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Filed by Board of Trade of the City of Chicago (CBOT)
Subject Company - Board of Trade of the City of Chicago
Pursuant to Rule 425 under the Securities Act of 1933
File No. 132-01854
* * * *
The following is the transcript of a meeting conducted June 8, 2000 that is
currently available to CBOT members and membership interest holders on
audiotape
CHICAGO BOARD OF TRADE
TRANSCRIPT - LESSORS MEETING - JUNE 8, 2000
Chairman Brennan: Well, good afternoon; maybe we could get started. I would
like to first of all, welcome everybody. Thank you for
coming. I know it's an awfully nice day outside. I
appreciate you taking your time to come in and listen to us
and maybe get some of your questions answered or hear more
about the Plan. I would also like to welcome - there's a
number of members that are listening on our MemberNet - so,
welcome to them. By now, you certainly all have received
the information that we sent out - our Restructuring Report,
the ballot documents, some Q & A. The Board of Directors
overwhelmingly approved - the materials you got the Board of
Directors overwhelmingly approved. The Restructuring Report
was unanimously accepted by the Board, the ballot was
overwhelmingly approved by the Board -- I think there was
only one vote against. The purpose today is to answer some
more of your questions. A number of you, I know, listened
either on MemberNet or were at the previous open meeting,
but we thought we'd give another opportunity to maybe
discuss some of the issues. Just as a brief aside, I think
many of you are aware, but maybe many of you aren't, the
Chicago Mercantile Exchange this week overwhelmingly
approved their for-profit ballot 98.3%. That's a membership
organization very similar to ours that has recognized the
need to change, the need to embrace the future and embrace
the change. Not that we have to do everything that the CME
does, but I think it's a little indicative of how the world
is going. When we started this process, really, there's one
driving force in this. That change is obviously quick, it's
still happening fast, the rate of change is increasing, the
idea of a Restructuring Plan like this is to be able to face
that change, face the competition and put the ownership of
this Exchange into your hands, the members' hands. Today,
you are not owners, you are members of an association, but
you are not equity owners in the business. None of us are.
The object of this is to put that ownership in the form of
stock in your hands. Right now we have a simple program and
after that there will be time for questions and answers. I
would hope that you would hold your questions until the end
of the program. I would like to introduce right now Veda
Kaufman-Levin. She is a member of our Board of Directors.
She's the Chairperson of the Lessor Committee. Those of you
who know her, know she's full of a lot of energy and she's
really taken this job on and has done a great job with it.
She's run with it, she's got her committee all lined up up
here, which is I think the first time I've seen a committee
100% in attendance come to the meeting and sit up in front.
It's good to see that your leaders are sitting here and
willing to face you face-to-face. Veda's a member of the
Implementation Committee. She's been a member of the
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Board since the beginning and I'd just like to introduce
Veda now. (applause)
Ms. Kaufman-Levin: Thank you for joining us today. I know many of you who are
here and for those of you who I don't know, I'd like to
introduce myself. I'm Veda Kaufman-Levin. I am Chairman of
the Lessor Committee. I am a member of the Chicago Board of
Trade Board of Directors and I've been part of the Exchange
community for 25 years, both as an owner of Chicago Board of
Trade seats and the Chicago Board Options Exchange seats. I
was a market maker for three years down on the floor of the
CBOE. I was a partner for 15 years at Kidder, Peabody in
their Institutional Options Department. Currently, I work
for the Investment Banking firm of Lazard, Freres, running
their Institutional Options Department here in Chicago.
Members of the CBOT who are lessors and lease out their
seats as I do, and as many of you do, have a critical stake
in the future of this Exchange. Reaching out to you is
vital to the success of the restructuring effort, so I'm
pleased that so many of you came out here today. Ask
questions - and I hope when you go away, you will have an
understanding that our restructuring initiative will allow
us to better position ourselves to meet and to beat the
competition. As lessors, many of you have not visited the
trading floor in a long while and are, therefore, not privy
to some of the white noise of the jungle. Let me give you
some background on the serious state of affairs of our
industry.
Canter Fitzgerald has formed e-Speed - a direct competitor
for many of our products. They recently signed a deal with
eight on-line brokers to offer electronic trading of fixed
income products. Volume may be negligible today, but they
are a lethal competitor with a state of the art electronic
cash and futures marketing platform, huge cash reserves and
a multi-billion dollar market capitalization. Our member
organizations are becoming our competitors. BrokerTec is
backed by 14 of the largest U.S. and European investment
banks - seven of which are our largest member firms.
BrokerTec shareholders provide 1/3 of all CBOT fees and
order flow. OTC markets have grown 2500% since 1990. Open
outcry volume has been decreasing. Electronic trading is
expected to account for virtually all overseas trading in
the very near future. Other exchanges are aggressively
modifying their ownership structures. The Merc gave a
resounding 98% "yes" vote to restructuring this past
Tuesday. NYMEX which is scheduled to vote June 20, is also
expected to vote resoundingly "yes". Paris, Amsterdam and
Brussels exchanges are merging to form Euronext and the ECN
Archipelago acquired the Pacific Exchange. A "yes" vote on
restructuring shows the financial world in Chicago, in New
York and globally, we understand the
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change is here. We are changing our business model in this
new environment. A "no" vote shows what the skeptics and the
press have always said about us: that we cannot and will not
rise above petty internecine politics. The disgust of the
financial community will be the sigh heard round the world.
The trading world needs and wants the CBOT, but only on
competitive commercial terms. The days of our industry and
our competitors deferring to CBOE timetables and plans are
long since gone. We can recognize this now and act or we can
refuse to accept this new reality, denying that our industry
making better use of technology and better business models
are moving beyond us. The proposed restructuring offers us
an inviting solution with real promise to restore our
competitive preeminence. Demutualization into two
independent companies will bring an end to our political
approach to business decisions, putting the onus on a
dynamic CEO and an energetic Board of Directors of each
company to live by the same rigorous and unforgiving
business discipline that drives our competitors who threaten
our franchise today. This focused approach offers the
possibility of keeping open outcry for as long as it is
viable and I believe that's many, many years to come. It
also gives us a direct stake as shareholders in a
competitive, electronic trading company. Our plan is very
solid. The Restructuring Report was overwhelmingly approved
by our Board. The Allocation Report also overwhelmingly
approved by our Board, is based on exhaustive, impartial and
comprehensive study. I know all too well that the major
issue among lessors is the CBOT exercise right. Protecting
this right has been the unalterable position of the
Restructuring Task Force and the Board of Directors since
the beginning of this effort almost a year and a half ago.
The opinion of the Board's legal advisors says that the Plan
does indeed protect that CBOE exercise right and John
Stassen from Kirkland & Ellis, our outside counsel, in just
a few moments, will more fully vet this issue. We are all
aware of the areas of dissension. We know that there is
great desire for clarity and certainty on these issues.
Clarity, we hope to give you today. Certainty is an
imponderable. I want you to know that as a member of the
Implementation Committee, a committee comprised of
representatives of all the constituency of this
organization, we discussed, we debated, we argued, the
various issues. The conclusions that we came to adopt at
those positions were most fair and most reasonable to all
parties, our current members and our future investors - our
current members and our future investors. Let me assure you
that we have excellent, excellent advisors. I've been
associated with an investment banking firm for many years.
I've seen the best and brightest and I've seen the not so
wonderful. We have good advisors. We have tremendously
capable attorneys. Lots of them, lots of
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them. At moments like this, let's remember we're paying top
dollar for their advice. Our organization is filled with the
best bean traders and the best corn traders, the best bond
traders. But many of you have little or no experience or
knowledge about investment banking or securities law. Now
I've heard from our leaders that we have 1,402 CIO's that
consider themselves experts on most subjects at any time and
no better than most people on any subjects. Resist the urge
to think that you are also brilliant investment bankers and
wonderful security lawyers. God knows we don't need any more
of those. Debate among us is a respected tradition. We
should and must debate these issues, but we must resist the
temptation to pick apart the various elements of this Plan.
There are groups today working to defeat restructuring,
shackling the e-company to our old structure by inserting
any number of requirements in the Plan contrary to the
advice of the professionals who are ultimately responsible
for marketing this new company to the street. Passage of
this Plan shows the world we get it, we're changing. Failure
to pass the Plan will prove the skeptics right - that the
CBOT cannot and will not rise above petty politics and
myopic thinking. We believe our very survival depends on
moving in the direction opposed by restructuring, the sooner
the better. We think a narrow, narrow, narrow window of time
still exists for us to change and to move into a
competitively positive position. We can turn today's
problems into tomorrow's opportunities. Nothing is more
powerful than an idea whose time has come. Please join me in
voting "yes" for restructuring. Embrace the change. Could we
hold questions til afterwards? Til after we're done.
Audience Member: until everybody's done?
Ms. Kaufman-Levin: Yes.
Ms. Kaufman-Levin: This will just take a moment - just hold your question.
Audience Member: Well, we've heard all of this
Ms. Kaufman-Levin: YES
Audience Member: and we've heard all the - and I think everybody has one
thing that's primarily on their mind and that's the question
whether or not the right to exercise
Ms. Kaufman-Levin: Yes, sir, Yes sir, and we're going to be addressing that
Audience Member: Well you did already and you indicated that uncertainty was
an imponderable, that you couldn't be sure of what the
result would be of the threatened litigation. I think
that's foremost on everybody's mind here and I'd like to cut
to the quick and let's get some solution.
Ms. Kaufman-Levin: I understand, sir.
Audience Member: A primary problem that you don't want any delays in getting
this thing completed. So my question is, if it's really so
essential that this thing be moved along as rapidly as
possible, why did we not act at the very first CBOE threat
and bring an action for declaratory judgment and get some
finality to their threatened position, their threatening
position. I don't think anybody here is going to want to
vote for this restructuring if it's going to involve the
CBOE telling our delegates that they can't enter the
building and then ask a court order to allow us to come back
in.
Ms. Kaufman-Levin: Okay.
Audience Member: speaks for a lot of us.
Ms. Kaufman-Levin: Okay, and we are going to be addressing this and we're going
to be addressing it right now. Let's just change the order.
Mr. Stassen, could you come up and address this issue?
