<PAGE>
Filed by the Board of Trade of the City of Chicago, Inc. (CBOT)
Subject Company -- Board of Trade of the City of Chicago, Inc.
Pursuant to Rule 425 under the Securities Act of 1933 File No.
132-01854
* * * *
The following communications were made earlier this year, as of their
respective dates, in connection with the CBOT's original restructuring strategy.
On August 31, 2000, the CBOT adopted a substantially revised restructuring
strategy. Thus, the following communications speak only as of their respective
dates and are, to a great extent, superseded and no longer relevant. The CBOT
directs your attention to its Rule 425 filings as of and subsequent to August
31, 2000.
* * * *
The following press release was distributed on January 20, 2000 and is currently
available at the Office of the Secretary of the CBOT.
[GRAPHIC] NEWS
CHICAGO BOARD OF TRADE
For Immediate Release Contact: Richard Myers
312/435-3621
[email protected]
CBOT DIRECTORS APPROVE HISTORIC RESTRUCTURING
Chicago, January 20, 2000 -- Continuing its tradition as the industry
standard bearer, the Board of Directors of the Chicago Board of Trade yesterday
overwhelmingly approved a plan to restructure the exchange.
The restructuring recommendation calls for the demutualization of the CBOT
with current members becoming shareholders in two new companies.
The first company will retain the open outcry platform of trading and will
be a closely held, for-profit company. The for-profit status will allow for
improved decision-making and a more economically viable business that can take
advantage of trading volumes that thrive in the open outcry environment.
The second company will establish an electronic trading capability. This
company is expected to trade all current CBOT contacts, plus additional
products, in an open access environment. It is expected that equity interests in
this new company will be distributed to CBOT members, potentially followed by an
initial public offering. No offering of securities will be made in connection
with any of the foregoing transactions except by means of a prospectus.
In a letter to CBOT members distributed earlier today, CBOT Chairman David
F. Brennan said, "This is an historic time for the Chicago Board of Trade. The
CBOT has built its leadership position by being highly responsive to customers
and having superior management. This restructuring is another ground-breaking
step in continuing the Board of Trade's tradition of industry leadership in the
increasingly global and technologically advanced marketplace."
The restructuring initiative is subject to membership approvals.
###
Editor's Note: Chairman Brennan's letter to CBOT members is attached.
We urge CBOT 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.
* * * *
<PAGE>
The following publication was distributed to CBOT members and membership
interest holders on January 20, 2000 and is currently available at the Office of
the Secretary of the CBOT.
[LOGO] Chicago Board of Trade
January 20, 2000
NOTICE
------
RE: JANUARY 19, 2000 BOARD OF DIRECTORS MEETING RESULTS
At a Special Meeting on Wednesday, January 19, 2000, the Board of Directors of
the Chicago Board of Trade adopted two Resolutions proposed by the
CBOT(R) Restructuring Task Force ("the Task Force"). The vote on these
Resolutions was recorded as indicated below.
. A Resolution to adopt and approve the strategy recommended by the Task
Force with respect to restructuring was approved by a vote of 22 "Aye" and
1 "Nay", recorded as follows:
Director Cahnman Aye Director Niciforo Aye
Cashman Aye Riechers Aye
Cermak Aye Sorkin Aye
Corvino Aye Thompson Aye
Curley Aye Wallace Aye
Filipowski Aye Weems Aye
Hamada Aye Zagotta Aye
Kurzydlo Nay
Lavender Aye
Lee Aye Second Vice Chairman
Levin Aye Ryan Aye
Manning Aye
Michel Aye First Vice Chairman
McMillin Aye Carey Aye
-MORE-
141 W. Jackson Blvd.
Chicago, Illinois 60604-2994
312 435-3500
<PAGE>
-2-
. A Resolution to designate an "Independent Allocation Committee",
(comprised of "public" directors Andrew J. Filipowski, Robert S. Hamada,
Robert H. Michel, James R. Thompson and Ralph H. Weems) to prepare
recommendations concerning an appropriate and fair allocation of value
among the members of CBOT in connection with the restructuring was
approved by a vote of 23 "Aye" and no "Nay", recorded as follows:
Director Cahnman Aye Director Niciforo Aye
Cashman Aye Riechers Aye
Cermak Aye Sorkin Aye
Corvino Aye Thompson Aye
Curley Aye Wallace Aye
Filipowski Aye Weems Aye
Hamada Aye Zagotta Aye
Kurzydlo Aye
Lavender Aye Second Vice Chairman
Lee Aye Ryan Aye
Levin Aye
Manning Aye First Vice Chairman
Michel Aye Carey Aye
McMillin Aye
Copies of the referenced Resolutions are available from the Secretary's Office.
/s/ Paul J. Draths
Paul J. Draths
Vice President and Secretary
We urge CBOT 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.
* * * *
<PAGE>
The following letter was distributed to CBOT members and membership interest
holders on January 20, 2000 and is currently available at the Office of the
Secretary of the CBOT.
January 20, 2000
Dear Fellow Members:
Yesterday, the Board of Directors of the Chicago Board of Trade overwhelmingly
approved a recommendation of the Restructuring Task Force that will preserve the
traditional open outcry platform of trading, while moving the CBOT fully into
the electronic marketplace. In this brief letter, I wanted to provide you with
an overview of the strategic restructuring proposal that was approved.
As you recall, a task force of directors and members, working closely with
senior managers and outside advisors, has been studying restructuring
alternatives since last summer. We have worked very hard to develop a plan that
answers customer, member, management and staff needs and desires. The CBOT must
change if we are going to thrive in an increasingly competitive environment.
This restructuring plan is the `best of all worlds' because it will help us to
better serve the trading community, while providing a more stable financial
future for our members and customers.
The restructuring recommendation calls for demutualization of the CBOT with
current members becoming shareholders in two new companies. The first company
will retain the open outcry platform of trading and will be a closely-held, for-
profit company. The for-profit status will allow for improved decision-making
and a more economically viable business that can take advantage of trading
volumes that thrive in the open outcry environment.
The second company will establish an electronic trading capability currently
unmatched by other exchanges. This company is expected to trade all current
CBOT contracts, plus additional products, in an open access environment. It is
expected that equity interests in this new company will be distributed to the
CBOT members, potentially followed by an initial public offering. No offering
of securities will be made in connection with any of the foregoing transactions
except by means of a prospectus.
A separate electronic trading company will allow us to pursue growth
opportunities aggressively, as well as seek more strategic alliances and
partnerships to capture additional order flow, expand distribution and provide
increased access to capital and technology. In fact, potential strategic
investors already have expressed an interest in this exciting new venture.
The Board of Directors has created an Implementation Committee of directors to
oversee the restructuring plan and prepare the membership ballot materials. The
Board also has created a committee consisting solely of independent directors to
recommend an allocation of value among the members of the CBOT.
<PAGE>
The members will vote to approve the initial steps in the restructuring plan
promptly after the preparation of the appropriate legal documentation, and a
second vote of the membership to approve the final details of the plan will be
required before the plan will be fully implemented later in the year. The
initial steps of the restructuring would commence immediately after the first
approval. It is anticipated that members will take the second vote in the
fourth quarter to approve the final restructuring steps, the conversion of the
CBOT into a for-profit corporation and the spin-off of the electronic trading
company.
You should understand that there are many details to be determined and tax and
other regulatory approvals to be obtained. We will be working to resolve these
issues. Members will receive more information through floor meetings and other
presentations prior to the vote.
