[Federal Register Volume 70, Number 66 (Thursday, April 7, 2005)]
[Notices]
[Pages 17732-17738]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1587]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51463; File No. SR-CBOE-2005-19]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Proposed Rule Change and Amendment No. 1 
Thereto Relating to an Interpretation of Paragraph (b) of Article Fifth 
of Its Certificate of Incorporation and an Amendment to Rule 3.16(b)

March 31, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 7, 2005, the Chicago 
Board Options Exchange, Incorporated (``CBOE'' or the ``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 March 28, 2005, the Exchange 
submitted Amendment No. 1 to the proposed rule change.\2\ 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\ Due to a pending motion to reconsider the Commission's 
approval of SR-CBOE-2004-16, which was submitted on March 7, 2005, 
Amendment No. 1 removed certain language from the text of CBOE Rule 
3.16(b) that was included with the original filing to reflect the 
stay of effectiveness of the text added by SR-CBOE-2004-16 pending a 
final Commission determination of the motion to reconsider. 
Accordingly, Amendment No. 1 revised the proposed rule change to 
reflect the text of CBOE Rule 3.16 as currently in effect, without 
the language added to the Rule by SR-CBOE-2004-16, and as it is 
proposed to be modified by the current rule filing. Amendment No. 1 
also adds Exhibit 3d to the filing, which consists of an opinion 
letter received by CBOE from its special Delaware counsel that 
pertains to the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change consists of an interpretation of paragraph 
(b) of Article Fifth of the Certificate of Incorporation of the CBOE 
pertaining to the right of the 1,402 Full Members of the Board of Trade 
of the City of Chicago, Inc. (``CBOT'') to become members of CBOE 
without having to purchase a CBOE membership (paragraph (b) of Article 
Fifth of CBOE's Certificate of Incorporation is referred to as 
``Article Fifth(b),'' and the right of CBOT Full Members to become 
members of CBOE as described therein is referred to as the ``Exercise 
Right''). This interpretation of the Exercise Right is embodied in an 
Agreement dated August 7, 2001, (``2001 Agreement'') between CBOE and 
the CBOT as modified by a Letter Agreement among CBOE, CBOT Holdings, 
Inc. (``CBOT Holdings'') and CBOT dated October 7, 2004 (the ``October 
2004 Letter Agreement''), and it is reflected in a related amendment to 
CBOE Rule 3.16.
    The 2001 Agreement as modified by the October 2004 Letter Agreement 
represents the agreement of the parties concerning the nature and scope 
of the Exercise Right following the consummation of a proposed 
restructuring of CBOT and in light of the expansion of the CBOT's 
electronic trading system. The 2001 Agreement as modified incorporates 
CBOE's interpretation concerning the operation of Article Fifth(b) in 
light of these changed circumstances at CBOT. That interpretation, 
together with a proposed amendment to Rule 3.16, constitutes the 
proposed rule change that is the subject of this filing.
    In a Letter Agreement among CBOE, CBOT Holdings and CBOT dated 
February 14, 2005 (the ``February 2005 Letter Agreement''), the parties 
confirmed that the proposed restructuring of the CBOT as described in 
Amendment 13 to the registration statement filed by CBOT Holdings and 
CBOT on Form S-4 under the Securities Act of 1933 as amended at that 
time, which was the last substantive amendment to the registration 
statement before it was declared effective by the Commission on that 
date, constitutes the CBOT restructuring for purposes of the 2001 
Agreement and CBOE's interpretation of Article Fifth(b) embodied 
therein. The 2001 Agreement as modified and clarified by the October 
2004 Letter Agreement and the February 2005 Letter Agreement is 
referred to herein as the ``2001 Agreement as amended.'' The text of 
the 2001 Agreement is attached as Exhibit 3a to the CBOE's Form 19b-4, 
the text of the October 7, 2004 Letter Agreement is attached as Exhibit 
3b to the CBOE's Form 19b-4, the text of the February 14, 2005 Letter 
Agreement is attached as Exhibit 3c to the CBOE's Form 19b-4, and the 
opinion letter of CBOE's special Delaware counsel is attached as 
Exhibit 3d to the CBOE's Form 19b-4. The text of the proposed rule 
change, including the above-referenced Exhibits and Amendment No. 1, is 
available on CBOE's Web site (http://www.cboe.org/Legal/SubmittedSECFilings.aspx), at the CBOE's Office of the Secretary, and 
at the Commission's Public Reference Room.

[[Page 17733]]

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

    In its filing with the Commission, 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.

