Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change, and Amendment No. 1 Thereto, Relating to an Interpretation of Paragraph (b) of Article Fifth of Its Certificate of Incorporation, 5472-5476 [E7-1828]

Download as PDF 5472 Federal Register / Vol. 72, No. 24 / Tuesday, February 6, 2007 / Notices Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–Amex–2006–117 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, Station Place, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–Amex–2006–117. 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 Commissions 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 in the Commission’s Public Reference Room. Copies of the filing also will be available for inspection and copying at the principal office of Amex. 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 wish to make available publicly. All submissions should refer to File Number SR–Amex–2006–117 and should be submitted on or before February 27, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.21 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–1830 Filed 2–2–07; 8:45 am] sroberts on PROD1PC70 with NOTICES BILLING CODE 8011–01–P 21 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 16:03 Feb 05, 2007 Jkt 211001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55190; File No. SR–CBOE– 2006–106] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change, and Amendment No. 1 Thereto, Relating to an Interpretation of Paragraph (b) of Article Fifth of Its Certificate of Incorporation January 29, 2007. 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 December 12, 2006, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ 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 CBOE. On January 17, 2007, the Exchange filed Amendment No. 1 to the proposed rule change.3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change This filing presents an interpretation of the rules of CBOE made necessary by the proposed acquisition of the Board of Trade of the City of Chicago, Inc. (‘‘CBOT’’) by Chicago Mercantile Exchange Holdings Inc. (‘‘CME Holdings’’). The acquisition is proposed to be accomplished by the merger of CBOT Holdings, Inc. (‘‘CBOT Holdings’’), of which CBOT is currently a subsidiary, with and into CME Holdings, with CME Holdings continuing as the surviving corporation and as the parent company of CBOT as well as of its existing wholly-owned subsidiary, Chicago Mercantile Exchange Inc. (‘‘CME’’). This interpretation is that upon the consummation of the acquisition of CBOT by CME Holdings, the right of members of CBOT to become and 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 The text of Amendment No. 1 is available at CBOE, the Commission’s Public Reference Room and http://www.cboe.org/publish/RuleFilingsSEC/ SR–CBOE–2006–106.al.pdf. In Amendment No. 1, the Exchange added a paragraph to the Purpose Section discussing membership rights as reflected in CBOT Holding’s S–4 filing on December 21, 2006, and attached several documents as Exhibits to Amendment No. 1, including a legal opinion letter dated January 16, 2007. 2 17 PO 00000 Frm 00059 Fmt 4703 Sfmt 4703 remain members of CBOE without having to purchase a CBOE membership will be terminated, in that there no longer will be individuals who qualify as a member of CBOT within the meaning of the rule that creates that right. This right (sometimes referred to as the ‘‘exercise right’’) is granted to CBOT full members under paragraph (b) of Article Fifth of the CBOE Certificate of Incorporation (‘‘Article Fifth(b)’’), as previously interpreted in accordance with agreements between CBOE and CBOT dated September 1, 1992 (the ‘‘1992 Agreement’’), August 7, 2001 as amended by letter agreements dated October 7, 2004, and February 14, 2005 (the ‘‘2001 Agreement’’), and December 17, 2003 (the ‘‘2003 Agreement’’).4 Persons who are members of CBOE pursuant to the exercise right are sometimes referred to as ‘‘exercise members’’ of CBOE. The proposed rule interpretation also describes how CBOE proposes to avoid disruption to its marketplace as a result of the termination of the exercise right on account of the acquisition of CBOT by CME Holdings. This will be accomplished by permitting certain ‘‘grandfathered’’ exercise members of CBOE to continue to have members’ trading rights on CBOE for a limited period of time commencing with the effectiveness of the acquisition and continuing until such time as there is no longer any risk of market disruption by reason of the termination of the exercise right. No textual changes to CBOE’s rule provisions are proposed by this filing. The text of the proposed rule change is available at CBOE, the Commission’s Public Reference Room, and www.cboe.com. 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 CBOE included statements concerning 4 The interpretations of Article Fifth(b) embodied in the 1992, 2001, and 2003 Agreements were the subject of proposed rule changes that were approved by the Commission under Section 19(b)(2) of the Act in Release Nos. 32430, 51733, and 51252, respectively. See Securities Exchange Act Release Nos. 32430 (June 8, 1993), 58 FR 32969 (June 14, 1993) (SR–CBOE–92–42); 51733 (May 24, 2005), 70 FR 30981 (May 31, 2005) (SR–CBOE–2005–19); and 51252 (February 25, 2005), 70 FR 10442 (March 3, 2005) (SR–CBOE–2004–16). CBOE also interpreted Article Fifth (b) in 2002 in other respects that are not directly pertinent to the proposed rule interpretation. See Securities Exchange Act Release No. 46719 (October 25, 2002), 67 FR 66689 (November 1, 2002) (SR–CBOE–2002–41). The Commission notes that although it approved the proposed rule changes referenced above, it has never approved the agreements discussed herein. E:\FR\FM\06FEN1.SGM 06FEN1 Federal Register / Vol. 72, No. 24 / Tuesday, February 6, 2007 / Notices 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 Exchange 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 purpose of the proposed rule change is to provide an interpretation of the rules of CBOE concerning the effect on the exercise right of the consummation of the proposed acquisition of CBOT by CME Holdings. The proposed rule change also includes a plan to enable CBOE to continue to provide fair and orderly markets when and if the exercise right is terminated upon the effectiveness of the acquisition of CBOT. sroberts on PROD1PC70 with NOTICES Background of the Exercise Right Article Fifth(b) provides in part, ‘‘In recognition of the special contribution made to the organization and development of the [CBOE] by the members of [CBOT], * * * every present and future member of [CBOT] who applies for membership in the [CBOE] and who otherwise qualifies shall, so long as he remains a member of said Board of Trade, be entitled to be a member of the [CBOE] notwithstanding any such limitation on the number of members and without the necessity of acquiring such membership for consideration or value from the [CBOE], its members or elsewhere.’’ The ‘‘special contribution’’ of the members of CBOT referred to in Article Fifth(b) consisted primarily of CBOT’s providing the seed capital for the startup of CBOE in the early 1970s by means of direct cash expenditures, CBOT’s guarantee of a bank loan to CBOE to fund additional CBOE start-up costs, and CBOT’s contribution of intellectual property. As the owners of CBOT, its members, through their dues and other payments made to CBOT, were the principal source of the funds expended by CBOT in the development of CBOE and related intellectual property, and effectively bore the risk on the bank loan guaranteed by CBOT. Although when CBOT first envisioned the creation of a market in listed securities put and call options, its intention was to trade these options in trading pits on CBOT itself, early in the planning process it recognized that VerDate Aug<31>2005 16:03 Feb 05, 2007 Jkt 211001 largely for regulatory reasons it would need to organize a new and separate securities exchange dedicated exclusively to the trading of listed securities options. This new exchange ultimately became the CBOE. Because a new and separate exchange with its own separate membership needed to be created to provide for the trading of listed securities options, CBOT was faced with the question of how to compensate its members for the funds they had provided (through CBOT) and the financial risks they had assumed as owners of CBOT in connection with the development of that new exchange. CBOT’s answer to this question, reflected in Article Fifth(b) of the Certificate of Incorporation of CBOE, was to give to each of its 1,402 members an ‘‘exercise right’’ to become a member of the new exchange without having to purchase a separate CBOE membership. From its very inception, the exercise right was tied to the continued ownership of a CBOT membership. Only those persons who continued to maintain the status of a CBOT member were entitled to the exercise right. By tying the exercise right to the continued ownership of a CBOT membership, CBOT sought to assure that any owner of a CBOT membership would receive a tangible benefit from the creation of CBOE, which would be reflected in the value of the CBOT membership, whether or not the owner of the CBOT membership might ever want to trade as a member of CBOE. Previous Interpretations of Article Fifth(b) The fundamental concept that the exercise right in Article Fifth(b) was a right of member-owners of CBOT was reflected in interpretations of that provision that have been embodied in various agreements between CBOE and CBOT. One such interpretation was embodied in the 1992 Agreement, which addressed, among other things, what would happen to the exercise right if the membership interests of the existing 1,402 member-owners of CBOT were divided into parts. That interpretation provided that, under those circumstances, all such parts, together with the trading rights appurtenant thereto, must be in the possession of an individual in order for that individual to be eligible to utilize the exercise right.5 Just such a division of the rights represented by membership on CBOT was effected by CBOT in its 2005 restructuring, when a CBOT member’s ownership rights were separated from 5 See PO 00000 1992 Agreement, Section 2(b). Frm 00060 Fmt 4703 Sfmt 4703 5473 that member’s trading rights. The ownership rights of CBOT members were then further diluted in the subsequent public offering of shares of stock of CBOT Holdings. When CBOT first proposed to restructure in late 2000, CBOE’s response was that the effect of this transaction would be to eliminate entirely the concept of CBOT ‘‘membership’’ as it existed when the exercise right was created as a right held by members of CBOT, and therefore would result in the termination of the exercise right. This interpretation of Article Fifth(b) was reflected in a filing made by CBOE with the Commission under Section 19(b) of the Act.6 CBOT disputed CBOE’s response, and brought suit against CBOE in the Circuit Court of Cook County, Illinois. That lawsuit was dismissed on the ground that the Court’s jurisdiction over matters involving exchange rules pertaining to membership was preempted by the Commission’s jurisdiction under the Act. CBOT appealed the dismissal. Subsequently, while CBOE’s 19(b) filing and CBOT’s appeal of the dismissal of its lawsuit were both pending, CBOE and CBOT settled their dispute on the basis of an interpretation of Article Fifth(b) by CBOE that would permit the exercise right to remain in existence following the restructuring of CBOT as long as specified conditions were satisfied. That interpretation was embodied in the 2001 Agreement. Among other things, that interpretation was subject to the condition that, in order to avail themselves of the exercise right to become and remain members of CBOE following the restructuring of CBOT, individuals needed to hold not only the trading rights of a full member of CBOT but also needed to hold the same number of shares of stock of CBOT Holdings originally issued to CBOT members in the restructuring. In this manner, the agreed-upon interpretation of Article Fifth(b) embodied in the 2001 Agreement carried forward the basic concept noted above that, in order to be viewed as a CBOT member eligible to utilize the exercise right to become and remain a member of CBOE following the restructuring of CBOT, a person must continue to have an ownership interest in CBOT (or must be the delegate of such a person). To assure that this interpretation would not apply under any circumstances other than the restructuring, the interpretation was expressly made subject to the condition that it would apply only ‘‘in the absence 6 See Securities Exchange Act Release No. 43521 (November 3, 2000), 65 FR 69585 (November 17, 2000) (SR–CBOE–2000–44). E:\FR\FM\06FEN1.SGM 06FEN1 5474 Federal Register / Vol. 72, No. 24 / Tuesday, February 6, 2007 / Notices sroberts on PROD1PC70 with NOTICES of any other material changes to the structure or ownership of the CBOT * * * not contemplated in the CBOT [restructuring].’’ The IPO of CBOT Holdings common stock, which followed soon after CBOT’s restructuring, was contemplated in the original restructuring transaction. Accordingly, consistent with the 2001 Agreement, the exercise right remained available following the IPO to CBOT members who continued to hold the ownership interest in CBOT Holdings that was issued to them in the restructuring, notwithstanding that the effect of the IPO was to reduce the percentage ownership represented by that interest. The Proposed Acquisition of CBOT by CME Holdings The present proposed acquisition of CBOT by CME Holdings, which would dramatically change the ownership of CBOT by making it a subsidiary of CME Holdings, was not contemplated as part of the original restructuring of CBOT. It is thus outside of the scope of the 2001 Agreement and the interpretation of Article Fifth(b) embodied therein. Similarly, once the proposed acquisition of CBOT is effective, an important condition of the interpretation embodied in the 2001 Agreement would cease to be satisfied—namely, that there not be any change to the ownership of CBOT not contemplated in its 2005 restructuring. The significance of these consequences of the acquisition of CBOT by CME Holdings is twofold: First, it means that, upon the effectiveness of the acquisition of CBOT by CME Holdings, the 2001 Agreement and the interpretation of Article Fifth(b) embodied therein can no longer be relied upon as a basis for treating the exercise right as continuing in effect following the 2005 restructuring of CBOT. Second, it also means that the 2001 Agreement and the interpretation of Article Fifth(b) embodied therein cannot be relied upon to answer the further question of whether the exercise right will remain in existence following the acquisition of CBOT by CME Holdings, wholly apart from those questions raised by the 2005 restructuring. In other words, the agreed-upon interpretation that settled the exercise right issues raised by CBOT’s restructuring and subsequent IPO by its terms applies only so long as there is no further change to the structure or ownership of CBOT not then in contemplation. Consequently, the fact that there would be such a further change upon the effectiveness of the acquisition of CBOT by CME VerDate Aug<31>2005 16:03 Feb 05, 2007 Jkt 211001 Holdings, means that, insofar as issues pertaining to the continued availability of the exercise right are concerned, the parties are back in the position they were in before they reached the settlement reflected in the 2001 Agreement. For this reason, and consistent with the position CBOE took when confronted with the proposed restructuring of