This is an historic time for the Chicago Board of Trade. The CBOT has built its
leadership position by being highly responsive to customers and having superior
management. This restructuring is another ground-breaking step in continuing
the Board of Trade's tradition of industry leadership in the increasingly global
and technologically advanced marketplace. I look forward to talking with you
about these developments.
Sincerely,
/s/ David P. Brennan
David P. Brennan
We urge CBOT 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 by means of a prospectus meeting the requirements of
Section 10 of the Securities Act of 1933, as amended.
* * * *
<PAGE>
The following publication was distributed to CBOT members and membership
interest holders on January 27, 2000 and is currently available at the Office of
the Secretary of the CBOT.
[LOGO] Chicago Board of Trade
Restructuring
-------------
Questions & Answers
-------------------
January 27, 2000
<PAGE>
January 27, 2000
Restructuring Questions and Answers
Why does the CBOT need to restructure now?
The CBOT needs to make a decision now about its future. There is a great risk if
we adopt a "do nothing, wait and see" strategy. There are many external and
internal forces providing incentive for the CBOT to change. For example, there
are the increased competitive threats to our business, the declining seat
values, the ability to arrange opportunities for critical strategic alliances
and the opportunity for the CBOT to capitalize on the growth of electronic
trading. Based on these factors and our view of the future, the Task Force and
Board has concluded that for the CBOT to compete effectively in the 21/st/
century, keeping the status quo is not a viable option.
Thus, a plan was designed to position members to benefit from both open outcry
and electronic trading. If we do not take this opportunity, the value to the
membership of any future restructuring proposals could be less -- we believe we
have an early mover advantage that we should seize now.
What is the restructuring strategy?
The restructuring recommendation is for the creation of two separate
demutualized companies--one to focus on open outcry and the other on electronic
trading. Both entities would be for profit. Current CBOT members would have
ownership in both of the new companies.
The open outcry company is now expected to remain closely held by the members
who own equity in the business. The for-profit status will allow for adoption of
modern corporate governance procedures, improved decision making and business
focus. The objective of this closely held corporation would be to use any
retained earnings to make investments in trading operations and technology, to
lower costs and to provide enhanced and more efficient trading opportunities.
The electronic trading company would be focused on rapid growth, open access,
high earnings and the potential for becoming a publicly traded company. It is
our intention to pursue an IPO if it would be the best way to unlock value for
the membership. On an interim basis, the electronic company will be operated as
a for-profit subsidiary of the new open outcry CBOT.
The plan contemplates that the new open outcry CBOT and the electronic trading
company will offer all products currently offered by the CBOT. We expect an
intercompany agreement will provide traders in the pit access to the electronic
platform and the ability to "hit and take" orders while in the pit.
1
<PAGE>
January 27, 2000
When will CBOT members vote on the restructuring strategy recommendation?
It is expected that members will vote to approve the strategic plan and certain
preliminary steps in March. This first vote is the catalyst to start the
restructuring process. The March time frame was chosen to provide sufficient
time for the membership to review the restructuring plan and ballot, as well as
have any questions answered. There will be a second vote of the membership later
this year to approve the subsequent details of the plan as soon as they have
been decided.
How many members must vote in favor of the plan for the recommendation to pass?
Two-thirds of all members present and voting must vote "yes" for the plan to
pass.
How will ownership be distributed?
The Board of Directors has adopted a thorough process to determine the
allocation of equity to the membership. An allocation committee comprised of all
the public directors, and chaired by Governor James Thompson, has been formed to
recommend an allocation of value to the Board. This recommendation will be
determined with respect to an appropriate and fair allocation of value among the
CBOT members in connection with the restructuring plan, including the allocation
of shares in the two new companies. The Board will review the Independent
Committee's recommendation, adopt an allocation and set that allocation in
advance of the first membership vote.
The distribution of equity in either or both the new open outcry CBOT or the
electronic trading company may be considered an offering of securities and may
require registration with the Securities and Exchange Commission. NO OFFER TO
SELL OR SOLICITATION OF OFFERS TO PURCHASE SECURITIES IS BEING MADE EXCEPT BY
MEANS OF A PROSPECTUS.
2
<PAGE>
January 27, 2000
Why is this plan the best solution for the CBOT?
The Restructuring Task Force considered many other alternative plans and
business models in developing a plan that is designed to provide the CBOT an
opportunity to compete effectively in the 21/st/ century. The Task Force felt
there were no other alternatives better able to provide value to the membership
and to position the CBOT for leadership in the future.
This solution was chosen because it best met the criteria set by the
Restructuring Task Force:
. Maximize membership value
. Ensure the CBOT remains the center of liquidity for its existing and new
products
. Enhance the governance structure
. Best position the exchange for the future
. Can be successfully implemented
Why would two companies be created instead of just one?
The creation of two separate companies allows each to independently make
decisions that are best for each individual company. Within a single company
structure, the Board and management teams could be forced to make trade off
decisions between the two types of trading platforms. With limited resources,
one or the other would be compromised and potentially could lead to the
sub-optimization or even failure of both. For example, if electronic trading was
growing rapidly the Board would be inclined to invest heavily to fuel that
growth. That investment could come at the expense of open outcry. Similarly, if
the single management team was focused on what is best for the business, there
could be cost pressure to close down open outcry in favor of more profitable
electronic trading despite what individual trader economics might be.
And finally, several financial advisors have indicated that a single company
structure could reduce the value of the electronic entity.
Won't we have more control over the migration to electronic trading if we are
restructured as one company versus two?
No. The market and the customers will decide where they want to trade. If we try
to control that process we could lose liquidity to our competitors. Two
companies allow the membership to benefit from the migration of volume as well
as provide strong incentives within the open outcry company to make open outcry
as competitive as possible.
3
<PAGE>
January 27, 2000
Who was involved with the creation and definition of the restructuring
recommendation?
The restructuring Task Force was made up of directors, members and senior
managers and has been working on the effort to develop the best recommendation
since last summer. The Task Force engaged management consultants (A.T. Kearney),
financial advisors (Merrill Lynch) and legal advisors (Piper Marbury Rudnick &
Wolfe as special counsel to the Task Force and the Implementation Committee) to
provide expertise in developing the best solutions within the guidelines set by
the Task Force. (In addition, Kirkland & Ellis, counsel to the CBOT and the
Board of Directors, provided legal advice relative to the proposed
restructuring.)
Both member and management input were obtained through focus groups, individual
conversations and email/MemberNet. The Board of Directors was briefed monthly
and most Directors also met with members of the Task Force independently to
provide input.
The Task Force voted unanimously to take this recommendation to the Board of
Directors, and the Board of overwhelmingly approved the plan.
If the plan is approved, how quickly will it be implemented?
This is a complex effort that will change the structure and charter the CBOT has
had for more than 150 years. After the membership vote, there are a number of
actions that can be taken immediately to set up the electronic company and begin
to restructure open outcry. From an implementation perspective, next steps
include:
. Establishing the legal corporate entities
. Developing a detailed implementation plan
. Developing detailed business plans and budgets
. Identifying providers or creating third-party companies for outsourced
services
. Communicating changes, timing and impact
We expect it will take at least until towards the end of the year before both
companies will be separate, for-profit entities.
4
<PAGE>
What is the future of open outcry? Why do we need to demutualize and go
for-profit?
