Form 19B-4 Amendment No

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Page 1 of 29 SECURITIES AND EXCHANGE COMMISSION File No. SR - 2005 - 10 WASHINGTON, D.C. 20549 Form 19b-4 Amendment No.

Proposed Rule Change by Boston Stock Exchange

Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934

Initial Amendment Withdrawal Section 19(b)(2) Section 19(b)(3)(A) Section 19(b)(3)(B)

Rule

Extension of Time Period 19b-4(f)(1) 19b-4(f)(4) Pilot Date Expires for Commission Action 19b-4(f)(2) 19b-4(f)(5) 19b-4(f)(3) 19b-4(f)(6)

Exhibit 2 Sent As Paper Document Exhibit 3 Sent As Paper Document

Description Provide a brief description of the proposed rule change (limit 250 characters).

The purpose of the rule is to amend Section 7 (Position Limits), Section 8 (Exemptions from Position Limits), and Section 9 (Exercise Limits) of Chapter III of the Rules of the Boston Options Exchange ("BOX") to increase the standard position and exercise limits for equity options contracts and options on the Nasdaq-100 Index Tracking

Contact Information

Provide the name, telephone number and e-mail address of the person on the staff of the self-regulatory organization prepared to respond to questions and comments on the proposed rule change.

First Name Annah Last Name Kim Title Chief Regulatory Officer, BOXR E-mail [email protected] Telephone (781) 759-1420 Fax

Signature Pursuant to the requirements of the Securities Exchange Act of 1934,

has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized.

Date 03/01/2005

By Maura Looney Assistant Vice-President

(Name) Regulation and Enforcement

(Title) NOTE: Clicking the button at right will digitally sign and lock this form. A digital signature is as legally binding as a physical Maura A. Looney, signature, and once signed, this form cannot be changed. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

For complete Form 19b-4 instructions please refer to the EFFS website.

Form 19b-4 Information The self-regulatory organization must provide all required information, presented in a clear and comprehensible manner, to enable the public to provide meaningful Add Remove View comment on the proposal and for the Commission to determine whether the proposal is consistent with the Act and applicable rules and regulations under the Act.

Exhibit 1 - Notice of Proposed Rule Change The Notice section of this Form 19b-4 must comply with the guidelines for publication in the Federal Register as well as any requirements for electronic filing as published by the Commission (if applicable). The Office of the Federal Register Add Remove View (OFR) offers guidance on Federal Register publication requirements in the Federal Register Document Drafting Handbook, October 1998 Revision. For example, all references to the federal securities laws must include the corresponding cite to the United States Code in a footnote. All references to SEC rules must include the corresponding cite to the Code of Federal Regulations in a footnote. All references to Securities Exchange Act Releases must include the release number, release date, Federal Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]-xx-xx). A material failure to comply with these guidelines will result in the proposed rule change being deemed not properly filed. See also Rule 0-3 under the Act (17 CFR 240.0-3)

Exhibit 2 - Notices, Written Comments, Copies of notices, written comments, transcripts, other communications. If such Transcripts, Other Communications documents cannot be filed electronically in accordance with Instruction F, they shall be filed in accordance with Instruction G.

Add Remove View

Exhibit Sent As Paper Document

Exhibit 3 - Form, Report, or Questionnaire Copies of any form, report, or questionnaire that the self-regulatory organization proposes to use to help implement or operate the proposed rule change, or that is Add Remove View referred to by the proposed rule change. Exhibit Sent As Paper Document

Exhibit 4 - Marked Copies The full text shall be marked, in any convenient manner, to indicate additions to and deletions from the immediately preceding filing. The purpose of Exhibit 4 is to permit Add Remove View the staff to identify immediately the changes made from the text of the rule with which it has been working.

Exhibit 5 - Proposed Rule Text The self-regulatory organization may choose to attach as Exhibit 5 proposed changes to rule text in place of providing it in Item I and which may otherwise be Add Remove View more easily readable if provided separately from Form 19b-4. Exhibit 5 shall be considered part of the proposed rule change.

Partial Amendment If the self-regulatory organization is amending only part of the text of a lengthy proposed rule change, it may, with the Commission's permission, file only those Add Remove View portions of the text of the proposed rule change in which changes are being made if the filing (i.e. partial amendment) is clearly understandable on its face. Such partial amendment shall be clearly identified and marked to show deletions and additions. File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 3 of 29 Item 1. Text of Proposed Rule Change

a) The Boston Stock Exchange (“Exchange” or “BSE”) proposes to amend Section 7

(Position Limits), Section 8 (Exemptions from Position Limits), and Section 9 (Exercise

Limits) of Chapter III of the Rules of the Boston Options Exchange (“BOX”) to increase the standard position and exercise limits for equity options contracts and options on the Nasdaq-

100 Index Tracking Stock (“QQQQ”). The text of the proposed rule change is attached as

Exhibit 5.

b) Not applicable to application of any other Exchange rule.

c) Not applicable.