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 CBOE as set forth in paragraph (b) of 
Article Fifth(b) concerning the effect on the Exercise Right of a 
proposed restructuring of the CBOT and the expansion of electronic 
trading on the CBOT and the CBOE. The source of the Exercise Right is 
Article Fifth(b), which provides in part that ``every present and 
future member of [CBOT] who applies for membership in the [CBOE] 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 [CBOE] 
notwithstanding any such limitation on the number of members and 
without the necessity of acquiring such membership for consideration or 
value from the [CBOE], its members or elsewhere.'' This filing does not 
propose to amend Article Fifth(b), but only to interpret how it should 
apply in circumstances that were not envisioned at the time Article 
Fifth(b) was adopted and therefore were not addressed in the language 
of that Article.
    This is not the first time Article Fifth(b) had to be interpreted 
by CBOE in response to unanticipated changed circumstances at CBOT. 
CBOE previously interpreted that Article in accordance with an 
agreement between CBOE and CBOT dated September 1, 1992, (the ``1992 
Agreement''), parts of which are incorporated in CBOE Rule 3.16(b).\3\ 
The interpretation embodied in the 1992 Agreement served to resolve a 
dispute between CBOE and CBOT concerning the effect on the Exercise 
Right of action taken or proposed to be taken by CBOT at that time to 
unbundle certain of the trading rights held by CBOT members, to issue 
transferable evening trading permits to its members, and to allow CBOT 
members to ``delegate'' (i.e., lease) the trading rights associated 
with their memberships. In CBOE's view, these actions had distorted and 
could further distort the traditional integration of access and 
ownership that was embodied in the concept of exchange membership as it 
existed when the Exercise Right was created.
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    \ 3\ The interpretation of Article Fifth(b) embodied in the 1992 
Agreement and an amendment to Rule 3.16 referring to the 1992 
Agreement were approved by the Commission in Securities Exchange Act 
Release No. 32430. See Securities Exchange Act Release No. 32430 
(June 8, 1993), 58 FR 32969 (June 14, 1993) (File No. SR-CBOE-92-
42).
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    To preserve what CBOE considered to be the original intent of the 
Exercise Right in light of these changed circumstances, Article 
Fifth(b) was interpreted in the 1992 Agreement so that only an 
individual who is an ``Eligible CBOT Full Member'' or an ``Eligible 
CBOT Full Member Delegate'' would be considered to be a member of the 
CBOT within the meaning of Article Fifth(b). The 1992 Agreement defined 
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'' 
was 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 provided that in the event of any 
division of the trading rights and privileges appurtenant to a CBOT 
Full Membership or any division of the CBOT Full Membership itself, a 
CBOT member retained the right to exercise only if he held all of the 
parts into which his membership may have been divided and all of the 
trading rights and privileges appurtenant thereto. As a result of the 
1992 Agreement, the number of potential ``exerciser'' members of CBOE 
has been limited to the 1,402 Full Members of CBOT or their delegates 
(lessees), but not both in respect of the same CBOT membership.
    CBOE next interpreted Article Fifth(b) in response to amendments to 
CBOT's rules that purported to adopt abbreviated membership approval 
procedures applicable to persons who sought to become CBOT Full Members 
only in order to be able to utilize the Exercise Right to become 
members of CBOE. Since persons who attempted to become CBOT members 
pursuant to these abbreviated procedures would not have any trading 
rights at CBOT, they would fail to satisfy the requirement of Article 
Fifth(b) as interpreted in the 1992 Agreement that to become a member 
of CBOE pursuant to the Exercise Right, a Full Member of CBOT must be 
in possession of all trading rights and privileges appurtenant to a 
CBOT Full Membership. CBOE clarified that these new procedures would 
not satisfy the requirements of the Exercise Right in an interpretation 
of Article Fifth(b) that was filed with and approved by the Commission 
in SR-CBOE-2002-41.\4\
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    \4\ See Securities Exchange Act Release No. 46719 (October 25, 
2002), 67 FR 66689 (November 1, 2002).
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    More recently, Article Fifth(b) again had to be interpreted by CBOE 
in response to changes to CBOT's rules that authorized CBOT to make 
available to its full members, upon their request, a separately 
transferable interest representing that component of CBOT full 
membership representing the Exercise Right. This interpretation was 
embodied in an Agreement between CBOE and CBOT dated December 17, 2003, 
(``2003 Agreement'') and in related revisions to CBOE Rule 3.16. The 
interpretation of Article Fifth(b) embodied in the 2003 Agreement was 
filed with the Commission in SR-CBOE-2004-16, and was approved by the 
Commission by authority delegated to the Division of Market Regulation 
on July 15, 2004.\5\ Upon receipt of a petition for review of the 
approval by delegated authority filed by a CBOE member, that approval 
was automatically stayed pending review by the full Commission.\6\ On 
February 25, 2005, the prior approval of this proposed rule change by 
delegated authority was set aside, and instead this proposed rule 
change was approved by the Commission.\7\
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    \5\ See Securities Exchange Act Release No. 50028 (July 15, 
2004), 69 FR 43644 (July 21, 2004).
    \6\ The stay of that approval was announced in Securities 
Exchange Act Release No. 50464 dated September 29, 2004.
    \7\ See Securities Exchange Act Release No. 51252 (February 25, 
2005), 70 FR 10442 (March 3, 2005).
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    Just as when CBOE had to interpret Article Fifth(b) in 1992 and in 
2004 in response to changed circumstances at CBOT, CBOE believes CBOT's 
current proposal to implement a restructuring of that exchange again 
makes it necessary to interpret how Article Fifth(b) will apply under 
these changed circumstances. The proposed restructuring of CBOT, which 
is subject to a vote of the CBOT membership, was

