[Federal Register Volume 65, Number 223 (Friday, November 17, 2000)]
[Notices]
[Pages 69585-69591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29449]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43521; File No. SR-CBOE-00-44]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
an Interpretation of Paragraph (b) of Article Fifth of Its Certificate 
of Incorporation

November 3, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 31, 2000, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the CBOE. 
On October 10, 2000, the CBOE submitted Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Nancy L. Nielsen, Assistant Corporate 
Secretary, CBOE, to Nancy Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission (October 10, 2000). 
Amendment No. 1 supersedes the original filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE proposes to adopt a rule change consisting of an 
interpretation of Article Fifth of the CBOE Certificate of 
Incorporation, as interpreted in the agreement between the CBOE and the 
Chicago Board of Trade (``CBOT'') dated September 1, 1992 (the ``1992 
Agreement''), which is incorporated in CBOE Rule 3.16(b), concerning 
the effect of the proposed restructuring of the CBOE or other action 
that may be taken by the CBOT to change its trading rules or procedures 
on the right of the 1,402 full members of the CBOT to become members of 
CBOE without having to purchase a CBOE membership (the ``exercise 
right''). The CBOE's proposed rule change also embodies a plan to 
enable CBOE to continue to provide fair and orderly markets in the 
securities traded on the Exchange in the event the exercise right is 
extinguished as a result of action taken by the CBOT. Below is the text 
of the proposed rule change. New language is italicized.

[[Page 69586]]

Special Provisions Regarding Memberships

    Rule 3.16(a)-(b)  No change.