Item 2. The Procedures of the Self-Regulatory Organization

a) The proposed rule change was approved by the Executive Committee of the

Board of Governors of the Exchange, on February 22, 2005.

a) Questions and comments on the proposed rule change should be directed to

Annah Kim at (781) 759-1420.

Item 3. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

a) The Exchange is proposing several changes to Section 7 (Position Limits),

Section 8 (Exemptions from Position Limits), and Section 9 (Exercise Limits) of Chapter III of the BOX Rules. Section 7 of Chapter III of the BOX Rules subjects equity options to one of five different position limits depending on the trading volume and outstanding shares of the underlying security. Section 8 of Chapter III of the BOX Rules establishes certain qualified hedging transactions and positions that are exempt from established options position limits as prescribed under Section 7 of Chapter III of the BOX rules. Section 9 of

Chapter III of the BOX Rules establishes exercise limits for the corresponding options at the

LITDOCS/590694.3 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 4 of 29 same levels as the corresponding security’s position limits. On February 23, 2005, the

Commission granted accelerated approval of a rule change proposed by the Chicago Board

Options Exchange, Inc. (“CBOE”) relating to position and exercise limits.1

Standard Position and Exercise Limits

The Exchange is proposing to adopt for BOX a pilot program for a period of six

months during which the standard position and exercise limits for options on the QQQQ

and for equity option classes traded on BOX would be increased to the following levels:

Current Equity Option Contract Limit Proposed Equity Option Contract Limit 13,500 contracts 25,000 contracts 22,500 contracts 50,000 contracts 31,500 contracts 75,000 contracts 60,000 contracts 200,000 contracts 75,000 contracts 250,000 contracts Current QQQQ Option Contract Limit Proposed QQQQ Option Contract Limit 300,000 contracts 900,000 contracts

BOX’s standard position limits have been in effect since BOX commenced

trading in February 2004. These standard position limits are the same as the standard

position limits at the other options exchanges at that time, which were last increased on

December 31, 1998.2 Since that time, there has been a steady increase in the number of accounts on the options exchanges that, (a) approach the position limit; (b) exceed the position limit; and (c) are granted an exemption to the standard limit. Several member firms have petitioned the options exchanges to either eliminate position limits, or in lieu of total elimination, increase the current levels and expand the available hedge

1 See Securities Exchange Act Rel. No. 51244 (February 23, 2005). 2 See Securities Exchange Act Release No. 40875 (December 31, 1998), 64 FR 1842 (January 12, 1999) (SR-CBOE-98-25) (approval of increase in position limits and exercise limits)

LITDOCS/590694.3 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 5 of 29 exemptions. A review of available data indicates that the majority of accounts that maintain sizable positions are in those option classes subject to the 60,000 and 75,000 tier limits. There also has been an increase in the number of accounts that maintain sizable positions in the lower three tiers. In addition, overall volume in the options market has consistently increased over the past five years. The Exchange believes that the increase in options volume and lack of evidence of market manipulation occurrences during that same period justifies the proposed increases in the position and exercise limits.

The Exchange also proposes the adoption of a new equity hedge exemption to the existing exemptions currently provided under Section 8 of Chapter III of the BOX Rules.

Specifically, new subparagraph (a)(vi) of Section 8 of Chapter III of the BOX Rules would allow for a “reverse collar” hedge exemption to apply when a long call position is accompanied by a short put position, and the long call expires with the short put. In addition, the strike price of the long call must equal or exceed the short put, and each long call and short put position must be hedged with 100 shares of the underlying security (or other adjusted number of shares). Neither side of the long call short put can be in-the-money at the time the position is established. This is consistent with existing subparagraph (a)(iv) of Section 8 of Chapter III of the BOX Rules, which provides for an exemption for a “collar,” and subparagraphs (a)(ii) and (a)(iii) of Section 8 of Chapter III of the BOX Rules, which provide for a hedge exemption for reverse conversions and conversions, respectively.

Manipulation

The Exchange believes that position and exercise limits, at their current levels, no longer serve their stated purpose. The Commission has previously stated that:

LITDOCS/590694.3 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 6 of 29 Since the inception of standardized options trading, the options exchanges

have had rules imposing limits on the aggregate number of options

contracts that a member or customer could hold or exercise. These rules

are intended to prevent the establishment of options positions that can be

used or might create incentives to manipulate or disrupt the underlying

market so as to benefit the options position. In particular, position and

exercise limits are designed to minimize the potential for mini-

manipulations and for corners or squeezes of the underlying market. In

addition such limits serve to reduce the possibility for disruption of the

3 options market itself, especially in illiquid options classes.

The Exchange believes that the existing surveillance procedures and reporting

requirements at BOX, other options exchanges, and at the several clearing firms are

capable of properly identifying unusual and/or illegal trading activity. In addition, when the Commission reviewed BOX’s regulatory program before allowing BOX to begin trading, the Commission did not uncover any material inconsistencies or shortcomings in the manner in which BOXR’s market surveillance of BOX would be conducted. These procedures utilize daily monitoring of market movements via automated surveillance techniques to identify unusual activity in both options and in underlying stocks.

