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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
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The following prepared remarks were delivered to the CFTC on July 19, 2000.
COMMODITY FUTURES TRADING COMMISSION
AGRICULTURAL ADVISORY COMMITTEE
JULY 19, 2000
Good afternoon, my name is Michael Ryan and I serve as 2nd Vice Chairman of the
CBOT's Board of Directors, a member of the CBOT Executive Committee and Chairman
of the CBOT's Strategy Committee. I would like to thank Commissioner Spears and
the CFTC's Agricultural Advisory Committee for the opportunity to appear before
you today to discuss the effects of CFTC's new regulatory framework and the
CBOT's restructuring initiative on the CBOT's Agricultural markets.
CBOT PRODUCTS AND CUSTOMERS
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As most of you probably know, the CBOT's core agricultural products include
futures and options on wheat, corn, oats, soybeans, soybean meal, soybean oil
and rough rice. These products account for approximately 25% of our transaction
volume, with the remainder derived from financial and stock index products.
The CBOT's agricultural futures and options contracts are utilized by a very
diverse group of users, including many who do not participate directly in the
markets but use the price discovery information provided by these products for
business planning and in OTC products. For example, many producers do not hedge
directly using exchange-traded futures and options but prefer to forward
contract with their local elevator. These forward cash contracts are typically
priced basis CBOT futures. The CBOT's agricultural futures contracts are also
used by the U.S. Department of Agriculture's Risk
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Management Agency to determine payment levels for Crop Revenue Insurance
products; however, few crop insurance companies participate significantly in
these markets.
The primary participants in the CBOT agricultural futures and options markets
include a broad range of U.S. and foreign commercial firms involved in grain
merchandising and processing, grain and livestock production, and food
processing and manufacturing. Important sources of liquidity in the
agricultural markets include CBOT members and institutional investors such as
commodity funds and pools.
While in the past the CBOT has had few competitors for its agricultural
products, information technology, globalization and the growth of foreign
exchanges have combined to create an intensely competitive environment for the
entire futures industry. As a result of these competitive pressures, the CBOT
is engaged in a number of initiatives designed to improve market efficiency and
lower costs, including enhancement of Electronic Order Routing to the CBOT's
open outcry markets, implementation of the Eurex Alliance electronic trading
system, and restructuring.
In order to enhance liquidity in the CBOT's agricultural futures and options
markets, CBOT staff constantly monitors contract performance and reaches out to
market users to determine how effectively we are meeting risk management and
price discovery needs. Since September 1999, the CBOT has reviewed contract
terms for every agricultural contract and implemented changes for all of them
except soybean meal. These changes, which range from re-designing the delivery
system for corn and soybeans to enhancing
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quality specifications for Rough Rice futures, were developed in close
cooperation with representatives of producer and other agricultural trade
associations.
This same combination of performance monitoring and customer input was used by
the CBOT to develop its current proposal to increase the maximum daily price
fluctuation limits for the CBOT's agricultural products. These changes,
initiated to enhance worldwide product distribution, will provide market users
with more continuity in price discovery and improved market access during
volatile markets, and were developed based on input from members of CBOT's
Agricultural Advisory Committee (AAC), major agricultural clearing firms, and
CBOT members. While a slight majority of our AAC favored either eliminating or
increasing daily limits by 50%, some producer groups and members of the National
Grain and Feed Association felt current limits should be maintained. Therefore,
the CBOT's proposed increase in price limits is a compromise between market
participants who prefer no limits and those who believe that daily price limits
provide an "cooling off" function in volatile markets.
CFTC's New Regulatory Framework
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On behalf of the CBOT, I would like to commend the Commissioners and staff for
their efforts in developing a new regulatory framework. We believe this
proposal creates an environment in which the U.S. futures industry may compete
effectively in the global derivatives marketplace. Replacing detailed
regulations with Core Principles that give exchanges the flexibility to decide
and design how to meet their regulatory obligations will allow exchanges to
better meet the needs of diverse customers.
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Effect of New Regulatory Framework on CBOT Ag Markets
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Competition among providers of risk management and price discovery services in
the agricultural markets is increasing as a result of advances in information
technology, globalization of markets and regulatory disparities between
traditional exchanges and OTC and foreign markets. In short, users of the risk
management and price discovery services provided by traditional exchanges are
demanding increased transparency, greater access and lower costs.
The impact of information technology on the commodity markets is currently most
pronounced in the cash markets where "Online" Exchanges such as ICECORP, E-
Markets, Rooster, and Cybercrop to name a few are attempting to link buyers and
sellers of agricultural products and inputs directly. Enhancements in
information technology are also lowering the barriers to entry into traditional
exchange markets as evidenced by recently approved contract markets for live
cattle, barge freight and a wide array of financial products. While the CFTC's
regulatory reform proposal will enable traditional exchanges to better meet
these competitive challenges, the reduced cost of regulation will also benefit
these new competitors.
