February 25, 2007
Ms. Elizabeth K. King
Dear Ms. King and Commissioners:
You are, of course, aware of the regulatory history of the CBOE. Every facet of our development, every rule change and our entire management structure has always been under the strict supervision of the commission and its staff.
Frankly, it takes a stretch of the imagination to see how the commission would not take the submission of the above rule SR-CBOE-2006-106 under consideration for approval. If the CBOE were to be so presumptive as to attempt to declare the elimination of the Exercise Right Privilege (ERP) in its present form without a rule filing, the CBOE would certainly expect to hear promptly that the commission claims jurisdiction. The commission's very name carries the word EXCHANGE in its body and it appears in our own name as well.
The fact that this issue is before the courts does not relieve the commission of its responsibility. Historically, there are instances of previous lawsuits against CBOE where the courts determined that the matter before it was justifiably an item of SEC jurisdiction. It was the CBOT that most recently brought legal action, not the CBOE. The CBOT chose a venue where they would have a better chance of blocking the CBOE's plans for demutualization and thus denying CBOE member/owners of the same right of financial gain and independence in the selling of their promised stock that almost every other exchange has accomplished.
Assuming that the commission agrees to consider the rule filing, I would like to make the following comments after briefly describing my personal involvement which I believe you will find pertinent.
My son and I both own CBOT memberships. I have been a member of the CBOT since the time of my twenty first birthday, about fifty six years ago. I was a founding member of the CBOE and had the privilege of making the very first transaction on opening day. I now own two CBOE memberships. It was my honor to serve three, three year terms on the CBOE board of directors and I served two terms as Vice Chairman/Chairman of the Executive Committee.
My history is deep and my memory clear. I was a sitting director of the CBOT from 1969 to early 1973. I attended every directors meeting during that period. Those were the years of development of the CBOE by the CBOT. Fortunately, I have in my possession the prime notebook of various documents that were presented to the CBOT board of directors at the meeting where it was decided to "spin off" the CBOE.
In these documents, there is no mention of equity rights to be retained in CBOE by CBOT members. Access rights, liquidation rights in CBOE assets in case of failure, and how to get back the $750,000 that was thus far invested in development of CBOE were the main topics of discussion. These funds were subsequently repaid. No mention of equity, just access, and access does not mean equity. The CBOT members had access to the CBOE upon exercise of their right. And once "exercised", they had the same rights and obligations as regular CBOE members. Therefore, if the CBOE owners give up their own access rights in the proposed demutualization plan, then access rights no longer exist for anyone including CBOT members.
Finally, let me state that there was much discussion in the CBOT board room during the formative years of CBOE that centered around how CBOE was to be subject to SEC regulation if it was to be granted exchange status. The CBOT did not want to deal with the SEC then, and now, thirty four years later, they still do not want to deal with the SEC.
On the first day of trading in, 1973, the CBOE traded around nine hundred contracts. Now we routinely do two and a half million contracts a day. Somehow you have to believe that even handed regulation had a part in this success.
Lawrence J. Blum