Furthermore, large stock holdings must be disclosed to the Commission by way of

4 Schedules 13D or 13G. Options positions are part of any reportable positions and, thus,

cannot be legally hidden. In addition, Section 10 of Chapter III of the BOX Rules, which

3 See Securities Exchange Act Release No. 39489 (December 24, 1997), 63 FR 276 (January 5, 1998) (SR- CBOE-97-11) (approval of increase in position limits and exercise limits for OEX index options). 4 17 CFR 240.13d-1.

LITDOCS/590694.3 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 7 of 29 requires members to file reports with the Exchange for any customer or member who held aggregate long or short positions of 200 or more option contracts of any single class for the previous day, will remain unchanged and will continue to serve as an important part of the Exchange’s surveillance efforts.

The Exchange believes that restrictive equity position limits prevent large customers, such as mutual funds and pension funds, from using options to gain meaningful exposure to individual stocks. This can result in lost liquidity in both the options market and the stock market. In addition, the Exchange has found that restrictive limits and narrow hedge exemption relief restrict member firms from adequately facilitating customer order flow and offsetting the risks of such facilitations in the listed options market. The fact that position limits are calculated on a gross rather than a delta basis also is an impediment.

Financial Requirements

The Exchange believes that the current financial requirements imposed by the

Exchange and by the Commission adequately address concerns that a member or its customer may try to maintain an inordinately large unhedged position in an equity option.

Current margin and risk-based haircut methodologies serve to limit the size of positions maintained by any one account by increasing the margin and/or capital that a member must maintain for a large position held by itself or by its customer. Also, the

5 Commission’s net capital rule, Rule 15c3-1 under the Act, imposes a capital charge on members to the extent of any margin deficiency resulting from the higher margin requirement.

5 17 CFR 240.15c3-1.

LITDOCS/590694.3 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 8 of 29 Finally, equity position limits have been gradually expanded from 1,000 contracts

in 1973 to the current level of 75,000 contracts for options on the largest and most active

underlying securities. To date, the Exchange believes that there have been no adverse

affects on the market as a result of these past increases in the limits for equity option

contracts.

QQQQ

The Exchange also proposes to change the references to the Nasdaq-100 Index

Tracking Stock that are currently in Sections 7 and 9 of Chapter III of the BOX Rules from

“QQQ” to “QQQQ” to correspond to the symbol change that occurred when the listing

moved from the Amex to the Nasdaq.

b) The Exchange believes that the proposal is consistent with the requirements of

Section 6(b) of the Act,6/ in general, and Section 6(b)(5) of the Act,7/ in particular, in that it is designed to promote just and equitable principles of trade, and to protect investors and the public interest.

Item 4. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose any

burden on competition not necessary or appropriate in furtherance of the purposes of the

Act.

Item 5. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others

The Exchange has neither solicited nor received comments on the proposed rule

change.

6 15 U.S.C. 78f(b). 7 15 U.S.C. 78f(b)(5).

LITDOCS/590694.3 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 9 of 29 Item 6. Extension of Time Periods for Commission Action

Inapplicable.

Item 7. Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for Accelerated Effectiveness Pursuant to Section 19(b)(2)

(a) This proposed rule change is filed pursuant to paragraph (A) of section

19(b)(3) of the Exchange Act.

(b) This proposed rule change does not significantly affect the protection of

investors or the public interest, does not impose any significant burden on competition, and, by its terms, does not become operative for 30 days after the date of the filing, or such shorter time as the Commission may designate if consistent with the protection of

investors and the public interest. The Exchange requests that the Commission waive the

five-day pre-filing notice requirement and the 30-day operative delay period for “non-

controversial” proposals and make the proposed rule change effective and operative upon

filing. The proposed rule change is based on a CBOE rule change recently approved by

the Commission8 and does not raise any novel issues. Additionally, the proposed rule

change is necessary to eliminate any confusion among members of multiple exchanges

regarding which position and exercise limits apply to them and for purposes of

maintaining a fair and orderly market.

Item 8. Proposed Change Based Upon Rules of Another Self-Regulatory Organization or of the Commission

The proposed rule change is based on CBOE Rules 4.11 and 4.12.

Item 9. Exhibits

1. Form of Notice of the Proposed Rule Change for the Federal Register. 5. Text of the Proposed Rule Change.

8 See supra note 1.

LITDOCS/590694.3 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 10 of 29

EXHIBIT 1

SECURITIES AND EXCHANGE COMMISSION (Release No. 34- ; File No. SR-BSE-2005-10)

February ___, 2005

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Boston Stock Exchange, Inc. Relating to Establishing a Pilot Period to Increase Position Limits and Exercise Limits for Equity Options and Options on the Nasdaq-100 Trading Stock on the Boston Options Exchange Facility

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),1/ and Rule 19b-4 thereunder,2/ notice is hereby given that on February _____, 2005, the

Boston Stock Exchange (“BSE” or "Exchange") filed with the Securities and Exchange

Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The

Commission is publishing this notice to solicit comments on the proposed rule from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Boston Stock Exchange (“Exchange” or “BSE”) proposes to amend Section 7

(Position Limits), Section 8 (Exemptions from Position Limits), and Section 9 (Exercise

Limits) of Chapter III of the Rules of the Boston Options Exchange (“BOX”) to increase the standard position and exercise limits for equity options contracts and options on the Nasdaq-

100 Index Tracking Stock (“QQQQ”). The text of the proposed rule change is available from the principal office of the Exchange and from the Commission.

