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Filed by Board of Trade of the City of Chicago, Inc. (CBOT)
Subject Company -- Board of Trade of the City of Chicago, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
File No. 132-01854
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The following letter was distributed to CBOT members and membership interest
holders on September 21, 2000, and is currently available on the CBOT's intranet
sites, MemberNet and OnBoard.
September 21, 2000
Dear Fellow Member,
I want to communicate to you the rationale behind your Board of Directors'
adoption of a revised restructuring strategy on August 31, 2000.
We are experiencing a dynamic time in the futures industry. Technology is
bringing about violent structural changes in the way we do our business, at a
pace that puts stress on every individual and every firm involved. Knowing the
CBOT's membership structure is a limiting factor in dealing efficiently in this
environment, our restructuring plan was developed in order to have a governance
model and business strategy fluid enough to adapt to the competitive challenges
we will inevitably face. As confident as we are in our plan, when we see changes
in our situation, we must recognize them and be prepared to deal their impact.
In an effort to maintain what we've referred to as "first mover advantage," we
decided to revise our restructuring strategy.
The differentiating aspect of this new strategy is that the electronic platform
("eCBOT") will now remain a wholly owned subsidiary of the open-outcry company,
and not be separated at this time as was originally contemplated by the Board of
Directors. This change, more fully explained below, will accomplish two
objectives critical to the success of our restructuring effort: (1) it will
accelerate the process of demutualizing our exchange, and (2) it will reduce the
time needed to actually deliver formal ownership of stock into your hands. The
new strategy also addresses a number of factors which have changed since we
adopted the original strategy, including increasing competitive pressures in the
industry, the evolving condition of the capital markets, further review and
analysis regarding the implementation and execution of the separate business
plans of the CBOT and eCBOT, and the overall financial status of the CBOT.
ISSUE: Time to Market
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The demutualization efforts of other domestic and international futures, equity,
and options exchanges demonstrate how time to market is critical for the CBOT.
Our revised strategy significantly reduces the time to market for the CBOT's
demutualization process and subsequent distribution of stock to our members. The
revision permits the CBOT to submit the mandatory SEC, CFTC, and IRS
applications issuing stock in one company, as opposed to issuing stock in two
companies, which will bring about a faster and cleaner approval of our for-
profit status. The lengthy and necessary discussions related to separating the
two companies at this time will not delay or prolong our demutualization. CBOT
members will be able to vote on demutualization sooner, and following approval,
CBOT stock can be distributed to our members in an expedited manner. Under the
new strategy, we will have the flexibility to continue to evaluate the CBOT
ownership structure and consider any number of value-enhancing transactions in
the future, such as separation of eCBOT and/or one or more offerings of stock in
CBOT or eCBOT to the public.
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ISSUE: Need to Change Current Governance Structure
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Accelerating our timeframe to demutualize also aids us in achieving a
streamlined CBOT governance structure. Our current structure limits the CBOT's
ability to make business decisions in a timely manner, impeding our competitive
position. Facing the intense competition affecting our market share and overall
financial performance, the Board of Directors believes the operation of a for-
profit, demutualized structure with a smaller Board will insure both quick
decisions and clear accountability. Equally important, the eCBOT management and
Board of Directors must be able to operate on a competitive basis with
significant independence. This independence is crucial if the eCBOT is to
attract investor funding, as well as make business decisions that maximize the
return on its technology assets that you, the CBOT membership, have paid for.
ISSUE: Structural Flexibility
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This new strategy will enable the eCBOT and CBOT to be operated independently
and in a competitive manner while allowing the companies to share certain
resources and infrastructure. Also, as a for-profit company following the
demutualization, the CBOT would have the flexibility to continue to evaluate the
CBOT ownership structure and to consider any number of value-enhancing
transactions in the future, such as one or more offering of shares of stock in
the for-profit CBOT and/or eCBOT to the public and/or a separation of the two
companies. Under the new strategy, the CBOT will have discretion as to if, when
and how it might propose to separate eCBOT from it so as to maximize value for
CBOT member stockholders.