CBOT in 2000, it is CBOE’s position that the effect of that restructuring of CBOT and the subsequent IPO was to eliminate the concept of a member-owner of CBOT as that concept was understood when Article Fifth(b) was first adopted in CBOE’s Certificate of Incorporation, and when it was subsequently interpreted in accordance with the 1992 Agreement. The ownership interest of CBOT members in CBOT will be further attenuated upon the effectiveness of CME Holdings’ acquisition of CBOT, when CBOT will become a subsidiary of CME Holdings. As explained above, both when the exercise right was first created and when it was interpreted in 1992, an essential feature of CBOT membership was the ownership rights in CBOT held by every CBOT member. Indeed, it was to compensate CBOT members for the contributions they made to the development of CBOE as the owners of CBOT that the exercise right was created in the first place. Consistent with the intended purpose of the exercise right, once CBOT members cease to be owners of CBOT, they will cease to be able to avail themselves of the exercise right as a means of acquiring membership in CBOE. This view of the exercise right is consistent with, and indeed is mandated by, the interpretation of Article Fifth(b) embodied in the 1992 Agreement. That interpretation makes it clear that the exercise right is held only by individuals who hold one of the 1,402 CBOT memberships that were in existence when CBOT members made their ‘‘special contribution’’ to the development of CBOE, or by persons who are the delegates of such individuals. Consistent with this proposition, Section 3(d) of the 1992 Agreement addresses the possibility that CBOT, among other things, may merge or consolidate with, or be acquired by, another entity, and establishes three conditions that all must be satisfied for the exercise right to remain available following any such transaction. These three conditions are: 1. ‘‘* * * the survivor of such merger, consolidation or acquisition (‘‘survivor’’) is an exchange which provides or maintains a market in commodity futures contracts or PO 00000 Frm 00061 Fmt 4703 Sfmt 4703 options, securities, or other financial instruments, and * * * 2. the 1,402 holders of CBOT Full Memberships are granted in such merger, consolidation or acquisition membership in the survivor (‘‘Survivor Membership’’), and * * * 3. such Survivor Membership entitles the holder thereof to have full trading rights and privileges in all products then or thereafter traded on the survivor (except that such trading rights and privileges need not include products that, at the time of such merger, consolidation or acquisition, are traded or listed, designated or otherwise authorized for trading on the other entity but not on the CBOT) * * *.’’ If CBOT is acquired by CME Holdings as proposed, not only would all three of these conditions not be satisfied, as would be necessary for the exercise right to remain available following the acquisition, but in fact none of these three conditions would be satisfied. Condition 1 would not be satisfied because, in the context of Section 3(d) of the 1992 Agreement, the reference to ‘‘the’’ survivor of a merger, consolidation or acquisition means the acquiring entity that survives the transaction. Here, CME Holdings will be the acquiring entity that survives the acquisition, but it is not an exchange. Condition 2 would not be satisfied because there will not be 1,402 holders of CBOT Full Memberships (defined as the 1,402 CBOT full memberships that were ‘‘existing’’ in 1992) who would be granted membership in the survivor. To the contrary, there would not be any holders of CBOT full memberships as they existed in 1992, since all of these memberships were stripped of their ownership attributes in the 2005 restructuring of CBOT. Likewise, CME Holdings—the survivor of the acquisition and the new owner of CBOT—would not be an exchange and would not be capable of granting membership interests in itself to anyone. In other words, this condition would allow the exercise right to remain in effect following an acquisition of CBOT only if the survivor of the acquisition that was the new owner of CBOT were an exchange owned by its members, including the former members of CBOT. In the case of the proposed CME Holdings acquisition, however, the surviving acquirer would not be an exchange, but would be a holding company in which many former members of CBOT may have no ownership interests whatsoever. Although CBOE has previously interpreted Article Fifth(b) to permit it to continue in existence, subject to stated conditions, following CBOT’s 2005 restructuring and subsequent IPO, the 2001 Agreement cannot be relied E:\FR\FM\06FEN1.SGM 06FEN1 sroberts on PROD1PC70 with NOTICES Federal Register / Vol. 72, No. 24 / Tuesday, February 6, 2007 / Notices upon for any purpose from and after the acquisition of CBOT by CME Holdings, for the reasons stated above. Even if CBOT is considered to be the survivor of the proposed acquisition, Condition 2 would still not be satisfied because, following the acquisition, persons who were members prior to the acquisition will no longer be members as that term was commonly understood when Article Fifth(b) was adopted in 1972 and when it was interpreted in 1992. Not only will these persons not be owners of CBOT, but, except for trading rights, they will no longer have most of the other rights formerly held by members of CBOT. The S–4 registration statement filed by CBOT Holdings on December 21, 2006 in respect of the proposed acquisition reveals that, following the acquisition, CBOT’s former Series B–1 members (who prior to the acquisition are the ‘‘full’’ members of CBOT entitled to the exercise right) will lose most of their membership rights. Among other things, they will be stripped of the right to elect directors and nominating committee members, the right to nominate candidates for election as directors, the right to call special meetings of members, the right to initiate proposals at meetings of members, the right to vote on extraordinary transactions involving CBOT, and the right to amend or repeal the bylaws of CBOT. In other words, following the acquisition of CBOT by CME Holdings, persons who had formerly been the full members of that exchange will simply be the holders of trading permits and will not be granted any of the other rights commonly associated with membership in an exchange. Finally, condition 3 of Section 3(d) of the 1992 Agreement would not be satisfied following the acquisition of CBOT by CME Holdings. This is because, for the reason stated above in the discussion of condition 1, condition 3 contemplates an acquisition where the surviving acquirer is an exchange, and it requires that CBOT members must have essentially the same full trading rights on that surviving exchange as they had on CBOT prior to the acquisition. Here, the surviving acquirer would not be an exchange, and for that reason it is not possible for CBOT members to have any trading rights on the survivor. The conclusion is the same even if CBOE were to look through CME Holdings to what will be its two subsidiary exchanges (CME and CBOT). Although former CBOT members may be granted trading rights in all products traded and to be traded on both of those exchanges, save only for those products traded exclusively on CME at the time VerDate Aug<31>2005 16:03 Feb 05, 2007 Jkt 211001 of the acquisition, these rights will no longer be the same ‘‘full’’ trading rights that were held by CBOT full members in 1992. This is the case because, at least in respect of new products to be introduced on CME after the acquisition, the trading rights of CBOT members will be diluted by the trading rights granted to other persons (i.e., CME members) to trade these same products. Once persons who are not members of CBOT are granted the