Interpretation and Policies

    .01  Pursuant to and in accordance with the Exercise Right embodied 
in Paragraph (b) of Article Fifth of the Exchange's Certificate of 
Incorporation, every present and future member of the CBOT, ``so long 
as he remains a member'' of CBOT, may be an exerciser member of the 
Exchange. As the Exercise Right has been interpreted in paragraph (b) 
of this Rule and in the 1992 Agreement referred to therein, only 
Eligible CBOT Full Members and Eligible CBOT Full Member Delegates have 
the right to become exerciser members of the Exchange. The 1992 
Agreement defines an ``Eligible CBOT Full Member'' to mean ``an 
individual who at the time is the holder of one of the One Thousand 
Four Hundred Two (1,402) existing CBOT full memberships (``CBOT Full 
Memberships'') and who is in possession of all trading rights and 
privileges appurtenant to such CBOT Full Membership.'' The term 
``Eligible CBOT Full Member Delegate'' is defined in the 1992 Agreement 
to mean ``the individual to whom a CBOT Full Membership is delegated 
(leased) and who is in possession of all trading rights and privileges 
appurtenant to such CBOT Full Membership.'' The 1992 Agreement also 
provides that ``in the event the CBOT splits or otherwise divides CBOT 
Full Memberships into two or more parts, all such parts and the trading 
rights and privileges appurtenant thereto, shall be deemed to be part 
of the trading rights and privileges appurtenant to such CBOT Full 
Membership and must be in the possession of an individual as either an 
Eligible CBOT Full Member or an Eligible CBOT Full Member Delegate in 
order for that individual to be eligible to be an Exerciser Member.'' 
CBOT, which since its inception has been a not-for-profit membership 
corporation, is proposing to demutualize or otherwise restructure so as 
to become a for-profit stock corporation. As a part of that 
restructuring, CBOT has transferred its electronic trading system to a 
new subsidiary. While not part of the current restructuring, CBOT may 
in the future distribute shares in the new subsidiary to CBOT members 
(stockholders), and it may issue additional shares in the new 
subsidiary as a part of a public or private financing. In addition, 
either as part of its restructuring or in a change to its trading rules 
and procedures that it may implement apart from the restructuring, CBOT 
proposes to give direct trading access to the electronic trading system 
to persons who are not now members of CBOT, and to trade all CBOT 
products on the electronic trading system, including its agricultural 
contracts and other products heretofore traded only by CBOT Full 
Members on the CBOT open-outcry trading floor.
    Once CBOT becomes a stock corporation, it will no longer have 
members. Nevertheless, so long as CBOT does no more than convert from a 
membership corporation to a stock corporation without changing its 
trading rules and procedures so as to extend the right to trade CBOT 
products, electronically or otherwise, to persons who are not CBOT full 
members or the stockholder equivalent of such members, CBOE interprets 
its rules to treat persons who become stockholders of CBOT in the 
restructuring as a result of their ownership of one of the 1,402 full 
CBOT memberships (or their delegates) as if they were full members for 
purposes of the Exercise Right. This means that so long as those 
stockholders retain all of the stock and other interests that may be 
distributed to them in respect of their full CBOT memberships and 
continue to hold all of the trading rights and privileges in respect of 
CBOT that they held in their former status as full members of CBOT, 
then those stockholders or their delegates who satisfy the requirements 
of an eligible CBOT Full Member Delegate will be entitled to the 
Exercise Right.
    However, CBOE interprets the Exercise Right to terminate 
immediately for all 1,402 CBOT full members or the stockholder-
equivalent of such members (of their delegates) if, whether as a part 
of a demutualization or other restructuring of CBOT or otherwise, CBOT 
changes its trading rules and procedures so as to extend the right to 
trade all CBOT products, electronically or otherwise, to persons who 
are not CBOT Full Members or the stockholder-equivalents of such 
members (or their delegates) or so that, if the Exercise Right were to 
continue to be available, CBOT Full Members or the stockholder-
equivalents of such members (or their delegates) would be able to trade 
all CBOT products directly on CBOT at the same time as they are trading 
on the Exchange as exerciser-members.
    In the event the Exercise Right is terminated pursuant to the 
preceding paragraph, the Exchange will promptly act to develop and 
propose a plan that will respond to CBOE's ongoing need to be able to 
provide fair and orderly markets in the securities it trades, and at 
the same time will be fair to the 1,402 former members of CBOT who will 
have lost their exercise rights. The plan to be developed by CBOE for 
this purpose will be subject to the approval of the Exchange 
membership, and to the approval of the Securities and Exchange 
Commission.
    During an interim period while this plan is being developed, the 
Exchange shall interpret its rules to stay the impact of the 
extinguishment of the Exercise Right on the trading access of those 
CBOT full members (or their delegates) who were exerciser members of 
the Exchange in good standing as of the close of business on August 28, 
2000 (``grandfathered exercisers'' ), and shall permit such persons to 
continue to be able to trade on the Exchange for the duration of the 
interim period notwithstanding the extinguishment of the exercise 
right. This interim period will extend for at least six months from the 
date the Exchange gives notice to its members that exercise right has 
been extinguished as a result of the restructuring of CBOT or changes 
to CBOT's trading rules or procedures as described above, and for any 
additional period until the Exchange's permanent plan to respond to the 
termination of the Exercise Right has been approved and implemented. 
However, once the Exercise Right is terminated under this 
interpretation, CBOT members or stockholders (or their delegates) who 
were not exerciser members of the Exchange in good standing on August 
28, 2000, shall not be permitted to exercise or have access to the 
Exchange's trading floor during the interim period. In order to 
continue to have trading access to the Exchange during this interim 
period, grandfathered exercisers will be required to maintain their 
status as members or stockholders of CBOT in good standing in 
accordance with the rules of CBOT (or as the delegates of such members 
or stockholders). Among other things, this means that delegates will 
need to remain in compliance with the terms of their CBOT lease 
arrangements.

II. Self-Regulatory Organization's Statements of the Purpose of, 
and Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CBOE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

[[Page 69587]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to provide an 
interpretation of the rules of the CBOE concerning the effect of the 
CBOT's proposed restructuring and of other changes that the CBOT 
proposes to make to the trading rights and privileges of its members on 
the exercise right. The proposed rule change also includes a plan to 
enable the CBOE to continue to provide fair and orderly markets if the 
exercise right is extinguished because of the consummation of certain 
steps of the proposed restructuring of the CBOT or the consummation of 
the other changes to the CBOT's trading procedures.