We cannot guarantee that open outcry will survive forever. Adopting a for-profit
structure will make CBOT's open outcry more competitive. It will allow open
outcry to:
. Make strategic decisions to increase order flow
. Streamline decision-making to respond quickly to market forces
. Avoid governance conflicts
. Focus the CBOT on enhancing trader opportunities
. Develop business-minded discipline
No one knows what the future trading platform will be for each of our products.
This plan was designed to position members to benefit whether open outcry
remains the dominant platform or electronic trading flourishes. We believe both
platforms can prosper.
What happens with clearing and the Board of Trade Clearing Corporation (BOTCC)?
Initially, it is expected that both companies will contract with BOTCC to act as
their clearinghouse and BOTCC will offer fungibility to both companies. No
formal agreement has been made at this time.
What about the agreement with the Chicago Board Options Exchange?
The restructuring proposal is designed to protect the CBOE exercise right. The
1992 CBOT/CBOE agreement expressly contemplates the possibility of restructuring
at the CBOT. The restructuring strategy will comply with the 1992 agreement.
How does the CBOT/Eurex alliance fit into this?
The CBOT/Eurex joint venture is a significant asset for the CBOT that we intend
to include as a key component of the electronic trading company. Our CBOT/Eurex
agreement will position us to create a superior electronic trading business.
What kind of markets does the strategy try to approach with the new structure?
In addition to the current CBOT customer base, there are great opportunities
among institutional investors, eBrokers, day traders, business to business
e-commerce and retail investors.
5
<PAGE>
January 27, 2000
What will it cost the CBOT to restructure?
We are still defining the total cost for restructuring. The new open outcry and
electronic trading companies will each pay for their own restructuring costs.
Based on preliminary analysis, it is expected that the two companies will be
able to afford these requisite restructuring and start-up/activation costs.
Further, as part of the separation arrangements between the two companies, it is
currently envisioned that the Electronic Trading company will reimburse the Open
Outcry company for Eurex development. Disclosure of this information will be
made once it is fully analyzed and finalized.
Should the CBOT improve its financial position before undertaking a
restructuring?
Fixing current financial problems is not separate from restructuring, in fact it
is an integral component of restructuring. Delaying restructuring will only
worsen the current financial position of the CBOT. Given the competitive
environment, the CBOT must undertake the restructuring program urgently.
Restructuring is the key to enable CBOT to make the significant operating,
structural, and financial improvements required.
How will a restructuring affect management of the CBOT?
Restructuring will result in changes to our current management and
organizational structure. The governance changes will affect the role and
capabilities needed in the restructured organization. Significant reductions in
department structures and staffing levels are expected in some areas. The Board
of Directors has recognized that management continuity is very important and
critical to the success of the restructuring effort.
Will we get more detail of the plan?
An implementation committee, consisting of eight Board members, has been formed
and is working out the details of the plan. These details will be shared with
the membership in connection with soliciting member approval of the plan.
What will happen to traders' jobs?
Similar to today, all traders have the choice to trade electronically or
continue trading in the open outcry market or to do both.
6
<PAGE>
January 27, 2000
What other alternatives did the Restructuring Task Force look at?
The Restructuring Task Force considered a number of alternatives for
accomplishing the dual objectives of developing a viable open outcry market and
creating a market-leading electronic trading capability. The options varied
around several elements, including governance, structure and trading platform.
In order to select the alternative that would best position the exchange for the
future, the Task Force rated all alternatives against several criteria. The
alternative that best matched these criteria was then selected for development
into a cohesive plan for restructuring of the CBOT.
How can members give input or express their concerns?
An email account has been set up with our management consultants. The address is
[email protected]. You can also send emails to the Implementation
--------------------------------
Committee at [email protected].
----------------------
7
We urge CBOT 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 by means of a prospectus meeting the requirements of
Section 10 of the Securities Act of 1933, as amended.
* * * *
<PAGE>
The following publication was distributed to CBOT members and membership
interest holders on January 27, 2000 and is currently available at the Office of
the Secretary of the CBOT.
[LOGO] Chicago Board of Trade
Restructuring
-------------
Overview
--------
January 27, 2000
<PAGE>
Summary
The derivatives industry has undergone significant changes over the last several
years. Electronic trading has emerged as the dominant platform in the European
and Asian exchanges as well as the continued growth platform in the US markets.
Exchanges in general have also been changing rapidly with the NYSE, Nasdaq and
CME announcing plans to demutualize. Much of this change is being fueled by the
advance of technology and the increased customer demand for cost-efficient,
effectively-run exchanges.
The Chicago Board of Trade is being impacted tremendously by these changes. As a
leader in the derivatives markets, the membership as well as the industry is
looking to the CBOT to define the "what" and "how" for the future. One step in
this process was the creation of an alliance with Eurex, the world's largest
electronic exchange. The next step is the adoption of a restructuring plan that
will position the CBOT as the leading marketplace of the 21st century.
Restructuring is essential for many reasons. First, without it, the CBOT will
not be able to preserve a viable open outcry exchange or capture the growth of
electronic trading. Second, restructuring is the best way to unlock and maximize
the value of CBOT membership. Finally, it is the only way for the CBOT to adapt
the business mindset that will allow it to make the decisive moves required to
leap ahead of its competition, build advantageous strategic alliances and lower
costs.
The process of developing the restructuring plan was led by the Restructuring
Task Force and facilitated by outside advisors. The process involved the
following:
. Assessing current industry trends and best practices
. Developing a model for the marketplace of the future against which the CBOT
could be measured
. Developing business outlines for open outcry and electronic trading
. Creating and overseeing implementation of a communication plan
A number of restructuring alternatives were evaluated by the Restructuring Task
Force in order to devise the best plan for all stakeholders involved. The
recommended plan that was approved by the Board of Directors calls for the
creation of two separate, demutualized, for-profit entities: one to focus on
open outcry and the other on electronic trading. Current membership would
translate into ownership in the new companies.
The open outcry corporation would allow members to continue to benefit from
existing operations. This company would remain closely held and guided by the
current membership with excess cash flows directed back into the organization to
make investments, reduce costs and provide enhanced member trading opportunity.
2
<PAGE>
The electronic trading company would provide current members with the
opportunity to benefit from the growth in this sector. This company would be
focused on rapid growth, open access, high earnings and the potential for
becoming a publicly traded entity.
This solution was chosen because it is the single alternative that best
maximizes value, ensures the CBOT would remain the center of liquidity,
preserves open outcry, establishes an electronic trading company, enhances
governance, improves competitiveness and can be successfully implemented.
The greatest risk for the CBOT lies in a "do nothing" strategy. Support by all
stakeholders and quick implementation of this recommendation are vital to
ensuring the CBOT's leadership position among the world's exchanges.
3
<PAGE>
================================================================================
Board Approved Recommendation
================================================================================
4
<PAGE>
Task Force Recommendation to the Board of Directors
After months of analysis, discussion and debate, the Restructuring Task Force
arrived at a restructuring plan that it believes would most benefit the CBOT.
