November 10, 2007
From: Carl M. Zapffe,
CBOT Full Member since 1973
November 08, 2007
Office of the Secretariat
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090
Attn: Ms. Nancy M. Morris, Secretary
VIA: Electronic Mail ONLY: Rule-Comments@SEC.gov
RE: FILE NUMBER SR-CBOE-2007-107 and SR-CBOE-2006-106
Ladies and Gentlemen,
This note is in response to the CBOE's submission to the SEC dated November 2, 2007, written by Joanne Moffic-Silver, CBOE Executive Vice President, General Counsel and Corporate Secretary.
Others with a better memory than mine are free to correct me here, but I joined the CBOT in 1973 at the same time the CBOE was formed. At that time 100% of the members of the CBOE were CBOT members who could exercise. Shortly after the formation of the CBOE 100 seats were offered for sale at $10,000 each. Those 100 CBOE seats plus the 1,402 CBOT Full memberships still meant that the CBOE had a composition of as much as 94% of CBOT Full members, assuming that all Full members had exercised. Of course, we hadn't all exercised, but neither had all 100 CBOE offered for sale been sold. The point to be made is that the CBOE was predominantly composed of CBOT Full members for some time after 1973.
There were few takers for an unproven product, so many of these seats languished or were pushed onto CBOT members by their CBOT clearing firms like Shatkin and O'Connor. Even if a CBOT member could buy a CBOE membership, why would we if we could just exercise and conduct business on the CBOE with our own yellow badges?
At the time all of the OTC stock option traders lived in New York, and it took some evidence of financial success of the CBOE options trading to get them to uproot and move to Chicago. We certainly didn't have any option trading expertise in the agricultural community, which was illegal at the time and had been since the 1930's.
Furthermore, leasing was an alien concept in those days, as the CBOT didn't institute leasing until 1982. Few CBOT members realized that a CBOT member could lease out their CBOE seats, and, even if they knew this, what could the rent be if there were many more CBOE seats available for sale?
I won't go into the political machinations at the time, but there was a clear effort to wrest control of the CBOE away from CBOT control by expansion of the CBOE memberships until there were more CBOE members (Read here CBOE voters) than CBOT exercisors. When this happened, the battle was lost and the CBOE captured control of their destiny and entered into the fractious relationship with the CBOT that has existed to this day.
In my opinion, the letter submitted by Joanne Moffic-Silver, Executive VP and General Counsel for the CBOE, is disingenuous at best and an obfuscation of the facts at worst. To jump ahead 2 years to June, 1975 AFTER the CBOE had issued all of these new memberships offers a distorted picture of the events before that time. I blame the SEC for throwing them a hail mary pass to put this mess into its best possible light for the CBOE as if nothing of legal certitude existed before June 30, 1975. For Ms. Moffic-Silver to claim that no CBOE membership and CBOT exercisor records existed before June 30, 1975 is the height of absurdity when CBOT membership records go back to 1848.
Before then when the members of the CBOT still had voting control of the CBOE, the governors of the CBOE promised us members of the CBOT that they would come back to the CBOT to ask for permission to issue more memberships. Needless to say, the CBOE never came back to the CBOT to ask for this permission. I believe that the number of CBOE memberships in extent at that time was in the low several hundreds.
I have been around for as long as the CBOE has been around, and I have never once have seen the CBOE do right by the CBOT and the yellow badge members who brought their exchange to life. They are doubtless trying to screw us once again (please pardon the colloquialism).
I know that this is all ancient history and those who are loyal to the interests of the CBOE will argue that it is irrelevant. Maybe the CBOE will win on the legal arguments and maybe they will win because they are hiding behind the skirts of the SEC, which owes nothing to the CBOT as our exchange is regulated by the CFTC. However, my point will always be that integrity and honor cannot be written in a legal document, and I have never seen an exchange with a corporate history of having less of this than the CBOE.
Carl M. Zapffe,
Full Member of the CBOT since 1973,
Former Second Vice Chairman of the CBOT, 1991, and
former member of the CBOT Board of Directors, 1985 - 1991