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Mr. Stassen: Kirkland & Ellis has represented the Board of Trade, and it
has been a great pleasure to do this, since 1931, and 27 of
those years I have been coming over here and you'd think I
would have gotten a decent name plaque within that time, but
I guess not. I also get the hard questions. And what I've
decided today, rather than give you conclusions and give you
our legal advice and restate what we've already said in the
various documents that have been mailed out to you
concerning the exercise of right, we'll go right to the text
of Article Fifth B of the CBOE Articles of Incorporation and
right to the 1992 Agreement and walk you through those
documents, it's going to take a few minutes, but tell you
what our legal position is - (pause) That's not going to
answer your questions?
Audience Member: My question is - I happen to know that lawyers have a good
base, you lawyers have a good basis for your opinion and I
don't even understand all the arguments that the CBOE makes,
that generates this threatened position, but I would like to
know why we have not acted aggressively and have a court
decide whether or nor their threat does, in fact, impose
legitimate obstacle to the delegates
Mr. Stassen: As you know, from the press, I'm sure, your Board of
Directors has considered litigation and has made the
Audience Member: My name's Ron Grossman
Mr. Stassen: Chairman Brennan wants to take the podium.
Chairman Brennan: I really think that these are good questions, these are
good issues and obviously I think that is foremost on a lot
of people's minds, Ron, but I think we have to afford this
group the opportunity to go through what they're going to
tell you and then you can have your questions, but I don't
think it's fair to have a one-way back and forth here and
break up the thing. Let's let them go through it - they
will be brief, I promise, and then we'll save questions for
later. Thank you. (applause)
Mr. Stassen: Thank you, Mr. Chairman. I'm going to ask my partner,
Garrett Johnson, who's been handling major litigation for
the Chicago Board of Trade for many years and who has
defended at deposition several people I see in this room,
who has studied this question very carefully, studied the
contracts, and by the way, we've never lost a case for the
Chicago Board of Trade, and that's since 1931. In any event,
Garrett is going to take you through some of the core
documents. We'll be ready to respond to your questions then,
but I think it's important, there has been so much
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misinformation, so much disinformation, and I don't know who
to attribute that disinformation to, but there's a great
deal of that, that we ought to go to the documents
themselves, take you through them and let you understand our
legal reasoning. It's going to take a few minutes, but I
think it will be worth your time. Garrett Johnson, please.
Mr. Johnson: I have not been representing the Board of Trade since 1931,
but I have for 25 or more years, on and off, and John's
right, I have defended a number of you at deposition and we
agreed to keep your precise identities confidential. You
have seen in the materials circulated in connection with
this Plan, expressions as Veda mentioned, the painstaking
effort that the leadership has taken with advice of bankers
and counsel to structure, restructuring in a way that would
preserve the exerciser right. You have also seen, in brief
terms, an expression of the confidence of your leadership
and the confidence of your counsel that the Plan does so.
John just promised that we would go through the specifics of
Article Fifth B and of the 1992 Agreement and describe for
you why we are so confident about that and that's what I
will do right now.
Mr. Johnson
(continuing): The right is in this CBOE Certificate of Incorporation, it
provides and, I'm sorry, this is not the full text, but the
full text both obviously of Article Fifth B of the
Certificate and of the Agreement can be available to you,
we're not - by selecting portions of it, and leading you
through what we believe to be the strength of our position,
it is not our intention to hide anything from you. The
important points are every present and future member of the
Board of Trade is entitled to be a member of the CBOE
without acquiring such membership for consideration or
value. Now that's additional consideration or value. The
provision also provides, or lays out in language that we
have not selected for this slide, the basis for this and it
really was two-fold. One: it was in recognition of the fact
that it was the efforts of the members of this Exchange that
made CBOE a reality; and, second: that in the early days,
it's a long time ago, nearly 30 years, expert traders from
this Exchange were desired to go over to the CBOE and
provide liquidity and provide experienced traders to that
institution. And it was in recognition of both those two
things that the exerciser rights were created. Over the
course of a number of years, things changed. CBOE, among
other things, became less grateful to this Exchange. But
there were other things that changed, and as a result of
those changes, disputes arose between the members of this
Exchange and this Exchange and the CBOE with respect to what
the exerciser right meant in certain previously
unanticipated circumstances. My understanding is that
leasing seats, that is the ability to lease a seat, to
appoint a delegate to one's seat from this Exchange was
first done in the late 1970's after the creation of this
right. That raised a question. What was contemplated there?
A second big question was related to the creation here of an
evening trading session and a concern on the part of the
CBOE that someone would delegate his seat, have his delegate
trade at the CBOE during the day and
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trade over here at night or vice versa. And then there was a
question whether in the event of delegation of the seat, the
owner of the seat or the delegate was empowered to become
the CBOE member. Those were resolved in the 1992 Agreement.
It preserved rights both for the CBOT member and for the
delegate of that membership to exercise and trade on the
CBOE. This is a quote from a definitional provision in the
1992 Agreement: "eligible CBOT full member (and there's an
equivalent definition for what is termed an eligible CBOT
full member delegate that I don't have on a slide, but is
available to you) that was defined to be an individual who's
the holder of one of the 1402 existing CBOT full memberships
and who is in possession of all trading rights and
privileges appurtenant to such CBOT full membership."
Appurtenant is one of those words lawyers put down on paper,
but don't say very often. "Trading rights and privileges",
that is what the owner of the Board of Trade membership has
to hold, "include the right to trade as a principal and
broker in all contracts traded on the CBOT, whether by open
outcry, electronically or otherwise, during any segment of
the trading day," (taking care of the issue about the night
session), "and every other trading right assigned to full
members as a class" (taking care of what might come in the
future and was not yet known). This again is a defined term
in the Agreement. In the 1992 Contract, the CBOE agreed that
specifically, that the exerciser right would survive Board
of Trade Restructuring under certain circumstances -and
here's a quote from that provision: "if the Board of Trade
merges or consolidates with or is acquired by or acquires
another entity, the exerciser right survives if three
conditions are met". Let's talk about what those conditions
are. Those three conditions set out in the Contract, are:
"that the surviving entity must be an Exchange that provides
a futures market or a market in options, securities or other
instruments; that the full members of the CBOT are granted
membership in that survivor exchange; and that those members
have full trading rights and privileges as defined in the
Contract in all products traded on the survivor Exchange."
Let's look at these three conditions. Is the survivor of the
restructuring a futures exchange? Clearly, "yes", the Board
of Trade will remain a futures exchange. So the first
condition is met. The second: Are the Board of Trades' full
members granted membership in the survivor? That is also
"yes". The 1,402 full members existing now will be members,
stockholders and members, of the surviving exchange. The
third condition - does that surviving membership entitle the
holder to full trading rights and privileges? The answer to
that is also "yes". All full members would have, with their
memberships, full trading rights and privileges on the
Exchange. So, it's our view, through this format, through
this structure of the Restructuring Plan, that the full
members will retain their full trading rights and privileges
and their CBOE exerciser rights. It wasn't designed or
intended to be a lawyer's trick or a technical reading of
either Article Fifth B or the Agreement, it was intended as
well to address any legitimate concern that the CBOE might
have. That is there is not going to be as a result of this a
dilution of the CBOE membership either. Now since January
when the Plan was announced and beginning in early March
with exchanges of correspondence, we've had an opportunity
to hear and read what the CBOE argues and what some others
have argued to question this analysis. Interestingly enough,
CBOE, to my knowledge, has never taken issue with the
analysis I just went through. That is, are the three
conditions of the 1992 Agreement met by the restructuring?
To my knowledge, they have taken no issue with that and I
think the reason for that is simple - they can't. They do
raise, in a series of Q & A's that they distributed to their
membership, what they claim to be, and these are their
terms: a technical, legal question, with respect to the 1992
Agreement. They cite to a different provision of the
Agreement that covers splitting or dividing Board of Trade
memberships into two or more parts. They claim now, they are
contending, that they believe that the restructuring plan
would violate that condition. But let's address that claim.
And this, we have a more complete quote from the language of
the express agreement, and that's Section 2B: "In the event
the Board of Trade splits or otherwise divides Board of
Trade 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 Board of Trade full
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memberships and must be in possession of an individual as
either an eligible Board of Trade full member or an eligible
Board of Trade full member delegate in order for that
individual to be eligible to be an exerciser member." Now
that's the provision that the CBOE has raised. What does
that provision mean? In our view, and this is a strongly
held view going back many months, including in advance of
CBOE having raised this, it does not mean what CBOE says. It
does not mean that restructuring would be the equivalent of
a split of the membership. We can give you a specific
example of what it does mean. If the Board of Trade created
separate trading rights for electronic trading and allowed
full members to lease those rights while retaining the rest
of the membership, any full member who did that, that is who
so leased those separate rights, could not exercise at the
CBOE. That's what we believe that provision to mean and we
believe that the CBOE, in 1992, believed that provision to
mean just that. And the reason for that is that in the 1992
ballot materials, now these are the materials that went out
with the Board of Trade ballot seeking membership approval
here for the Agreement with CBOE, but these were materials
that were approved by both Exchanges before they were
distributed, those materials state, and I quote: "Question:
regarding GLOBEX, must the GLOBEX screen trading right be in
the possession of the CBOT full member in order for him to
exercise on the CBOE?" And the answer is "Yes". Now that's
exactly the example that I gave in the previous slide. That
is, it was a creation of a separate trading right that by
regulation at the time, was separately delegable. Under the
agreed understanding of the 1992 Agreement, separating those
two would have meant that the owner or delegate could not
exercise the CBOE exerciser right. Why is that different
from what we're looking at? In part it's different because
it was agreed to be different in 1992. The 1992 Agreement
dealt with trading rights, not with ownership. Our
understanding, while they've not yet asserted this, our
understanding, and this is based on some questions from
members here, is that they might assert that a full member's
sale of stock, some or all of the stock in the electronic
trading company, would violate the 1992 Agreement. There
isn't any basis in the 1992 Agreement for that. The 1992
Agreement deals on its terms with trading rights and focused
in its negotiation, on disputes over the trading rights.
Again, in the ballot materials in 1992, this is addressed
directly and explicitly: "Question: will Ceres Trading LP
interests also be subject to the Exercise Agreement? Answer:
No. The Ceres Trading LP interests are not trading rights or
privileges and, therefore, are not subject to the Agreement.