right to trade products on the same terms as members of CBOT, as would be the case with new products introduced following the acquisition of CBOT by CME Holdings, then the trading rights inherent in CBOT membership will be reduced from what they were prior to the acquisition, and thus cannot support the availability of the exercise right to persons who hold those diminished rights. Conclusion Since the conditions of Section 3(d) of the 1992 Agreement will not be satisfied following the acquisition of CBOT by CME Holdings, the terms of that Section mandate that ‘‘Article Fifth(b) shall not apply’’ following the acquisition. In other words, once CBOT has been acquired by CME Holdings, the exercise right will no longer be available as a means of acquiring membership in CBOE. Transitional Proposal To prevent any risk that the loss of exercise members upon the termination of the exercise right might adversely affect liquidity in CBOE’s market, CBOE is prepared to maintain the status quo for some period of time after the exercise right has been terminated. This result would be accomplished by staying, for an interim period of time, the impact of the termination of the exercise right on the trading access of those individuals who were exercise members of CBOE on a designated cutoff date. This would permit those individuals to continue to trade on CBOE in the capacity of CBOE members during that interim period.7 For this purpose, CBOE proposes the close of business on December 11, 2006 as the cut-off date for determining whether 7 In this respect, the decision to stay the effectiveness of what otherwise would result in a termination of trading access is analogous to the right of the Exchange under CBOE Rule 3.19. That Rule authorizes the Exchange, when the Exchange determines that there are extenuating circumstances, to permit a member ‘‘to retain the member’s status for such period of time as the Exchange deems reasonably necessary’’ to enable the member to address specified problems that otherwise would cause the membership status to terminate. PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 5475 exercise members would have the right, during the interim period, to continue to have trading access to CBOE. Individuals who were exercise members of CBOE in good standing on that date would continue to be able to trade as members of CBOE during the interim period, notwithstanding the abovedescribed effect on the exercise right of the acquisition of CBOT, but individuals who were not effective exercise members on that date would not be permitted to exercise or have trading access to CBOE during the interim period without obtaining a separate CBOE membership. This interim period would continue for so long as necessary to avoid any disruption to the market as a result of the loss of exercise members, which could involve CBOE adopting a plan to provide some form of trading access to such persons in the absence of the exercise right. Any such plan would be subject to the approval of CBOE members under Section 2.1 of the Exchange’s Constitution, and to the approval of the Commission under Section 19(b) of the Act.8 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,9 in general, and furthers the objectives of Section 6(b)(5) of the Act,10 in particular, in that it is a reasonable interpretation of existing rules of the Exchange that is designed to promote just and equitable principles of trade, to perfect the mechanism of a free and open market, and, in general, 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 that is 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 Written comments on the proposed rule change were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 8 15 U.S.C. 78s(b). U.S.C. 78f(b). 10 15 U.S.C. 78f(b)(5). 9 15 E:\FR\FM\06FEN1.SGM 06FEN1 5476 Federal Register / Vol. 72, No. 24 / Tuesday, February 6, 2007 / Notices 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: (A) By order approve such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. 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: sroberts on PROD1PC70 with NOTICES Electronic Comments • Use the Commission’s Internet comment form http://www.sec.gov/ rules/sro.shtml; or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–CBOE–2006–106 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File No. SR-CBOE–2006–106. 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 at 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 in the Commission’s Public Reference Room. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. 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 wish to make available publicly. All submissions should refer to File No. SR–CBOE–2006–106 and should be VerDate Aug<31>2005 17:18 Feb 05, 2007 Jkt 211001 submitted on or before February 27, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.11 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–1828 Filed 2–5–07; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55193; File No. SR–CBOE– 2006–111] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Exchange Fees for Fiscal Year 2007 January 30, 2007. 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 December 22, 2006, the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’ 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 substantially prepared by the CBOE. The CBOE has designated this proposal as one establishing or changing a due, fee, or other charge imposed by the CBOE under Section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission.5 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the CBOE Fees Schedule (‘‘Fees Schedule’’) to make various changes for fiscal year 2007. The text of the proposed rule change is available at the CBOE, on the Exchange’s Web site at http:// www.cboe.com, and in the Commission’s Public Reference Room. 11 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). 5 The Exchange has proposed that the changes to the Fees Schedule take effect on January 1, 2007. 1 15 PO 00000 Frm 00063 Fmt 4703 Sfmt 4703 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 Exchange 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 Exchange 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 purpose of this proposed rule change is to amend the Fees Schedule to make various fee changes. The proposed changes are the product of the Exchange’s annual budget review. The Exchange proposes to amend the fees as noted below. a. Options Transaction Fees The Exchange proposes to revise per contract transaction fees in order to remain competitive and to streamline its Fees Schedule. Equity Options: The Exchange proposes to charge all CBOE liquidity providers (CBOE market-maker, Designated Primary Market-Maker (‘‘DPM’’), Electronic Designated Primary Market-Maker (‘‘e-DPM’’), Lead MarketMaker (‘‘LMM’’) and Remote MarketMaker (‘‘RMM’’)) (collectively, ‘‘Liquidity Providers’’) a $.20 per contract transaction fee.6 Currently, market-makers (including LMMs) are charged $.22 per contract; DPMs are charged $.16 per contract; e-DPMs are charged $.25 per contract; and RMMs are charged $.26 per contract. Member firm proprietary transaction fees are currently $.20 per contract for facilitation of customer orders and $.24 per contract for non-facilitation orders. The Exchange proposes to charge a flat fee of $.20 per contract for all member firm proprietary transactions. The public customer transaction fee would remain at $.00, but public customer transactions would be subject to the proposed Customer Complex Order Fee.7 Broker-dealer and non-member 6 The $.20 per contact transaction fee is the standard Liquidity Provider transaction fee and will be eligible for reduction pursuant to the ‘‘Liquidity Provider Sliding Scale,’’ described in Section II.A.1.b. below. 7 See infra Section II.A.1.e. E:\FR\FM\06FEN1.SGM 06FEN1

