From: Michael D. Morelli
Securities and Exchange Commission
Attn: Nancy M. Morris, Secretary
Re: File No. SR-CBOE-2006-106
Dear Ladies and Gentlemen,
File No. SR-CBOE-2006-106, in my opinion is about a contractual agreement. The Chicago Board Options Exchange (CBOE) is trying to renege and invalidate a contractual agreement that dates bake to the inception of the CBOE.
The Chicago Board of Trade (CBOT) Full Members founded the CBOE, underwrote all the costs, guaranteed the debt, provided floor trading space, and were the original traders/market makers that gave the Exchange its original legitimacy. The Exercise Right Privilege (ERP) was the vehicle that provided early liquidity (market functionality), transparency and price discovery there by guaranteeing the viability of the CBOE. Now, as in the past, the CBOE wants to renege on its original contract with the CBOT. The SEC has to find that the ERP has been a significant contributor to the success of the CBOE, the functioning of its markets and management, and should be rewarded accordingly. Eliminating the ERP participation will dramatically and negatively impact the CBOE. The SEC should deny the CBOE request for a rule change per File No. SR-CBOE-2006-106.
In November 2000 the Chicago Board of Options Exchange (CBOE) filed a rule change with the Securities and Exchange Commission (SEC - File No. SR-CBOE-00-44) claiming that if the Chicago Board of Trade (CBOT) restructures as a for profit company, any Full Member that sells any stock in the for- profit company would lose his Exercise Right Privilege (ERP), even if that Member holds the same trading rights and privileges as today. In addition, the CBOE claims the ERP will end "immediately" if the CBOT changes its trading rules and procedures, whether or not as a result of restructuring. The SEC, at that time, denied the CBOE request for a rule change.
Now in December 2006 the CBOE filed with the SEC (File No. SR-CBOE-2006-106) a rule change seeking to terminate the right of Full Members of the CBOT to become members of the CBOE pursuant to an ERP granted to CBOT Full Members under the CBOE's charter. The filing claims that the CBOE seeks to terminate the ERP upon consummation of the proposed merger between CBOT Holdings and CME Holdings. It further states that the CBOE will allow CBOT members who have already exercised to continue trading at the CBOE for an unidentified "interim period of time" following the merger. However, the CBOE also proposes that individuals who were not effective exerciser members of the CBOE on December 11, 2006 will not have trading access to the CBOE during this "interim period" and thereafter.
This issue is about the contractual agreement set forth by the CBOE and the CBOT in 1973. To negate this contract with a rule change by the SEC will set a very dangerous precedent, perhaps allowing other entities involved mergers and acquisitions to back out of obligations and agreements as it suits their needs. This contract is still valid and an enforceable agreement.
The SEC needs to deny this rule change or risk the consequences that a contrary ruling will hold for future contract law.
Michael D. Morelli
Member of the Chicago Board of Trade since 1977