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]
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5472
Federal Register / Vol. 72, No. 24 / Tuesday, February 6, 2007 / Notices
Electronic Comments
• Use the Commission’s Internet
comment form (https://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 (https://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]
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CFR 200.30–3(a)(12).
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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.
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 https://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
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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.
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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.
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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
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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
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1992 Agreement, Section 2(b).
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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).
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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
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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
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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
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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
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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.
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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
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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 https://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 https://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 https://
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.
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]]>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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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 https://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\
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\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).
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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.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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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 https://
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 https://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\
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\11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-1828 Filed 2-5-07; 8:45 am]
BILLING CODE 8011-01-P