[[Page 17734]]

originally described in a registration statement filed in 2001 by CBOT 
under the Securities Act of 1933 as a series of transactions that were 
designed to (1) demutualize CBOT by converting it from a not-for-profit 
membership corporation to a for-profit stock corporation and 
distributing shares of common stock of the for-profit CBOT to its 
members; (2) modernize the CBOT's corporate governance structure by 
substantially eliminating the membership petition process, streamlining 
its board of directors and making other changes to improve the 
efficiency of its corporate decision-making process; and (3) reorganize 
the CBOT's electronic trading business into a new wholly-owned 
subsidiary of CBOT that would trade electronically all of the products 
theretofore traded in CBOT's open-outcry market, including agricultural 
products not previously traded electronically.\8\ In connection with 
the restructuring as then proposed, each member of CBOT would have 
received a predetermined number of shares of Class A common stock 
representing equity in the new for-profit corporation, and a single 
share of one of five series of Class B common stock representing an 
additional equity interest in the new corporation and, subject to 
satisfaction of applicable membership and eligibility requirements, 
trading rights and privileges corresponding to those associated with 
one of the five current classes of membership in the existing not-for-
profit CBOT. When all of the steps of the restructuring of CBOT as 
originally proposed were fully implemented, CBOT would no longer have 
been a membership corporation but instead would have become a stock 
corporation with its former members as its stockholders. CBOT's 
electronic trading system, which was to have been operated as an open-
access system by a wholly-owned subsidiary of CBOT, would have traded 
all CBOT products side-by-side with their being traded on the existing 
open-outcry trading floor (as long as that market continued to 
operate).
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    \8\ Registration Statement on Form S-4, Registration No. 333-
54370, initially filed by CBOT on January 22, 2001.
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    CBOE believes these changes in the structure of CBOT would have had 
the potential to impact the Exercise Right in ways that were not 
contemplated when that right came into existence. Just as in 1992 when 
other changes at CBOT not anticipated at the time the Exercise Right 
was created raised questions concerning their effect on the Exercise 
Right, CBOT's proposed restructuring once again made it necessary for 
CBOE to interpret Article Fifth(b) in response to the changes that were 
now being proposed. To this end, over a period of several months in 
2001 the CBOE and CBOT engaged in a series of discussions to see 
whether agreement could be reached concerning the nature and scope of 
the Exercise right following the proposed restructuring of CBOT, and 
how this might be reflected in an interpretation by CBOE of Article 
Fifth(b). The 2001 Agreement was the result of those discussions, and 
embodied an interpretation of the Exercise Right by CBOE that, subject 
to the terms and conditions of that Agreement, would allow CBOT Full 
Members and Full Member Delegates to be able to exercise following the 
effectiveness of the proposed restructuring of CBOT as described by 
CBOT at the time the 2001 Agreement was entered into on August 7, 2001. 
The 2001 Agreement made this interpretation of the Exercise Right by 
CBOE contingent upon certain obligations imposed on CBOT, including the 
obligation to take steps to preserve the value of CBOT memberships and 
thereby prevent the restructuring from having a dilutive effect on the 
value of CBOE memberships by encouraging mass exercise or by making it 
easier for CBOT members or their delegates to trade concurrently as 
CBOT members and as exerciser members of CBOE.
    Later in 2001, following the signing of the 2001 Agreement, CBOT 
informed CBOE that it wished to make certain revisions to its proposed 
restructuring. Among these were to make CBOT a wholly-owned for-profit 
subsidiary of a new holding company, CBOT Holdings, Inc., a Delaware 
stock, for-profit corporation (``CBOT Holdings''). CBOT Holdings would 
be owned by its common stockholders, who would have all voting rights 
and equity ownership rights in the corporation. In the revised 
restructuring, each member of CBOT would have received a predetermined 
number of shares of common stock of CBOT Holdings, with each of the 
1,402 CBOT Full Members receiving 25,000 shares of CBOT Holdings common 
stock. In addition, Class B memberships, representing trading rights on 
the CBOT subsidiary, would have been issued in five different series to 
the five different categories of current members of CBOT, with each of 
the 1,402 CBOT Full Members receiving one Series B-1 membership in CBOT 
representing the trading rights of a Full Member in the CBOT market. In 
addition, 1,402 Class C memberships, representing the Exercise Right 
(when held together with the other interests issued to CBOT Full 
Members in the restructuring), would have been issued to the 1,402 
current CBOT Full Members. As then proposed, Series B-1 memberships and 
Class C memberships would have been freely transferable. To be 
consistent with the provision of Article Fifth(b) as interpreted in the 
1992 Agreement that the Exercise Right itself could not be transferred 
separate and apart from a transfer of the related CBOT Full Membership, 
although Class C memberships would have been freely transferable, the 
holder of a Class C membership would not have been entitled to utilize 
the Exercise Right unless the holder also held all of the other rights 
and privileges of a CBOT Full Member (namely, the shares of CBOT 
Holdings common stock and the Series B-1 membership issued to CBOT Full 
Members in the restructuring).
    In addition, under the restructuring of CBOT as then revised, Class 
B members of CBOT would have had limited voting rights to approve 
changes that could adversely affect certain specified ``core'' trading 
rights of such members. Also, in the restructuring as then revised, the 
electronic trading business of CBOT would continue to have been 
operated by a wholly-owned subsidiary of CBOT (a second-tier subsidiary 
of CBOT Holdings) in much the same manner as was contemplated in the 
restructuring as originally proposed.
    On October 24, 2001, CBOE, CBOT Holdings and CBOT entered into a 
letter agreement (the ``October 2001 Letter Agreement'') that modified 
the 2001 Agreement to take into account these revisions to CBOT's 
proposed restructuring. The October 2001 Letter Agreement reflected a 
further interpretation of the Exercise Right by CBOE intended to make 
it clear that, subject to the terms and conditions of the October 2001 
Letter Agreement as well as of the 2001 Agreement, the Exercise Right 
would continue to be available to CBOT's Full Members and Full Member 
Delegates following the revised restructuring. The October 2001 Letter 
Agreement also made it clear that under the proposed holding company 
structure, CBOT and CBOT Holdings would remain bound by the obligations 
of CBOT under the 2001 Agreement.
    Some time after the execution of the October 2001 Letter Agreement, 
CBOT again informed CBOE that it intended to make some additional 
revisions and refinements to its proposed restructuring. Among other 
things, CBOT intended to eliminate the free transferability of Series 
B-1 memberships that were to be issued to