Once again, this Q & A was approved by the CBOE in 1992
before it went out to the membership of this Exchange. And
what those two sets of Q & A's do, in our view, is
demonstrate the clear difference that was understood in 1992
between a split of the trading rights and split of ownership
or division of ownership. After all, Board of Trade members
received ownership, limited partner interests, not stock,
but limited partner interests in series and the CBOE and the
Board of Trade understood at the time that that did not
negate the exerciser right. So, in our view, the CBOE is
wrong. They're wrong in what they have said directly and
they are wrong, if what they raise is what we have heard
from background rumblings and questions from the
memberships. There is no split of the memberships that will
occur. No split of the trading rights will occur either.
Full members after restructuring, will still have all
trading rights and privileges that they are required to have
in order for the exercise right to remain effective. And
moving the Board of Trade's electronic trading business,
part of which is now in Ceres, part of which is not, to a
new Delaware corporate structure, is neither a split of a
membership or a split of the trading rights. And so in our
view, we have a very strong position that we, that is the
Board of Trade, should prevail and preserve the exerciser
right in the event that restructuring is passed. Now, let me
pause here and make explicitly clear what I think has been
clear. I have been discussing in this analysis the full
restructuring plan, that is why after full restructuring, we
believe that the exerciser right will be preserved and will
still exist. We could go back and parse that for the first
step of the analysis, but if you followed me through this
analysis, you understand that for the first step of the
analysis, there is essentially nothing that we have heard
that the CBOE could argue that implicates, that has any
implications for the trading right at all. The first step is
going to be described to you in more detail by my partner
Joe Gromacki, but it is essentially a move to Delaware and
it will have no remote connection with a split of the
membership and it will have no remote connection and no
impact at all on the trading rights.
Mr. Johnson: Mr. Chairman do you want to take questions now on this subject
or do you want to wait until the end?
[Pause]
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Mr. Gromacki: Thank you, Garrett. What I'd like to do here today is to
give you a very brief overview of Step 1 of the CBOT
Restructuring.
Mr. Gromacki: (continuing) Today, the Chicago Board of Trade is an
Illinois special charter corporation subject to the Illinois
Special Charter Not-for-Profit Corporation Act. As such, it
has a somewhat unique legal status. After Step 1, the Board
of Trade will continue to be a non-stock, not-for-profit
corporation. However, instead of being organized as a
special charter organization here in Illinois, it will be
organized in Delaware. There are three legal actions which
are required in order to effect Step 1 of the restructuring.
And these are the things that are submitted to you for your
approval in the first member vote. The first is an election
by the Board of Trade to accept and be governed by the
Illinois Not-for-Profit Corporation Act. That is the Act
which currently governs the Chicago Mercantile Exchange. The
second is a technical amendment to the special charter to
add certain provisions that are required under the NFP Act.
The reason for electing the NFP Act is to facilitate the
third part of Step 1 of the Restructuring which is the
reincorporation merger of the Board of Trade into a newly
formed Delaware non-stock not-for-profit corporation. These
are three separate actions. However, you're being asked to
vote on them pursuant to a single integrated ballot because
the Board of Trade wouldn't pursue these steps independently
without pursuing all three. They have the combined effect of
moving the Board of Trade from Illinois to Delaware.
Mr. Gromacki: (continuing) What is the impact on the Board of Trade? The
Board of Trade's current special charter and rules and
regulations will be replaced by a new charter by-laws which
will incorporate substantial portions of the current rules
and regulations. The special charter will no longer exist.
However, all of the members and membership interest holders
will continue to have a membership or membership interest in
the Board of Trade. You'll have a corresponding class of
membership or membership interests in the Delaware
Reorganized Board of Trade.
Mr. Gromacki: (continuing) What is the impact on members? The objective in
structuring Step 1 of the Restructuring was to substantially
replicate to the largest extent possible all of your current
rights and obligations as members and membership interest
holders. And that is what has been accomplished by the
structure of the transaction was it's being submitted to you
for your approval. Your rights and obligations will be
substantially similar in all material respects to those that
you have today. There will be some changes as a result of
moving to a different state. Some of these changes arise
from the desire to modernize and streamline some of the
corporate governance features of the Board of Trade in a
manner consistent with the overall Restructuring Plan and
others are simply the result of the application of a new
body of law to the Board of Trade. However, as the ballot
materials describe in more detail, all of your key rights
have been preserved. The voting rights of fulls and AMs have
been preserved. The liquidation and dissolution rights of
all classes of members have been preserved. All of the
trading rights and privileges have been preserved. All of
the terms and conditions of membership are also preserved.
Even your governance structure will carry over entirely in
the new organization in Delaware. The same officers and the
same directors will continue to serve for the same terms.
Mr. Gromacki: (continuing) Earlier I said that there are some differences.
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What I'd like to do is just take a minute to highlight what
these differences are because they are important.
The most important difference is that as a Delaware
organization, the Board of Trade will have the ability to
elect for-profit status. That is essential so that it can
distribute stock in the new companies to the members.
Delaware is one of a relatively small number of
jurisdictions in the United States that allows a corporation
to do this. You can do it either by merging into a for-
profit corporation or by amending your charter to provide
that you can issue stock. There are some other changes.
Delaware law does not really recognize a special ballot. So
the special ballot will become a proxy ballot.
Also, the petition process that you have currently is not
expressly recognized under Delaware law. However, we have
gone to great pains to replicate the petition process in the
Delaware organization. It will be called something a little
different. It will be called proxy voting at special
meetings called by a certain quorum of members, but it will
vest the same authority in the members that you have today.
Lastly, because Delaware law sets forth more detailed
requirements, in terms of which rights should be set forth
in an organization's charter and which rights should be set
forth in the by-laws or rules and regulations, some of your
rights have been basically moved from the rules and
regulations and placed into the charter. Charter
amendments, in Delaware, as in Illinois, require both Board
and Member approval. This is a technical change as a result
of the application of Delaware law. However,
notwithstanding these differences, members rights will be
substantially similar in all material respects. All of
these differences have been described in detail in the
ballot disclosure that has been distributed to you.
Lastly, I just want to touch upon the approval process for
Step 1. On May 16th the Board of Directors overwhelmingly
approved Step 1. The next requirement is membership
approval. As I said before, although Step 1 as a technical
legal matter consists of three independent steps, the Board
of Trade wants to take all of these steps together and so
these are being submitted to you pursuant to a single
ballot. As a result, we have combined your special ballot
with a
<PAGE>
proxy vote on the third part of the restructuring. The
required approval is two-thirds. This is set forth by
statute. Step 1 is described in great detail in the ballot
disclosure that has been distributed. Certain aspects are
also described in the Restructuring Report. You should
review carefully all of these materials before you vote, but
as we've said Step 1 is an important step. By moving the
Board of Trade to Delaware, the Board of Trade will exist
under a more flexible and well-developed body of law which
will enable it to pursue its strategic goals, including the
restructuring. Thank you.
I don't think CC needs any introductions, but for those of
you who don't know CC, CC Otum wants to say a few words.
Mr. Otum: Thank you David. First of all, I'm delighted to be here
today and I'm equally pleased to be able to reunite myself
with so many old friends and former associates. I know that
it goes without saying that each of you who are in
attendance and those of you who are listening by way of
MemberNet today realize how critical the issue of
restructuring is, not only to us as members, but to the
institution. I stand before you as a member lessor who has
shared every emotion, every doubt and every concern that you
might now be experiencing. For months I've tried to analyze,
quantify and rationalize this Herculean proposal. I have
also tried to understand and to accept the attendant
changes. The more I analyzed the proposal, the more I
vacillated as to my conclusions. As I continued to flip
flop, I began to understand better a quotation that former
President Harry Truman was fond of citing. He liked to say
that he wished that all economists had only one hand so they
couldn't say "but on the other hand". Of equal importance
also is the fact that I could not envision the evisceration
of an institution that had served its members and the world
so well for 152 years. But my ambivalence truly accelerated
when I began to debate against myself the pros and cons of
my own personal wishes and preferences against those issues
that might need to be championed by the Lessor's Committee.
It was at this point that I decided that the only things
that were in the middle of the road were dead animals and
yellow stripes. Without further explanation, let me affirm
and attest to each of you that I totally and wholeheartedly
and without hesitation support this restructuring effort. In
keeping with the support, I wholeheartedly support the first
issue on this issue. You might ask "Is this a perfect plan?"
Of course it's not. But this is not a perfect world. But
this is a damn good plan. You might ask also "Is this plan
going to satisfy each member?" Of course it's not. As you're
well aware there are those
<PAGE>
of us who would probably vote to close Christmas Day if we
had a choice. What this Plan does give each of us is a
tremendous opportunity to share in a limitless revenue
stream that will be created by increasing our capital base
and enabling us to be a significant competitive force in
world markets. Changes in international derivatives trading
are occurring at warp speed. Advances in technology are
rapidly supplanting the need for traditional derivatives
exchanges. We can either embrace these changes or risk
oblivion. Nevertheless, you must remember that adversity can
be a breathing ground for opportunity. Time, financial
considerations and competitors are not our allies. There are
a host of focused technologically savvy, well capitalized
entities that are poised to try and capture our market share
and plunder our existing contracts. As we speak today, the
Chicago Mercantile Exchange and the Pacific Coast Stock
Exchange have received initial SEC approval and are poised
for an upcoming IPO. On an international scene, traditional
futures exchanges as well as securities markets in New York,
London, Tokyo, Frankfurt, Sydney and Singapore have either
instituted de-mutualization or appear to be in serious
consideration of such. However, these facts and situations
need not be seen as negatives. They should be seen as a
clarion call to unify the membership and to allow the Board
of Trade to not only survive, but to elevate itself back
into the rightful position of being the premier derivatives
exchange in the world. This plan provides for these
contingencies. There are numerous contentious issues such as
CBOE exercise rights, member fee preferences, other things
upon which there needs to be debate, negotiation and
resolution. Passage of this first vote promises a natural
process and a forum for resolution of these issues. Let us
use our previous successes as a springboard and as a
cornerstone for future greatness. Please join me today in
realizing this greatness by casting a "yes" vote. Thank you.
