Nancy M. Morris
Secretary, Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-1090
February 21, 2007
re: File no. SR - CBOE - 2006 - 106
Dear Sir or Madam,
Please let this writing serve as a comment to the above referenced Proposed Rule Change filed by the Chicago Options Exchange (CBOE). I respectfully request that you defer in ruling on the above proposed rule, as you did when the CBOE submitted a similar proposed rule change in an attempt to have the Exercise Right Privilege (ERP) terminated in 2000 ( i.e. SR - CBOE - 00 - 44). I respectfully submit that deferring would be the appropriate course of action, as elucidated below, because the matter is not yet ripe for your consideration due to an open and active matter concerning the meaning of certain contracts between the CBOE and the Chicago Board of Trade (CBOT) currently pending in the Delaware courts. Furthermore, a careful examination of the arguments offered by the CBOE in their submission will reveal that they are not supported or substantiated by any evidence other than bald assertions of fact nor are they supported by common sense.
In their submission, the CBOE asserts that the Proposed Rule Change has been "made necessary by the proposed acquisition" of the CBOT by the Chicago Mercantile Exchange (CME). They support this assertion with the claim that following such a merger, "there no longer will be individuals who qualify as a member of CBOT within the meaning" of the contracts and agreements that created the ERP. Further, they allege that there would be "disruption to its marketplace" as a result. Leaving aside for a moment that these conclusions are based on one reading (which I might add is subjective, self-interested, inequitable and contrary to the historical understanding) of these agreements, common sense dictates that there is no "necessary" condition that would result in a "disruption" to the CBOE's marketplace. CBOE has other options in dealing with the "status" of CBOT members who have since the inception of the CBOE been allowed to be and trade as members of the exchange, one being, quite clearly that they can allow these individuals to continue to have full rights and access. This would certainly be less disruptive as no change would occur to the operations of the marketplace. In fact, their proposed rule change, even with the interim grandfather period proposed, would serve to remove active traders from the marketplace at the cost of less liquidity and increased volatility. In short, the CBOE proposal itself would create disruption to the marketplace that would not occur if they were to allow individuals to continue to access and trade in the marketplace as members instead of eliminating them, as they propose. Furthermore, it is unsupportable to assert that it would be impossible to determine who these individuals are and would be. There is a limited universe of potential candidates, ever decreasing each time the CBOE purchases an ERP on the open market, which in a recent letter to their membership they acknowledge they may continue to do. It would certainly be less disruptive to monitor the status of the individuals who have already exercised and to fashion new tests for future exercisers following the merger than to eliminate a whole class of market participants. Common sense dictates that the status quo would be less disruptive to the marketplace than their proposed rule change. Finally, if it is deemed best for the marketplace to "eliminate" exercise members or potential exercise members, the CBOE has the means already at their disposal--they can pay for it. As has been pointed out, CBOE has purchased a number of ERP's on the open market. If they have not "retired" as many ERP's as they would like, perhaps the solution is to pay a higher price rather than to embroil the Commission in a contract dispute in an attempt to end run the Delaware courts.
As to their substantive arguments in support of their proposed rule change, most focus, as they should, on Section 3(d) of the 1992 Agreement between the CBOE and the CBOT. I will not attempt to convince you in this writing why their interpretation of this agreement is but one possible and contested interpretation. Common sense dictates that the Commission acknowledge this in light of the pending action in the Delaware courts on these very issues. CBOE by their submission and comment letters attempts to put you in the position of an arbiter of a contest between parties that is the traditional province of State Law, arguing on preemption grounds that the Commission is empowered to do so. I respectfully request that you defer ruling on these issues until they have been fully vetted by the State court which our Federalism has by tradition and the genius of years of jurisprudential development placed in their able hands. I respectfully submit that by deferring, the Commission will further its legislative mandate 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. Deferring will create less disruption to the marketplace, surely in the short term and more than likely in the long term, by allowing the Delaware courts to fully and finally determine the respective rights and duties of the parties to the contracts referenced above and in the CBOE's proposed rule submission.
Before concluding, please allow me to opine as to the real motivations behind the proposed rule submission and what is actually "necessary" to the CBOE and what would be "disruptive" to their interests. If the CBOE wants to follow in the footsteps of the CME, the CBOT and other stock, options and futures exchanges by demutualizing and having a public offering of stock, as they have many times on the public record asserted they intend to do, it needs to be determined who in fact are the current owners of the exchange. Common sense dictates that what is "necessary" for one class of members/owners to have a bigger piece of the pie is to eliminate other contenders to the prize of equity in the form of stock ownership. What would be "disruptive" to the goals of the CBOE in having the whole apple is the possibility of being required to halve it with the other class of owners, i.e. the Full members of the CBOT. These goals may be understandable, but they certainly are not fair, just and equitable, at least from the perspective of that "other class of owners," which includes myself and many members of my family who have been members of the CBOT for over 50 years.
I also ask that you indulge me in a brief summary of my individual situation and how this proposed rule change would act in an unjust, inequitable and unfair manner to me personally. In March of 1997 I purchased a Full membership at the CBOT, which at that time had a significant premium attached to it in part due to the raging bull market that the CBOE was participating in across the street. In fact, when I purchased my membership, I paid an all-time high, which was justified when compared to then current lease rates and delegate fees, i.e. fees paid by a lessee vs. those paid by an owner. As my fellow member Mr. O'Bryan noted in his submission, the lease rates for a CBOT Full membership were well over $8,000.00/month on their way to $10,000.00/month at that time and were not due to active grain markets for which I intended to use my membership. Following the dot com bubble burst, however, membership values and lease rates plummeted, again not primarily as a result of anything at the CBOT or her markets, but in a great part because demand for these memberships for use across the street also plummeted. I believe I have more than paid for my right to participate in any distribution of equity across the street for having ridden out this horrific and near crippling volatility in seat values. It can not be contested that over the years our seat values and lease revenue have been linked because of the heretofore perpetual rights CBOT Full members have had at the CBOE. I find it personally distressing and indicative of greed pure and simple that the CBOE has asked you to effectively disenfranchise an entire class of individuals of their hard earned property rights in your role as market regulator. I beg of you, please do not allow the Commission to be put into that position, it would be an affront to our Federalist system, to traditions of justice, equity and fair-dealing and contrary to common sense.
Thank you in advance for your careful consideration of this comment.
Thomas F. Cashman
CBOT Full Member