[[Page 17735]]

its Full Members in the restructuring. Instead, CBOT proposed to impose 
a complete restriction on the transfer of Series B-1 memberships, 
except that a Series B-1 membership could be transferred together with 
a transfer of all of the 25,000 shares of CBOT Holdings common stock 
associated with the Series B-1 membership, and except that the CBOT 
Board of Directors would be authorized to remove or reduce the 
restriction on the transferability of Series B-1 memberships if it 
determined such action to be appropriate. In response, CBOE, CBOT 
Holdings and CBOT entered into a letter agreement dated September 13, 
2002 (the ``September 2002 Letter Agreement'') as a further addendum to 
the 2001 Agreement. The September 2002 Letter Agreement reflected a 
further interpretation of the Exercise Right by CBOE to make it clear 
that, subject to the terms and conditions of the September 2002 Letter 
Agreement as well as of the October 2001 Letter Agreement and the 2001 
Agreement, the Exercise Right would continue to be available to CBOT's 
Full Members and Full Member Delegates notwithstanding the restriction 
on transferability of Series B-1 memberships. The September 2002 Letter 
Agreement also clarified the intent of the parties to the effect that 
in order to be an ``Eligible CBOT Full Member'' or an ``Eligible CBOT 
Full Member Delegate'' eligible to exercise pursuant to the 
interpretation embodied in the 2001 Agreement, a person must be in 
possession of ``all trading rights and privileges appurtenant to such 
CBOT Full Membership'' as that phrase is defined in the 1992 Agreement.
    More recently, CBOT further revised its proposed restructuring to 
reflect, among other things, the settlement of the litigation brought 
by certain members of CBOT that had challenged the proposed allocation 
of equity in a restructured CBOT. Consistent with the settlement, in 
the restructuring as now proposed, each Full Member of CBOT will 
receive 27,338 shares of Class A common stock of CBOT Holdings in three 
different series, together with one Class B, Series B-1 membership in 
the CBOT subsidiary. The issuance of a transferable Class C membership 
in the CBOT subsidiary representing the Exercise Right has been 
eliminated, because, as described above, in 2004 CBOT amended its rules 
to provide for the issuance of a transferable ``Exercise Right 
Privilege'' to any of its Full Members requesting the same.\9\ Since 
these Exercise Right Privileges are intended to serve the same purpose 
that was to have been served by Class C memberships, and since the 
rules of CBOT governing the issuance and transfer of Exercise Right 
Privileges will remain in effect following the effectiveness of the 
proposed restructuring, there is no longer any need for CBOT to provide 
for the issuance of Class C memberships in the restructuring.\10\
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    \9\ As was previously the case for Class C memberships as 
described in the text above, in order to be consistent with the 
nontransferability of the Exercise Right itself separate from a 
transfer of the related CBOT Full Membership, the holder of an 
Exercise Right Privilege may not utilize the Exercise Right it 
represents unless the holder also holds all of the other rights and 
privileges of a CBOT Full Member (which, following the restructuring 
of CBOT, will include the 27,338 shares of Class A common stock and 
the Class B, Series B-1 membership issued to each CBOT Full Member 
in the restructuring).
    \10\ CBOE has interpreted Article Fifth(b) in response to CBOT's 
recent rule change providing for the issuance of transferable 
Exercise Right Privileges in accordance with an agreement between 
CBOE and CBOT dated December 17, 2003. See supra note 5 and 
accompanying text.
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    Other recent changes in the proposed restructuring of CBOT are 
intended to permit CBOT Holdings to facilitate the creation of public 