Background of the Exercise Right

    Paragraph (b) of the Article Fifth of the CBOE's Certificate of 
Incorporation (hereafter, ``Article Fifth(b)'') provides in part that 
``every present and future member of [CBOT] who applies for membership 
in the [Exchange] and who otherwise qualifies shall, so long as he 
remains a member of said Board of Trade, be entitled to be a member of 
the [Exchange] notwithstanding any such limitation on the number of 
members and without the necessity of acquiring such membership for 
consideration or value from the [Exchange], its members or elsewhere.'' 
Paragraph 2(a) of the 1992 Agreement provides that only an individual 
who is an ``Eligible CBOT Full Member'' or an ``Eligible CBOT Full 
Member Delegate'' is a member of the CBOT within the meaning of Article 
Fifth(b). Paragraph 1(a) of the 1992 Agreement defines an ``Eligible 
CBOT Full member'' to mean ``an individual who at the time is the 
holder of one of the One Thousand Four Hundred Two (1,402) existing 
CBOT full memberships (``CBOT Full Memberships'') and who is in 
possession of all trading rights and privileges appurtenant to such 
CBOT Full Membership.'' The term ``Eligible CBOT Full Member Delegate'' 
is defined in Paragraph 1(b) of the 1992 Agreement to mean ``the 
individual to whom a CBOT Full membership is delegated (leased) and who 
is in possession of all trading rights and privileges appurtenant to 
such CBOT Full Membership.'' (Emphasis supplied in both definitions.) 
Paragraph 2(b) of the 1992 Agreement also provides that ``in the event 
the CBOT splits or otherwise divides CBOT Full Memberships into two or 
more parts, all such parts, and the trading rights and privileges 
appurtenant thereto, shall be deemed to be part of the trading rights 
and privileges appurtenant to such CBOT Full Membership and must be in 
possession of an individual as either an Eligible CBOT Full Member or 
an Eligible CBOT Full Member Delegate in order for that individual to 
be eligible to be an Exerciser Member.''
    These provisions reflect an underlying intent that CBOT members 
must choose at any given time to use their CBOT membership to trade 
either on the CBOT or (by exercise) on the CBOE, but not on both 
exchanges at the same time. This fundamental principle has driven the 
way in which the exercise right has been interpreted as the CBOT's 
trading procedures have evolved over the years. When the exercise right 
was first included in the CBOE's Certificate of Incorporation as a 
right belonging to CBOT members, the concept of exchange membership, on 
the CBOT as on all exchanges, embraced the indivisible coupling of 
trading access and ownership. All of CBOT's owners had the right to 
trade there, and the only persons who had the right to trade on the 
CBOT were its owners. The traditional integration of access and 
ownership embodies in the concept of membership was subsequently 
attenuated, when ``seat-leasing'' was permitted on the CBOT in the late 
1970s and when the CBOT proposed to allow its members to split the 
trading rights of its members by issuing evening trading permits. In 
each of these cases, Article Fifth(b) was interpreted so as to preserve 
the original intent of the exercise right. In the case of seat leasing, 
the CBOE interpreted its rules to provide that only the delegate 
(lessee) of a CBOT membership who held all of the trading rights 
appurtenant to full membership would be able to exercise, and that the 
owner of the CBOT membership, by giving up his trading rights to a 
delegate, has lost the right to exercise. In response to evening 
trading permits and other split-ups of the trading rights of CBOT 
members, the CBOT and the CBOE agreed in Paragraph 2(b) of the 1992 
Agreement that, in the event of any such a split-up or division of CBOT 
Full Memberships into two or more parts, ``all such parts, and the 
trading rights and privileges appurtenant thereto, * * * must be in the 
possession of an individual as either an Eligible CBOT Full Member or 
an Eligible CBOT Full Member Delegate in order for that individual to 
be eligible to be an Exerciser Member [of CBOE].'' [Emphasis supplied].
    The common thread in each of these situations is that full CBOT 
members must choose at any given time whether to use their CBOT 
memberships to trade CBOE products and, while they are doing so, not to 
trade CBOT products. In other words, the exercise right consistently 
has been interpreted as imposing a practical cost on its use, because a 
CBOT member must be willing to give up trading access to CBOT products 
during any time that member is trading on the CBOE as an exerciser 
member. It always has been a fundamental assumption of the exercise 
right that this constraint, together with the related difficulties in 
managing the risk of trading while moving back and forth between the 
CBOT and the CBOE floors, would limit the number of exerciser members. 
In fact, over the past twenty years the number of full CBOT members (or 
delegates) who have been exerciser members of CBOE has fluctuated 
between approximately 450 and 700 individuals. In other words, at least 
50% of the CBOT full members (or delegates) eligible to exercise at any 
given time have chosen not to do so, and instead have chosen to trade 
(or to lease the right to trade) as members of CBOT only. A principal 
purpose of the 1992 Agreement was to prevent any division either of the 
trading rights and privileges appurtenant to a CBOT full membership or 
of any division of the CBOT full membership itself from nullifying the 
practical cost associated with the use of the exercise right.

