From: Dan Frost – Trader for 16 years, CBOE owner since 1989
Sent: February 19, 2007
Subject: File No. SR-CBOE-2006-106

I support the CBOE’s proposed rule change.

The CBOT’s objections to the rule change come on three fronts:

1) The belief they have equity rights in the CBOE (which will be extinguished)

This is the way the founding of the CBOE has been explained to me.

The CBOT DID NOT WANT to have any thing to do with SEC jurisdiction.
The CBOT DID NOT WANT to have to pay double dues or any potential assessments.
The CBOT DID NOT WANT to have any potential liability – either legal or financial.

For this reason, the CBOT did not issue an extra CBOE seat to every CBOT member. They could have done this – but they did not. The CBOT’s main objective was to have an extra opportunity to TRADE when times were slow in the grain pits, with NO RISK. The ERP was a right to trade on either one exchange or the other, and not both at the same time. If the CBOT members owned a CBOE membership – then why not be able to use one and lease the other at the same time? There are too many arguments against the claim of ownership to list.

Now that there is an increased valuation in the CBOE seats and a possible IPO, the CBOT wants to get on the bandwagon and declare their ownership.

I remember a time after one of the market crashes when there was talk of potential class action lawsuits against the CBOE. Sitting in a room with a table of CBOT owners. Boy, were they glad they were not exposed to such a risk like that. Boy, were they glad they didn’t have to answer to the SEC. No talk of owning a piece of the CBOE at that time.

2) The belief that the CME acquisition is just a “name change”

It is ironic that the CBOE was very prompt and cooperative in the 2001 Agreement with the CBOT, which helped lay the groundwork for CBOT’s eventual restructuring. There were concessions made on both sides to allow the CBOT to move forward. Now that there is a whole new proposed ownership structure for the CBOT, the CBOT want to have their cake and eat it also. They want the acquisition to proceed on terms that will maximize their CBOT holdings, completely outside the scope of the 2001 Agreement, and yet still retain their ERP status before the acquisition.

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 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 changes to the ownership of CBOT not contemplated in its 2005 restructuring. (Federal Register/Vol 72, No.24 Tuesday, 2/6/07)

3) The belief that the SEC is not the proper ruling body to decide the ERP.

Again, the CBOT reaffirms their desire to distance themselves from any contact with the SEC. The SEC is the body that regulates the very worth of the ERP. Any changes to dues, fees, and requirements of access rights must be approved by the SEC.

After the 2005 restructuring, any CBOT member who wanted to reap the value of the ERP has had many opportunities to sell the ERP on the open market. Everyone who wanted could have participated in a $100,000 offer from the CBOE. Now that the takeover of the CBOT by the CME will nullify the ERP, this value will eventually be zero. Because of the unknown outcome of certain lawsuits, there is a current market in the ERP. I would suggest any CBOT member who doesn’t want to risk the ERP value going to zero, to sell it now before it is too late. If the CBOT members don’t want to sell the ERP now, they will be assuming the risk of a worthless ERP later. Many times trading I had profits in a trade, never took the profits, only to have the trade become worthless.


Dan Frost