Agencies

[Federal Register Volume 72, Number 24 (Tuesday, February 6, 2007)]
[Notices]
[Pages 5472-5476]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-1828]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55190; File No. SR-CBOE-2006-106]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change, and Amendment 
No. 1 Thereto, Relating to an Interpretation of Paragraph (b) of 
Article Fifth of Its Certificate of Incorporation

January 29, 2007.
    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 December 12, 2006, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' 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 CBOE. 
On January 17, 2007, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The text of Amendment No. 1 is available at CBOE, the 
Commission's Public Reference Room and http://www.cboe.org/publish/
RuleFilingsSEC/SR-CBOE-2006-106.al.pdf. In Amendment No. 1, the 
Exchange added a paragraph to the Purpose Section discussing 
membership rights as reflected in CBOT Holding's S-4 filing on 
December 21, 2006, and attached several documents as Exhibits to 
Amendment No. 1, including a legal opinion letter dated January 16, 
2007.
---------------------------------------------------------------------------

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

    This filing presents an interpretation of the rules of CBOE made 
necessary by the proposed acquisition of the Board of Trade of the City 
of Chicago, Inc. (``CBOT'') by Chicago Mercantile Exchange Holdings 
Inc. (``CME Holdings''). The acquisition is proposed to be accomplished 
by the merger of CBOT Holdings, Inc. (``CBOT Holdings''), of which CBOT 
is currently a subsidiary, with and into CME Holdings, with CME 
Holdings continuing as the surviving corporation and as the parent 
company of CBOT as well as of its existing wholly-owned subsidiary, 
Chicago Mercantile Exchange Inc. (``CME''). This interpretation is that 
upon the consummation of the acquisition of CBOT by CME Holdings, the 
right of members of CBOT to become and remain members of CBOE without 
having to purchase a CBOE membership will be terminated, in that there 
no longer will be individuals who qualify as a member of CBOT within 
the meaning of the rule that creates that right. This right (sometimes 
referred to as the ``exercise right'') is granted to CBOT full members 
under paragraph (b) of Article Fifth of the CBOE Certificate of 
Incorporation (``Article Fifth(b)''), as previously interpreted in 
accordance with agreements between CBOE and CBOT dated September 1, 
1992 (the ``1992 Agreement''), August 7, 2001 as amended by letter 
agreements dated October 7, 2004, and February 14, 2005 (the ``2001 
Agreement''), and December 17, 2003 (the ``2003 Agreement'').\4\ 
Persons who are members of CBOE pursuant to the exercise right are 
sometimes referred to as ``exercise members'' of CBOE.
---------------------------------------------------------------------------

    \4\ The interpretations of Article Fifth(b) embodied in the 
1992, 2001, and 2003 Agreements were the subject of proposed rule 
changes that were approved by the Commission under Section 19(b)(2) 
of the Act in Release Nos. 32430, 51733, and 51252, respectively. 
See Securities Exchange Act Release Nos. 32430 (June 8, 1993), 58 FR 
32969 (June 14, 1993) (SR-CBOE-92-42); 51733 (May 24, 2005), 70 FR 
30981 (May 31, 2005) (SR-CBOE-2005-19); and 51252 (February 25, 
2005), 70 FR 10442 (March 3, 2005) (SR-CBOE-2004-16). CBOE also 
interpreted Article Fifth (b) in 2002 in other respects that are not 
directly pertinent to the proposed rule interpretation. See 
Securities Exchange Act Release No. 46719 (October 25, 2002), 67 FR 
66689 (November 1, 2002) (SR-CBOE-2002-41). The Commission notes 
that although it approved the proposed rule changes referenced 
above, it has never approved the agreements discussed herein.
---------------------------------------------------------------------------

    The proposed rule interpretation also describes how CBOE proposes 
to avoid disruption to its marketplace as a result of the termination 
of the exercise right on account of the acquisition of CBOT by CME 
Holdings. This will be accomplished by permitting certain 
``grandfathered'' exercise members of CBOE to continue to have members' 
trading rights on CBOE for a limited period of time commencing with the 
effectiveness of the acquisition and continuing until such time as 
there is no longer any risk of market disruption by reason of the 
termination of the exercise right.
    No textual changes to CBOE's rule provisions are proposed by this 
filing. The text of the proposed rule change is available at CBOE, the 
Commission's Public Reference Room, and www.cboe.com.

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 CBOE included statements 
concerning

[[Page 5473]]

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 Exchange 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 purpose of the proposed rule change is to provide an 
interpretation of the rules of CBOE concerning the effect on the 
exercise right of the consummation of the proposed acquisition of CBOT 
by CME Holdings. The proposed rule change also includes a plan to 
enable CBOE to continue to provide fair and orderly markets when and if 
the exercise right is terminated upon the effectiveness of the 
acquisition of CBOT.