CBOT's Restructuring Proposal and Changes to Electronic Trading 
Procedures

    Recently, the CBOT has proposed to its members a major 
restructuring of the CBOT that, if implemented, the CBOE believes will 
conflict with the terms and the purpose of the exercise right. The CBOT 
described its proposed restructuring in a ``Restructuring Report'' 
distributed to the CBOT membership on May 16, 2000,\4\ and in ballot 
materials distributed to CBOT members on June 1, 2000, in connection 
with a membership vote on the first step of the restructuring, and the 
CBOT described a modified proposal in a letter to its members dated 
September 21, 2000.
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    \4\ See CBOT Restructuring Report (May 16, 2000).
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    As described in these materials, the CBOT's restructuring consists 
of a number of separate but related steps. The first step, which has 
already been accomplished, was to change the state of incorporation of 
the CBOT from Illinois to Delaware, while continuing to preserve the 
status of the CBOT as a not-for-profit membership corporation.\5\
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    \5\ The CBOE has stated that it will not take any action to 
limit the exercise right if the CBOT implements no more than this 
step of the restructuring. See Letter dated June 29, 2000, from 
Thomas A. Bond, Vice-Chairman of CBOE, to David Brennan, Chairman of 
CBOT, enclosing CBOE Information Circular IC00-64.

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[[Page 69588]]