(applause)
Ms. Kaufman-Levin: This concludes the formal part of this presentation. I
would like to introduce the Lessor Committee which is up
here and that's consisting of Chuck Bloomfield - could you
stand up - could the Lessor Committee stand up: Chuck
Bloomfield, Norm Friedman, Bill Fritz, Sid Hamper, Larry
Israel, Bill Power and Lou Skydell and most importantly,
Nancy Binyen. Those of you who have questions that are -
Nancy, stand up. Nancy's my twin. For those of you who have
questions or issues that are important to you as lessors,
please feel free to e-mail or call or fax Nancy and call or
fax members of our committee. We're a good committee, we
want to serve you well and we look forward to your questions
and comments. If you have questions or comments relative to
restructuring, Carol Burke, our inside counsel, has said
that she will take those questions so that they are answered
correctly and directly to your questions. We're here to
help you, to be your representatives, and to help you
understand this whole restructuring process. I'm going to
let Mr. Brennan handle the Q & A now.
Chairman Brennan: Thank you Veda. Well, there you have it. It was pretty
brief. I know I promised to be brief. I expect there are a
couple of questions out there, so I'll entertain them and we
have the answers for you, I hope. Mr. Tox.
Audience Member: Would it help to answer Ron Grossman's question. This is a
rumor, I
<PAGE>
don't know this to be fact, but I heard that the Board was
within an hour of voting to go to court when the CBOE called
and restarted conversation.
(Lost part of conversation beginning of tape 2)
.....court, weren't we about to sue?
Audience Member: I would say that certainly had a lot of discussion at the
Board. It certainly was an option and it probably the
lawyers will tell you still is an option. But, I don't know
if that answers your question, but there have been
discussions at the Board.
Audience Member: I was trying to help Ron.
Audience Member: Ron, I'll give it back to you.
Audience Member: There was some comment that the first step vote won't in any
way impact on exercise rights. I think you said that Mr.
Johnson?
Mr. Johnson: Yes.
Audience Member: Has the CBOE agreed that that's true? (Laughter)
Audience Member: I'll answer that. You want me to answer that?
Audience Member: Yes.
Audience Member: The answer to your question is no.
Audience Member: Then let me ask once more for the 3rd time. Why has not the
Board of Trade gotten a bulletproof answer to this question
by seeking a declaratory judgment? I mean if it was so
essential that we move this thing along as rapidly as
possible, why did we not get some assurances that we aren't
going to be cutting our throats by doing this?
Chairman Brennan: Well, I'll let the lawyers explain. The process that that
takes and the time that might take and what kind of process
that is, but that was one of the options that the Board
discussed, but we feel very strongly as you have heard
today, because we are taking this two-step process, we
thought we would give the process of our talks with the CBOE
longer time before we had to do something like that. As you
have heard today, that this vote really just puts us from
Illinois to Delaware. It puts us in the exact place that
the CBOE is today. They are Not-for-Profit Delaware
Corporation. Chuck. Hold on one second, you want to follow
up?
Mr. Johnson: Let me just add that along the lines that the chairman
mentioned in terms of timing. One of the problems with
filing suit is that people are now saying that the Microsoft
situation will be still after the end of the trial - years
before resolution. That may or may not be true but it is
true unfortunately my business, the litigation business,
that it sometimes takes an awfully long time and that is
certainly one of the unpredictable aspects of taking an
aggressive litigation course as you described, is that it
would in the most optimistic of circumstances, take a very
long time to get through a trial court and even after
getting through the trial court, there would be a cloud as
it were because of the possibility of an appeal.
<PAGE>
Audience Member: Would it involve an evidentiary hearing, do you believe?
Mr. Johnson: Well, let me relate that to your other question and that is
you asked whether the CBOE had agreed with our position on
Step 1, which we believe is obviously correct. And they have
not agreed. They have not disagreed. It is not in their
interest as the other side of an adversarial negotiation, if
we can describe it that way, to give us something for
nothing. And I think that implicates a whole bunch of other
aspects of this as well and that there are negotiation and
leveraged aspects of the differences of opinion between the
exchanges.
Audience Member: If we go ahead and the CBOE tries to get heavy and lock the
doors to our exercisers, then what do you suppose would be
the ensuing result?
Mr. Johnson: I don't think that any of us doubts that that would lead to
litigation.
Audience Member: And then, how would that impact on us pursuing the
restructuring?
Mr. Johnson: You mean Step 2?
Audience Member: Yes.
Mr. Johnson: I think at that point, we would probably have to resolve
that issue.
Audience Member: Would it not be in our interest to resolve the issue now
rather than spend all the time and effort in Step 1? Before
we pursue Step 1, to resolve this issue now.
Chairman Brennan: I think that the first step is such a technical move and
the Board thinks that this is such a technical move, that
the timing of that, we'd rather go get Step 1 done and allow
amicable talks to proceed.
Audience Member: But, David in the meantime, we could have this judicial
process beginning to come to conclusion and not have to
start all at once.
Chairman Brennan: You are right. It could begin, but I don't know where it
ends. That time frame, we are not in control of. It is in
the courts.
Audience Member: But on the other hand, it doesn't seem to me that this would
be a case that would involve a long protracted evidentiary
hearing like the Microsoft case is. I don't think there is
any dispute as to what the facts
<PAGE>
are. It's an interpretation, it's a matter of law, not a
matter of fact. It's an interpretation of the agreements and
how they impact. Not what they are, but what they mean and
those are questions of law that would not require an
evidentiary hearing.
Mr. Johnson: I agree with you, that would be our position. What I tried
to say, but not as directly as I should have is we have no
assurance that our opponents in the litigation as you
describe it, that is the CBOE, would agree with us that no
evidentiary hearing is needed. They might well choose to
seek to draw things out by turning it into an evidentiary
case. Chuck.
Audience Member: It is obvious that our counsel thinks our position is very
strong. Obviously, they have some position in this. I
guess the question is we feel there is some validity in
their position because we are negotiating with them. Is
there anybody here that is at liberty to tell us what their
proposal is from the table?
Chairman Brennan: There have been discussions back and forth since March.
Our bankers have met numerous times. There is no concrete
firm proposals unlike that you read in the newspapers.
There has been concepts discussed, but again discussions are
underway and the bankers are still currently meeting. They
are meeting this week.
Audience Member: Thank you.
Chairman Brennan: Yes sir, you had your hand up.
Audience Member: Hi, I'm Jack Fahey. I'm a member on the CBOE for the last
20 years and I cornered a member of the CBOE Board yesterday
and point blank said if we go with the first vote, would
that cause the rights problem. He said it's his
understanding that unless the rights are split up that at
that point it becomes a problem. So at this point, he
doesn't see it, but he's basically speaking off the record.
I could mention names, if necessary, but the situation is,
he feels, unless it is split up, they have no argument and
it's better to get something go ahead now and see what
happens versus like CC said lay dead in the road and get
100% of nothing.
Chairman Brennan: Thank you. Lee Stern
Audience Member: Thank you. I've had conversations with Mr. Brodsky, who is
a good friend of mine, within the last 2 or 3 days. This
meeting really and the first step is the most important step
we have to take. I didn't hear, and correct me if I am
wrong, but my understanding is under the Delaware charter,
it takes 51% on certain votes as opposed to two-thirds. Is
that
<PAGE>
correct?
Chairman Brennan: Yes. It is very correct to say that once you are a
Delaware corporation, the vote that would be required to
change your charter to provide that you are for profit would
be a majority vote, not a two-thirds vote.
Audience Member: Alright, here is my comment and here is the point that I
want to make and I may be risking a friendship. There was
no confidentiality in my discussions. The concern of Mr.
Brodsky and apparently at the CBOE who are running the show
is that if we vote for our first ballot on June 28, then it
would only required 50% of the membership or 51% of the
membership to approve the second stage and at that point and
time, they feel that we would be in violation, there would
be a lawsuit, etc., etc. So it seems to me that their
interpretation is as this gentleman just mentioned, was that
they are trying to kill the first step, they are trying to
do it in the newspapers, they are trying to do everything
they can to stop that first step. The first step is the
most important step as far as we are concerned. However,
there is no one in their right mind, including, I think our
chairman, who would say we would go ahead with the second
step without having some sort of understanding as to where
we lie and where we will be with the CBOE in regards to the
problems we apparently have now. Why they are trying to
stop us, why are they trying to dictate to us to stop us
from doing the first step is beyond the realm of
imagination. I don't think there would be five votes for
the second step if we didn't have the knowledge of what the
second step meant in regards to our relationship with CBOE.
I say vote for that first step. If we don't vote for the
first step, we are just playing into everybody's hands that
would like to see us fail. (Applause). I think that it is
most important that we vote for that first step. Going with
that Mr. Chairman, I understand that we are in negotiations
now, our banks are negotiations now, we can continue
negotiations, the membership can show that we are behind
what we want to do. We do the first step, continue those
negotiations, and if necessary as I told you and I told
Brodsky, we'll lock the both of you up in a room somewhere
close the doors and say, you're there until you come out
with a deal.
Chairman Brennan: I'm ready for that. (Applause) Thank you. Yes sir?
Audience Member: Mr. Johnson, If we were to do an IPO after this first step
and it was voted on by 51% of the membership. Would the
CBOE have some kind of argument? I mean, because we would
be diluting or don't you think we would be diluting the
Board of Trade seat?
Mr. Johnson: That is really a good part of the analysis that I tried to
go through and the answer is no. Following that step that is
beyond the 2nd
<PAGE>
step even to the IPO of the electronic entity that is
following it's creation in the moving of the electronic
business all under that umbrella. Even with the IPO in our
view it doesn't disturb the fundamental of the 1992
agreement or of the exerciser right because all of the
trading rights and privileges remain with the membership at
the Board of Trade. Maybe I wasn't clear enough, but that's
what the analysis was intended to show that is what our
reasoning is.
Chairman Brennan: Nick.
