November 28, 2007
November 28, 2007
Office of the Secretariat
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090
Attn: Ms. Nancy M. Morris, Secretary
VIA: Electronic Mail ONLY: Rule-Comments@SEC.gov
RE: FILE NUMBER SR-CBOE-2007-107 and SR-CBOE-2006-106
Ladies and Gentlemen,
I would like to correct some of the inaccuracies in the November 21, 2007 letter from Mr. Norman S. Friedland to the SEC Commissioners.
Mr. Friedland seeks to dismiss my letter by terming it in essence an ad hominem attack on Ms. Joanne Moffic-Silver, who just happens to be the Executive Vice President, the General Counsel, and the Corporate Secretary of the Chicago Board Options Exchange, the very institution that is attempting to extinguish the ownership rights of CBOT Full members in that Exchange.
That Ms. Moffic-Silver should be a staunch advocate for the Exchange that pays her salary should be of no surprise to anyone. As the paid legal advocate for that Exchange, she is, of course, under no obligation to disclose any information to the SEC that may damage their legal position. However, as a member of the CBOT who is unpaid by anyone, I feel compelled to disclose to the SEC Commissioners the truth of the matter concerning the history of the origins of the CBOE when the CBOT Full members (There were no other CBOT members at that time) created that Exchange in 1973.
My complaint is really with the staff at the SEC who have somehow accepted the spurious claims from someone at the CBOE that no membership information exists from before 1975. This is the silliest thing that I have ever heard of, since membership records at the CBOT go all of the way back to its founding in 1848. The SEC staff has thus allowed the CBOE to get away with submitting membership information at the CBOE to be based on those members in existence as of June 30, 1975, some two years after the founding of the Exchange when there were finally more CBOE members than CBOT Exercisers.
It is the old complaint, "Garbage in, garbage out." Ask for the wrong information and you are guaranteed to get it. The trouble is, when you skim the surface of this request, it is easy to see that the Truth falls by the wayside since the SEC will be getting an answer, but not the right answer and surely not the whole truth.
In 1973 the CBOE was created and it was then composed of 1,402 CBOT Full members along with 100 exclusive CBOE seats that were created for those who did not want to trade grains or go through the CBOT membership process. The CBOE came back to the CBOT and requested an additional tranche of memberships, and this second request was granted with the proviso that if the CBOE wanted to create any more CBOE memberships, then they must come back to the CBOT Full members for a vote to get permission to do this. Suffice it to say that the CBOE never asked the CBOT to schedule a vote for permission to do this, and I, as a CBOT Full member at that time, was never able to vote on the expansion of the CBOE membership.
The CBOE started their corporate life in the CBOT member's lounge on the Fourth Floor of our member-owned building at 141 West Jackson Boulevard. As the CBOE grew, the CBOT members, after much discussion, allowed them to reconstruct our main CBOT trading floor so that we lost our ceiling and our original four story ceiling was dropped to a two story level so that the CBOE could conduct business on the seventh floor.
By the way, this cost a lot of money and our doing this also ruined the once perfect acoustics on our trading floor. I was there when they built this monstrosity, and the construction made business difficult for a long time with our sight lines obstructed by steel beams placed everywhere.
The point to be made here is that CBOT Full members not only created the CBOE, but they also gave that Exchange every support necessary to succeed as a viable exchange. Now this is the thanks that we get...
Mr. Friedland goes on to make at least one other error in his letter to the SEC. The CBOE did expand their membership to take away control of their destiny from the CBOT. The numbers do speak for themselves, at least before June 30, 1975 when there were far less than 931 CBOE members. Mr. Friedland can pick the date when the facts suit his argument, but I would argue that if you dig a little deeper into the history of the founding of the CBOE, the SEC would find that his position is incorrect.
Finally, I am somewhat angered by his claim that we always had the right to take over the CBOE by exercising in mass numbers and then voting ourselves back in control. Believe me, we have discussed this many times over the years, but it was made virtually impossible to do this. Mr. Friedland must be well aware of the CBOE 80% rule that stipulates that any change in control of the CBOE governance must pass by an 80% margin. This rule was specifically put in place by the CBOE to prevent just such a thing, which would be an attempt by CBOT Full members to regain control of the CBOE. I hope that it is obvious that the 931 CBOE members would always prevent the 1,402 CBOT members from doing this.
Every other CBOE rule that has ever addressed the corporate relationship of the CBOE to the CBOT has always been done to advantage the CBOE and to disadvantage the Full members of the CBOT. And don't get me started on the millions that we lost promoting the joint trading venture with the CBOE in the late Eighties when they rigged that venture to fall flat on its face.
Carl M. Zapffe,
CBOT Full member 1973
Member CBOT Board of Directors, 1985 - 1991,
Second Vice Chairman, 1991