Background of the Exercise Right

    Article Fifth(b) provides in part, ``In recognition of the special 
contribution made to the organization and development of the [CBOE] by 
the members of [CBOT], * * * every present and future member of [CBOT] 
who applies for membership in the [CBOE] and who otherwise qualifies 
shall, so long as he remains a member of said Board of Trade, be 
entitled to be a member of the [CBOE] notwithstanding any such 
limitation on the number of members and without the necessity of 
acquiring such membership for consideration or value from the [CBOE], 
its members or elsewhere.''
    The ``special contribution'' of the members of CBOT referred to in 
Article Fifth(b) consisted primarily of CBOT's providing the seed 
capital for the start-up of CBOE in the early 1970s by means of direct 
cash expenditures, CBOT's guarantee of a bank loan to CBOE to fund 
additional CBOE start-up costs, and CBOT's contribution of intellectual 
property. As the owners of CBOT, its members, through their dues and 
other payments made to CBOT, were the principal source of the funds 
expended by CBOT in the development of CBOE and related intellectual 
property, and effectively bore the risk on the bank loan guaranteed by 
CBOT.
    Although when CBOT first envisioned the creation of a market in 
listed securities put and call options, its intention was to trade 
these options in trading pits on CBOT itself, early in the planning 
process it recognized that largely for regulatory reasons it would need 
to organize a new and separate securities exchange dedicated 
exclusively to the trading of listed securities options. This new 
exchange ultimately became the CBOE. Because a new and separate 
exchange with its own separate membership needed to be created to 
provide for the trading of listed securities options, CBOT was faced 
with the question of how to compensate its members for the funds they 
had provided (through CBOT) and the financial risks they had assumed as 
owners of CBOT in connection with the development of that new exchange.
    CBOT's answer to this question, reflected in Article Fifth(b) of 
the Certificate of Incorporation of CBOE, was to give to each of its 
1,402 members an ``exercise right'' to become a member of the new 
exchange without having to purchase a separate CBOE membership. From 
its very inception, the exercise right was tied to the continued 
ownership of a CBOT membership. Only those persons who continued to 
maintain the status of a CBOT member were entitled to the exercise 
right. By tying the exercise right to the continued ownership of a CBOT 
membership, CBOT sought to assure that any owner of a CBOT membership 
would receive a tangible benefit from the creation of CBOE, which would 
be reflected in the value of the CBOT membership, whether or not the 
owner of the CBOT membership might ever want to trade as a member of 
CBOE.

Previous Interpretations of Article Fifth(b)

    The fundamental concept that the exercise right in Article Fifth(b) 
was a right of member-owners of CBOT was reflected in interpretations 
of that provision that have been embodied in various agreements between 
CBOE and CBOT. One such interpretation was embodied in the 1992 
Agreement, which addressed, among other things, what would happen to 
the exercise right if the membership interests of the existing 1,402 
member-owners of CBOT were divided into parts. That interpretation 
provided that, under those circumstances, all such parts, together with 
the trading rights appurtenant thereto, must be in the possession of an 
individual in order for that individual to be eligible to utilize the 
exercise right.\5\
---------------------------------------------------------------------------

    \5\ See 1992 Agreement, Section 2(b).
---------------------------------------------------------------------------

    Just such a division of the rights represented by membership on 
CBOT was effected by CBOT in its 2005 restructuring, when a CBOT 
member's ownership rights were separated from that member's trading 
rights. The ownership rights of CBOT members were then further diluted 
in the subsequent public offering of shares of stock of CBOT Holdings. 
When CBOT first proposed to restructure in late 2000, CBOE's response 
was that the effect of this transaction would be to eliminate entirely 
the concept of CBOT ``membership'' as it existed when the exercise 
right was created as a right held by members of CBOT, and therefore 
would result in the termination of the exercise right. This 
interpretation of Article Fifth(b) was reflected in a filing made by 
CBOE with the Commission under Section 19(b) of the Act.\6\ CBOT 
disputed CBOE's response, and brought suit against CBOE in the Circuit 
Court of Cook County, Illinois. That lawsuit was dismissed on the 
ground that the Court's jurisdiction over matters involving exchange 
rules pertaining to membership was preempted by the Commission's 
jurisdiction under the Act. CBOT appealed the dismissal.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 43521 (November 3, 
2000), 65 FR 69585 (November 17, 2000) (SR-CBOE-2000-44).
---------------------------------------------------------------------------

    Subsequently, while CBOE's 19(b) filing and CBOT's appeal of the 
dismissal of its lawsuit were both pending, CBOE and CBOT settled their 
dispute on the basis of an interpretation of Article Fifth(b) by CBOE 
that would permit the exercise right to remain in existence following 
the restructuring of CBOT as long as specified conditions were 
satisfied. That interpretation was embodied in the 2001 Agreement. 
Among other things, that interpretation was subject to the condition 
that, in order to avail themselves of the exercise right to become and 
remain members of CBOE following the restructuring of CBOT, individuals 
needed to hold not only the trading rights of a full member of CBOT but 
also needed to hold the same number of shares of stock of CBOT Holdings 
originally issued to CBOT members in the restructuring.
    In this manner, the agreed-upon interpretation of Article Fifth(b) 
embodied in the 2001 Agreement carried forward the basic concept noted 
above that, in order to be viewed as a CBOT member eligible to utilize 
the exercise right to become and remain a member of CBOE following the 
restructuring of CBOT, a person must continue to have an ownership 
interest in CBOT (or must be the delegate of such a person). To assure 
that this interpretation would not apply under any circumstances other 
than the restructuring, the interpretation was expressly made subject 
to the condition that it would apply only ``in the absence

[[Page 5474]]

of any other material changes to the structure or ownership of the CBOT 
* * * not contemplated in the CBOT [restructuring].'' The IPO of CBOT 
Holdings common stock, which followed soon after CBOT's restructuring, 
was contemplated in the original restructuring transaction. 
Accordingly, consistent with the 2001 Agreement, the exercise right 
remained available following the IPO to CBOT members who continued to 
hold the ownership interest in CBOT Holdings that was issued to them in 
the restructuring, notwithstanding that the effect of the IPO was to 
reduce the percentage ownership represented by that interest.