    The next step of the proposed restructuring, which also appears to 
have taken place, was the creation of a new, for-profit stock 
subsidiary of the CBOT, to which the CBOT has transferred its 
electronic trading system and related rights and obligations. These 
rights and obligations previously were held by a partnership (the Ceres 
Partnership), of which the CBOT was the sole general partner. The new 
electronic trading subsidiary owns and operates an electronic trading 
system for the trading of those CBOT products previously traded on the 
electronic trading system of the Ceres Partnership. This subsidiary 
proposes ultimately to trade all CBOT products.\6\ In particular, the 
CBOT Restructuring Report states not only that ``CBOT members will be 
afforded full trading rights and privileges to trade at the electronic 
trading company,'' but also that nonmembers of the CBOT, wherever 
located, ``will not be required to own seats or any other type of 
membership interests in order to utilize directly the electronic 
trading platform.'' \7\
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    \6\ See CBOT Restructuring Report (May 16, 2000), at p. 12.
    \7\ See CBOT Restructuring Report (May 16, 2000), at pp. 12 and 
14.
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    In other words, CBOT members no longer would enjoy exclusive access 
to trade CBOT products. Through this reformulated electronic trading 
platform, nonmembers would have equivalent access to trade CBOT 
products that previously could be traded only by and through members. 
The reformulated electronic trading facility apparently also would 
afford CBOT members (or their delegates) the ability to trade CBOT 
products at the same time as they are trading on the CBOE pursuant to 
the exercise right.
    According to CBOT's materials, the next step of the CBOT's 
restructuring will be to change the form of organization of CBOT from a 
not-for-profit membership corporation to a for-profit stock 
corporation. When this has been accomplished, persons who had been 
members of the membership corporation will become stockholders of the 
stock corporation, in exchange for their membership interests in the 
CBOT. In the proposed restructuring that was described in June 2000, 
the CBOT stated that shares in the electronic trading subsidiary would 
be distributed to the former members of CBOT, either concurrently with 
the change of CBOT from a membership to a stock corporation or shortly 
thereafter. This action was to be followed by a public offering of 
additional shares in the electronic trading company. As more recently 
described in a September 21, 2000 letter from the Chairman of the Board 
to CBOT members, it now is proposed by CBOT that the electronic trading 
company would remain a wholly-owned subsidiary of CBOT after CBOT 
changes from a membership to a stock corporation. However, the CBOT 
still would continue to evaluate its ownership structure and consider 
whether to separately offer shares in the two companies or otherwise to 
separate their ownership in the future. Regardless of whether the 
electronic trading company remains a wholly-owned subsidiary of CBOT or 
its shares are distributed to persons other than CBOT, it appears from 
the CBOT materials, as part of the restructuring or concurrently with 
its implementation, the CBOT proposed to utilize the electronic trading 
company to provide comprehensive electronic access to trade CBOT 
products to individuals who are not CBOT members.\8\
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    \8\ As discussed below, the CBOT recently also proposed, 
independent of any restructuring proposal, to provide complete 
electronic access to trade its agricultural contracts by allowing 
them to be traded for the first time on the CBOT's electronic 
trading facility.
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    These next steps of the restructuring, whether they consist only of 
the change to a for-profit stock corporation or also include the 
distribution of shares in the electronic trading subsidiary, are 
subject to one or more votes of the CBOT membership. According to the 
CBOT materials, these steps also are subject to applicable regulatory 
approvals from the Commodity Futures Trading Commission and the 
Commission. As of June 1, 2000, the CBOT anticipated implementing all 
of the steps of the restructuring prior to the end of the current year. 
Although the statements made by CBOT officials in announcing the 
revised restructuring in September did not mention any specific dates 
for implementing the next step of the restructuring, it was represented 
that the change in strategy would accelerate the process of 
demutualizing CBOT.
    After announcing its revised restructuring plan, the CBOT also 
announced, in a letter dated September 20, 2000, from the Chairman of 
CBOT to the CBOT members, that its Board of Directors had approved a 
major change in the way in which all of CBOT's agricultural contracts 
would be traded, subject to the change being approved by a vote of the 
CBOT members. This change would result in all of CBOT's agricultural 
contracts, which heretofore have been traded only by CBOT full members 
by open-outcry on the CBOT trading floor, being traded during all of 
the CBOT's hours of operation on the electronic trading system, side-
by-side with trading in the CBOT's open-outcry market. Although the 
details of this change have not yet been communicated, the September 20 
letter stated that it was being proposed to ``satisfy member and 
customer demand for increased access to these products.''

The Effect of CBOT's Proposed Changes on the Exercise Right

    If and when the CBOT implements the restructuring proposal 
described above and the proposed grant of electronic access to trade 
its products, including its agricultural contracts, the following 
changes will have been effected: (1) the CBOT no longer will be a 
membership corporation, but instead will be a stock corporation, with 
its former members as its stakeholders; (2) the CBOT's electronic 
trading system, formerly a member-access only system owned and operated 
by a partnership of which the CBOT was the general partner, will be an 
open-access system owned and operated by a for-profit subsidiary of the 
CBOT, although the CBOT thereafter may distribute the shares of that 
subsidiary to CBOT members or other persons; (3) all CBOT products will 
be traded side-by-side on the existing open-outcry trading floor (as 
long as that market continues to operate) and on the open-access 
electronic trading system; and (4) members of the CBOT no longer will 
enjoy exclusive access to trade directly all products traded on the 
CBOT because persons who are not members will now be able to trade 
directly all CBOT products through the CBOT's electronic system. Even 
if the CBOT implements only the modification to the way in which 
agricultural contracts are traded, without restructuring as a for-
profit stock corporation, the right to trade these contracts, which 
formerly was limited to CBOT full members on the CBOT trading floor, 
will then be shared with all persons who have access to the new 
electronic trading facility.
    The proposed restructuring of the CBOT and the proposed 
modification of the way in which agricultural products are traded will 
extinguish the exercise right, whether implemented together or 
separately. First, as already noted, after the CBOT restructures as a 
for-profit stock corporation, the CBOT no longer will have members, 
because the CBOT will no longer be a membership corporation. 
Accordingly, with specific reference to Article Fifth(b) of the CBOE 
Certificate of Incorporation, no person