In 1999, your Board of Directors made a commitment to seek out and pursue the
most rational and effective restructuring strategy. We recognized the necessity
of restructuring then, and it is clearly the case now that our future hinges on
the successful completion of the CBOT's restructuring process. The revised
strategy adopted by your Board of Directors significantly improves our ability
to reach that final goal: a competitive, disciplined, focused company,
delivering maximum value to its owners in terms of business performance and
returns to shareholders.
Sincerely,
/s/ David P. Brennan
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David P. Brennan
We urge CBOT members and membership interest holders to read the Registration
Statement on Form S-4, including the proxy statement/prospectus contained
within the Registration Statement, regarding the CBOT restructuring referred to
herein or in connection herewith, when it becomes available, as well as the
other documents that the CBOT has filed or will file with the Securities and
Exchange Commission, because they contain or will contain important information.
CBOT members and membership interest holders may obtain a free copy of the proxy
statement/prospectus, when it becomes available, and other documents filed by
the CBOT at the Commission's web site at www.sec.gov, or from the CBOT by
directing such request in writing or by telephone to: Board of Trade of the City
of Chicago, Inc., 141 W. Jackson Blvd., Chicago, Illinois 60604-2994, Attention:
Office of the Secretary, Telephone: (312) 435-3605, Facsimile: (312) 347-3827.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of securities in any state in which
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. No offering of
securities shall be made except by means of a prospectus meeting the
requirements of Section 10 of the Securities Act of 1933, as amended.
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The following remarks were given by the Chairman of the Board at a meeting of
the National Grain Trade Council on September 21, 2000.
REMARKS FOR DAVID BRENNAN, CHAIRMAN, CHICAGO BOARD OF TRADE
NATIONAL GRAIN TRADE COUNCIL ANNUAL MEETING
THURSDAY, SEPTEMBER 21, 2000
Good afternoon. I would like to thank Dan Dye and Roy Henwood for inviting me to
speak here today, and I want to thank the members of the National Grain Trade
Council for the positive working relationship that exists between our two
organizations.
I appreciate being given the opportunity to share with you the many changes we
are currently experiencing at the Chicago Board of Trade, and the changes are
momentous. On August 27th, we launched our new electronic trading platform as
part of our business alliance with Eurex, the Swiss-German electronic futures
exchange. We have a restructuring strategy that, once our members approve later
this year, is designed to allow the exchange to be run more like a business so
we can continue to provide the best open outcry and electronic markets for our
customers -- and let them decide where they want to put their business, as long
as we can keep it in Chicago. We also are continuing our push in Washington for
regulatory relief through the reformation of the Commodity Exchange Act. By
achieving these initiatives, the CBOT will continue to expand its role as an
innovative leader in the risk management sector.
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As we go forward, the futures industry finds itself at a crossroads. Two
significant developments are directly affecting the industry: globalization and
technology. As a result, cash and futures markets are converging and exchanges
are reinventing themselves.
As a soybean trader who does his work both in the pit and on the screen, I watch
the market every day and track the developments of the global futures industry.
Many of you may be aware of the threats facing the CBOT, as many of our large
customers have attempted to become our competitors by leveraging technology. To
date, those attempts have not been successful. However, we will not take them
for granted and we cannot afford to rest on our laurels.
In fact, many believe that the exchanges will see significant competitive
threats from electronic cash market exchanges, called e-marketplaces, who, in
the not too distant future will offer futures and options on their respective
platforms.
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If one were to look into the crystal ball of our industry you could potentially
see consolidation and the formation of strategic partnerships between exchanges,
major cash market e-marketplace order flow providers, information content
providers, commerce service providers, and technology service providers.
On every front, technology is leading exchanges and customers to change the way
they do business. Just ten years ago, electronic trading accounted for 7% of
global futures and options volume. In 1999, nearly 40% of all global futures
trading was electronic. Exchanges are investing heavily in electronic trading
and will eventually use e-commerce to extend it.
While the CBOT experienced great success with Project A, our first electronic
trading system, it became increasingly apparent that we needed a more robust and
reliable system that could broaden the distribution of our products and also
enable us to trade up to 100% of our volume electronically, if needed.