markets in its equity securities and to engage in capital-raising 
transactions and other securities issuances. Before it can authorize 
any such transactions, however, the CBOT Holdings board of directors 
must seek and obtain the approval of a majority of the stockholders of 
CBOT Holdings to do so (referred to as the ``second approval''), which 
would follow the initial approval of the CBOT membership to implement 
the steps of the CBOT restructuring up to the point where the second 
approval is needed. Still other changes concern the transfer 
restrictions that will apply to CBOT Holdings common stock issued to 
CBOT members. The transfer of these shares separate from a transfer of 
the associated Series B-1 CBOT membership will continue to be 
restricted, as will the transfer of the Series B-1 memberships separate 
from the transfer of all of the 27,338 shares of Class A common stock 
associated with them. It is now provided that the transfer restrictions 
on shares of Class A common stock will be lifted in stages following 
any underwritten public offering of these shares. In addition, 
following the second approval certain additional permitted transfers 
will be allowed as exceptions to these transfer restrictions. 
Restrictions on the transfer of Series B-1 memberships and on certain 
limited transfers of shares of Class A common stock will also be lifted 
following the ``second approval.'' Finally, the proposed restructuring 
reflects certain changes to the governance of CBOT Holdings and its 
CBOT subsidiary, including changes to the size and composition of the 
boards of directors of both corporations in connection with any 
underwritten public offering of CBOT Holdings Class A common stock, as 
well as changes to the voting rights of CBOT members.
    On October 7, 2004, CBOE, CBOT Holdings and CBOT entered into the 
October 2004 Letter Agreement as a further amendment to the 2001 
Agreement in order to incorporate in that Agreement and in CBOE's 
interpretation of the Exercise Right embodied therein the recent 
changes made by CBOT to its proposed restructuring. The October 2004 
Letter Agreement also incorporates the terms of the October 2001 and 
September 2002 Letter Agreements and provides that it supersedes those 
two agreements. Finally, in a Letter Agreement among CBOE, CBOT 
Holdings and CBOT dated February 14, 2005 (the ``February 2005 Letter 
Agreement''), the parties confirmed that the proposed restructuring of 
the CBOT as described in the registration statement filed by CBOT 
Holdings and CBOT on Form S-4 under the Securities Act of 1933 as 
amended at that time, which was shortly before it was declared 
effective by the Commission, constitutes the CBOT restructuring for 
purposes of the 2001 Agreement and CBOE's interpretation of Article 
Fifth(b) embodied therein. The interpretation of Article Fifth(b) 
embodied in the 2001 Agreement as modified and clarified by the October 
2004 Letter Agreement and the February 2005 Letter Agreement (referred 
to herein as the ``2001 Agreement as amended'') is intended to confirm 
to the CBOT and its Full Members that if CBOT is restructured as 
proposed, the 1,402 Full Members of the CBOT following the 
restructuring will continue to be able to utilize the Exercise Right to 
become members of CBOE in accordance with and subject to the terms and 
conditions of that interpretation.
    The interpretation by CBOE of the Exercise Right embodied in the 
2001 Agreement as amended does not displace the interpretation 
reflected in the 1992 Agreement, except where there are inconsistencies 
between the interpretation embodied in the modified 2001 Agreement and 
the interpretation embodied in the 1992 Agreement, the interpretation 
embodied in the modified 2001 Agreement controls. Neither does it 
displace CBOE's interpretation of the Exercise Right concerning 
abbreviated membership approval procedures at CBOT that was filed with 
and approved

[[Page 17736]]