This plan was presented to the Board of Directors and was approved
overwhelmingly, following a period of thorough review and discussion. In summary
form, the recommendations are highlighted in the graphic below:
<TABLE>
<CAPTION>
--------------------------
Fully Demutualized as Two
Distinct Companies
--------------------------
---------- -------------
Owners Shareholders
---------- -------------
| |
----------------------------------------- | | -----------------------------------------
New open outcry company | | Electronic trading company
| |
----------------------------------------- ---------- ------------- -----------------------------------------
<S> <C> <C> <C>
. For-profit Open Electronic . For-profit
. Closely-held Outcry Trading . Publicly held
. Streamlined, cost efficient Corp Company . Cost efficient/economical
. Invest in supporting technology (e.g. . Current CBOT members receive shares
order routing, gateway/API) ---------- ------------- . Separate trading rights ownership
. Bundled trading rights/ownership . Open access
. Restricted trading access Demutual Demutual . Leverage Eurex alliance
. Trade all current products and can For-Profit For-Profit . Trade all current CBOT contracts plus
pursue additional products additional products
. CBOE exercise right retained -------------------------- . Independent Board and professional
. Independent Board and professional management
management
----------------------------------------- -----------------------------------------
</TABLE>
The Board approved the alternative of creating two separate for-profit entities,
one for open outcry and one for electronic trading, providing both companies the
best chance to succeed. As autonomous entities, each would be able to make
independent strategic business decisions and pursue business opportunities as
they see fit. As "for-profit" companies, both would have the financial and
decision-making flexibility to pursue alliances and joint ventures, as well as
the resources to make necessary technology investments. Furthermore, creating a
separate electronic trading company best positions the membership to benefit
from the growth and high market value of electronic trading companies.
The strategy calls for ownership of the open outcry business to be bundled with
trading rights and closely held by the current membership. Access to trading
would be restricted to the owner/holders of the trading rights. A separate class
of unrestricted equity
5
<PAGE>
unrelated to trading classes is also expected to be established to provide
future flexibility. The governance model for the open outcry business would be
adapted to allow for streamlined decision-making.
A separate electronic trading business would be better able to attract new
management talent with eBusiness expertise. Several investment bankers advised
the Restructuring Task Force that the electronic trading company would have a
higher valuation if it is entirely separate from the open outcry company. A
separate electronic trading company would also attract potential competitors who
may become investors or alliance partners. Shares in the electronic trading
company would be distributed to the current CBOT membership, with plans to
potentially offer additional shares to the public.
NO OFFER TO SELL OR SOLICITATION OF OFFERS TO PURCHASE SECURITIES IS BEING MADE
EXCEPT BY MEANS OF A PROSPECTUS.
The following sections outline in greater detail the rationale for two
for-profit companies, the description of each company, the CBOE exercise right
and the Eurex alliance.
The New Open Outcry Company
The recommended restructuring plan calls for a new open outcry company with the
objective of providing an efficient, well-managed open outcry trading platform.
The strategic focus would 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 new company should become more cost competitive in its
operations as well as more streamlined in its decision-making processes. The new
open outcry company would be "for profit" but closely held, and is currently not
expected to pay dividends.
A demutualized, for-profit entity would have the operating flexibility to take
actions to right-size the current organization. Changes to current staffing
levels are expected to come from rationalizing participant and member services,
as well as outsourcing non-core functions that can then vary in response to
shifts in volume as they occur. Non-salaried expenses, such as travel, marketing
and support costs, would also be rationalized.
In parallel with actions to create a more efficient organization, the
restructuring plan calls for active investment in technology to enhance
efficiency and effectiveness of operations. These plans include:
. Leveraging the Eurex technology, including the global network and API for
enhanced order capture and routing capability
. Providing for "hit and take" functionality in the pits
6
<PAGE>
Also, it is expected that the new company would maintain and potentially grow
market data revenues by offering value added information services and a variable
pricing structure for different customers and trading participants.
A streamlined governance would allow the new open outcry company to redefine the
traditional relationship between the exchange and its membership. Business
decisions could be reached quickly to be more responsive to competitive
pressures (regarding issues such as transaction fees, tick size and block
trading). Management would be empowered to aggressively pursue cost reduction
efforts, identify and retain key personnel from the current organization and
obtain required new capabilities.
The New Electronic Trading Company
The electronic trading company would build a market leadership position by
providing a superior electronic trading platform, leveraging the CBOT brand and
Eurex alliance and providing open access to a continually expanding global
customer trading community.
While the focus would be on creating a cost-competitive trade execution
capability, the company would also invest aggressively in technology to maintain
and enhance its competitive advantage. This would include developing new
business and revenue sources in areas such as business to business e-commerce,
retail access and potentially franchising its capability to other exchanges and
geographies.
As a market leader, the electronic trading company could invest in order flow by
providing incentives to customers to trade products and higher volumes. Part of
the investment in business development would also be to support increased access
to an expanded trading community. Similar to plans for the open outcry company,
non-core functions would be outsourced to attain a cost structure scalable with
volume shifts.
To ensure success, the electronic trading company would need to be quick to
market, and activated as soon as possible. Moving rapidly would capture early
mover advantages for the new electronic trading company, and encourage potential
competitors to join in alliances. Management would need to acquire new
leadership with eBusiness expertise and continually leverage and build on the
Eurex alliance.
Plans established for the new electronic trading company would have the goal of
establishing a market leadership position. Large business development budgets
would be established with the expectation that the electronic trading company
would have to provide volume discounts, build access capabilities to specific
client segments and offer other incentives to capture order flow. Significant
investments in technology are also planned so that the trading platform remains
leading-edge.
7
<PAGE>
CBOE Exercise Right
One source of value to full members of the CBOT is the embedded right to trade
at the CBOE. While a member may only trade at one or the other exchange at a
time, this exercise right effectively means that a CBOT full member has access
to two exchanges. In addition, since a full member has the additional right to
lease his or her membership (other CBOT membership classes have this right, as
well, but may not gain CBOE access), it means that members may enjoy the value
of this right even after they retire from active trading. Currently, nearly half
of the CBOT full memberships have exercised their right to access trading at the
CBOE.
The Board of Directors fully intends to preserve the CBOE exercise right. In
the new CBOT, the trading rights and the ownership (equity instead of seats)
would continue to be bundled. That is, trading access would be restricted to
equity holders in the restructured CBOT. The CBOT's legal counsel has advised
the Board of Directors that the 1992 agreement with the CBOE contemplates a
restructured CBOT under certain conditions and the approved restructuring plan
meets those conditions.
Eurex Alliance
Central to the strategy of the electronic trading company is to leverage and
build on the strengths of its alliance with Eurex. The restructuring calls for
Eurex to provide the technology platform for the electronic trading company, at
least for the term of the current Eurex agreement. In addition, Eurex would
provide network and trading functionality so that members can effect the
electronic trading company transactions from the floor of the new CBOT. While
the current relationship between the CBOT and Eurex is very similar to a
traditional technology outsourcing arrangement (with the CBOT using technology
provided by Eurex), it is clear that both parties have a strong interest in
expanding the relationship.
Other Key Interfaces
Included in the restructuring plan are critical interfaces between the two
companies, many of which are in the process of being determined. Interfaces
include the following:
. There would be a non-compete clause for a specific to-be-determined timeframe
so that the open outcry company cannot create a competing, fully electronic
exchange
. While regulatory functions and market data services would be separate
initially, opportunities to combine specific functions would be explored once
the businesses are operational
. Arrangements would be negotiated so that products of both exchanges would be
fungible at BOTCC
. Both exchanges are free to offer all products currently traded at the CBOT
. The electronic trading company would not pay on-going fees to CBOT, or vice
versa
8
<PAGE>
* * * * *
There remain details that need to be worked out between and within the open
outcry and electronic trading businesses. These will require significant work
before the transition is complete and activation can take place.