Audience Member: I thought that was an excellent discussion you made of the
issues but I would like to revisit this issue about member
who owned both EBOT stock and [unintelligible] stock who
sold his EBOT stock and I'm not so sure that there is as
strong a case is there is for step 1 that there would not be
a problem with the invalidation of the exercise right. Now
I understand your argument that the EBOT stock does not
involve trading rights but I think if you look at 2B which I
know you have many times, its says if the Board of Trade
divides its self into two or more parts all such parts shall
be deemed to be trading rights and privileges in other words
as you know assumed so there is not an argument there. You
cannot simply make the argument well the EBOT stock doesn't
involve trading rights, because of what the paragraph says
if you put it up on the board again (I guess members have it
in their packet) it says that each of the parts shall be
deemed to be trading rights and privileges. Now that is the
EBOT argument you know I've heard your argument. As far as
I'm concerned both sides have some cause to make, but that
is why there's some legal uncertainty here. So I guess my
basic point is that I certainly agree with you on step 1
that we are definitely on solid ground and there is no
problem there. I think there is a possibility that if a
member sold his EBOT stock and therefore no longer held both
parts there could possibly be an invalidation of the
exercise right. Now from my point of view as a member I
don't consider that necessarily a problem. I can hold both
parts if I decide to sell one part because it is at a high
price I could see the cost benefit analysis if selling one
and foregoing the exercise right it's therefore within the
members control, so that is my thought on it it is basically
that I doubt and even from what you're saying I don't think
you're entirely you said, you considered the sale of the
EBOT stock issue to be one in which you had a strong
position, but I don't think it's as strong or you do not
feel it's as strong of a position as you have on the step 1
of the restructuring.
Audience Member: I don't want to undercut our confidence in our position
overall by drawing that (can't get the rest two people are
talking)
Audience Member: And I don't either (unintelligible)
Mr. Johnson: Step 1 should be no problem. Even an arguable problem.
<PAGE>
The argument that you expressed is the one I tried to
address in the 2nd part of the analysis. I'll just make a
could of comments without going over it. One you cited to
the provision but the provision doesn't talk about splitting
the exchange it talks about splitting or dividing the
memberships and that's an important difference in our view.
We take a lot of comfort from the distinction that was draw
in 1992 between the way the trading rights that were
indicated by the situation back then and the ownership
interest in series that was talked about in terms of the LP
interest was handled in those agreed Q & A's. We think, and
that's why I went through those, that's a very strong
support for our position that the 1992 agreement really was
intended to and did address trading rights and not
ownership. This is another way of repeating what I had said
earlier in the analysis. In saying all that, I don't mean to
suggest that it is not an argument that they will likely
make and they will make it with a straight face and I'm sure
with talented lawyers behind them.
Audience Member: That being said, the only thing that I would suggest is to
make, if possible, a full scale effort to update the 1992
agreement to provide some certainty with regard to these
issues. I know you've been working the last two months with
regard to a merger that to me seems to be a much more global
issue with many things involved as opposed to simply
directing your energies to providing some clarity with
regard to the 1992 agreement.
Mr. Johnson: I guess I would say with many respects a third party
observer to this process, I don't believe that the effort to
achieve certainty with respect to the implications of
restructuring for the exerciser right as been undercut at
all by the attention given to other aspects of either the
restructuring or the merger discussions with the CBOE. My
observation is that they've all gotten the attention they
deserve but it's certainly the case that CBOE is not showing
any indication to do us any favors.
Chairman Brennan: Yes sir?
Audience Member: My name is Wally Roberts and I've been asked to read a short
note from a good friend of mine Corky Isen(?) Who is unable
to be here today (a 50 year member of the exchange). It is
address to Mrs. Levin and Mr. Otum. My inability to be at
today's meeting prompts the writing of this letter. I hope
that answers will be forthcoming to explain why we're being
asked to participate in a vote who's outcome would appear to
be to trigger a lawsuit. Prudence would dictate that the
issues be address and resolved. I'm in favor of the
restructuring plan both as a long time member and a lessor
except (underlined) for the unanswered questions revolving
around the exercise rights to the CBOE. Our Board of
Directors I am sure have been well advised by their
attorneys as to the strength of their position, so too, it
is apparent have the Directors of the
<PAGE>
CBOE regarding their position. As a trader I've always lived
by the maximum of determine what can not possibly happened
then protect against it. The risk of losing our exercise
right is to large and the consequences devastatedly
expensive. It appears fool hearty even arrogant to proceed
with our vote until all efforts to resolve the issue have
been made especially while merger negotiations are in
progress. I for one will need convincing that it is in the
best interest of the membership as a whole and lessors in
particular to proceed with this vote as it appears now
without resolution of the exercise issue I would have to
vote against the proposal and urge all other lessors to do
the same. (Applause).
Chairman Brennan: It is too bad that Corky couldn't be here because I think
at the beginning of that he said that he hope that some of
his questions would be answered. I think they were
answered, but I respectfully disagree with the 50 year
member.
Chairman Brennan: Jake. We have limited time here Jake. (Laughter).
Audience Member: I didn't bring anything written so (you have it memorized
who are you kidding) (more laughter). I want to respond to
Lee because I thought he brought up a couple of very
important points, but as Veda said, we have 1402 CIO's,
COO's, CEO's, Chefs, Cooks, and Bottle washers here and
we've lived with that for all the years that we've lived
with that. There are lawyers here there are people who have
made their livings in all kinds of other businesses. I
don't think that any of us are asking these questions
because their not debatable legally I'm asking this
questions and people are asking these questions because we
have a hell of a lot at stake and the fact that there
debatable is important and [unintelligible] and that leads
me to Lee's issue. Lee says we need to make a statement.
Ron says, we need to get some certainty. I don't believe
that the CBOT intends on suing us. The CBOT is going to
lock out one person or as many as it wants it's going to
make us sue them. I think that if we do not demutualize at
this point in time they do not have anything to talk about.
We can then resolve the issue either legally or through
negotiations but they have nothing to stand on. Then Lee
said, lets do step 1 he's right everybody said here its
technical, but step 1, if it's only technical, we don't have
to do it now. Lets do it 30 days before step 2, if it is
not technical if there is something more involved like going
down from 2/3 to 1-1/2 before we have any of the
information about step 2 and by the way is Kearney here
anymore? I understand that Kearney no longer represents us
or work for us. Is this true? But if we don't get the
information that Kearney is supposedly has been working on
that we trotted out to great salesmen whatever I believe we
no longer have a relationship with them. If step 2 is the
important issue and this is a technical issue what are we
doing here? Then lets get the technical issue, if you want
to send a message to the world send a message to the world
change the governs(?) to the Board of
<PAGE>
Trade tomorrow. If you bring up a vote to the members here
to change the governing to imitate to mimic a corporate
structure having a strong CEO, having a smaller Board
vesting the authority in that CEO. I guarantee you it will
send a stronger message to the world out there than this
technical issue and the tip toeing around are exercise
rights and on what step 2 is going to be all about and
whether it should be 2/3 or 1/3. Lets get on to the job that
we need to do, we all want to change the govern structure,
lets change the govern structure without putting things in
doubt.
Chairman Brennan: Well a couple of comments, with all due respect Jake we
have tried on numerous occasions I think we tried with Booz
Allen, I think we tried it many number of times to change.
You have to embrace the change, you have to change your
govern structure in order to change. Step 1 (you are
correct) is a technical move it is because of our age that
we need to take two votes because we have this special
charter. You can't vote on step 2 a month after step 1.
Audience Member: Sure you can.
Chairman Brennan: No you cannot.
Audience Member: Why not?
Chairman Brennan: I'll let the lawyers answer that. Those SCC(?) filings
there is IRS,
Audience Member: Why we can't have step 1 30 days before step 2 45 days.
Mr. Gromacki: I think that there are a number of reasons why step 1 is
important to the Board of Trade. Step 1 takes you out of a
very unusual box that you're in in a sense that you are a
special charter organization with a lot of ambiguity
surrounding your legal status. Step 1 in and of itself
moves you to a jurisdiction where whether you pursue this
restructuring plan or some other restructuring plan or some
business combination with some other entity you've created
greater flexibility.
Audience Member: Joe, with all due respect can we have that vote 30 or 45
days before step 2?
Mr. Gromacki: I think you could structure a transaction where the vote
could be closer to the step 2 vote. I don't know how close
you can make it to the step 2 vote.
<PAGE>
Chairman Brennan: Jake. He can't answer that because you have to get a
ruling the SEC ruling. It took the Merc(?) 4 months by the
time they filed with the SEC(?).
Audience Member: I understand.
Step 2 involves the SEC.
Chairman Brennan: I understand the question was. I understand how long it
takes to get step 2
Chairman Brennan: I understand your question you want to delay step 1. The
Board and we are saying we want to do it now. It is
important that you do it now.
Audience Member: There is the [unintelligible].
Chairman Brennan: That is not the [unintelligible]. We could wait to next
year. We could wait two years from now. We've had experts,
outside counsel, outside experts, we debated it we've been
working on this for over a year. It is in the membership
hands now. This is a good plan is it perfect I don't know
that anything is perfect, but folks it is in your hands.
Audience Member: John, with all due respect to Mr. Isen and others who was a
member for 50 years there has been a pie check here at the
Board of Trades since 1913 and you don't get that kind of
longevity without being able to roll with the punches. Mr.
Filipowski who is an esteemed member of our Board of
Directors has a number of times spoken of inflection points
in the economy and how inflection points long held long term
businesses disappear because they can't change. I think we
are losing sight of without belittling any of these
discussions clearly CBOT exercise right of significant
clearly Jake might have some points and there are other
points, but looking at the simplest issue. The Mercantile
Exchange is already making a transition. The New York
Mercantile Exchange is already making a transition. I'm a
broker here in the corn pit so this whole transition
inflection point might not only take away my lessor
privileges it might take away my day job. On the other hand
if we don't make these changes I guarantee both of those
will be gone and I think that the renaissance over getting
through step 1 if you put this in its most simple
perspective is its got to be done and its got to be done
now. We don't have time for litigation, we don't have time
for working with the CBOT timetable, and Jake if you could
do it within 10 days step 1 and step 2 I think that would be
great but I don't think anybody could guarantee that. I
think that if you want to be in business two years from now
that you have to do this now.
<PAGE>
Audience Member: As long as we're going way back (laughter).
Chairman Brennan: Yes sir.
Audience Member: Thank you Bill [unintelligible]. I'm under the impression
from on of your past meetings that step 2 does not need a
membership vote all it needs is a Board of Director's vote.
Mr. Gromacki: That was correct, but in the ballot you have
[unintelligible]
Audience Member: Will it be guaranteed that we won't have [unintelligible]
Chairman Brennan: It is guaranteed (I forgot the page and I marked it) its in
the charter of the non-for-Profit Delaware so the vote is
guaranteed you can't change it without a vote(?).