by the Commission in SR-CBOE-2002-41, or CBOE's interpretation 
concerning the effect on the Exercise Right of CBOT rule changes 
pertaining to the issuance of Exercise Right Privileges that was filed 
with and approved by the Commission in SR-CBOE-2004-16.\11\ Because 
existing CBOE Rule 3.16 refers to certain terms that were previously 
defined in the 1992 Agreement and are now further defined in the 
modified 2001 Agreement, the proposed rule change also includes an 
amendment to that Rule to make it conform to the definitions in both 
the 1992 Agreement and the modified 2001 Agreement.
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    \11\ See supra notes 4-7 and accompanying text.
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    A principal feature of the interpretation embodied in the modified 
2001 Agreement is to define who will be an ``Eligible CBOT Full 
Member'' and ``Eligible CBOT Full Member Delegate'' entitled to 
exercise after CBOT has completed its proposed restructuring. These 
definitions are intended to apply upon consummation of the proposed 
CBOT restructuring as specifically described in Amendment No. 13 to 
CBOT Holdings' Registration Statement on form S-4 (Registration No. 
333-72184), and any subsequent amendments to that registration 
statement consented to by CBOE, and in the absence of any other 
material changes to the structure or ownership of CBOT or to the 
trading rights and privileges appurtenant to a CBOT Full Membership not 
contemplated in the restructuring as so described.
    As noted above, in the currently proposed restructuring of CBOT, 
each of the 1,402 CBOT Full Members, who are the only persons currently 
entitled to the Exercise Right, will receive 27,338 shares of Class A 
Common Stock of CBOT Holdings representing equity ownership in that 
corporation and one Series B-1 membership in CBOT representing the 
trading rights of a CBOT Full Member and specified voting rights in 
respect of CBOT. Consistent with the interpretation of the Exercise 
Right embodied in the 1992 Agreement to the effect that in the event of 
any split or other division of CBOT Full Membership into two or more 
parts, a CBOT Full Member must hold all of the parts into which his 
membership may have been divided and all trading rights and privileges 
appurtenant thereto in order to be able to exercise, the interpretation 
of the Exercise Right embodied in the modified 2001 Agreement 
conditions the right of an individual to become a CBOE member by 
exercise upon that individual's being the owner or delegate of all of 
the parts distributed in respect of his membership in the restructuring 
(i.e., the 27,338 Class A shares of common stock of CBOT Holdings and 
the Series B-1 membership), as well as an Exercise Right Privilege. 
These interests may be separately bought and sold and bundled and 
rebundled for purposes of qualifying the owner as eligible to exercise, 
subject to the restriction on transferability of Class A Common Stock 
and Series B-1 memberships referred to above. Antidilution adjustments 
are provided for in the case of certain issuances of additional shares 
of Class A Common Stock of CBOT Holdings, and the CBOT has agreed that 
no Series B-1 Memberships beyond the 1,402 issued in the restructuring 
will ever be issued.
    CBOE's interpretation of the Exercise Right embodied in the 2001 
Agreement as amended also addresses CBOE's concerns regarding the 
expansion of electronic trading of CBOT products. CBOE believes that 
expanded electronic trading on CBOT carries with it with the potential 
for providing open access to the CBOT market over the electronic 
platform on substantially the same terms to members and nonmembers 
alike. This raises the possibility that CBOT members will no longer 
need the trading rights provided by their memberships in order to be 
able to trade CBOT products, in which event they would be free to sell 
or delegate their CBOT memberships to persons who would utilize CBOT 
memberships only to obtain the Exercise Right, or they would themselves 
utilize their CBOT membership to become exerciser members, while 
retaining the right to trade on CBOT on the same terms as members of 
that exchange. Likewise, CBOE believes that expanded electronic trading 
of CBOT products could facilitate the ability of CBOT members or their 
delegates to trade on CBOT as members and on CBOE as exercise members 
concurrently, since physical presence on the CBOT trading floor would 
no longer be required to trade CBOT products that are available on the 
electronic system.
    For these reasons, CBOE believes that expanded electronic trading 
on CBOT could result in a mass exercise by CBOT Full Members to an 
extent never contemplated at the time the Exercise Right was first 
established. When the Exercise Right was first established, the only 
way a CBOT Full Member who was also a member of CBOE could trade as a 
member of both exchanges was to physically move from one exchange's 
trading floor to another. Although the proximity of the two trading 
floors made this at least theoretically possible, few CBOT Full Members 
have ever attempted to trade on both floors in this way. In CBOE's 
view, this is because a CBOT member who is also a CBOE member would 
find it difficult to fulfill his obligations to both exchanges, as well 
as to manage the positions resulting from his trading, if he frequently 
had to be absent from one exchange's trading floor because of a need to 
be on the other exchange's floor. For this reason, although the 
Exercise Right has always been available to all 1,402 CBOT Full 
Members, CBOE believes it was inherent in the nature of exchange 
trading at the time Article Fifth(b) was adopted that only a fraction 
of CBOT Full Members would be expected to use that right to become 
members of CBOE. Confirming this, during the entire time the Exercise 
Right has been in effect the percentage of CBOT Full Members who 
exercised has averaged 33.12%, and has never exceeded 52.85%. During 
the year ended December 31, 2004, the percentage of CBOT Full Members 
who exercised ranged from a high of 29.24% to a low of 25.53%.
    Neither the restructuring and demutualization of CBOT nor the 
development of electronic trading was contemplated at the time the 
Exercise Right was first established, nor were they addressed in the 
1992 Agreement. On the other hand, CBOE believes both have the 
potential to increase the number of exercise members of CBOE by 
changing the nature of CBOT full membership in ways different than were 
intended when the Exercise Right was established. In order to permit 
the Exercise Right to remain available to CBOT Full Members and Full 
Member Delegates following the proposed restructuring of CBOT in a 
manner consistent with what CBOE believes was its original intent, CBOE 
(with CBOT's concurrence) proposes to interpret its rules governing the 
Exercise Right (i.e., Article Fifth(b) and the interpretation thereof 
embodied in the 1992 Agreement) that takes these unforeseen 
circumstances into account.
    CBOE's interpretation of the Exercise Right embodied in the 2001 
Agreement as amended is based upon specified agreements made by CBOT 
Holdings and CBOT. These include the agreement of CBOT and CBOT 
Holdings to take various measures to promote the value of CBOT 
membership while at the same time to limit the ability of CBOT members 
and their delegates to trade as members on CBOT and CBOE concurrently, 
in order to reduce the likelihood of a mass exercise under 
circumstances that CBOE believes were not contemplated when the 
Exercise Right was established. These measures include restricting the 
ability of

