SEC no-action letter: Boston Stock Exchange, Inc. request for exemption from Rule 11Aa3-2(d) regarding Intermarket Option Linkage Plan fees

February 4, 2004

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:

"With respect to new Participants, an amendment to the Plan may be effected by a new Eligible Exchange executing a copy of the Plan, as then in effect (with the only change being the addition of the new Participant's name in Section 4(a) of the Plan), submitting such executed Plan to the SEC, and paying the then current fee applicable to new Participants, as specified in Section 11(b) of the Plan. Such amendment will be effective at the later of (A) the amendment being approved by the Commission or otherwise becoming effective pursuant to 11A of the Exchange Act and Rule 11Aa3-2 thereunder and (B) the new Participant paying the then-current fee applicable to new Participants."

Section 11(b) of the Plan states that:

"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 a new Participant's pro rata share of costs of initially developing the Linkage, as well as any additional development costs the Participants incur in maintaining and enhancing the Linkage. Upon payment, such fee shall be distributed equally to the then-current Participants."

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 OCC 4 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.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority, 8

Robert L.D. Colby Deputy Director

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

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BOSTON
STOCK EXCHANGE I FEB 0 3 2004
George W. Mann, Jr.
Executive V;ce President and General Counsel
Via Federal Express
Mr. Jonathan G. Katz, Secretary
Office of the Secretary
U. S. Securities and Exchange Commission
450 5th St., NW
Washington, DC 20549
Re: The Boston Stock Exchange, Ine. - Request far Exemption from Rule 11Aa3=2(d) regarding Sections 4,5, and 11 of the Intermarket Option Linkage Plan Dear Mi. Katz:
The Boston Stock Exchange Inc. (“BSE” or “Exchange”), respectfilly requests that the Commission grant the BSE an exemption from paragraph (d) of Rule 1 lAa3-2l under the Securities Exchange Act of 1934 (“Exchange Act”). Rule flAa3-2(f) under the Exchange Act permits the Commission to grant exemptions from the requirements of the rule.2 As more specifically discussed below, the BSE seeks an exemption firom Rule 1 1 Aa3-2(dI3 under the Exchange Act to allow the BSE not to comply with the fee provisions of the plan governing Intermarket Option Linkage (“Plan”) 17 CFR240.11Aa3-2. Rule 11Aa3-2(f) under the Exchange Act permits the Commission to grant an 2 exemption to any SRO fiom -the requirements of Rule llAa3-2, either unconditionally or on specified terms and conditions, “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 o€ impediments to, and perfection of the mechanisms of, a national market system.” 17 CFR 240. I. 1Aa3-2(f). Rule IlAa3-2(d) under the Exchange Act requires each SRO “to comply with the terms of any effective national market system plan of which it is a sponsor or a participant.” 100 Franklin Street Boston, MA 021 10 Tel 617.235.2005 Fax 617.646.0101 gearge.mannQbostonstock.com

Mr. Jonathan G. Katz
Introduction
The BSE is in the process of creating a new electronic uptions trading facility of the Exchange, called the Boston Options Exchange (“BOX”), to be operated by the Boston Options Exchange Group LLC. The BSE currently does not trade options. As part ofthe steps necessary to start trading options on the BSE through BOX, the BSE must become a new participant as defined in the Plan (“Plan Parti~ipant”)~ and comply with all Plan provisions. The current self-regulatory organization (,‘SRO”) participants in the Plan (“Current Participants”) administer the Plan through the Option Linkage Authority (“OLA”) and the OLA’s Operating Committee c‘ OL A0 C” ) . In connection with the BSE’s efforts to become a new Plan Participant, the OLAOC has granted the BSE interim participant status allowing the BSE to participate in OLAOC meetings. However, in order to commence options trading, among other things the BSE must:
1) become a new Plan Participant by following Section 4(c)(i) of the Plan;
and
2) pay the fee specified in Sections 4(c), 5(c), and 1 l(b) ofthe Plan.
Rule 11Aa3-2(d) requires the BSE comply with all the provisions of the Plan as well as the requirements of Rule 11Aa3-2, and the BSE is able to comply with the Plan’s provisions except as to those provisions for which the BSE is seeking an exemption in this letter. The BSE believes, for reasons more hlly discussed below, that it is appropriate for the Commission to exempt the BSE from compliance with such provisions because an 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.
Section 1 1(b) of the Plan, entitled “New Participants” states:
“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 a new Participant’s pro rata The Plan defines a Participant as “an Eligible Exchange whose participation in the Plan 4 has become effective pursuant to Section 4(c) of the Plan.”