[[Page 69589]]

any longer will be within the category of ``present and future 
members'' of the CBOT who, for ``so long as he remains a member'' is 
entitled to avail himself of the exercise right. Moreover, by 
destroying its membership structure, the CBOT will have made it 
impossible for its former members to hold ``all trading rights and 
privileges appurtenant to such CBOT Full Membership,'' a requirement 
that Paragraphs 1(a) and 2(b) established as a fundamental prerequisite 
to the continued existence of the exercise right.
    Second, once the CBOT's electronic trading facility may be accessed 
directly by nonmembers of the CBOT for the trading of CBOT products 
that previously could be traded only by CBOT members, CBOT members (or 
their delegates) will have lost a key ``privilege'' of membership 
within the meaning of the 1992 Agreement--namely, the privilege of 
being able to trade CBOT products to the exclusion of nonmembers. A 
``privilege'' is defined as a ``particular and peculiar benefit or 
advantage enjoyed by a person, company, or class, beyond the common 
advantages of other citizens'' or a ``peculiar right, advantage * * * 
[or] power.'' \9\ Under this definition, the exclusive access of CBOT 
members to trade CBOT products is a ``privilege,'' in that it is a 
``particular or peculiar benefit or advantage'' that members enjoy and 
that is ``beyond the common advantages'' of nonmembers. The CBOT 
members therefore will have lost an important ``privilege'' of 
membership once the electronic trading facility is made available to 
nonmembers for the trading of CBOT products. Because CBOT members no 
longer will possess all of the ``rights and privileges appurtenant'' to 
their memberships, CBOT members will cease to meet the definitions of 
either an ``Eligible CBOT Full Member'' or an ``Eligible CBOT Full 
Member Delegate,'' the only categories of persons who are entitled to 
become a member of CBOE pursuant to the exercise right.
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    \9\ See Black's Law Dictionary at 1197 (6th Ed. 1990).
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    Notwithstanding that the change from a membership to a stock 
corporation would provide a sound basis for considering the exercise 
right to be extinguished, the CBOE does not interpret the exercise 
right as having been extinguished if the CBOT only takes this single 
reorganizational step. While the taking of this step and the consequent 
elimination of members of CBOT is inconsistent with the terms of 
Article Fifth(b) and the 1992 Agreement, the CBOE does not interpret 
Article Fifth(b) and the 1992 Agreement so that this step, by itself, 
will cause the termination of the exercise right, so long as the CBOT 
takes no further action to erode what has been the trading rights and 
privileges of its former members. Instead, if the CBOT does no more 
than to change from a Delaware not-for-profit membership corporation to 
a Delaware for-profit stock corporation and if the 1,402 CBOT full 
members thereby become stockholders of CBOT, the CBOE proposes to treat 
such persons in precisely the same way that full CBOT members are 
currently treated. This means that those 1,402 stockholders of CBOT 
would remain entitled to the exercise right if they retain all of the 
stock in CBOT and all other interests that may be distributed to them 
in respect of their full CBOT memberships and if they continue to hold 
all of the trading rights and privileges that they previously held as 
full CBOT members. Similarly, the CBOE proposes that delegates of all 
of the trading rights and privileges appurtenant to full CBOT 
membership (but not the delegating stockholder) would also continue to 
be entitled to the exercise right.
    However, whether occurring when or after the CBOT becomes a stock 
corporation, and once the right to trade all CBOT products is made 
available to persons who are not CBOT members (or stockholders), the 
CBOE interprets the exercise right as being extinguished, because the 
