE. PCX and Phlx hav session regarding the Participation Fee. This if for discussion on Wednesday with Mike S~mon ISE .:<Amendment Number X 8 (Partupant Fee Criteria) doc .

Amendment No. X-8 to Plan for the Purpose of Creating and Operating an Intermarket Option Linkage Underlining indicates additions; pmckets] indicate deletions.
Section I1 - Financial Matters
Develooment and 0Dertttin~ as&
The Participants shall share equally in the dcosts of developing and operating the Linkage. However, each Participant shall assume sale responsibility and costs for any modifications to its Exchange Systems necessary to achieve the efficient operation of the Linkage. Any Eligible Exchange that seeks to become a new Participant shall be required to pay a participation fee. The Operating Committee shall establish the participation fee no less Frequently than once a calendar year. The participation fee shall reasonably reflect; fi) Initia-~ment Costs. This shall incwa new Participant's pro rata share of following costs of initial1 y developing the Linkage[& Costs of develooine; theiiclud srstcni requirements for the Lin￾docu~nented: at@ The bilities wer's' casts charged to the Pam-@ . . with restrect to commenc&g the initial ooeration of the Linw lii) Additional Develovment Costs. This shmlude a new Particitrant's m rata shwe ~f the following [as well as any] additional development costs the Participants incud in maintaining and enhancing the Linkage:
0 0 f dev lo i . . eo etent such costs. under eenefallv-mated accountinn owias. w a treated as dta1 emndituresand would be amottized over the~hrcc vem precedingthe admission of the new Partio~Costs of modifying the Unbe to accgmmadate the new Particiwnt but &to the extent that such msb are not othenvise m&ed to be oaid or reimbursed bv such new particiaant. Upon payment, such fee shall be dishibuted~ually tqthe then-current Participants. unless such Partlci~ants determine that another method of distribution would be more equitable,

December IS, 2004
Current Plan language includes "shall reasonably reflect a new Participant's pro mta &ate of costs of initially developing the ."The Plan defines &&age as "the systems and data commu&ations netwodsthat lLnk electronically the Partidpants" (Not the Plan itself), and not for "good will" or my &me benefits to the newenrrant (See SEC letter hrn Annette Nazareth dated October 1,2004to the OLAOC participants). As with all national Plan meetiags on the Plans themselves, each patticipants' principal role and benefit in attending meetingsand 'conference calls, at their own expense, is either the result of a dkective kom the SEC, (such as the Options Jiakage Authority pdcipants were asked to drafta LinkagePlan) or, just as important, to have input to ensure each participants market model is protected through input that is prlacipally motivated through stcakgic and competitive benefits to its own market structure. These could easily be chatacterrized as "goodwill'' and a future benefit to a new entrant who would need to develop its market model in compliance with the Plan. None of the current national Plan participants have ever submitted expenses for their time and travel to discuss the Plan document or amendments theteto. This would be an inappropriate self-serving extension of what development costs have historically covered. Such costs would include software, systems and htifities, tangible property such as tandem processors, and other relgted hardware. The proposed language in Section ll@)(i) first and second bullets include criteria that should not and have not, to our knowledge, been part of any Plans' new participant fee. They simply specify some of the current criteria of the OLAOC's previous proposals that have clearly resulted in the highly speculative costs that.have been proposed in prior correspondence. Most of these costs are undocumented and represent estimates of time and participation in meetings to draft the Linkage Plan that would dehe the regulatory boundaries of the Options Linkage, similar to how the ITS Plan was drafted and is periodically amended. As ITSChairman, and a participant in most of these meetings dating back to 1986, new ITS participants were not billed any portion of my time or expense nor did any other ITS participant bill for their portion of time and expense. We see no reason to re-interpret the LinkagePlan to cover speculative costs that were never stated when originally filed but only interpreted after BOX subrnirted its request to become a pattiupant We would submit the attached edits to Amendment Number X-8 for further discussion. We also recognize that we cannot participate in any portion of any meeting of the OLAOC at which a vote on objective standards for determining a patticipant fee for new Patriapants or on the specific participant fee applicable to , the BSE is taken. We would understand this to mean that any discussion by the OLAOC of the objective standards to be voted upon should be hdd in executive
session without the BSE's participation. We would be happy to discuss further ourviews on our changes as they relate to the dtaft that the committee has bm considering,