The Proposed Acquisition of CBOT by CME Holdings

    The present proposed acquisition of CBOT by CME Holdings, which 
would dramatically change the ownership of CBOT by making it a 
subsidiary of CME Holdings, was not contemplated as part of the 
original restructuring of CBOT. It is thus outside of the scope of the 
2001 Agreement and the interpretation of Article Fifth(b) embodied 
therein. Similarly, once the proposed acquisition of CBOT is effective, 
an important condition of the interpretation embodied in the 2001 
Agreement would cease to be satisfied--namely, that there not be any 
change to the ownership of CBOT not contemplated in its 2005 
restructuring.
    The significance of these consequences of the acquisition of CBOT 
by CME Holdings is twofold: First, it means that, upon the 
effectiveness of the acquisition of CBOT by CME Holdings, the 2001 
Agreement and the interpretation of Article Fifth(b) embodied therein 
can no longer be relied upon as a basis for treating the exercise right 
as continuing in effect following the 2005 restructuring of CBOT. 
Second, it also means that the 2001 Agreement and the interpretation of 
Article Fifth(b) embodied therein cannot be relied upon to answer the 
further question of whether the exercise right will remain in existence 
following the acquisition of CBOT by CME Holdings, wholly apart from 
those questions raised by the 2005 restructuring. In other words, the 
agreed-upon interpretation that settled the exercise right issues 
raised by CBOT's restructuring and subsequent IPO by its terms applies 
only so long as there is no further change to the structure or 
ownership of CBOT not then in contemplation. Consequently, the fact 
that there would be such a further change upon the effectiveness of the 
acquisition of CBOT by CME Holdings, means that, insofar as issues 
pertaining to the continued availability of the exercise right are 
concerned, the parties are back in the position they were in before 
they reached the settlement reflected in the 2001 Agreement.
    For this reason, and consistent with the position CBOE took when 
confronted with the proposed restructuring of CBOT in 2000, it is 
CBOE's position that the effect of that restructuring of CBOT and the 
subsequent IPO was to eliminate the concept of a member-owner of CBOT 
as that concept was understood when Article Fifth(b) was first adopted 
in CBOE's Certificate of Incorporation, and when it was subsequently 
interpreted in accordance with the 1992 Agreement. The ownership 
interest of CBOT members in CBOT will be further attenuated upon the 
effectiveness of CME Holdings' acquisition of CBOT, when CBOT will 
become a subsidiary of CME Holdings. As explained above, both when the 
exercise right was first created and when it was interpreted in 1992, 
an essential feature of CBOT membership was the ownership rights in 
CBOT held by every CBOT member. Indeed, it was to compensate CBOT 
members for the contributions they made to the development of CBOE as 
the owners of CBOT that the exercise right was created in the first 
place. Consistent with the intended purpose of the exercise right, once 
CBOT members cease to be owners of CBOT, they will cease to be able to 
avail themselves of the exercise right as a means of acquiring 
membership in CBOE.
    This view of the exercise right is consistent with, and indeed is 
mandated by, the interpretation of Article Fifth(b) embodied in the 
1992 Agreement. That interpretation makes it clear that the exercise 
right is held only by individuals who hold one of the 1,402 CBOT 
memberships that were in existence when CBOT members made their 
``special contribution'' to the development of CBOE, or by persons who 
are the delegates of such individuals. Consistent with this 
proposition, Section 3(d) of the 1992 Agreement addresses the 
possibility that CBOT, among other things, may merge or consolidate 
with, or be acquired by, another entity, and establishes three 
conditions that all must be satisfied for the exercise right to remain 
available following any such transaction. These three conditions are:

    1. ``* * * the survivor of such merger, consolidation or 
acquisition (``survivor'') is an exchange which provides or 
maintains a market in commodity futures contracts or options, 
securities, or other financial instruments, and * * *
    2. the 1,402 holders of CBOT Full Memberships are granted in 
such merger, consolidation or acquisition membership in the survivor 
(``Survivor Membership''), and * * *
    3. such Survivor Membership entitles the holder thereof to have 
full trading rights and privileges in all products then or 
thereafter traded on the survivor (except that such trading rights 
and privileges need not include products that, at the time of such 
merger, consolidation or acquisition, are traded or listed, 
designated or otherwise authorized for trading on the other entity 
but not on the CBOT) * * *.''

    If CBOT is acquired by CME Holdings as proposed, not only would all 
three of these conditions not be satisfied, as would be necessary for 
the exercise right to remain available following the acquisition, but 
in fact none of these three conditions would be satisfied. Condition 1 
would not be satisfied because, in the context of Section 3(d) of the 
1992 Agreement, the reference to ``the'' survivor of a merger, 
consolidation or acquisition means the acquiring entity that survives 
the transaction. Here, CME Holdings will be the acquiring entity that 
survives the acquisition, but it is not an exchange.
    Condition 2 would not be satisfied because there will not be 1,402 
holders of CBOT Full Memberships (defined as the 1,402 CBOT full 
memberships that were ``existing'' in 1992) who would be granted 
membership in the survivor. To the contrary, there would not be any 
holders of CBOT full memberships as they existed in 1992, since all of 
these memberships were stripped of their ownership attributes in the 
2005 restructuring of CBOT. Likewise, CME Holdings--the survivor of the 
acquisition and the new owner of CBOT--would not be an exchange and 
would not be capable of granting membership interests in itself to 
anyone. In other words, this condition would allow the exercise right 
to remain in effect following an acquisition of CBOT only if the 
survivor of the acquisition that was the new owner of CBOT were an 
exchange owned by its members, including the former members of CBOT. In 
the case of the proposed CME Holdings acquisition, however, the 
surviving acquirer would not be an exchange, but would be a holding 
company in which many former members of CBOT may have no ownership 
interests whatsoever. Although CBOE has previously interpreted Article 
Fifth(b) to permit it to continue in existence, subject to stated 
conditions, following CBOT's 2005 restructuring and subsequent IPO, the 
2001 Agreement cannot be relied