Mr. Jonathan G. Katz share of costs of initially developing the Linkage, as well as any additional development costs the Participants incur maintaining and enhancing the Linkage. Upon payment, such fee shall be distributed equally to the then-current Participants.” In addition, Sections 4(c)(i)(iv) and S(c)(ii) of the Plan also require new Plan Participants to pay the fee required by Section 1 l(b). The BSE and the OLAOC are currently in disagreement regarding the payment to be made by BSE under the terms of Section 1 l(b) of the. Plan. In particular, the BSE disagrees with the amount of the fee demanded by the OLAOC. On September 15,2003, the OLAOC suggested a new Plan Participant fee for BSE of $439,377. In a letter dated December 5, 2003, the BSE offered $163,660. In a letter dated December 23,2003, the OLAOC rejected the ME’S offer and repeated its demand for $439,377. Most recently, in a letter dated December 3 I, 2003, the BSE repeated its desire to pay a fair fee, disputed whether the QLAOC’s suggested fee was fair, and reiterated the BSE’s desire to receive and evaluate documentation of the actual costs faced by the OLA in connection with the BSE’s entry as a new Plan Participant. The BSE believes the OLAOC is dismissing the BSE’s views regarding the appropriate fee without any effort to address the questions raised by the BSE in its earlier fetters, and without providing the documentation requested. As a result, the BSE has not been able to comply with the Section 1 l(b) fee provision and is unsure when it will be able to comply. For the same reasons, the BSE is unsure when it will be able to comply with the fee provisions of Sections 4(c)(i)(iv) and S(c)(ii). Therefore, BSE is seeking an exemption fiom the Commission from the Rule 1 IAa3-2(d) requirement to comply with the fee provisions of Sections 1 l(b), 4(c)(i)(iv), and S(c)(ii) of the Plan and thereby permit BSE to be a new Plan Participant prior to its payment of the required fee. fiemptiun Rewest Due to the disagreement between the BSE and OLAOC regarding the appropriate fee to be paid, the BSE has yet to pay a fee as required by the Plan and doubts whether its fee dispute with the OLAOC will be resolved prior to the time the BSE wishes to commence the operation of BOX. Therefore, the BSE respecthlly requests an exemption, in accordance with Rule1 1Aa3-2(f) under the Exchange Act from the requirement of Rule 1 1Aa3-2(d) under the Exchange Act that the BSE follow Sections 4(c)(i)(iv), S(c)(ii), and 1 l(b) of the Plan regarding the payment of a participation fee by new Plan Participants. With respect to an exemption fiom the requirement of Rule 1 1 Aa3-2(d) that the BSE pay the participation fee, the BSE requests such exemption until such time as the BSE and the OLAOC are able to resolve the issue of the appropriate new participant fee for the BSE. As a condition of such exemption, the BSE is willing

Mi. Jonathan G, Katz to place in escrow with the Options Clearing Corporation (C'OCCI') the fill amount of the fee requested by the OLAOC until resolution of the dispute. The exemptions the BSE requests from Rule 1 I Aa3-2(d) satisfy the requirements of Rule 1 lAa3-2(f) that an exemption be consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and perfkction of the mechanisms of, a national market system. As a general matter, such exemption will allow the BSE to participate in the Plan upon the start of BOX trading without the assistance or consent of the BSE's competitors. By its very nature, the Plan itself is designed to perfect the mechanisms of a national market system through the linkage of options exchanges; thus, to permit the BSE to participate in the Plan would be to link the BSE to all other options exchanges through the Plan that would otherwise not be linked, possibly leading to fragmentation. Permitting the BSE to delay payment of the participation fee does not harm investors or the goals of a national market system. The BSE is willing to pay a fair fee for participation in the Plan as demonstrated by the BSE's offer to place in escrow with the OCC the full amount ofthe fee requested by the OLAOC until resolution of the dispute, and pay such fit1 amount if the OLAOC can demonstrate the fairness of such fee. As noted, such exemption will atflow the BSE to start options trading without the assistance or consent of the BSE's competitors and is consistent with the public interest. The ability for new options exchanges to become a participant in the linkage plan fosters competition among options exchanges which inures to the benefit of investors in terms of better execution. Further, the BSE believes its BOX trading facility will enhance execution quality for options trading in the U.S. (especially in light of the fact that BOX guarantees price improvement) which is in the public interest and enhances the protection of investors. For the foregoing reasons, the BSE respectfblly requests that the Commission grant an exemption to the BSE f'rom Rule I lAa3-2 under the terms and conditions specified above. Conclusio fi Thank you for your time and attention to this matter. If you have any questions please feel gee to call Neal Sullivan at 202-778-6 159, Wayne Pestone at 202-778- 3 189 or me at 61 7-2352005-

Mr. Jonathan G. Katz
Sincerely yours,
7 and General Counsel v
Enclosures
Cc: Elizabeth King, SEC’s Division of Market Regulation Kelly McConnick Riley, SEC’ s Division of Market Regulation