The transition will take place in two distinct steps, each of which will be
submitted to membership vote for your approval. The first step involves
reincorporating the CBOT as a Delaware not-for-profit company and the formation
and activation of the electronic trading company as a wholly owned subsidiary of
the CBOT. The second step calls for the election by the CBOT to become a
Delaware for-profit and the distribution of its shares and the shares of the
electronic trading company to the CBOT members.
Attending to the plan's details will be an Implementation Committee consisting
of members of the Board of Directors. David Brennan (the committee chair) will
be joined on this committee by Charlie Carey, Andrew Filipowski, Harold
Lavender, Peter Lee, Veda Kaufman Levin, James McMillan, Joe Niciforo and Mike
Ryan. This committee will make recommendations to the Board of Directors for
approval around open issues such as changes to the Board structure, the cost of
implementation and any applicable agreements between the two new companies.
The allocation of ownership equity across member groups is an important and
critical issue. The Board of Directors has formed an Independent Allocation
Committee to specifically address this issue. The committee is comprised solely
of the CBOT's public Directors and is chaired by Governor Thompson. This
committee will make a recommendation to the Board with respect to an appropriate
and fair allocation of value among CBOT members in connection with the
restructuring, including the allocation of shares in the two new companies.
Answers to the questions surrounding the details of the restructuring plan,
including the allocation of ownership equity, will be provided prior to the
first membership vote so that each member can feel comfortable that he or she is
making a fully informed decision. The initial ballot will be made available as
soon as reasonably practicable, which is expected to be within the next few
weeks.
9
<PAGE>
Conclusions
The future for CBOT members is full of opportunity. However, divergent needs of
members, competitive forces, advances in technology and the evolution of the
international derivatives market all are having an impact on how that
opportunity will be realized. The Board of Directors believes that this
restructuring plan can offer the membership the best means to capitalize on that
opportunity. It does so by creating two business-focused entities that together
provide the CBOT's current members with a hedge against future developments in
their markets.
The existing mutual structure of the CBOT no longer serves the greater
interests of a majority of stakeholders. A more streamlined and flexible
governance structure is needed to allow the Chicago Board of Trade to react
quickly to market developments. In addition, having an equity structure would
provide both companies a ready means of attracting strategic investors and
alliance partners that will become increasingly important in the future.
By creating an open outcry company that is business-focused and economically
viable, the entire membership benefits from the preservation of the existing
trading environment for as long as the market will support it. The restructuring
plan also is designed to preserve the option to lease seats and to exercise the
right to trade at the CBOE.
For the large majority of CBOT members, the restructuring would provide a better
financial future the sooner it is adopted and activated. It should be made
absolutely clear that maintaining the status quo posture would mean that both
open outcry and electronic trading run the risk of sub-optimal performance or
even failure.
The future of the derivatives industry is not certain. What is certain is that
this restructuring plan is structured to provide the membership with the best of
both worlds: a viable open outcry environment and a growing and valuable
electronic trading company. With the implementation of this restructuring plan,
the CBOT can position itself to lead the global derivatives market for the next
150 years.
We urge CBOT 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.
10
<PAGE>
The following letter was distributed to CBOT members and membership interest
holders on January 27, 2000 and is currently available at the Office of the
Secretary of the CBOT.
[LOGO] Chicago Board of Trade
David P. Brennan
Chairman of the Board
REMINDER
January 27, 2000
Dear Fellow Member:
The first Membership meeting to discuss restructuring will be held today at 2:15
in the Soybean Pit of the Agricultural Trading floor. I encourage you to make
every effort to attend. This is your opportunity to receive answers to many of
your questions.
Your participation is important.
Sincerely,
/s/ David P. Brennan
David P. Brennan
141 W. Jackson Blvd.
Chicago, Illinois 60604-2994
312 435-3601
Fax: 312 341-3392
We urge CBOT 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.
* * * *
<PAGE>
The following presentation was made to CBOT members and membership interest
holders on January 27, 2000 and is currently available at the Office of the
Secretary of the CBOT.
================================================================================
Agenda
Time Topic Speaker
. 2:15 to 2:25 Welcome & Introduction David Brennan
. 2:25 to 2:30 President's Remarks Tom Donovan
. 2:30 to 2:40 Industry Perspective Cliff Lewis
Brian Sterling (Merrill Lynch)
. 2:40 to 3:15 The Restructuring Plan Justin Zubrod (A.T. Kearney)
. 3:15 to 3:30 Member Perspectives Joe Niciforo
Veda Kaufman Levin
Charlie Carey
. 3:30 to 4:30 Q&A
<PAGE>
================================================================================
Growth Rates
[Graph Appears Here]
Millions of Contracts
<TABLE>
<CAPTION>
1996 2000
---- ----
<S> <C> <C>
CBOT
Eurex
</TABLE>
<PAGE>
===============================================================================
Cash Debt ... Going Electronic
. Espeed . eBondtrade.com
. Market Axess . MuniAuction
. TradeWeb . Bondnet.com
. EuroMTS . Others
3
<PAGE>
================================================================================
E-Cash vs CBOT Costs
All-In User Costs
[Graph Appears Here]
$/100k
CBOT
Espeed - List
Espeed - Best
<PAGE>
================================================================================
AG.COMs
. International Commodities Exchange (icecorp.com)
. Freemarkets.com
. Nasdaq IPO - $9 Billion market cap
. E-markets.com
. DirectAg.com
. Graintrader.net
. B2Bs: VerticalNet, Commerce One, Ariba...
5
<PAGE>
================================================================================
Cantor IPO
. Espeed: new dot.com
. Raised $200 MM for business development
. Stock up 140% since IPO
. Market cap of $2.5 Billion
. Expanding into `B2B' and commodities
. Volume Up Exponentially
6
<PAGE>
================================================================================
BrokerTec
. Goldman, Merrill, Lehman, Morgan Stanley,
Salomon, CSFB, Deutsche Bank, etc.
. Raised $60+ Million
. BrokerTec at CBOT
. 73% of Bond open interest
. 50% of Bond order flow sent to floor
. Will not work with Membership Organization
7
<PAGE>
================================================================================
The Next 12 - 18 Months....
. New Threats:
. ECNs, Nasdaq, `B2B'
. Other Exchanges Going For-Profit
. It's a Race....