[[Page 5475]]

upon for any purpose from and after the acquisition of CBOT by CME 
Holdings, for the reasons stated above.
    Even if CBOT is considered to be the survivor of the proposed 
acquisition, Condition 2 would still not be satisfied because, 
following the acquisition, persons who were members prior to the 
acquisition will no longer be members as that term was commonly 
understood when Article Fifth(b) was adopted in 1972 and when it was 
interpreted in 1992. Not only will these persons not be owners of CBOT, 
but, except for trading rights, they will no longer have most of the 
other rights formerly held by members of CBOT. The S-4 registration 
statement filed by CBOT Holdings on December 21, 2006 in respect of the 
proposed acquisition reveals that, following the acquisition, CBOT's 
former Series B-1 members (who prior to the acquisition are the 
``full'' members of CBOT entitled to the exercise right) will lose most 
of their membership rights. Among other things, they will be stripped 
of the right to elect directors and nominating committee members, the 
right to nominate candidates for election as directors, the right to 
call special meetings of members, the right to initiate proposals at 
meetings of members, the right to vote on extraordinary transactions 
involving CBOT, and the right to amend or repeal the bylaws of CBOT. In 
other words, following the acquisition of CBOT by CME Holdings, persons 
who had formerly been the full members of that exchange will simply be 
the holders of trading permits and will not be granted any of the other 
rights commonly associated with membership in an exchange.
    Finally, condition 3 of Section 3(d) of the 1992 Agreement would 
not be satisfied following the acquisition of CBOT by CME Holdings. 
This is because, for the reason stated above in the discussion of 
condition 1, condition 3 contemplates an acquisition where the 
surviving acquirer is an exchange, and it requires that CBOT members 
must have essentially the same full trading rights on that surviving 
exchange as they had on CBOT prior to the acquisition. Here, the 
surviving acquirer would not be an exchange, and for that reason it is 
not possible for CBOT members to have any trading rights on the 
survivor. The conclusion is the same even if CBOE were to look through 
CME Holdings to what will be its two subsidiary exchanges (CME and 
CBOT). Although former CBOT members may be granted trading rights in 
all products traded and to be traded on both of those exchanges, save 
only for those products traded exclusively on CME at the time of the 
acquisition, these rights will no longer be the same ``full'' trading 
rights that were held by CBOT full members in 1992. This is the case 
because, at least in respect of new products to be introduced on CME 
after the acquisition, the trading rights of CBOT members will be 
diluted by the trading rights granted to other persons (i.e., CME 
members) to trade these same products. Once persons who are not members 
of CBOT are granted the right to trade products on the same terms as 
members of CBOT, as would be the case with new products introduced 
following the acquisition of CBOT by CME Holdings, then the trading 
rights inherent in CBOT membership will be reduced from what they were 
prior to the acquisition, and thus cannot support the availability of 
the exercise right to persons who hold those diminished rights.

Conclusion

    Since the conditions of Section 3(d) of the 1992 Agreement will not 
be satisfied following the acquisition of CBOT by CME Holdings, the 
terms of that Section mandate that ``Article Fifth(b) shall not apply'' 
following the acquisition. In other words, once CBOT has been acquired 
by CME Holdings, the exercise right will no longer be available as a 
means of acquiring membership in CBOE.

Transitional Proposal

    To prevent any risk that the loss of exercise members upon the 
termination of the exercise right might adversely affect liquidity in 
CBOE's market, CBOE is prepared to maintain the status quo for some 
period of time after the exercise right has been terminated. This 
result would be accomplished by staying, for an interim period of time, 
the impact of the termination of the exercise right on the trading 
access of those individuals who were exercise members of CBOE on a 
designated cut-off date. This would permit those individuals to 
continue to trade on CBOE in the capacity of CBOE members during that 
interim period.\7\ For this purpose, CBOE proposes the close of 
business on December 11, 2006 as the cut-off date for determining 
whether exercise members would have the right, during the interim 
period, to continue to have trading access to CBOE. Individuals who 
were exercise members of CBOE in good standing on that date would 
continue to be able to trade as members of CBOE during the interim 
period, notwithstanding the above-described effect on the exercise 
right of the acquisition of CBOT, but individuals who were not 
effective exercise members on that date would not be permitted to 
exercise or have trading access to CBOE during the interim period 
without obtaining a separate CBOE membership. This interim period would 
continue for so long as necessary to avoid any disruption to the market 
as a result of the loss of exercise members, which could involve CBOE 
adopting a plan to provide some form of trading access to such persons 
in the absence of the exercise right. Any such plan would be subject to 
the approval of CBOE members under Section 2.1 of the Exchange's 
Constitution, and to the approval of the Commission under Section 19(b) 
of the Act.\8\
---------------------------------------------------------------------------

    \7\ In this respect, the decision to stay the effectiveness of 
what otherwise would result in a termination of trading access is 
analogous to the right of the Exchange under CBOE Rule 3.19. That 
Rule authorizes the Exchange, when the Exchange determines that 
there are extenuating circumstances, to permit a member ``to retain 
the member's status for such period of time as the Exchange deems 
reasonably necessary'' to enable the member to address specified 
problems that otherwise would cause the membership status to 
terminate.
    \8\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\9\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\10\ in particular, in that it 
is a reasonable interpretation of existing rules of the Exchange that 
is designed to promote just and equitable principles of trade, to 
perfect the mechanism of a free and open market, and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 that is 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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to

[[Page 5476]]

90 days of such date if it finds such longer period to be appropriate 
and publishes its reasons for so finding or (ii) as to which the 
Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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:

Electronic Comments

     Use the Commission's Internet comment form http://
www.sec.gov/rules/sro.shtml; or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-CBOE-2006-106 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-CBOE-2006-106. 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 at 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 in the Commission's Public Reference Room. Copies of the filing 
also will be available for inspection and copying at the principal 
office of the Exchange. 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 wish to 
make available publicly. All submissions should refer to File No. SR-
CBOE-2006-106 and should be submitted on or before February 27, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-1828 Filed 2-5-07; 8:45 am]
BILLING CODE 8011-01-P