On August 27th, the Chicago Board of Trade and Eurex, the world's largest
electronic futures exchange, embraced this change by launching a new
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trading platform called a/c/e, the first electronic trading network of its scale
in the world. The proven Eurex technology and its existing global distribution
network will be the gateway for expanded access to CBOT and Eurex products for
market users, bringing significant benefits to our members and customers through
increased global trading opportunities. Through this alliance traders will have
one screen, but access to all of the products on the world's top two futures
exchanges.
The level of trading volume thus far has met our expectations, as CBOT members
participated in trading from the U.S., Germany, France, and the United Kingdom.
The excitement and enthusiasm for a/c/e was felt immediately following its
launch. In fact, we reached over 1 million contracts in just 12 trading days.
As of yesterday, total trading volume on the system was 1,605,085 contracts. Of
this total, 23,222 contracts have been traded in the agricultural markets. And,
on average, daily trading volume for the first 17 days of trading on a/c/e
totaled 1,451 agricultural contracts.
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In the financial markets, average daily volume for the first 17 trading days has
been 92,922 contracts, compared with average daily volume of 31,343 contracts
during the final week of trading on Project A.
Our customers and members have embraced this new platform as 15% -20% of the
volume in our bellwether financial product, the U.S. Treasury Bond futures
contract, already is on a/c/e.
At the launch, 84 CBOT members and member firms were immediately able to trade
all CBOT products on the a/c/e platform. They access the system through a wide-
area communication network (WAN) from 107 locations worldwide. The second phase
of the alliance, scheduled for launch in the fourth quarter of this year, will
include an additional 60 to 80 firms currently in the process of signing on to
the new system. An aggressive plan also is in the works to increase access
points through 2001, including 210 new additional connections in key financial
centers around the world.
We also are working hard to incorporate new technology enhancements in our open
outcry markets in the move toward a paperless trading floor. Through e-
openoutcry.com, our new browser-based order entry system,
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clearing firms have the ability to allow customers to send orders directly from
the a/c/e trading screen to our members in the pit.
One year ago, only 5% of agricultural orders were routed electronically. Today,
38% of all non-spread agricultural futures orders are routed through the
electronic order routing system; 36% of all corn futures orders; 80 percent of
all oat futures orders; and 27% of all wheat orders are routed through our
electronic order routing system. On a peak day, 4 out of every 10 orders are
routed electronically. Customers receive trade confirmations for market orders
in less than one minute. Electronic order routing decreases errors and,
therefore, risk. And, out-trade risk has been reduced by 40% for firms using
electronic order routing.
Our member firms connect their customers directly to our members in the trading
pits. And new technology, including handheld devices, will make electronic order
routing even more efficient. All of this is being done in the name of improving
the efficiency of order flow in and out of our open outcry trading pits, so that
we can improve the level of customer satisfaction, and in turn the level of
business our customers provide to the Chicago Board of Trade.
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Another CBOT strategic initiative is the adoption of a for-profit structure, or
demutualization, that will better prepare us to deal with competitive threats
and maintain our global leadership position in a technology-advanced
marketplace.
In June, CBOT members, at my urging, overwhelmingly approved the first step in
our restructuring plan that shortly thereafter resulted in reincorporation of
the Board of Trade, from an Illinois not-for-profit company to a Delaware not-
for-profit entity.
And last month the CBOT Board of Directors unanimously adopted a revised
restructuring strategy under which the electronic CBOT, called eCBOT, will
remain a wholly owned subsidiary of the for-profit open outcry company. Although
it will be a CBOT subsidiary, the plan is to operate the eCBOT on an independent
and competitive basis with significant autonomy for eCBOT's management.
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CBOT members will receive shares of stock in the new for-profit CBOT. However,
in contrast to the original strategy, CBOT members will not receive stock in
eCBOT as part of the transaction at this time. The new for-profit CBOT will
continue to operate eCBOT as a subsidiary, but will have the flexibility in the
future to decide to separate the company from the new eCBOT and/or conduct an
initial public offering of eCBOT. Completion of the revised restructuring plan
is subject to membership approval, and receipt of various regulatory clearances.