-> For Money
-> For Strategic Partners
-> For New E-Markets
8
<PAGE>
--------------------------------------------------------------------------------
Chicago Board of Trade
[LOGO]
Creating a Viable Future
Member Floor Meeting
January 27, 2000
ATKEARNEY
9
<PAGE>
================================================================================
The restructuring task force
---------------------------------------------
Restructuring Task Force
---------------------------------------------
David Brennan-- Chairman
. Charlie Carey . Peter Lee
. Bernie Dan . Tom Neal
. Dave Fisher . Joe Niciforo
. Dave Goldberg . Ed O'Connor
. Ron Hersch . Jim O'Connor
. Neal Kottke . Mike Ryan
---------------------------------------------
Management
---------------------------------------------
. Tom Donovan . Cliff Lewis
. Carol Burke . Glen Johnson
---------------- -------------------- ------------------
Consultants Financial Advisors Legal Counsel
---------------- -------------------- ------------------
. Kirkland & Ellis
A.T. Kearney Merrill Lynch . Piper Marbury
Rudnick & Wolfe
10
<PAGE>
==============================================================================
The review process
. 12 Restructuring Task Force meetings
. 13 Focus Groups -- 225 People
. 5 Board meetings
. Obtained well-regarded outside expertise
. A.T. Kearney
. Merrill Lynch
. Kirkland & Ellis
. Piper Marbury Rudnick & Wolfe
-------------------------------------------------
A.T. Kearney did a thorough assessment of CBOT
today and in the future and created business
models to position CBOT to be competitive
-------------------------------------------------
11
<PAGE>
===============================================================================
The review process (cont'd)
. Met with diverse group of members / Directors to gain buy-in
. Met with leading industry players / experts outside the CBOT
. Facilitated other communications efforts
. MemberNet / A.T. Kearney
. One-on-One Meetings
. Suggestion Boxes
. Memos to Membership
. E-mail
----------------------------------
We opened up multiple
communication channels to gather
input from many sources
----------------------------------
12
<PAGE>
===========================================================================
The industry environment
Change in Investor Change in Member
Priorities Priorities
Relaxation of CBOT's
Regulatory Repositioning Electronic Trading
Constraints for the Future
Increased Competition and
Industry Realignment
Source: A.T. Kearney analysis
13
<PAGE>
===========================================================================
The marketplace of the future
<TABLE>
<S> <C>
-----------------------------------
Defined Customer Segments
-----------------------------------
----------------------------------- --------------------------------
Integrated Product Offerings Customer Requirements
----------------------------------- of Marketplace of
----------------------------------- the Future
Differentiated Pricing --------------------------------
----------------------------------- . Liquidity / transparency
-----------------------------------
Appropriate Trading Platform(s) . Efficient execution, clearing
----------------------------------- and settlement
-----------------------------------
Open Access > . Integrity of regulation
-----------------------------------
----------------------------------- . Linkages to other markets
Marketplace Efficient Operating Model
of the ----------------------------------- . Global breadth of products and
Future ----------------------------------- markets
Modern Governance
----------------------------------- . Responsive, market leading
----------------------------------- product innovation
Ready Access to Capital
-----------------------------------
-----------------------------------
Robust Regulatory Framework
-----------------------------------
-----------------------------------
Flexible Legal Structure
-----------------------------------
</TABLE>
Source: A.T. Kearney analysis
14
<PAGE>
================================================================================
------------
COBOT'S current business model Key
------------
1 Small Gap
5 Large Gap
------------
<TABLE>
<CAPTION>
<S> <C> <C>
Gap
---
-------------------------------------
Defined Customer Segments 3
-------------------------------------
-------------------------------------
Integrated Product Offerings 3 Key Features
------------------------------------- ------------
------------------------------------- . Member, not customer
Differentiated Pricing 5 focused
-------------------------------------
------------------------------------- . Leading open outcry...
Appropriate Trading Platform(s) 5
------------------------------------- > . ... Inadequate electronic
------------------------------------- platform
Open Access 3
------------------------------------- . Cumbersome governance
-------------------------------------
Gap Analysis Efficient Operating Model 3 . Little access to capital
-------------------------------------
------------------------------------- . Tight, narrow charter
Modern Governance 5
-------------------------------------
-------------------------------------
Ready Access to Capital 5
-------------------------------------
-------------------------------------
Robust Regulatory Framework 1
-------------------------------------
-------------------------------------
Flexible Legal Structure 5
-------------------------------------
</TABLE>
Source: A.T. Kearney analysis
15
<PAGE>
================================================================================
Conclusions of the review
. There are competitive gaps given CBOT's governance structure and how it
operates today
. CBOT needs to invest and improve both its open outcry and electronic
trading businesses
. CBOT will continue to face even greater competitive market pressures
. There is overwhelming support for change by both members and management
. CBOT needs to act and make decisions quickly
--------------------------------------------
These conclusions were supported by what
we heard from you in the Focus Groups
--------------------------------------------
16
<PAGE>
================================================================================
The restructuring plan is robust
<TABLE>
----------------------------------------------
Fully Demutualized as Two
Distinct Companies
----------------------------------------------
----------------- ------------------
Owners Shareholders
----------------- ------------------
------------ ------------
Open
Outcry e-Corp.
Corp.
------------ ------------
Demutual Demutual
For-Profit For-Profit
----------------------------------------------
<S> <C> <C>
. Based on rigorous . Business assumptions . Sent to Board in advance
analysis, proposed by driven by Restructuring
management Task Force . Presented at all-day Board
consultants, A.T. > > offsite meeting
Kearney . Plan unanimously
approved by . Lengthy discussions at two
. Supported by Restructuring Task Force Board meetings
investment bank,
Merrill Lynch . Overwhelmingly approved
by Board
</TABLE>
17
<PAGE>
================================================================================
Board recommendation
<TABLE>
<CAPTION>
-------------------------------- ------------------------------------------ -------------------------------------
New CBOT - Open Fully Demutualized Electronic Trading
Outcry as Two Distinct Companies Company
-------------------------------- ------------------------------------------ -------------------------------------
<S> <C> <C>
. For-profit, closely-held . For-profit
. Lean, cost efficient . Publicly held
------------- ----------------
. Invest in supporting Owners Shareholders . Cost efficient /
------------- ----------------
technology (e.g. order economical
routing gateway / API) ---------- ------------
Open . Current CBOT members
. Trading rights bundled Outcry e-Corp. receive shares
with ownership Corp.
---------- ------------ . Separate trading rights
. Restricted trading access and ownership
Demutual Demutual
. Trade all current For-Profit For-Profit . Open access
products and can pursue
additional products . Leverage Eurex alliance
. CBOE exercise right . Trade all current CBOT
retained contracts plus additional
products
. Independent Board and
professional management . Independent Board and
professional management
-------------------------------- ------------------------------------------ -------------------------------------
</TABLE>
18
<PAGE>
==============================================================================
Cooperative operating agreement
. Separate Boards of Directors appointed
. New Boards determine management requirements
. Separate market data services
. Initially separate regulatory functions, possibly combine / outsource later
. Fungible products at BOTCC
. Both offer all products currently at the CBOT
. Eurex agreement will be binding for both
. Human Resource retention / transition plans part of implementation
19
<PAGE>
================================================================================
Cooperative operating agreement (cont'd)
. Open outcry prohibited from offering e-trading system for three years
(small order matching excluded)
. Financial arrangements between open outcry and electronic trading company
. No on-going payments between entities
. Determining reimbursement of CBOT for:
-- Eurex development
-- Restructuring / activation costs
-- Common operating costs
. Information dissemination business
. Common objective is to protect and grow total revenue
-----------------------------------
Mechanics of achieving these
objectives must be finalized
-----------------------------------
20
<PAGE>
================================================================================
Benefits of the plan
. Position membership to benefit from existing open outcry business while
capitalizing on potential growth of electronic trading
. Allow CBOT best opportunity to capitalize on high market value for
electronic / technology companies
. Provide both open outcry and electronic trading best chance to succeed --
dedicated organizations whose sole focus can be on growing and maximizing
those businesses, without conflicting interests
. Provide business focus for decision-making
. Without restructuring, proceeds cannot be distributed to members
21
<PAGE>
================================================================================
Why alternatives are sub-optimal
<TABLE>
<S> <C>
----------------------------------------------------- ------------------------------------
Spin-off Electronic Trading Fully Demutualize With One
Into a Separate Company Board / Management
----------------------------------------------------- ------------------------------------
----------------------- --------------------------- -----------------
Members Shareholders Shareholders
----------------------- --------------------------- -----------------
------------------ --------------------- ---------- ----------
Open Open Elec.