Memorandum
The ISE would like to place on the agenda for the January 24" meeting a proposed amendment to the Lhkage Plan to provide more specificity for determining new participant fees. The attached proposal reflects what Ibelieveto be the unanimous agreement of the Arnex, CBOE. ISE. PCX and Phlx as a responseto the letter of Annette Nazareth dated October I,2004. That Iem asked the options exchanges to draft a Plan amendment setting forth a clearer discussion of the methodology of determining new entrant fees. Following Commission approval of this Plan amendment, it would be the intent of the five exchanges to apply these criteria in an objective matter to determine an appropriate entry fee for the BSE. Attachment

Amendment No. X-8 to PPian for the Purpose of Creating and Operating an Intermarket Option Linkage Underlining indicates additions; ~rackets] indicate deletions.
Section 11 - Financial Matters
Develoment and Operating Costs
The Participants shall share equally in the costs of developing and operating the Linkage￾However, each Participant shall assume sole responsibility and costs for any modifications to its Exchange Systems necessary to achieve the efficient operation of the Linkage. Mew Participants Any Eligible Exchange that seeks to become a new Participant shall be required to pay a participation fee. The Operating Committee shall establish the participation fee no less frequently than once a calendar year. The participation fee shall reasonably reflect:
Ji) Initial Develo~ment Costs. This shall include a new Participant's pro rata share of follow in^ costs of initially developing the ~inka~e[,]; The initial Participants' costs of desianinp the Linkage and implementinar that &inn through the Wng and adoption of this Plan incluh. but not limited to. meeting and travel costs; Costs of develo~ina the functional reareauimments for the Linkage. and adrninisterim the urocess for selwting and contracting: with a Linkage facilities manager to operate the Linkage ~ursuant to such requirements: and The facilities manager's costs chawed to the Participants with rmect to comrnencinrr initial operation of the Linkage; and Jii) Additional h%Wl~~mmt Costs. This shall include a new Particiuant's pm rata share of the following [as well as any] additional development costs the Participants have incmd in maintaining and enhancing the Linkage:
Costs of developinn, exuandina and maintaining the Links- to the extent that such costs, under merallv-accepted twcomk ~rinciples, woutd be treated I as capital expenditures and would be amortized over the five vm ~t*ecdn@ the admission of the new Particimt: and Costs of modifiing the Linkaae to accommodate the new Participant, but only to the extent that such costs are not ofherwise recluired to be paid or reimbursed by such new Particiumt. Upon payment, such fee shall be distributed equally to the then-current Participants, unless such Participants determine that another method of distribution would be more equitable

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From: mann, george [george.mann@bostonstock.com] Sent: Friday, March 18, 2005 2:12 PM To: tierney, kristin Subject: FW Linkage Meeting - New Participant Fee Importance: High -----Original Message----- From: Klm, Annah Sent: Thursday, January 20, 2005 9:45 AM TO: 'Peter G. ~rmstrong';~ltaGf,Michael; Ed Provost (E-mail); Mike Bickford (E-mail); Mike Simon (E-mail) CC: Angel0 EvangeJou (E-mail); mann, george; Rogers, Charles; Debbie Flynn (E-mail); Jeniffer Colihan (E-mail); Tim FOX (E-mail); 'kinge@sec.gwt; Kim, Anna h Subject: Linkage Meeting - New Participant Fee Impoeance: High OLAOC Members, We have reviewed the Executive Committee's latest response to the new Participant fee proposal of the Operating Committee. Please find attached, BSE's suggested amendments to this latest proposal and the December 15, 2004 memorandum that supports our rationale for these amendments. You should note that the attached documents are the same documents BSEIBOX submitted to the Committee on December 13,2004 for discussion & consideration at the December 15,2004 meeting. Based on the proposal recently circulated by Mike Simon, it appears that the Committee chose not to consider any of the issues raised by the BSE reproposing the exact same Proposal prior to December and in so doing not making a good faith effort to respond to the issues raised to set forth fair, transparent and objective standards. It was expected that the Committee would make specific provisions within the proposed amendments that would add clarity and make the process for determining a proper entrance fee more transparent to ensure fairness. The Committee's recent proposal, however, has failed to achieve this objective. The "clearer discussion of the methodology of determining new entrant fees," as represented in the agenda cover niemo, does not respond at all to the primary issues raised in Annette Nazareth's letter dated October 1,2004. Our prior memo and preceding letters have clearly demonstrated the problems of including costs (estimates to represent salary levels billed by the hour) of each exchange staff attending meetings and billing for their time and expenses for travel. At the heart of this speculative characterization is the first bullet that incorporates staff time and expense for draffing and adopting the "Plan" itself which no other National Market Plan has ever done. We have objected to this as a valid element of the fee almost from the inception of these discussions prior to BOX'S approval. The fact that this item continues ta be a factor in determing new Participant fees is an indication that the Conim~ttee has yet to act in good faith in recognizidg this particular matter. We chose not to attach the history of our objectians since we believe the basis for Annette Nazareth's letter was in part an affirmation of the many issues we raised previously. We hope the Committee will revisit this matter with the goal of mtablishulg objective criteria in detvl-mining a fair and
reasonable fee for new Participants.