Mr. Gromacki: That is absolutely correct the charter of the Board of Trade
after it moves to Delaware and this is in the ballot
materials that have been sent to you it is both described
and the charter itself is included in there. There is an
article which says that the corporation is not-for-profit in
order to change that you have to solicit a major member
approval. So there is no way to back out of the second
vote. It is going to be included in the charter which will
govern the organization.
Audience Member: Why did you go to 51% on the 2nd vote? Why don't you put
that into the charter.
Audience Member: It would take a 2/3 majority vote to do the second step.
That is because it will take away the power of the lessors I
think isn't it?
Chairman Brennan: No.
Audience Member: Okay.
Chairman Brennan: Majority rules it is the democratic way.
Chairman Brennan: Danny.
Audience Member: John you made reference to rule 5b in the CBOT articles
incorporation but you didn't really discuss it. I think
that [unintelligible] as I look at what I have there is a
hundred copies of it for those who are interested it plainly
states that the CEO in their rules can not change the
exercise unless 80% of the members agree and mathematically
that won't happen.
<PAGE>
Mr. Stassen: 80% of the Board of Trade exerciser members and 80% of the
CBOT regular members. So it takes a class vote of 80% of
each. It is in article 5b. Absolutely right. Now their
position in their letters they've been sending out is that
somehow the exercise right is extinguished it vaporizes it
goes into the [unintelligible] I've [unintelligible] so they
are not going to submit the matter to a vote.
Audience Member: So that's with their position we need to address 5b with
them. (Inaudible discussion)
Mr. Stassen: That is what they are contending is [unintelligible].
Audience Member: Okay. Thank you.
Audience Member: Yes sir, I'm Robert [unintelligible]. This is a question
for Garrett (nice to see you again by the way) (How are
you?) Garrett perhaps the question would be answered if I
had a complete copy of the 1992 agreement, but just going
off of what you have here. It says the CBOT agrees
exerciser rights would survive Board of Trade restructuring
if the Board of Trade mergers, consolidates, or is acquires
another entity. Looking at steps 1 through whatever many
steps does this qualify as a merger consolidation or
acquisition? The reason why I ask the question is because
if in fact you look at it the other way around and say that
exerciser rights would survive only under these conditions:
mergers, acquisitions, or consolidations. I would like for
you to address that question.
Chairman Brennan: The short answer is yes that the mechanism of the
restructuring and the move to Delaware involves a merger.
Mr. Gromacki: Absolutely correct.
Audience Member: So that provision does explicitly applied by its terms and
there is no only in there either. It is not if and only if.
Chairman Brennan: Ryan.
Audience Member: I've read this paragraph 2b about a 100 times now and I
continue to focus on the very specific text of all such
parts and it appears to me I'm not a lawyer, but I try to
think like one once in a while. These restructuring in
themselves don't in any way distribute those parts to
anything other than the existing membership until we sell a
piece of that interest in some form of IPO and I would like
John's opinion as to what an IPO in general does to a
existing shareholder's interest. The obvious is a dilution
due to an increase number of shares, but is there more to it
in that
<PAGE>
the three words all such parts are being modified by that
IPO.
Audience Member: Well an IPO is selling part of the ownership of the company.
It is not selling any part of the membership. Particularly
in the case of the E-commerce company. The individual
members won't get the benefit of the IPO except to the
creation of a market for their own shares. The IPO itself
is not dividing any part of anything other than the company
as a whole.
Mr. Johnson: I understand what you are saying, but again all such parts
Audience Member: Parts of the membership. Membership shall not be split or
divided in all such parts [unintelligible].
Audience Member: All such parts that if we split or divide which is what we
are basically talking about creating two classes of shares.
If the A shares or B shares have any portion of those are in
any way separated that that would eliminate the exerciser
right. So if the A shares and B shares were not extended in
any type of IPO and a particular member happened to continue
to own both that doesn't appear to jeopardize the exerciser
privilege but at the point of the IPO in which a person is
in effect via dilution selling a portion of their B shares,
their EBOT shares. Aren't you then doing exactly what this
paragraph says that you will not be allowed to do. That all
such parts meaning all shares need to be accounted for to
maintain the exercise right.
Mr. Stassen: Garrett you have covered that with the slide.
Mr. Johnson: What we had talked about is that the ownership interest (the
language you quote) references trading rights and not
ownership interest and that is the analysis we've been
through and that I've tried to go through as we went through
the slides. That is the distinction that was drawn in 1992
between the GLOBEX situation and the series situation that
is the limited partnership interest in series is ownership
that is not trading rights. In GLOBEX it was trading
rights. They certainly didn't take the position that
someone selling a or someone dealing with the ownership
interest and the context to the series trading rights in
1992 or distributing those interest in 1992 extinguish the
exerciser right.
Audience Member: Well I think we agree that we're not selling the trading
rights, but this paragraph says that all such parts are
deemed to be trading rights. Therefore, for the purposes of
any other context in the agreement the B shares which don't
represent trading rights in their functional state
<PAGE>
but do represent trading rights legally in terms of this
agreement cannot be divested.
Mr. Johnson: We read the agreement differently. We read the agreement to
apply to trading rights and not to ownership.
Mr. Johnson: One thing to keep in mind is that today those of you who are
CBOT full members and have leased your seats and somebody is
exercised that person has trading rights and privileges to
the Board of Trade but that person doesn't have any of the
rights to vote, to benefit from the appreciation of a Board
of Trade membership or depreciation for that matter or to
receive the income from the series partnership. Those
[unintelligible] of whatever the ownership or equity in
voting rights are retained by the CBOT full member. CBOT
has never required that those be held by the lessee who is
over at CBOT as an exerciser. So there's always been an
interpretation of this agreement in the practical
application of it. This division between trading rights and
privileges and disillusion rights, voting rights,
appreciation of valuable membership and the rights for
income from the series trading limited partnership CBOE has
never required that those things be bundled together.
Audience Member: I understand that. In terms of putting something
constructive into the way I read this. Maybe a structural
form in which the class A and class B shares don't
participate in an IPO but that we would crate a third entity
which would be an operating company. To operate the EBOT
business which would lease certain technology from what we
now label as the EBOT such that there would be no shares
sold in what we presently have but simply shares sold in an
operating company that the B class members could participate
in as any of the public would but it is not the B class
members are not directly given interest in that operating
company.
Chairman Brennan: Bill, Hi (laughter).
Audience Member: My name is Bill Power, I"m on the lessor committee. I think
that people have to understand the CBOT's reason for doing
this. They would loved to go public and do all the things
that we are doing, but they don't know how many members they
have. So they are going to be coming at us whether we do
this restructuring or don't do this restructuring, because
they wish to go public and have a finite number of members.
As it stands now under the 1992 agreement that we didn't
portions that we didn't talk about if they went public
tomorrow you could walk into the CBOT's membership
department get a little time stamp and go through the
process of exercising and getting whatever consideration
they have without becoming a [unintelligible] member without
doing any of
<PAGE>
these others things that memberships are required to do and
they'd like to as one of the attorneys said not give away
something for nothing so they are going to try and restrict
this any way they can. The point being that if you're
thought is oh if we don't do this they will leave us alone.
Don't believe it.
Mr. Chairman: Mark.
Audience Member: I'm a full member who leases his seat out to CBOE also.
What I'm surprised at is that there is 900 CBOE members and
there is 700 lessors that lease their seats out to the CBOE.
If anybody here in their right mind thinks that they're
actually going to pull 700 members out of that pit out of
that CBOT at this point in time when they are in fact
fighting for their live against the other three exchanges
i.e. The American Exchange, The Pacific, and I forgot the
other one is. The competition there has never been more
fierce that it is now. It would be like going into the 10
year pit where I tried right now and pulling out like 50,
60, 70% of the traders there and actually thinking that you
are going to execute orders that the customers are going to
get their orders executed. There is not one chance in hell
that they'll pull 700 guys out at this incredibly crucial
point in time. People do bluff and this is in fact one of
those times there is no way they will pull those guys off
the floor. How would they possibly fill the pits up? I
don't know how many pits there are there, but the fact is
I'm sure there would be some very very important pits there
that we would have to close down they would lose their share
of the market to the other exchanges and there is no way
they would do that now.
(Applause)
Mr. Chairman: Art.
Audience Member: I'm an associate member and I lease my seat out. I trade in
the Dow pit now. I would say it is possible maybe their not
going to pull 700 people off their floor, but they are
afraid that there will be 700 more people coming to that
floor also at some point possibly. I'm referring to that if
our exchange which is 80% of our exchange I know a lot of
members here haven't been on the floor for a while, but 80%
of our exchange is done over in the financial side. Well if
all that business is migrated electronically its going to be
very hard for Open [unintelligible] to support our floor.
Just with the grains the 20% that's done agricultural and
its possible that is what they are also afraid of that there
will be a flood of seeds onto the CBOT floor and that will
cause another problem for them. I'm wondering if you know
or you suspect or there are some assumptions what percentage
of our business will be going electronic and once it does go
electronic how are we the people that still trade on the
<PAGE>
floor here everyday going to support Open [unintelligible].
So If there are assumptions, I thought at some point we
would be hearing these assumptions of volume and how this is
going to migrate electronically and how are we going to
manage that?
Chairman Brennan: I think there is a short answer and the long answer. There
is a thousand different opinions on whether its going
electronic, when its going electronic, if it is going
electronic. I think this restructuring plan as proposed
gives them both a good chance. I think the way it is under
one roof today I think Open [unintelligible] these floors
are at a serious disadvantage. They do 95% of business
today and they take all that money and fund the electronic
side because that is what is expensive.
Audience Member: Could you say that again.
Chairman Brennan: I'm saying 95% of our business is done on these two floors
5% is done electronically and all that money that the
exchange generates not all of it most of it goes to fund the
electronic side. So you have to split them. Open
[unintelligible] as a better chance on its own that it does
under one roof trying to serve two masters and trying to
support two different trading platforms which is what they
are very different trading platforms. Same product
different platforms.
Chairman Brennan: Ron you had your hand up.
Audience Member: I think to understand why it is necessary that the Board or
Trade merge with a Delaware not-for-profit corporation
rather than an ordinary for profit corporation initially?
Chairman Brennan: I turn to Joe.