1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4.

LITDOCS/590843.1 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 11 of 29 II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed

any comments it received on the proposed rule change. The text of these statements may be

examined at the places specified in Item IV below. The self-regulatory organization has

prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects

of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

The Exchange is proposing several changes to Section 7 (Position Limits), Section 8

(Exemptions from Position Limits), and Section 9 (Exercise Limits) of Chapter III of the

BOX Rules. Section 7 of Chapter III of the BOX Rules subjects equity options to one of five different position limits depending on the trading volume and outstanding shares of the underlying security. Section 8 of Chapter III of the BOX Rules establishes certain qualified hedging transactions and positions that are exempt from established options position limits as prescribed under Section 7 of Chapter III of the BOX rules. Section 9 of Chapter III of the BOX Rules establishes exercise limits for the corresponding options at the same levels as the corresponding security’s position limits. On February 23, 2005, the Commission granted accelerated approval of a rule change proposed by the Chicago Board Options

Exchange, Inc. (“CBOE”) relating to position and exercise limits.3

3 See Securities Exchange Act Rel. No. 51244 (February 23, 2005).

LITDOCS/590843.1 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 12 of 29 Standard Position and Exercise Limits

The Exchange is proposing to adopt for BOX a pilot program for a period of six

months during which the standard position and exercise limits for options on the QQQQ

and for equity option classes traded on BOX would be increased to the following levels:

BOX’s standard position limits have been in effect since BOX commenced

trading in February 2004. These standard position limits are the same as the standard

position limits at the other options exchanges at that time, which were last increased on

December 31, 1998.4 Since that time, there has been a steady increase in the number of accounts on the options exchanges that, (a) approach the position limit; (b) exceed the position limit; and (c) are granted an exemption to the standard limit. Several member firms have petitioned the options exchanges to either eliminate position limits, or in lieu of total elimination, increase the current levels and expand the available hedge exemptions. A review of available data indicates that the majority of accounts that maintain sizable positions are in those option classes subject to the 60,000 and 75,000 tier limits. There also has been an increase in the number of accounts that maintain sizable

4 See Securities Exchange Act Release No. 40875 (December 31, 1998), 64 FR 1842 (January 12, 1999) (SR-CBOE-98-25) (approval of increase in position limits and exercise limits)

LITDOCS/590843.1 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 13 of 29 positions in the lower three tiers. In addition, overall volume in the options market has consistently increased over the past five years. The Exchange believes that the increase in options volume and lack of evidence of market manipulation occurrences during that same period justifies the proposed increases in the position and exercise limits.

The Exchange also proposes the adoption of a new equity hedge exemption to the existing exemptions currently provided under Section 8 of Chapter III of the BOX Rules.

Manipulation

The Exchange believes that position and exercise limits, at their current levels, no longer serve their stated purpose. The Commission has previously stated that:

Since the inception of standardized options trading, the options exchanges

have had rules imposing limits on the aggregate number of options

contracts that a member or customer could hold or exercise. These rules

LITDOCS/590843.1 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 14 of 29 are intended to prevent the establishment of options positions that can be

used or might create incentives to manipulate or disrupt the underlying

market so as to benefit the options position. In particular, position and

exercise limits are designed to minimize the potential for mini-

manipulations and for corners or squeezes of the underlying market. In

addition such limits serve to reduce the possibility for disruption of the

5 options market itself, especially in illiquid options classes.

The Exchange believes that the existing surveillance procedures and reporting

requirements at BOX, other options exchanges, and at the several clearing firms are

Furthermore, large stock holdings must be disclosed to the Commission by way of

6 Schedules 13D or 13G. Options positions are part of any reportable positions and, thus,

cannot be legally hidden. In addition, Section 10 of Chapter III of the BOX Rules, which

requires members to file reports with the Exchange for any customer or member who

held aggregate long or short positions of 200 or more option contracts of any single class

5 See Securities Exchange Act Release No. 39489 (December 24, 1997), 63 FR 276 (January 5, 1998) (SR- CBOE-97-11) (approval of increase in position limits and exercise limits for OEX index options). 6 17 CFR 240.13d-1.

LITDOCS/590843.1 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 15 of 29 for the previous day, will remain unchanged and will continue to serve as an important part of the Exchange’s surveillance efforts.

Financial Requirements

The Exchange believes that the current financial requirements imposed by the

Exchange and by the Commission adequately address concerns that a member or its customer may try to maintain an inordinately large unhedged position in an equity option.