Outcry e-Corp. Outcry Trading
Corp. Division Division
------------------ -------------------- ---------- ----------
Mutual Demutual Mutual Demutual
Not-For-Profit For-Profit Not-For-Profit For-Profit
----------------------------------------------------- ------------------------------------
. Without significant restructuring, open outcry entity cannot be . Would likely result in rapid demise of open outcry
economically viable and would be unable to compete
. There would be pressure to close pits and move to lower
. Distribution of benefits (particularly equity) to members from cost electronic platform
spin-off is hampered
. Market value of combined is considerably lower than that of
separate electronic company
</TABLE>
22
<PAGE>
================================================================================
A.T. Kearney perspectives
. We do not believe open outcry will disappear in near-term
. For-profit, demutualized, open outcry company is best way for it to adapt /
compete
. Creating a robust electronic trading capability is best long-term financial
hedge for both asset value and trading opportunity
. We believe that same products can trade successfully / simultaneously on
two platforms -- electronic and open outcry
23
<PAGE>
================================================================================
A.T. Kearney perspectives (cont'd)
. These changes do not pre-ordain the demise of open outcry, and may differ
for financial and agricultural products
. This restructuring plan positions members to benefit regardless of the
outcome
--------------------------------------------
How both companies respond to the
competitive marketplace will determine
the long-term viability of each
--------------------------------------------
24
<PAGE>
================================================================================
A.T. Kearney perspectives (cont'd)
. Creating two, separate and independent entities that will each compete in
the marketplace is critical
. The electronic trading company likely will have a higher valuation if
entirely separate from CBOT
. Separation will enable us to bring in management talent with eBusiness
expertise
. Activating separate electronic trading company quickly creates credible,
competitive response that may convert potential competitors into partners
25
<PAGE>
================================================================================
A.T. Kearney perspectives (cont'd)
. As "for-profit" companies, both entities will have much greater financial
and decision-making flexibility and resources to make necessary technology
investments
. While separate, some interconnectivity may be required to allow open outcry
traders to use the electronic trading company's global network
. Two divisions under one holding company would eventually kill off one or
both businesses
-----------------------------------------------------
Importantly, experience from other
electronic exchanges suggests that the size
of the overall market is likely to expand
-----------------------------------------------------
26
<PAGE>
================================================================================
Summary - A.T. Kearney perspectives
. This restructuring is by far the most ambitious pursued by any major
exchange to date
. Others have taken half steps down the same path -- there is opportunity for
first mover advantage for the new CBOT and electronic trading company
. Transition will be a challenge -- continuing to provide an environment for
existing trading while establishing two, entirely new businesses
. While the challenge is potentially daunting, the resolve and dedication of
the Task Force, management, the Board and the members of the CBOT give us
great reason to believe that the restructuring vision will be achieved
27
<PAGE>
================================================================================
The new open outcry company
---------------------------------------------
New Open Outcry Strategic Objectives Key Features
--------------------------------------------- ------------
. Preserve member opportunity within a . Demutual
for-profit structure
. For-profit
. Provide a superior open outcry trading
platform . More efficient /
streamlined
> organization
. Reduce costs and restructure pricing to . Smaller Board
unlock profitability
. New technology
investments
. Preserve and enhance liquidity
. Closely held
---------------------------------------------
28
<PAGE>
================================================================================
The new electronic trading company
<TABLE>
<CAPTION>
Key Features
------------
<S> <C>
---------------------------------------------------
Electronic Trading Company's Strategic Objectives . For-profit, publicly held
---------------------------------------------------
. Lean
. Leverage strong brand and current
capabilities . Open access
. Grow the electronic digital trading . Growth oriented
community
> . High tech
. Provide a superior electronic trading
platform . Extensive distribution
. Leverage strategic acquisitions and . Financially self-
alliances sustaining
---------------------------------------------------
. Pays open outcry for
Eurex development
</TABLE>
29
<PAGE>
================================================================================
Restructuring challenges
<TABLE>
<S> <C>
---------------------------------------- ----------------------------------------
Challenges Risks To Be Managed
---------------------------------------- ----------------------------------------
. Moving quickly and . Taking half steps, going
maintaining momentum slowly, losing first mover
advantage
. Appointing management
team to lead change . Creating special incentive
for members that damage
. Developing a lean, flexible value
cost structure
. Continuing to deplete
. Defining relationship resources or incurring debt
between management and membership
. Not providing clear
. Leveraging alliances - separation between CBOT
strategic, technology, clearing and electronic trading
enterprise
---------------------------------------- ----------------------------------------
</TABLE>
30
<PAGE>
================================================================================
Activation principles adopted by Board
. Approve the business strategy quickly
. Delegate next steps to a subgroup-- Implementation Committee
. Maintain a process that is open to the membership and staff
. Ensure that the Board of Directors approves or ratifies all elements of the
restructuring plan
31
<PAGE>
================================================================================
Process going forward
<TABLE>
<CAPTION>
---------- --------- ----------------------
First First Second Second
Board Member Board Member
Approval Vote Approval Vote
---------- --------- ----------------------
<S> <C> <C>
. Implementation Committee
. Eurex cost
. Ceres roll-up . Initiate CBOT
. Fair member treatment restructuring-up as
(CBOT and e-Corp.) . Complete CBOT
. Transition plan . e-Corp. start-up as restructuring
subsidiary
. Allocation Committee > > . e-Corp. spin-off
recommendation . Regulatory approvals
. Distribute equity
. CBOE dialogue . Spin-off preparation
. Communication program . Final valuation
. Membership
. Management
. Legal roll-out
----------------------------- -------------------------------
First / Second Quarter Third / Fourth Quarter
----------------------------- -------------------------------
</TABLE>
32
<PAGE>
================================================================================
Conclusion - restructuring benefits YOU!
<TABLE>
---------------------------------------------------------------------
Key Benefits
---------------------------------------------------------------------
<S> <C>
For the institution
-------------------
-----------------------------------------------------
Fully Demutualized as Two . Provides both open outcry and electronic trading the
Distinct Companies best chance to succeed
----------------------------------------------------- . Capitalizes on the high market value for electronic /
technology companies
--------------------- ------------------------- . Business-focus for decision making
Owners Shareholders
--------------------- ------------------------- For members
-----------
------------ ------------
Open . For majority of CBOT members, we believe
Outcry e-Corp. restructuring will provide a better financial future --
Corp the sooner the better
------------ ------------ . Creation of e-Corp unlocks ownership value
Demutual Demutual . FCMs, clearing firms benefit from improved
For-Profit For-Profit throughput and lower trading costs
. Strong locals are expected to do well, as in any
----------------------------------------------------- environment
. Lessors are not adversely impacted as open outcry
and CBOE exercise right are preserved
---------------------------------------------------------------------
</TABLE>
33
<PAGE>
[LOGO]
34
<PAGE>
================================================================================
What does a member have today?
------------------------------
CBOT Seat Ownership
------------------------------
------------------ ------------- ----------------- ---------------------
------------------ ------------- ----------------- ---------------------
CBOT Trading/
Leasing/Access Membership Equity CBOE Exercise
Right Vote Ownership Right
------------------ ------------- ----------------- ---------------------
Trading / Leasing Negative Liquidation Trading / Leasing
Revenues Control Value Only Revenues
------------------ ------------- ----------------- ---------------------
Source: Merrill Lynch
35
<PAGE>
================================================================================
What will a member have after restructuring?