Mr. Gromacki: The Illinois law says that you can merge with a Delaware
corporation so long as the surviving corporation is a not-
for-profit corporation. So that is why this initial step is
being taken and also the for profit conversion if you will
of the Board of Trade will involve the issuance the public
offering of securities to the members that is a transaction
like the CME transaction that will need to registered with
the SEC. So there is a number of reasons why it is being
structured in this matter.
Audience Member: Thank you for the clear answer. Now David, I have one more
question. Is it possible in order to expedite this matter
that the ballot the first step ballot have as a condition to
it that the second step will not be pursued until there is a
resolution of this problem the exercise problem.
Chairman Brennan: I wouldn't ask this membership to vote on something like
that looming out there. I think Lee Stern said it there
wouldn't be five
<PAGE>
votes for it. I think you have to go do the first step give
the process time as I said the bankers are meeting with the
CBOT bankers the professionals are meeting and let that work
it's way out. There are issues between two membership
organizations they don't get done overnight. I'm here to
protect the Board of Trade interest. I'm sure Mr. Brodsky is
there to protect his members interest and hopefully we can
find a resolution.
Yes sir.
Audience Member: Is it possible with a 1,200 members of the Board of Trade
all exercise that the CBOT and then tried to do something
over there politically?
Chairman Brennan: What was the first part? Is it possible?
Audience Member: Is it possible? I mean there is 900 members there and its
1200 members here.
Chairman Brennan: I've been exercised at the CBOT since 1984 I've never
execute a trade over there.
Audience Member: I mean has that been looked into? That we take over the
CBOT if they won't make a deal with us.
Chairman Brennan: Not by me. (Laughter)
Chairman Brennan: I've passed the test twice. (Laughter) You can pass the
test.
Broker dealer test it comes right down to that there are
some fees on that bloody test to take and it discourages a
lot of people. In fact it seems to have discouraged about
702 at this point.
I've passed it in `94 and I don't want to give it up. I'm
paying the dues (laughter).
Norman.
Audience Member: Paul McGuire has always wanted to do that by the way that's
how long that ideal has been around. John, isn't it true on
the `92 agreement that if the CBOT makes any drastic changes
that the Board of Trade member automatically gets a vote
without having to exercise?
<PAGE>
Audience Member: If they do any recapitalization or if they go public or
whatever (inaudible).
Mr. Stassen: Well if they do a recapitalization or go public the Board of
Trade members have an opportunity to exercise in the
expedited manner that was laid out.
Audience Member: Without having to take the test or anything.
Mr. Stassen: Well I don't
Audience Member: It is in that agreement.
Mr. Stassen: I don't have that agreement in front of me so I can't answer
that question categorically. It is suppose to be expedited,
but they seem to think of all kinds of problems as they go
along so I can't give you an categorically answer on that.
That they would not assert some kind of stumbling block to
it.
Audience Member: Thank you.
Mr. Stassen: They won't make anything easy for us as someone had said
earlier, but we have a `92 agreement provision that is very
specific about allowing our people to go over there on
expedited basis to participate in any demutualization.
Chairman Brennan: Yes Mam. Thanks David. Just two quick questions. First
could the lawyers explain the difference between A class
shares and B class shares I'm a little confused on that.
Secondly, even when I get my quote unquote stock a guess
from the Board of Trade if I choose to sell all of my stock
are I not still a member of the exchange? I think you may
have already spoken about that but is that right?
Chairman Brennan: Joe.
Mr. Gromacki: The overall restructuring plan involves converting the Board
of Trade into a stock corporation that would have two
classes of stock. One would be a class of stock the class A
shares that would represent just equity pure equity. It
wouldn't give you any right to trade at the Board of Trade.
The second class the class B shares will be similar in many
respects to the class A shares except that they will have
associated with them trading rights and privileges so that
just as there is today a full membership there would be a
class of a series of the class B stock that would have
associated with it all of the trading rights and privileges
currently associated with a full membership. To answer
your second
<PAGE>
question after the conversion of the Board of Trade into a
stock corporation as a corporate legal matter it would no
longer be correct to say that you were a member. You would
be a stock holder in that corporation. In a sense you would
continue to be a member by virtue of this special class of
shares the class B shares that you would hold because they
would have associated with it the privileges and trading
rights currently associated with a membership. But as a
purely corporate legally matter you would be a stock holder
its probably easiest to think of your interest in the fore
profits CBOT as being that of a member stock holder because
you would continue to have these trading rights and
privileges.
Mr. Stassen: The word member will still exist. Membership will still be
described. You will be very much in sense of the membership
you would be very much like members of the [unintelligible]
now. They are members because they have trading rights and
privileges but they have in the case of [unintelligible] no
ownership whatsoever. The Board of Trade is the sole owner
of the [unintelligible]. The membership term will continue
and everybody going down to the pits will still be called
members and wear their badges. Life won't change.
Audience Member: Okay. So I'll still be able then to lease out my seat is
what you are saying.
Mr. Stassen: That is right there is not anticipation to change any of the
rules about allowing people to lease their trading rights
and privileges.
Audience Member: Is that through the Class B shares is that what you are
saying?
Mr. Stassen: That is right.
Audience Member: Okay. Thank You.
Chairman Brennan: Yes sir.
Audience Member: My name is Steve [unintelligible] I'm an associate member
and I like to touch on a couple of points here. One that
the gentle said over there. No they wouldn't probably want
to get rid of 700 market makers over there, but they
probably have a solution to cover that right away and don't
think I'm giving them any secrets. They could easily issue
emergency permits to cover all the members or issue new
permits for other people to come in and make markets for
them. I don't think that they're exactly cutting their
throats.
<PAGE>
Mr. Stassen: They don't have authority.
Audience Member: Right I know that, but still if they want to go to war they
still have other solutions. I'm not espousing that they are
going to be in the best position. Another point that was
touched on and I just like to ask Mr. [unintelligible] a
question. Is there some rule my understanding is vague. Is
there some ruling agreement that allows for their
maintaining the value of their membership because they are
worried about the dilution of the value membership by too
many exerciser's coming over. Is there or is there not
something in the rule there?
Mr. Stassen: Is there something in who's rule?
Audience Member: In the agreement? That is?
Mr. Stassen: In the `92 agreement?
Audience Member: Correct sir.
Mr. Stassen: About limiting?
Audience Member: Trying to protect the value of their membership.
Mr. Stassen: The 1992 agreement makes it very clear that the 1,402 Board
of Trade full members have a perpetual right to exercise.
The only limit in the agreement is 1402. We can't go out and
create another 100 full memberships and have those
memberships have exercise rights, but the existing 1402 full
membership are in the agreement are enshrined as having the
exercise right.
Audience Member: Okay. We have the exercise right I understand that. If all
1400 as we exist today decide to exercise is there any leg
for them to stand on to deny the members rights because of
the dilution of their membership?
Mr. Stassen: Not under article fifth B or the 1992 agreement.
Audience Member: Alright.
Audience Member: So then to what the other gentlemen said if their worried
about all of us exercising as we become an EBOT and flooding
their markets it seems to me whether or not we create the
new organization or not if we continue to exist as we are
today eventually as Mr. [unintelligible] said they way I see
it the markets are eventually [unintelligible] away from us.
I can see that a lot of other full members are going to
exercise at some point to capture the lease coming in. So
what is their motivation to
<PAGE>
blocking us now since there is no rule or there is no
stipulation or anything that protects them from us coming
over because they are worried about the value of their seat.
What is their driving motive?
Chairman Brennan: I can't speak to their motive. I don't know. I can only
speculate that there is 1402 exercise rights in `92 I think
there were 300 of our seats over there or three hundred and
change. Today there is around 600 on the floor (inaudible).
I think people are starting to wander out but I'm happy to
stay and answer some questions. I want to thank those of
you who are walking out I heard you [unintelligible] vote in
favor of this with all speed.
Chairman Brennan: Mr. Forester. I don't think you have to exercise and take
the test to have a political influence over there. I think
all you need to do when you lease your seat is to get the
proxy vote back and now you're a voter at the CBOT unless
I'm missing something. I think that would be a very
effective way to have an impact on this. I've leased my
seat and I have the voting rights.
Audience Member: You have the voting.
Audience Member: They call it a proxy over there so it is a little different
deal, but we can do that we don't have to exercise and take
the test and do all that. All we need is somebody to
organize that if we need to. So it is not as complicated as
you think to have a political influences at the CBOT.
Audience Member: That is what we are going to have here a proxy. I do
understand there is a number of lessors that have retained
the right to vote at the CBOT while they have leased their
seat at the [unintelligible].
Audience Member: That is correct. And that might be something that we need
to look at a little more.
Audience Member: I've heard that.
Audience Member: That might be some leverage.
Chairman Brennan: John.
Audience Member: I like to answer this gentlemen questions. I don't know but
my analysis is if they can negotiate someway to keep 1402 of
us from potentially going over there. They will do it one.
Two they wanted to mutualize and they are waiting to see
what we do. If they cut up their shares among 930 guys that
is better than cutting it up amongst 2332 guys. They are
talking their position they are long beans and they are
bullish (laughter).
<PAGE>
Audience Member: That never works either. (Laughter)
Chairman Brennan: Nick.
Audience Member: I'm wondering what sort of budgets have been worked out for
Open [unintelligible] in years to come. As we know from the
restructuring plan there are a variety of higher expenses
that are forecast in future years. For example marketing,
this that or the other thing. How does and as you know we
are in a cash crunch as is. So what do you foresee for
future years.
Chairman Brennan: As far as the budget for Open [unintelligible]
Audience Member: Yes. Dues have been talked about is that on the schedule
and if so how much? An actually $300 a month doesn't sound
like very much but if you have a budget I'm interested to
know what do you think is an appropriate amount.
Chairman Brennan: I think the Board in June is going to consider dues and
transaction fee increases.
Audience Member: This brings up a point that I've been advocating with a few
like-minded members namely that we should continue are
ownership of market data as you know under the restructuring
plan we keep all quotation revenue for the 1st 18 months but
after that it is split. My thought is that given the
demands that will be placed on Open [unintelligible] for
market and for this that and the other thing and given the
importance of quotations revenues now in our budget that it
would be advisable to keep our ownership of market data
rather than giving it away to EBOT.