7 Commission’s net capital rule, Rule 15c3-1 under the Act, imposes a capital charge on members to the extent of any margin deficiency resulting from the higher margin requirement.

Finally, equity position limits have been gradually expanded from 1,000 contracts in 1973 to the current level of 75,000 contracts for options on the largest and most active

7 17 CFR 240.15c3-1.

LITDOCS/590843.1 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 16 of 29 underlying securities. To date, the Exchange believes that there have been no adverse

affects on the market as a result of these past increases in the limits for equity option

contracts.

QQQQ

The Exchange also proposes to change the references to the Nasdaq-100 Index

Tracking Stock that are currently in Sections 7 and 9 of Chapter III of the BOX Rules from

“QQQ” to “QQQQ” to correspond to the symbol change that occurred when the listing

moved from the Amex to the Nasdaq.

2. Basis

The Exchange believes that the proposal is consistent with the requirements of

Section 6(b) of the Act,8/ in general, and Section 6(b)(5) of the Act,9/ in particular, in that it is designed to promote just and equitable principles of trade, and to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose any

burden on competition not necessary or appropriate in furtherance of the purposes of the

Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others

The Exchange has neither solicited nor received comments on the proposed rule

change.

8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(5).

LITDOCS/590843.1 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 17 of 29 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The Exchange has designated the proposed rule change as a “non-controversial” rule

change pursuant to Section 19(b)(3)(A)(iii) of the Act10 and subparagraph (f)(6) of Rule

19b-4 thereunder.11 The Exchange represents that the proposed rule change does not

significantly affect the protection of investors or the public interest, does not impose any

significant burden on competition, and, by its terms, does not become operative for 30

days after the date of the filing, or such shorter time as the Commission may designate if

consistent with the protection of investors and the public interest. The Exchange has

requested that the Commission waive the five-day pre-filing notice requirement and the

30-day operative delay period for “non-controversial” proposals and make the proposed

rule change effective and operative upon filing. The proposed rule change is based on a

CBOE rule change recently approved by the Commission12 and does not raise any novel

issues. Additionally, the proposed rule change is necessary to eliminate any confusion

among members of multiple exchanges regarding which position and exercise limits

apply to them and for purposes of maintaining a fair and orderly market.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the

Act. Comments may be submitted by any of the following methods:

10 15 U.S.C. 78s(b)(3)(A)(iii). 11 17 CFR 240.19b-4(f)(6). 12 See supra note 3.

LITDOCS/590843.1 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 18 of 29 Electronic Comments

• Use the Commission’s Internet comment form

http://www.sec.gov/rules.sro.shtml); or

• Send an e-mail to [email protected]. Please include File Number SR-

BSE-2005-10 on the subject line.

Paper Comments

• Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.

All submissions should refer to File No. SR-BSE-2005-10. This file number should be

included on the subject line if e-mail is used. To help the Commission process and review

your comments more efficiently, please use only one method. The Commission will post all

comments on the Commission’s Internet Web site (http://www.sec.gov/rules.sro.shtml).

Copies of the submission, all subsequent amendments, all written statements with respect to

the proposed rule change that are filed with the Commission, and all written

communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying at the Commission's

Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the above-mentioned self-regulatory organization. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you with to make available publicly. All submissions should refer to the file number in the

LITDOCS/590843.1 File No. SR-BSE-2005-10 Submitted: March 1, 2005 Page 19 of 29 caption above and should be submitted on or before [insert date 21 days from publication in the Federal Register].

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

authority13.

Margaret H. McFarland Deputy Secretary

13 17 CFR 200.30-3(a)(12).

LITDOCS/590843.1 SR-BSE-2005-10 Submitted: March 1, 2005 Page 20 of 29

EXHIBIT 5

New language [deleted language]

RULES OF THE BOSTON STOCK EXCHANGE

RULES OF THE BOSTON OPTIONS EXCHANGE FACILITY

Trading of options contracts on BOX

Chapter III. BUSINESS CONDUCT

Sec. 1-6 No change.

Sec. 7 Position Limits

(a) Except with the prior permission of an Options Official or his designee, to be confirmed in writing, no Options Participant shall make, for any account in which it has an interest or for the account of any Customer, an opening transaction on any exchange if the Options Participant has reason to believe that as a result of such transaction the Options Participant or its Customer would, acting alone or in concert with others, directly or indirectly:

i. control (as defined in paragraph (e) below) an aggregate position in an options contract traded on BOX in excess of 13,500 or 22,500 or 31,500 or 60,000 or 75,000 options contracts (whether long or short), except that for a pilot program period of 6 months (“Section 7(a) Pilot Program Period”) from [enter approval date] through [enter date six months after the approval date], the position limits shall be 25,000 or 50,000 or 75,000 or 200,000 or 250,000 options contracts (whether long or short), of the put type and the call type on the same side of the market respecting the same underlying security, combining for purposes of this position limit long positions in put options with short positions in call options, and short positions in put options with long positions in call options, or such other number of options contracts as may be fixed from time to time by BOX as the position limit for one or more classes or series of options; or

LITDOCS/590684.1 SR-BSE-2005-10 Submitted: March 1, 2005 Page 21 of 29

ii. exceed the applicable position limit fixed from time to time by another exchange for an options contract not traded on BOX, when the Options Participant is not a member of the other exchange on which the transaction was effected.