CBOT would no longer have members and because the CBOT stockholders 
would no longer possess all of the trading rights and privileges 
appurtenant to membership. Moreover, even if the CBOT does not 
restructure as a stock corporation, the exercise right would be 
extinguished once CBOT members lose this privilege of exclusive access 
to trade CBOT products.\10\
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    \10\ Regardless of the effect of these developments on the 
exercise right, the CBOE believes that the exercise right would be 
extinguished with respect to those CBOT members who fail to continue 
to possess all of the interests in the CBOT that may have been 
distributed in respect to their CBOT memberships, including 
interests in CBOT's electronic trading facility, as required by 
Section 2(b) of the 1992 Agreement regarding the division of CBOT 
membership into separate parts.
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    As set forth above, these interpretations follow from, and are 
consistent with, not only the language of Article Fifth(b) as 
interpreted in the 1992 Agreement, but also the way in which the 
exercise right is intended to operate. In particular, the underlying 
purpose and intent of the exercise right has been that CBOT members 
need to choose at any given time to use their CBOT membership to trade 
either on the CBOT or (by the exercise right) on the CBOE, and may not 
trade on both exchanges at the same time. Because the exercise right 
has been interpreted to require CBOT members to make this choice, there 
has been a practical cost associated with the exercise right and 
therefore a natural constraint on the number of people who exercise.
    However, the CBOT proposes a restructuring and a change in its 
trading rules or procedures as a result of which, CBOT membership no 
longer would be needed to trade CBOT products directly. If the exercise 
right were to survive such changes, CBOT members (or stockholders) 
would no longer have to choose at any given time between trading CBOT 
products as members or stockholders of that exchange or trading CBOE 
products as exerciser members of the CBOE. Instead, if the exercise 
right were not extinguished in the face of these changes, it is 
probable that all 1,402 of the present full members of CBOT, or their 
lessees, would chose to exercise to trade on the CBOE, since they could 
do so while retaining trading access to all CBOT products by means of 
the electronic trading facility.
    Not only would this scenario be inconsistent with the language and 
purpose of Article Fifth(b) and the 1992 Agreement, it would inflict 
serious harm on the CBOE. First, it would undermine CBOE's ability to 
maintain a fair and orderly market. Instead of there being 
approximately 1,600 members trading on CBOE (the current 700 exercisers 
plus the approximately 900 persons who own a CBOE membership directly, 
or their lessees), there would likely be 2,300 persons having direct 
access to CBOE. This would strain CBOE's facilities to the breaking 
point, as it would lead to far more persons having direct access to the 
CBOE trading floor than the floor and its facilities are capable of 
accommodating. This development therefore would be inconsistent with 
the maintenance of fair and orderly markets on CBOE. Second, the 
addition of 700 additional CBOE members would allow the exercise right 
to dilute the value of CBOE memberships substantially in a way that has 
never been contemplated or allowed since the time the exercise right 
was first established.
    Thus it is clear both as a matter of interpreting the language of 
Article Fifth(b) and the 1992 Agreement and of implementing the 
purposes intended to be served thereby, and in order to maintain the 
CBOE as a fair and orderly securities market, the exercise right should 
be extinguished once the CBOT restructures or otherwise changes its 
trading rules or procedures so as to deprive its full members of the 
exclusive trading access to its products,