Audience Member: Well that is sort of a philosophical thing. This is
[unintelligible]
Audience Member: Before you. I wanted to also endorse what you said at the
last meeting that the market data function could be a
sleeping giant in terms of the possible profit potential
from it.
Chairman Brennan: I think it could be, but I think that the corporation that
generates that data is probably entitled to it. I don't
view it as giving it away. We are not giving it away after
18 months we anticipate that it will be shared and be shared
on a volume basis. So that entity which is generating that
data owns the data.
Audience Member: Well my point of view is that we own it now. We do need the
<PAGE>
money. And if we could retain it I think it would help us
out in a lot of ways.
Chairman Brennan: There is no question it would be better to have more money.
(Laughter)
Audience Member: The quote is not just based on volume. I mean I could pay
18 for it and trade one lot and the electronically it could
trade 10,000 contracts at 18 but I still paid for that
quote. I still put it up there. So I don't see why that is
being done. Once we do make this first vote and once the
bar is lowered to 50% we will never be able to retain that I
believe.
Chairman Brennan: Retain?
Audience Member: The Open [unintelligible] revenue from our quotes.
Chairman Brennan: Well you don't know that though.
Audience Member: Well I do know that if that revenue is coming from that room
and that room is going to electronic or even 50% of that
room goes electronic that is going to mean a significant
lost of income to Open [unintelligible] and I'm talking
about from not just from quote fees but from exchange fees.
Chairman Brennan: You know what. That is the brutal truth. If this market
place goes electronic you are right okay but do you want to
lose it to your platform or someone else's. I understand
that the Open [unintelligible] losses its business to the
electronic side that it won't be able to generate the
revenue that is true.
Audience Member: That is why the Open [unintelligible] needs to retain some
sort of either built in MFN or some sort of actual royalty
fee or franchise fee.
Chairman Brennan: But remember the membership is going to own both of these
companies. If you saddle one company with the baggage of
another that can't make it on its own.
Audience Member: I agree these guys in the [unintelligible] pit and a lot of
these members here will be gaining on one side and maybe
losing on the other side. But I trade in the Dow and I can
tell you David that the only reason that [unintelligible]
has any
Chairman Brennan: I'm agreeing with you if you say the [unintelligible] can't
survive without the pit is what you are saying right?
<PAGE>
Audience Member: That's right.
Chairman Brennan: How are they going to lose to the electronic?
Audience Member: They are going to trade electronically a million Dow
contracts and we're going to trade if we are lucky
Chairman Brennan: So you are saying that the Dow will survive on the
electronic side but the open outcry can't.
Audience Member: Yes.
Chairman Brennan: I don't know why?
Audience Member: No the Dow will survive on the electronic side we will
create it with a floor presence but the floor will not be
generating that kind of income to allow us to one day have
IBM futures, one day have Cisco futures, we won't have the
money to have a floor presence because they will be trading
a million electronically and only 10,000 on the floor. But
the floor needs to be there. That's my little AM opinion.
(Laughter).
Chairman Brennan: Gary.
Audience Member: I can't believe how complacent this lessors group has been
about the issue of MFN, that is Most Favored Nation status,
or Member Preference Fees in this demutualization plan. As
you know lets call MFN the member preference acronym. MFN
is only going to extend for 3 years or at the current plan
on EBOT. Then it is going to disappear. Well you guys have
to realize that right now you own a high yield bond you're
full members are collecting somewhere between 6 and 11,000
thousand dollars a month for the last 18 months that is a
high yield bond that you own. If this demutualization goes
through and this exchange goes entirely electronic -- which
is highly likely, highly likely -- you are going to have a
high bate of stock that some people think will be worth a
lot of money. I happen to think its not going to be worth a
lot of money, but you are going to replace that high
yielding bond with a much lower yielding bond because all
these full seats are going to over to the CBOT and depress
lease prices. In fact the CBOT is talking about having an
electronic system where a membership is not important. And
your yield is going to go from 10,000 a month down to zero.
Now if we had most favor nation status in perpetuity and we
went electronic, like I think we will. We'd still have some
yield in that class B trading share that was discussed and
there would still be some income. If there was a very high
volume on EBOT, it's possible that your lease income -- in a
four million contracted
<PAGE>
day, all electronic world -- would be higher than it is
today. I don't happen to believe that the member preferences
or this MFN is going to hurt EBOT's stock. I think it is
going to help it. If the member preference hurts EBOT"s
stock, it is not going to hurt it by much. I am just
incredulous that faced with this, this group is willingly
giving up a monthly income and accepting a high bate of
stock and is just not even giving a blink to it here. All
you people got to ask yourselves, how many of you own half a
million dollars worth of a high beta, E-commerce stock.. How
many of you own that much? I bet not very many. How many
would be comfortable owning that? Not very many. How many
would be comfortable owning a half of million dollars of an
E-commerce stock when you have a chance of also owning a
high-yield bond? I think you'd all vote for the high-yield
bond and the high beta stock rather than just the high beta
stock.
Chairman Brennan: Is there a question in there, Gary?
Audience Member: I thought it was questions and comments. I have a comment.
The rest of the comment...
Chairman Brennan: It's 5:40.
Audience Member: Okay, I'll hurry it along. You talked about the CME having
98% approval. The CME has member preference in perpetuity.
The CME has 6 seats out of 19 on the board that are
represented by the Class B trading rights shares. The CME
has a CEO that gets paid on the appreciation of Class B
trading rights stock and the Class A stock. All these
measures help to reserve the value of the lease value in an
all electronic world at the Merc. I don't think there is
any secret that that's the reason that that vote passed by
98% and this vote is going to have a very difficult chance
in passing.
Chairman Brennan: Let me say something about the CME. I don't want to
compare our plan to theirs that much. Our plan is very
different than the CME's. They are staying one company.
They have percentage thresholds where they automatically
close pits and there are those that believe, and I think
they might not be far off, where you could see a day where
these electronic-side trade substantially higher volumes
percentage wise than the pits. And these pits could enjoy
higher volume than they do today. But under the CME's plan,
they will automatically close them. It's a different plan.
Audience Member: Okay. It's a different plan, but it definitely has a
provision for the lessors to earn a lease, even in an all
electronic world.
Chairman Brennan: As long as those pits are open.
<PAGE>
Audience Member: No, no. Even if the pits over there close, there is still a
member preference which means there will still be a lease
value for their Class B share. In conclusion, I want to say
if there was MFN in perpetuity, I could vote for this
demutualization. Without it, I can't vote for it. And I
think that all you lessors have got to ask yourself the
question -- if you comfortable making this change in the
asset class that you are holding. It is a tremendous
change. If you don't want to make that change, then I think
you got to vote "no" when the bar is set at three-quarters
in the first vote. Don't wait until the bar is set at a
half. If you are comfortable having that tremendous change
in the asset class that you hold, then fine. If your
uncomfortable with that change in asset class, vote "no."
Thank you.
Audience Member: I don't think that a lot of lessors are looking at it the
same way that you are, Gary. It is true, and you forgot the
key word, it's a high yield junk bond that we own. You just
said "high yield bond," it's kind of junk. And I think
everybody in this room understands that and lives with that
risk. And it is true that they would switch asset to a high
beta stock. It is also true that they could purchase a no
cost collar for that stock, which is really no problem to
do, they are issued all the time. But I think that what the
lessors are looking at, when you look at a bond, and we are
bondholders, you look at what the underline is, and the
thing that you are most afraid of is bankruptcy. And that's
what I'm most afraid of. That's what's driving me. So, if
I have to skip through the raindrops to go from one stone to
another, from a high-yield junk bond to a very risky stock,
I'm willing to make that. Because the alternative, I don't
believe is what you think it is, where we can sit and do an
MFN. If you run the dollars on that MFN, which I have, it
doesn't capitalize at the same rate. It's really pennies to
a lessor. But if you wind up with -- you can't stop the
clock. In other words, the choice isn't, oh, well do the
MFN and then our yield is going to stay up and we're still
going to have this instrument. It is that you won't be able
to do the instrument at all. We really have no choice. Now
again, as I spoke with you before the meeting, we disagree.
I've been in sales. I used to sell computers. All lot of
them. One hundred million a year. And when you sell
something to somebody, there is either interest, or there is
no interest. You can't take out an ugly car and say, "do
you want to buy this car, it's at a discount," they just
don't want to buy the car. They either want to buy it and
have interest and they'll pay the price or they won't buy
it. And your view is, you can sell them what the
experienced underwriter is telling you is essentially an
defective product. And what these guys have done, is
they've sat in a room and they've said, okay, you have a
good point. MFN and these and guys want it forever, the
underwriters say nothing. We'll do it like an out trade for
three years. What were you doing three years ago? What did
the world like three years ago? What is it going to be
three years from now? Nobody knows. Three years is an
absolute eternity. In addition, I'd like to tell me one
exchange that's raised their rates in the last couple of
years. Secondly,
<PAGE>
I'd like you to tell me a business where the stock is held
closely by the key customers and they've jammed with a rate
increase. That's the way I look at it.
Audience Member: Would you repeat that last sentence thing please.
Audience Member: Where you have a business, True Value Hardware perhaps, I
don't know. Where the shareholders are your key customers
and your key providers and the corporation has increased the
rates to them. It just doesn't happen.
Audience Member: Okay, first of all the exchange that raised rates was the
Board of Trade, on Project A, raising the rates that
individual sole proprietor members paid. Our rates went up
and the rates for clearing firm proprietary accounts went
down. So, hey, my rates went up on Project A within...the
Board of Trade is the exchange.
Audience Member: And what happened?
Audience Member: I guess my other comment is that you make a lot of good
points there, but the fact of the matter is that the Merc
has a member preference, not most favorite nation... member
preference and perpetuity, and since their plan has come
out, the value of their seats have almost doubled. Last
trade in the Merc seat is 785 thousand, and I think that
shows... page 35 of the Merc restructuring says Member
preferences it goes in perpetuity. So the fact that their
seats are doing so much better than ours... I think shows
that the market will accept it.
Chairman Brennan: I appreciate everybody coming. Thanks for coming. I do
urge you to vote in favor of this. This is big change, but
the markets are moving fast, there's a lot of change
happening out there, I don't think anybody is blind to it.
It's the right thing to do. Again, thank you for coming.
(Applause)
Audience Member: Yes, thank you Veda, and the lessor's committee for hosting
this, I think it's the first.
[END]
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