The new regulatory framework will benefit users of risk management and price
discovery services directly by allowing service providers to reduce cost and
stimulate innovation. New product listings are likely to proliferate in response
to the lower regulatory costs and the lower cost structures of electronic
trading. New product specifications may also be
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influenced by the proposed regulatory structure as providers look for innovative
ways to provide users with the tools they demand in the most cost-effective
manner.
CBOT Restructuring Plan
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On June 28, 2000, CBOT members overwhelmingly voted in favor of implementation
of the initial step of the Exchange's strategy to restructure as a for-profit,
demutualized organization, with about 91% membership support. This initial step
will allow the CBOT to reincorporate as a Delaware non-stock, not-for-profit
corporation, which will serve to facilitate the CBOT's future restructuring
efforts.
The approved restructuring plan has the following features:
. Allocation of shares of stock representing both trading rights and equity
ownership in For Profit CBOT to members;
. Adoption of a streamlined management governance structure at the CBOT with
a smaller Board of Directors and a more efficient decision making process
that would enhance the CBOT's ability to respond to the rapidly evolving
marketplace;
. Reorganizing CBOT's electronic trading business as a for-profit company
focused on electronic trading;
. Allocating shares in the electronic trading company to the members;
. Unlocking value in current membership interests in the CBOT through a
potential initial public offering of the stock of the electronic trading
company;
. Attracting capital for the electronic trading company and potentially the
For-Profit CBOT;
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. Executing a three-year non-compete and cooperative agreement with the
electronic trading company during which time For-Profit CBOT cannot operate
an electronic trading system within its corporate structure, except for a
small order retail execution-type system.
Restructuring the exchange is essential for many reasons. Without it, the CBOT
may not be able to preserve a viable open outcry exchange capable of competing
in the future and at the same time capture the growth of electronic trading.
Restructuring enables the CBOT to adopt a business model that will allow it to
make the decisive moves required to address competitive challenges, build
advantageous strategic alliances, lower costs, and serve customers.
IMPACT OF RESTRUCTURING ON AGRICULTURAL MARKETS
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Detailed business plans for the restructured CBOT companies will be developed by
the Boards of Directors and management of the two companies. However, the
strategic focus of the two separate companies provides a broad picture of their
business objectives and how the agricultural markets may be affected.
For the open outcry company, the focus is expected to be on maintaining and
enhancing liquidity by investing in supporting technologies to capture and
efficiently execute trades, while considering changes to trading rules and other
measures aimed at retaining and enhancing order flow. The main reason for
becoming a for profit corporation is to allow the CBOT to be governed by a more
modern and developed body of corporate law in
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Delaware than that provided by the CBOT's current special charter. Restructuring
will also allow for a more streamlined corporate governance system that
reallocates authority from the membership to the Board of Directors.
The reorganized electronic trading company would continue the CBOT's endeavor to
build a market leadership position by providing a superior electronic trading
platform, initially capitalizing on the CBOT brand and Eurex alliance and
providing greater access to a continually expanding global trading community.
These clients will not be required to own seats or any other type of membership
interests in order to utilize directly the electronic trading platform. The
focus of the electronic trading company will be on creating a cost-competitive
trade execution capability and it will invest aggressively in technology to
maintain and enhance its competitive advantage. This could include new business
and revenue sources in areas such as business to business e-commerce for
commodity trading, direct retail access and franchising its capability to other
exchanges and geographies.
SUMMARY
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In summary, I believe combination of the CFTC's proposed regulatory framework
and the CBOT's restructuring initiative will allow the CBOT to enhance the
world's most liquid, accessible and reliable marketplace for a wide array of
financial and agricultural products and services. These changes will also
stimulate innovation in product development and lead to the creation of new
trading mechanisms. The proposed regulatory framework combined with the
conversion of exchange governance structures
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will allow risk management products and price discovery services to be provided
at lower cost, directly benefiting users of these services.
Thank you again for the opportunity to appear before your Committee today. I
would be happy to answer any questions you may have.
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The CBOT urges its members and membership interest holders to read the
Registration Statements on Form S-4, including the proxy statement/prospectus
contained within the Registration Statements, regarding the CBOT restructuring
referred to herein or in connection herewith, when it becomes available, as well
as the other documents that the CBOT has filed or will file with the Securities
and Exchange Commission, because they contain or will contain important
information. CBOT members and membership interest holders may obtain a free
copy of the proxy statement/prospectus, when it becomes available, and other
documents filed by the CBOT at the Commission's web site at www.sec.gov, or from
the CBOT by directing such request in writing or by telephone to: Board of Trade
of the City of Chicago, 141 W. Jackson Blvd., Chicago, Illinois 60604-2994,
Attention: Office of the Secretary, Telephone: (312) 435-3605, Facsimile: (312)
347-3827. This communication shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of securities in
any state in which offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state. No
offering of securities shall be made except by means of a prospectus meeting the
requirements of Section 10 of the Securities Act of 1933, as amended.
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