[[Page 17737]]

exercising CBOT members to have preferred member access to the CBOT's 
electronic trading platform while they are present on the CBOE trading 
floor or are logged on to the CBOE electronic platform. If either of 
these circumstances applies, the exercising members may access CBOT's 
electronic platform only in the capacity of nonmember customers. 
Similarly, CBOT agreed that any CBOT Full Member Delegates who have 
exercised may trade on CBOT's electronic platform only as customers.
    The 2001 Agreement as amended also reflects the agreement of CBOT 
to modify its rules effective not later than December 1, 2004, to 
preclude any Full Member of CBOT who is also an exerciser member of 
CBOE from trading on the trading floor of CBOT as a member of CBOT at 
any time when the member is logged on to CBOE's electronic trading 
platform.\12\ This latter restriction does not apply to a CBOT Full 
Member who owns more than one CBOT membership, at least one of which 
has not been delegated or, in the case of a CBOT Full Membership, used 
to acquire a CBOE membership by exercise. Finally, the 2001 Agreement 
as amended provides that if a CBOT Full Member delegates his only CBOT 
Full Membership to a delegate who exercises, the CBOT Full Member has 
no right to exercise and may trade on CBOE only as a customer.
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    \12\ CBOE represents that the CBOT has already implemented this 
modification of its rules.
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    The revised terms of the proposed restructuring of CBOT increase 
the likelihood that following the restructuring of CBOT, subject to the 
``second approval'' of the stockholders of CBOT Holdings referred to 
above, there may be additional issuances of shares of CBOT Holdings 
Class A Common Stock. In order to prevent the value of the 27,338 
shares of CBOT Holdings Class A common stock issued to CBOT Full 
Members in the restructuring from being diluted as a result of certain 
below-market issuances to CBOT Full Members, CBOT has agreed that, 
subject to limited exceptions, no such shares will be issued to CBOT 
Full Members unless a recognized, independent investment bank or 
valuation firm has rendered an opinion that the consideration to be 
received by CBOT Holdings in connection with any such additional 
issuance is fair to the issuer from a financial point of view, or 
unless the shares are issued for a consideration that is not less than 
the consideration received by CBOT Holdings in connection with any 
concurrent or related issuance for a bona fide business purpose to a 
person who is not a CBOT Full Member, or unless the consideration is 
not less that the average of the closing prices of CBOT Holdings Class 
A Common Stock as reported in the Consolidated Quotation System.
    In order to make these restrictions on exercising members and 
delegates effective for their intended purpose, the 2001 Agreement as 
amended provides that the application of CBOE's interpretation of the 
exercise right to the CBOT's holding company structure is conditioned 
on CBOT and CBOT Holdings meeting obligations to maintain meaningful 
fee preferences for the members and delegates of CBOT as compared with 
the fees payable by nonmember customers, and to maintain other 
incentives to support the value of CBOT Full Membership. In the 
original 2001 Agreement, these were the direct obligations of CBOT. In 
the 2001 Agreement as amended, CBOT Holdings is obligated to cause 
CBOT, as its subsidiary, to comply fully with its obligations under the 
2001 Agreement, and not to take any action, directly or indirectly, 
that if taken by CBOT itself would amount to a violation of the terms 
of the 2001 Agreement, or that would cause the various incentives to 
promote the continued value of CBOT membership, including member and 
delegate fee preferences and pit closing provisions and seat ownership 
requirements for CBOT clearing firms as described in the 2001 
Agreement, to no longer be meaningful for the purpose stated in the 
2001 Agreement.
    The 2001 Agreement as amended provides that if disagreements arise 
between CBOE and CBOT or CBOT Holdings as to whether meaningful fee 
preferences and other incentives are being maintained, the matter will 
be referred to arbitration. The arbitrators are authorized to determine 
whether meaningful member and delegate fee preferences remain in 
effect, and if not, to specify a remedy for CBOT's or CBOT Holdings' 
failure to maintain them and to specify how they must be restored. The 
arbitrators are also authorized to prescribe the consequences of any 
failure by the CBOT or by CBOT Holdings to take any action required 
under the remedy specified by the arbitrators within 30 days of the 
arbitrators' decision.
    To facilitate administration of the 2001 Agreement as amended, each 
party has agreed to provide to the other information regarding the 
status of members, including exercisers, on a current and continuing 
basis. CBOE represents that the CBOT has also agreed to amend its rules 
to implement the provisions of the 2001 Agreement as amended.
2. Statutory Basis
    CBOE represents that the interpretation of the Exercise Right 
embodied in the 2001 Agreement as amended and the conforming amendment 
to CBOE Rule 3.16 that together constitute the proposed rule change are 
consistent with and further the objectives of the Act, as amended, and 
Section 6(b)(5) of the Act \13\ in particular, in that they constitute 
an interpretation of and an amendment to the rules of the Exchange that 
are 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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    \13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    Although no written comments were solicited or received with 
respect to the proposed rule change in its present form, comments were 
received from some members in respect of the prior filing of the 
interpretation of Article Fifth(b) embodied in the 2001 Agreement that 
has since been withdrawn, and on August 30, 2001, 10 members of the 
CBOE filed suit in the Circuit Court of Cook County, Illinois seeking a 
temporary restraining order and preliminary injunction against the CBOE 
and the CBOT that would prevent CBOE from implementing the 2001 
Agreement.\14\ The allegations made by these commenters and by the 
plaintiffs in the dismissed lawsuit raised essentially the same 
procedural issue, which involved characterizing the 2001 Agreement not 
as an interpretation of Article Fifth(b), but as an amendment to that 
Article. Since by its terms Article Fifth(b) may be amended only with 
the approval of 80% of the exerciser members of CBOE and 80% of the 
non-exerciser members of CBOE, these commenters and the plaintiffs in 
the lawsuit took the position that the 2001 Agreement was invalid.
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    \14\ On September 17, 2001, the Court granted CBOE's and CBOT's 
motions to dismiss this lawsuit.