(b) Should an Options Participant have reason to believe that a position in any account in which it has an interest or for the account of any Customer of such Options Participant is in excess of the applicable limit, such Options Participant shall promptly take the action necessary to bring the position into compliance.

Limits shall be determined in the following manner:

i. A 13,500-contract limit (or 25,000 option contract limit during the Section 7(a) Pilot Program Period) applies to those options having an underlying security that does not meet the requirements for a higher options contract limit.

ii. To be eligible for the 22,500-contract limit (or 50,000 option contract limit during the Section 7(a) Pilot Program Period), either the most recent six (6) month trading volume of the underlying security must have totaled at least twenty (20) million shares, or the most recent six (6) month trading volume of the underlying security must have totaled at least fifteen (15) million shares and the underlying security must have at least forty (40) million shares currently outstanding.

iii. To be eligible for the 31,500-contract limit (or 75,000 option contract limit during the Section 7(a) Pilot Program Period), either the most recent six (6) month trading volume of the underlying security must have totaled at least forty (40) million shares or the most recent six (6) month trading volume of the underlying security must have totaled at least thirty (30) million shares and the underlying security must have at least 120 million shares currently outstanding.

iv. To be eligible for the 60,000-contract limit (or 200,000 option contract limit during the Section 7(a) Pilot Program Period), either the most recent six (6) month trading volume of the underlying security must have totaled at least eighty (80) million shares or the most recent six (6) month trading volume of the underlying security must have totaled at least sixty (60) million shares and the underlying security must have at least 240 million shares currently outstanding.

LITDOCS/590684.1 SR-BSE-2005-10 Submitted: March 1, 2005 Page 22 of 29

v. To be eligible for the 75,000-contract limit (or 250,000 option contract limit during the Section 7(a) Pilot Program Period), either the most recent six (6) month trading volume of the underlying security must have totaled at least 100 million shares or the most recent six-month trading volume of the underlying security must have totaled at least seventy-five (75) million shares and the underlying security must have at least 300 million shares currently outstanding.

(d) Every six (6) months, BOXR will review the status of underlying securities to determine which position limit should apply. A higher limit will be effective on the date set by BOXR, while any change to a lower limit will take effect after the last expiration then trading, unless the requirement for the same or a higher limit is met at the time of the intervening six (6) month review. If, however, subsequent to a six (6) month review, an increase in volume and/or outstanding shares would make a stock eligible for a higher position limit prior to the next review, BOXR in its discretion may immediately increase such position limit.

(e) Control exists under this Section 7 when it is determined by BOXR that an individual or entity makes investment decisions for an account or accounts, or materially influences directly or indirectly the actions of any person who makes investment decisions.

i. Control will be presumed in the following circumstances, and will be presumed to continue until determined otherwise pursuant to paragraph (e)(ii) below:

1) among all parties to a joint account who have authority to act on behalf of the account;

2) among all general partners to a partnership account;

3) when an individual or entity holds an ownership interest of ten percent (10%) or more in an entity (ownership interest of less than ten percent (10%) will not preclude aggregation), or shares in ten percent (10%) or more of profits and losses of an account;

4) when accounts have common directors or management;

5) where a person has the authority to execute transactions in an account.

ii. Control, presumed by one or more of the above findings or circumstances, can be rebutted by proving to BOXR that the factor does not exist or by showing other factors which negate the presumption of control. The rebuttal proof must be submitted by

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affidavit and/or such other documentary evidence as may be appropriate in the circumstances. BOXR also will consider the following factors in determining if aggregation of accounts is required:

1) similar patterns of trading activity among separate entities;

2) the sharing of kindred business purposes and interests;

3) whether there is common supervision of the entities which extends beyond assuring adherence to each entity’s investment objectives and/ or restrictions.

iii. Initial determinations under this paragraph (e) shall be made by the staff of the Market Regulation Center. The initial determination may be reviewed by an Options Official or his designee, based upon a report by the MRC. An Options Participant or Customer directly affected by such a determination may ask an Options Official or his designee to reconsider, but may not request any other review or appeal except in the context of a disciplinary proceeding. The decision to grant non-aggregation under this paragraph (e) shall not be retroactive.

(See BSE Rules Chapter I, “Definitions”, Section 2, “Member, etc.”)

Supplementary Material to Section 7

.01 The position limits contained in this Section 7 shall be 300,000 for options contracts overlying the Nasdaq 100 Index Trading Stock® (“QQQQ”) and the Standard and Poor’s Depositary Receipts Trust (“SPDR”), except that during the Section 7(a) Pilot Program Period the position limits on the QQQQ and the SPDR shall be 900,000 contracts.