December 15,2004
Curteat Plan hgqp?includes "shall reasonably reflect a new Participant's pro rata share of costa of initidly developing the ."l'he Plan dehiles &Gage as "the systems and data communicatio~~snetwok that link electronidly the Patticipants" (Not the Plan itself), and not for "goodda' or any f u benefits ~ to the new entrant (See SEC letter hm Annette Nazareth dated October 1,U)04 to tlte OLAOC participants). As with dl national Plan meetings on the Plans themselves, each participants' ptinapal role and benefit in attending meetings and conference calls, at their awn expense, is either the result of a directivebthe SEC, (such as the Options Ldnkage Authority participants were asked to dmft a LinkagePlan) or, just as impoadnt, to have input to ensure each participants market model is protected through input that is pdhcipallp motivated tkough sttatxgic and competitive benefits to its own market sbructure. These could easily be characterized as "goodwill"and a hhlte benefit to a new entrant do would need to develop its &t model in compliance with the Plan. None of the current national Plan participants have ever submitted expenses for thek time and travel to discuss the Plan document or amendments thereto. This would be an inappropriate self-serving extension of what development costs have historically covered. Such costs would include soh, systems and kilities, tangible property such as tandem processors, and other related hardware. The proposed language in Section ll@)Q) htst and second bullets include critetia that should not and have not, to our knowledge, been patt of any Plans' new participant fee. They simply specify some of the current criteria of the OLAOC's previous proposals that have dearly resulted in the highly speculative costs that have been proposed in prior correspondence. Most of these costs are undocumented and represent estimates of time and participation in meetings to draft the Linkage Plan that would dehe the regulatory boundaries of the Options Linkage,similar to how the ITSPlan was drafted and is periodically amended. As ITSC-, and a participant in most of these meetings dating back to 1986, new ITS participants were not billed any portion of my time or expense nor did any other ITS participant bill fix ththeir portion of time and expense. We see no reason to re-interpret the Linkage Plan to cover speculative costs that were never stated when originally filed but only interpreted after BOX submitted its request to become a participant We would submit the attached edits to Amendment Number X-8for further discussion. We also recogaize that we cannot participate in any portion of any meeting of the OLAOC at which a vote on objective standards for determining a participant fee for new Participants or on the specific participant feeapplicable to the BSE is taken. We would mdersrand this to mean that any discussion by the OLAOC of rhe objectlive standaidsto be voted upon should be held in executive session without the BSEA
pdcipation. We would be happy to discuss hrther our views on our changes as they relate to the draft &at the committee has been considering. I

Amendment No. X-8 to P1.a for the Purpose of Creating and Operahg an letermarket Option Linkage &&&& indicates additions; @mckets] indicate deletions.
Section 11 - Financial Matters
The Participiints shd share equally in the wwsts of developing and operating the Linkage. However, eech Participant shall assume sole respansl%ility and fir any modifications to its Exchange Systems necessary to achieve the efficient operation of the Linkage. New Particimts Any Eligible Exchange that seeks to become a new Participant shall be required to pay a participation fee. The Operating Committee shall establish the participation fee no less fresuently than once a calendar year. The participation fee shall reasonably reflect; . .. fi) Inttial Develo~ment Costs. Th~s shal-a new Participant's pro rata share of & following costs of initially developing the Linkag4,k Costs of develo~im the~lcri~lrl svstcnl recluirements for the Linkage as documcntedr and 'ile facilities m-fs' costs charged to the Parbct~slnts . . with tesoect to wmmencine the iniw odon of the Linkitge; and lii 1 Additi onal De v elwmsnt Costs. This shall include a n& P~crm s ~xo rata . . e pf the following [as well as any] additional development costs the Participants have incud in maintaining and enhancing the ~inka~d; n Costso f develo~in~ exp- ma intaining the Linkape to the mtent &&.w&asts. under eenerallv-& accauntinp wiDci~les. would k treated as F1861j$bl ex~endituiwmd would be amorti& over thes?yec prdin~ the -ion of the new Particioant: mdl=osts of modifvina; the !&&we to accommodab €he new Partici~ant. but onlv to the exmt drat such fasts m. are not odKtwise muired to be vaid or reimbursed bv such new Upon payment, such fee shall be distributedpxlually tqthe then-current Participanrs, unless such Perticioants determine that another method of distribution would be mare eauitablq,