[[Page 69590]]

which has been one of the rights and privileges appurtenant to 
membership. \11\
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    \11\ Before or after the CBOT implements those steps of its 
restructuring or those changes to its trading rules or procedures 
that cause the exercise right to be extinguished in accordance with 
the rules interpretation reflected in this filing, the CBOE believes 
that it is possible that CBOT will take (or, unknown to the CBOE, 
may already have taken) other actions that raise independent 
questions concerning the continued existence of the exercise right 
that are not addressed in this filing. These steps may or may not be 
part of the restructuring, or the CBOT may further revise its 
proposed restructuring in ways that this filing does not address. If 
any such event makes it necessary for the CBOE to further interpret 
its rules applicable to the exercise right, CBOE proposes to do so 
pursuant to one or more separate filings (or amendments to this 
filing) under Section 19(b)(1) of the Act. 15 U.S.C. 78s(b)(1).
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Transitional Proposal

    Just as adding 700 more persons to the floor of the CBOE would tax 
its physical space and resources beyond the breaking point, so too 
would the overnight elimination of some 700 exerciser members from the 
CBOE trading floor run the risk of disrupting its market. This result 
would follow because there suddenly would be 700 fewer persons on the 
floor acting either as market makers to provide liquidity and 
continuity for the CBOE market, or as brokers to represent customer 
orders. To prevent this risk of disruption to its market, CBOE believes 
that notwithstanding the extinguishment of the exercise right upon the 
implementation of changes described above, the CBOE must be able to 
allow CBOT members or their lessees who are already exerciser members 
of the CBOE to continue to have trading access to the CBOE for an 
interim period. The CBOE proposes to stay for an interim period the 
impact of the extinguishment of the exercise right on the trading 
access of those members of CBOT (or their delegates) who were exerciser 
members of the CBOE on a designated cut-off date, by permitting such 
persons to continue to be able to trade on the CBOE during this interim 
period. \12\ For this purpose, the CBOE proposes the close of business 
on August 28, 2000, as the cut-off date for determining who would have 
the right to continue to have trading access to the CBOE during the 
interim period. CBOT members (or their delegates) who were exerciser 
members of CBOE in good standing on that date (``grandfathered 
exercisers'') would continue to be able to trade as members of the CBOE 
for the duration of the interim period, notwithstanding the 
implementation of any step of the CBOT restructuring or other change to 
its trading rules or procedures that has the effect of extinguishing 
the exercise right as described above. However, persons who were not 
effective exercisers on that cut-off date would not be permitted to 
exercise or have access to the CBOE trading floor during the interim 
period. In order to continue to have trading access to CBOE during this 
period, grandfathered exercisers would be required to maintain their 
status as full members of the CBOT or as holders of all of the stock 
distributed to them in respect of full CBOT memberships (or as the 
delegates of such members or stockholders) in accordance with the rules 
of CBOT. Among other things, this means that delegates would need to 
remain in compliance with the terms of their CBOT lease arrangements.
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    \12\ In this respect, the decision to stay the effectiveness of 
what would otherwise result in a termination of trading access is 
analogous to the right of the CBOE under CBOE Rule 3.19 (formerly 
CBOE Rule 3.17) (``Obligation of Terminating Members''). This rule 
authorizes the CBOE, under circumstances when a membership would 
otherwise automatically terminate on account of a failure to satisfy 
certain requirements of membership, to permit the member ``to retain 
the member's status for such period of time as the Exchange deems 
reasonably necessary'' to provide time to cure the failure.
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    During the interim period when grandfathered exercisers would be 
allowed to have trading access on CBOE even after the exercise right 
has been extinguished, the CBOE would propose a permanent response to 
the situation presented by the extinguishment of the exercise right. 
This permanent response would address the CBOE's ongoing need to be 
able to provide fair and orderly markets in the securities it trades 
and would be fair to the 1,402 former members of the CBOT who will have 
lost their exercise rights. This interim period would extend for six 
months from the date the CBOE gives notice that the exercise right has 
been extinguished in accordance with the interpretation of Article 
Fifth(b) and the 1992 Agreement as described above, and for such 
additional period as may be needed to develop and implement a permanent 
response to the extinguishment of the exercise right. The permanent 
response would be subject to the approval of the CBOE members under 
Section 2.1 of the CBOE's Constitution, and to the approval of the 
Commission under Section 19(b)(1) of the Act.\13\
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    \13\ 15 U.S.C. 78s(b)(1).
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2. Statutory Basis
    The CBOE believes that the proposed rule change is consistent with 
and furthers the objectives of Section 6(b) of the Act in general,\14\ 
and in particular, with Section 6(b)(5) of the Act,\15\ in that it is a 
reasonable interpretation of existing rules of the Exchange that is 
designed to promote just and equitable principles of trade, to perfect 
the mechanisms of a free and open market, and to protect investors and 
the public interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The CBOE has neither solicited nor received written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 99 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so funding or (ii) as to 
which the CBOE consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should fix six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
CBOE. All submissions should refer to the File No.

[[Page 69591]]

SR-CBOE-00-44 and should be submitted by December 8, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29449 Filed 11-16-00; 8:45 am]
BILLING CODE 8010-01-M