.02 Whenever the Exchange determines that a higher margin requirement is warranted in light of the risks associated with an under-hedged options position, the Exchange may impose additional margin upon the account maintaining such underhedged position, pursuant to its authority under Chapter VII of the Rules of the Exchange (Carrying of Accounts- Customers’ Securities- Give-up Orders). The Clearing Participant carrying the account will be subject to capital charges under SEC Rule 15c3-1 to the extent of any margin deficiency resulting from the higher margin requirements.

Sec. 8 Exemptions from Position Limits

(a) Equity Hedge Exemption. The following qualified hedging transactions and positions described in paragraphs (i) through (v) below shall be exempt from

LITDOCS/590684.1 SR-BSE-2005-10 Submitted: March 1, 2005 Page 24 of 29 established position and exercise limits as prescribed under Section 7(c) of this Chapter III (Position Limits) above. Hedge transactions and positions established pursuant to paragraphs (vi) and (vii) below are subject to a position limit equal to five (5) times the standard limit established under Section 7(c) of this Chapter III (Position Limits) above:

i. Where each option contract is “hedged” or “covered” by 100 shares of the underlying security or securities convertible into such underlying security, or, in the case of an adjusted option contract, the same number of shares represented by the adjusted contract: (1) long call and short stock; (2) short call and long stock; (3) long put and long stock; (4) short put and short stock.

ii. A long call position accompanied by a short put position, where the long call expires with the short put, and the strike price of the long call and short put is equal, and where each long call and short put position is hedged with 100 shares (or other adjusted number of shares) of the underlying security or securities convertible into such stock (“reverse conversion’’).

iii. A short call position accompanied by a long put position where the short call expires with the long put, and the strike prices of the short call and long put are equal, and where each short call and long put position is hedged with 100 shares (or other adjusted number of shares) of the underlying security or securities convertible into such stock (“conversion”).

iv. A short call position accompanied by a long put position where the short call expires with the long put, and the strike price of the short call equals or exceeds the strike price of the long put, and where each short call and long put position is hedged with 100 shares of the underlying security (or other adjusted number of shares). Neither side of the short call, long put position can be in-the- money at the time the position is established (“collar’’).

v. A long call position accompanied by a short put position where the long call expires with the short put and the strike price of the long call equals or exceeds the short put and where each long call and short put position is hedged with 100 shares of the underlying security (or other adjusted number of shares). Neither side of the long call, short put position can be in-the-money at the time the position is established (“reverse collar”).

[v.]vi. A long call position accompanied by a short put position with the same strike prices and a short call position accompanied by a long put position with a different strike prices (“box spread’’).

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[vi.]vii.A listed option position hedged on a one-for-one basis with an over-the-counter (“OTC’’) option position on the same underlying security. The strike price of the listed option position and corresponding OTC option position must be within one strike of each other and no more than one expiration month apart.

[vii.]viii.For those strategies described under (ii), (iii), [and] (iv), and (v) above, one component of the option strategy can be an OTC option contract guaranteed or endorsed by the firm maintaining the proprietary position or carrying the Customer account.

[viii.]ix.An OTC option contract is defined as an option contract that is not listed on a national securities exchange or cleared at the Options Clearing Corporation.

(b) The equity hedge exemption is in addition to the standard limit and other exemptions available under BOX Rules.

(c) Market Maker Exemption. The provisions set forth below apply only to Market Makers seeking an exemption to the standard position limits in all options traded on BOX for the purpose of assuring that there is sufficient depth and liquidity in the marketplace, and not for the purpose of conferring a right upon the Market Maker applying for an exemption.

i. In light of the procedural safeguards, the purpose of this exemption process, and the prohibition against the granting of retroactive exemptions, decisions granting or denying exemptions are not subject to review under Chapter XXX of the Rules of the Exchange regarding Hearings and Review.

ii. An exemption may be granted for the purpose of maintaining a fair and orderly market in the options on a given underlying security.

iii. Generally, an exemption will be granted only to a Market Maker who has requested an exemption, who is appointed to the options class in which the exemption is requested pursuant to Chapter VI Section 4 of these Rules (Appointment of Market Makers), whose positions are near the current position limit and who is significant in terms of daily volume. The positions must generally be within ten percent (10%) of the limits contained in Section 7 of this Chapter III (Position Limits).

iv. If an exemption is granted, it will be effective at the time the decision is communicated, and retroactive exemptions will not be granted.

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v. The size and length of an exemption will be determined on a case by case basis; however, an exemption usually will be granted until the nearest expiration. The exemption may specify the extent to which the resulting position may be carried in options in one or more expiration cycles.

vi. Procedures for Market Makers nearing the limits due to general market conditions:

1) A request for an exemption from the established position and exercise limits must be in writing and must state the specific reasons why an exemption should be granted.

2) The request should be submitted to BOXR no later than 1:00 p.m. for same-day review.