I am committed to restructuring, and I am committed to devoting the time,
energy, and resources to make sure that the CBOT and its members are positioned
to compete here or elsewhere in the world. Restructuring will allow us to
continue to make deliberate business decisions, decisions that will maximize our
shareholders' value and allow the Exchange to prosper financially.
While technology and globalization provide new opportunities and cause us to
change the way we do business, there is one thing which has not changed. And
that is the idea of customer service and market integrity.
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Our exchange is consistently reaching out and communicating with our customers
every day. We will continue to seek your input on issues related to product
performance and new product design such as was done with the development and
implementation of the new Illinois Waterway Delivery System for Corn and
Soybeans. As you know, we have been closely monitoring the performance of the
IWDS system, and on Tuesday our Board of Directors approved a package of changes
that will simplify and improve the performance of this new delivery system.
We recently redesigned our website to offer global investors increased access to
exchange market data, information and services. The new site, located at
www.cbot.com, provides a sneak peek at the exchange's future e-commerce
capabilities.
A salient feature of the new site will be `snapshot' quotes on all CBOT
products, which we believe will be a boon for the growing number of individual
investors using the site. With this move, the CBOT becomes the first futures
exchange to offer its `snapshot' data direct to users. And, for the value-added
service, the CBOT will charge users a nominal monthly subscription fee of $10.
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Today, it is not enough to simply list contracts and say, "come here and trade."
The Chicago Board of Trade is more than that. We are innovative. We are
proactive. Our objective is to use our competitive advantages to overcome global
challenges by continuing our steadfast pursuit of unparalleled customer service.
I would now like to talk briefly about the new regulatory framework the
Commodity Futures Trading Commission currently is undertaking and its impact on
our markets.
For many years, the Board of Trade has urged the Commission to take meaningful
action to streamline and modernize its regulatory regime in order to afford fair
even-handed treatment to exchange and exchange markets in derivatives. For many
years, the Board of Trade has testified before the Commission and Congress that
the differences between swaps markets and futures markets have become
increasingly blurred, with the same market participants trading substantially
similar products under distinctly dissimilar regulatory structures.
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We applaud the Commission's efforts, particularly those of Chairman Bill Rainer,
to complement regulatory reform legislation now pending in the House and Senate.
The Board of Trade is hopeful that legislation will be enacted this year,
addressing many of the issues covered by the Commission's proposal. In fact, the
Commission's proposal has served well as a blueprint in many respects for that
legislation.
Whether legislative or administrative in nature, we look forward to working with
Chairman Rainer and the Commission to effect regulatory relief for U.S. futures
exchanges. We envision a true working partnership with the Commission in which
we both strive to achieve common self-regulatory goals without imposing undue
government oversight. We view the Commission's proposal as an important step in
that process.
Our members are the best traders in the world. We have an unbeaten tradition of
excellence that goes back four or five generations. The liquidity provided by
our members is unmatched.
Our technology is first-rate - whether for a/c/e, our new electronic trading
platform, or for electronic order routing to our trading floors.
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Our commitment to customer service is unquestionable. Where is the industry
going? Nobody can predict the future. But any good businessman can tell you the
leader will give customers what they want at the best price.
Right now, that's the Chicago Board of Trade. And we intend to keep it that
way.
Thank you.
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We urge CBOT members and membership interest holders to read the Registration
Statement on Form S-4, including the proxy statement/prospectus contained within
the Registration Statement, regarding the CBOT restructuring referred to herein
or in connection herewith, when it becomes available, as well as the other
documents that the CBOT has filed or will file with the Securities and Exchange
Commission, because they contain or will contain important information. CBOT
members and membership interest holders may obtain a free copy of the proxy
statement/prospectus, when it becomes available, and other documents filed by
the CBOT at the Commission's web site at www.sec.gov, or from the CBOT by
directing such request in writing or by telephone to: Board of Trade of the City
of Chicago, Inc., 141 W. Jackson Blvd., Chicago, Illinois 60604-2994, Attention:
Office of the Secretary, Telephone: (312) 435-3605, Facsimile: (312) 347-3827.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy, nor shall there be any sale of securities in any state in which
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. No offering of
securities shall be made except by means of a prospectus meeting the
requirements of Section 10 of the Securities Act of 1933, as amended.
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