From: Edward. E. Kessler
Sent: February 13, 2007
Subject: File No. SR-CBOE-2006-106


I am, and have been, a full member of the Chicago Board of Trade (“CBOT”) for over 30 years. After the reorganization of the CBOT in 2005 prior to its initial public offering, I retained my trading rights on the CBOT, all CBOT shares issued to me in that transaction and the exercise right to become a member of the Chicago Board Options Exchange (“CBOE”). I have also been a member of the Chicago Board Options Exchange during various periods of time initially as a purchaser of a membership offered directly by the CBOE in 1973 and subsequently as a CBOT exerciser of the right granted by Article Fifth (b) of the CBOE Certificate of Incorporation.

As the CBOE, the CBOT and numerous interested parties have elsewhere provided reference to the detailed background and written agreements relating to the issues before the Securities and Exchange Commission (“SEC” or the “Commission”), I will not attempt to repeat that 34 year history here. However, I wish to comment upon one aspect of the CBOE portrayal of the facts. The CBOE filing states:

“Although when the 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….” Fed. Reg./Vol 72, No. 24 p.5473

The CBOE then disingenuously describes the manner in which the CBOT membership would be “compensate(d)” for the funds expended and for the risks incurred in financing the creation of the new exchange as though the relationship were merely a loan or advance of funds. In reality, from the very beginning and as promulgated in the Certificate of Incorporation by the vary members of the CBOT, the clear intention was to perpetuate an equity ownership in the CBOE by means of the Article Fifth (b) exercise right. That inalienable right was continuously respected by the CBOE as the child of the CBOT for approximately 20 years, or until the CBOE began a concerted program to void the fundamental relationship between the exchanges.

During that entire period and continuing to this day, all of the Agreements between the parties recognized that equity interest of full members of the Board of Trade, such as myself, and required notices regarding material corporate events such as distributions etc. to allow members of the CBOT to exercise their continuing rights and participate as owners of the CBOE. Now the CBOE would have you believe that the equity interests of CBOT members were not in fact equity, but some kind of “debt” that was voidable through a unilateral “Rule Change”. The motive of the CBOE for pursuing this disingenuous path is plain and simple greed in its attempt to disenfranchise all CBOT full members of their equity interest which, on a cumulative basis, has a value of approximately $1.5 Billion.

For the reasons stated below the Commission should either deny the Rule Change proffered by the CBOE or reserve judgment until the pending litigation between the CBOT and the CBOE in the Federal District Court is resolved.

The Commission should defer consideration of the proposed “Rule Change” for two reasons. Firstly, the matter before the Commission is not ripe as the proposed business combination between the CBOT and the Chicago Mercantile Exchange holding company has not been finalized or closed and therefore any decision by the SEC is premature as the terms, conditions, structure of any transaction may change and indeed, the transaction may never close. Secondly, there is presently existing litigation pending before the Federal District court which pertains explicitly to the questions presented before the Commission. Without detracting in any manner from respect for the jurisdiction, authority or capability of the SEC or its staff, it would appear that the Federal court system would offer greater protections to all parties the preservation of their respect rights and remedies by means of the rules of evidence, depositions, oral testimony etc. through the Federal courts as opposed to any administrative proceeding. Further, the time, effort, and expenditure of Commission resources to intercede in the existing litigation may not serve the interests of the Commission.

A court of equity like the Federal courts may be better equipped to evaluate the issues and take testimony to resolve the issues of fact that exist between the parties. The CBOE has chosen to narrowly interpret the three conditions contained in Section 3 (d) of the 1992 Agreement between the CBOE and the CBOT defining the continuation of the exercise rights of full members of the CBOT. The CBOE has unilaterally concluded that “all three of the conditions (would) not be satisfied” (ibid at P. 5474) by the proposed transaction basing its conclusions on the fact that the proposed transaction contemplates CME Holdings as the surviving entity which is not itself a regulated exchange but rather a holding company for the Chicago Mercantile Exchange. It is suggested that the clear intent of the parties to the 1992 Agreement was to permit the continuation of the exercise rights of full members of the CBOT for a transaction like the one before the Commission and that issues raised by the CBOE create a distinction without a difference. It is a slender thread indeed that the CBOE now hangs its arguments to disenfranchise hundreds of long time CBOT members like myself of membership and trading rights in the absence of due process of law but by means of a spurious “Rule Change”.

For the reasons provided above, the proposed “Rule Change” File No. SR-CBOE-2006-106 should be denied or, in the alternative, deferred until any transaction between the CBOT and CME Holdings is concluded or there is a final resolution of the pending litigation in the Federal courts.


Edward. E. Kessler