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[[Page 17738]]

    Since this same procedural issue may again be raised in comments on 
the proposed rule change, CBOE will repeat here the substance of what 
it previously said when this issue was raised in the context of the 
prior filing of the interpretation of Article Fifth(b) embodied in the 
2001 Agreement.
    CBOE believes any allegation that the 2001 Agreement or the 
interpretation of Article Fifth(b) embodied therein reflects an 
amendment of Article Fifth(b), and not an interpretation of that 
Article, is entirely without merit. The interpretation embodied in the 
2001 Agreement does not change either the language or intended meaning 
of Article Fifth(b), but instead provides an interpretation of that 
Article to deal with circumstances involving the proposed restructuring 
of CBOT that were not contemplated or addressed in that Article or in 
any prior interpretations of that Article.
    Exactly the same kind of interpretation of Article Fifth(b) was 
embodied in the 1992 Agreement and in the 2003 Agreement and was the 
subject of SR-CBOE-2002-41. Each of these prior interpretations 
addressed circumstances that were not contemplated when Article 
Fifth(b) was adopted, and were not addressed in the terms of that 
Article. Because CBOE had no choice but to interpret Article Fifth(b) 
in response to these changed circumstances, and because these 
interpretations did not amend the terms of that Article, none of these 
prior interpretations was submitted to an 80% class vote of the CBOE 
membership as would have had to be done if they had been treated as an 
amendment to that Article. They were, however, filed by CBOE and 
approved by the Commission as interpretations of an existing rule 
constituting a rule change under Section 19(b) of the Act and Rule 19b-
4 thereunder.\15\
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    \15\ See supra notes 3-7.
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    Just as issues resulting from unanticipated changes at CBOT were 
addressed in 1992, CBOE believes the proposed restructuring of CBOT, in 
which the existing rights of CBOT Full Members will be changed into 
rights of stockholders in a new holding company and into trading and 
limited voting rights in a reorganized for profit subsidiary of the 
holding company, raises unanticipated issues concerning who if anyone 
should be viewed as a Full Member of CBOT entitled to the Exercise 
Right following the restructuring. CBOE believes these issues can be 
resolved only by CBOE's interpreting how Article Fifth(b) will apply 
under these changed circumstance. Such an interpretation is embodied in 
the 2001 Agreement as amended, and it, together with a conforming 
amendment to Rule 3.16, constitutes the proposed rule change filed 
hereby. Neither this interpretation of Article Fifth(b) nor the 
proposed change to Rule 3.16 makes any changes to the text of Article 
Fifth(b) nor are they in any way inconsistent with that Article. 
Instead, they simply interpret Article Fifth(b) so it may operate as 
intended in circumstances that CBOE believes were not contemplated at 
the time that Article was drafted or was previously interpreted.
    If CBOE were not able to interpret Article Fifth(b) under 
unanticipated changed circumstances without satisfying the 80% class 
vote requirements that apply in the case of an amendment to that 
Article, CBOE would be placed on the horns of a dilemma. If an 
interpretation did not achieve the 80% approval of each class of voting 
members, the interpretation could not be enforced. However, CBOE would 
still need to know how the Exercise Right should apply under the 
changed circumstances. But under the view that any interpretation CBOE 
might adopt in such circumstances must be treated as an amendment to 
Article Fifth(b), CBOE could be paralyzed because conceivably no 
interpretation would receive the necessary vote. In other words, where 
CBOE has no choice but to interpret Article Fifth(b) in response to 
unanticipated changed circumstances and where its interpretation is 
entirely consistent with that Article, CBOE must be able to make such 
an interpretation without having to satisfy the requirements that would 
apply if Article Fifth(b) were being amended.

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 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CBOE-2005-19 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CBOE-2005-19. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 also will be available for inspection and copying at the 
principal office of the CBOE. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-CBOE-2005-19 and should be submitted on or before April 
28, 2005.

    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. E5-1587 Filed 4-6-05; 8:45 am]
BILLING CODE 8010-01-P