3) Review of the request will be conducted informally, i.e., BOXR may receive information in such manner as is most effective, in its discretion, to ascertain whether an exemption is necessary to maintain depth and liquidity in the market.

4) BOXR will communicate the exemption decision to the requesting Market Maker and his or its Clearing Participant as soon as possible, generally on the day following review.

5) Requests for instant exemptions may be made for extraordinary situations, such as when there is an order imbalance or a Market Maker is near the limits intraday. Following immediate review of the situation, BOXR will decide whether an exemption is warranted.

(d) Firm Facilitation Exemption. To the extent that the following procedures and criteria are satisfied, an Options Participant may receive and maintain for its proprietary account an exemption (“facilitation exemption”) from the applicable standard position limit in non-multiply-listed options traded on BOX for the purpose of facilitating (i) orders for its own Public Customer (one that will have the resulting position carried with the firm) or (ii) orders received from or on behalf of a Public Customer for execution only against the Participant firm’s proprietary account.

i. The Options Participant must receive approval from BOXR prior to executing facilitating trades.

ii. The facilitation exemption shall be granted to the Options Participant owning or controlling the account in which the exempt options positions are held. For purposes of this paragraph (d),

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control shall be determined in accordance with the provision of Section 7 of this Chapter III (Position Limits).

iii. BOXR approval may be given on the basis of verbal representations; however, the Options Participant must, within a period of time to be designated by BOXR, furnish the appropriate forms and documentation substantiating the basis for the exemption. The approval of the facilitation exemption will specify the maximum number of contracts that may be exempt under this paragraph (d). In no event may the aggregate exempted position under this paragraph (d) exceed twice the applicable standard limit.

iv. The facilitation exemption is in addition to the standard limit and other exemptions available under BOX Rules. An Options Participant so approved is hereinafter referred to as a “facilitation firm.”

v. The facilitation firm must provide all information required by BOX on approved forms and keep such information current. The facilitation firm shall promptly provide to BOX any information or documents requested concerning the exempted options positions and the positions hedging them.

vi. Regarding the execution of its Public Customer Order and its own facilitating order, a facilitation firm shall make neither order contingent on “fill or kill” instructions.

vii. To remain qualified, a facilitation firm must, within five (5) business days after the execution of a facilitation exemption order, hedge all exempt options positions that have not previously been liquidated, and furnish BOX with documentation reflecting the resulting hedging positions.

viii. The facilitation firm shall:

1) liquidate and establish its Public Customer’s and its own options and stock positions or their equivalent in an orderly fashion, and not in a manner calculated to cause unreasonable price fluctuations or unwarranted price changes; and not initiate or liquidate its Public Customer’s or its own stock position or its equivalent with an equivalent index options position with a view toward taking advantage of any differential in price between a group of securities and an overlying stock index option;

2) promptly notify BOX of any material change in the exempted options position or the hedge; and

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3) not increase the exempted options position once it is closed unless approval is received again pursuant to a reapplication under this paragraph (d).

ix. Violation of any of these provisions, absent reasonable justification or excuse, shall result in withdrawal of the facilitation exemption and may form the basis for subsequent denial of an application for a facilitation exemption hereunder.

Sec. 9 Exercise Limits

(a) Except with the prior permission of an Options Official or his designee, to be confirmed in writing, no Options Participant shall exercise, for any account in which it has an interest or for the account of any Customer, a long position in any options contract where such Options Participant or Customer, acting alone or in concert with others, directly or indirectly, has or will have:

i. exercised within any five (5) consecutive business days aggregate long positions in any class of options traded on BOX in excess of 13,500 or 22,500 or 31,500 or 60,000 or 75,000 options contracts, except that during the Section 7(a) Pilot Program Period the exercise limits shall be 25,000 or 50,000 or 75,000 or 200,000 or 250,000 options contracts, or such other number of options contract as may be fixed from time to time by BOX as the exercise limit for that class of options; or

ii. exceeded the applicable exercise limit fixed from time to time by another exchange for an options class not traded on BOX, when the Participant is not a member of the other exchange which lists the options class.

(b) Reasonable notice shall be given of each new exercise limit fixed by BOXR by posting notice thereof by BOXR.

(c) Limits shall be determined in the manner described in Section 7 (Position Limits). For a Market Maker that has been granted an exemption to position limits pursuant to Section 8 of this Chapter III (Exemption to Position Limits), the number of contracts which can be exercised over a five (5) business day period shall equal the Market Maker’s exempted position.

Supplementary Material to Section 9

.01 The exercise limits for options overlying the Nasdaq 100 Index Tracking Stock® (“QQQQ”) and the Standard and Poor’s Depositary Receipt Trust (“SPDR”)

LITDOCS/590684.1 SR-BSE-2005-10 Submitted: March 1, 2005 Page 29 of 29 shall be 300,000 contracts, except that during the Section 7(a) Pilot Program Period the exercise limits on the QQQQ and the SPDR shall be 900,000 contracts.

Sec. 10 through 15 No change.

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