<TABLE>
---------------------- ------------------
CBOT + eBOT
---------------------- ------------------
<S> <C> <C> <C> <C> <C>
------------------- ------------------- ------------------- ------------------- ------------------ -------------------
CBOT and eBot
Trading/Leasing/ Shareholder Equity CBOE Exercise Shareholder Equity
Access Right Vote Ownership Right Vote Ownership
------------------- ------------------- ------------------- ------------------- ------------------ -------------------
Continued Liquidation / Continued Rights and Recognized
Trading / Leasing Control Economic Value Trading / Leasing Representation Economic Value
Revenues Revenues
------------------- ------------------- ------------------- ------------------- ------------------ -------------------
. Unchanged . Unchanged . Potential . Unchanged . Additional . Additional
at CBOT Realizaion Right Value
. Access at
eBOT
</TABLE>
Source: Merrill Lynch
36
<PAGE>
================================================================================
The industry environment
<TABLE>
------------------------------------------------------- ------------------------------------------------------------
Change in Investor Priorities Change in Member Priorities
------------------------------------------------------- ------------------------------------------------------------
<S> <C>
. Customer pressure to offer cost effective solutions . Investor pressure for liquidity, low-cost efficient trade
execution, robust infrastructure
. Member demand liquidity, low-cost efficient execution
and infrastructure . New pressure to preserve membership value
. As a result, investors ask the question whether . Members increasingly requiring direct access,
traditional exchanges best access to global markets electronic networks
------------------------------------------------------- ---------------------------------------------------------
----------------------------------------- --------------------------------------------------------
Relaxation of Regulatory Constraints Electronic Trading
----------------------------------------- --------------------------------------------------------
. Financial regulations increasingly unified . Technology / telecommunications advances
enable alternative trading platforms
. Deregulation is expected to facilitate:
CBOT's . Growth in ECNs, trend toward screen
- Convergence across products, markets and > Repositioning > trading threat of disintermediation
geographies for the Future
. Decreased need for traditional brokerage and
- Lowered barriers to entry, increased exchange services
competition
. Leaders aligning themselves with multiple
- Product innovation, proliferation alternative platforms
----------------------------------------- --------------------------------------------------------
----------------------------------------------------------------------------------
Increased Competition and Industry Realignment
----------------------------------------------------------------------------------
. Basis of competition: liquidity, integrity, efficiency
. `Natural' monopoly no longer exist -- exchanges compete, search for alliance
across value chain
. Increasing consolidation and demutualization
. Consolidation of clearing houses to improve capital deployment
. Exchanges can potentially lose price quote revenue
----------------------------------------------------------------------------------
</TABLE>
Source: A.T. Kearney analysis
We urge CBOT 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 by means of a prospectus meeting the requirements of
Section 10 of the Securities Act of 1933, as amended.
* * * *
37
<PAGE>
* * * *
The following is a transcript of a meeting conducted on January 27, 2000 that is
currently available to CBOT members and membership interest holders on videotape
in the Office of the Secretary of the CBOT.
CHICAGO BOARD OF TRADE
Transcript B Member Floor Meeting B January 27, 2000
Chairman Brennan: Good afternoon and welcome. I think we should probably get
started. I was waiting a few minutes for the financial room
to empty out. Can everybody here me; it's pretty big crowd
here I can see. Can you hear me there? Okay. Well again
welcome, and thank you for coming. I am very excited to talk
to you today about our restructuring initiative that will
soon be brought before this membership. This is just the
first of many meetings and communications that we will have
regarding the CBOT's Restructuring Plan. But before I start,
I'd like to personally thank the members of the
restructuring task force, and the Board of Directors for
bringing this plan to the membership. This is a bold plan
which required significant time and consideration by both
groups before it could be brought forward. To all of you, on
behalf of this membership, I would like to say thank you,
you have done a great service to the future of this
institution. At this meeting, we are going to outline for
you the Restructuring Plan that was approved by the Board
last week and provide you with some of the background that
lead us to this recommendation. I will begin by giving you
an overview and addressing some key questions in my opening
remarks. Tom will then give his perspective on the
importance of this restructuring effort. Next, I have asked
our advisors AT Kearney and Merrill Lynch along with Cliff
Lewis to present the industry perspective and the outline of
the Restructuring Plan. After that presentation, I have
asked three members of our Board of Directors to speak to
some of the critical issues from a member's perspective.
After we have heard from these groups, we will have time for
questions and answers, of course. And I ask that you hold
your questions until then so that we can get through all of
the information in a timely matter. Let me begin by saying
status quo is not an option. Time is of the essence, we need
to act right now if we are going to maintain our competitive
advantage and capture future growth. The objective of
restructuring is simple: position the members of this
exchange to own the future however that future unfolds
within the evolution of trading venues. To do this, we need
to create the best possible open outcry and the best
possible electronic trading business for the CBOT and its
members. The restructuring task force engaged expert
advisors, AT Kearney and Merrill Lynch, to identify the best
restructuring alternative for this membership. The law firm
of Piper Marbury was then recruited as outside independent
legal counsel to the restructuring task force and
1
<PAGE>
now to the implementation committee. The task force
unanimously approved the strategy recommended by these
advisors and brought it to the Board. Last week, the Board
overwhelmingly approved that same Restructuring Plan which
we will present to you today. The strategy approved by the
Board is to create two separate, for profit companies. One
for open outcry and the other for electronic trading. The
open outcry company would be for-profit but would be closely
held by the current membership which will continue to
provide opportunity for the members. The for-profit
structure would all for streamline decision making, reduced
costs and the use of any retained earnings to invest in
technology and other enhancements. Separation from the
electronic company will allow open outcry the best chance to
compete since it will no longer be the stepchild of
electronic trading as it is currently perceived today.
Increased technology investment is planned to make it the
most efficient open outcry market. This plan strengthens
open outcry, not kill it like some would like to say. This
plan is the only I believe that the open outcry will be able
to complete. I trade on this floor pretty much every day, I
trade right here in this pit and I really believe this is
the best way for this floor to compete in the future going
forward. We are creating a company whose sole focus is to
bring order flow to this floor. We cannot successfully
continue to serve two masters, allocating resources between
the floor or the screen. The electronic company will
capitalize on the growth in electronic trading. Shares in
the electronic trading company would be distributed to the
current Board of Trade with plans to offer additional shares
to the public. The electronic trading company will leverage
capital markets and strategic markets rather than be funded
by the current open outcry system. We have already been
approached by some potential strategic investors who are
anxious to participate. We are not assuming that electronic
trading wins. No one knows exactly what the future holds for
the trading industry. Preparation is key at this pivotal
point. Right now the membership is not hedged. The Board of
Trade's Eurex platform will come on-line mid-year and
compete with open outcry. But members will not benefit from
direct ownership of the Board of Trade electronic trading.
This plan provides the membership with a competitive open
outcry system and direct ownership in a high-growth
electronic company. The issue of ownership brings up one
critical question we all know is on your mind B and that is
of allocation. I am going to address this and several other
questions here as well as share with you the process we are
using to finalize those details. Allocation of ownership for
both companies is a critical issue. Upon the advice of
outside legal counsel, the Board of Directors has created an
independent allocation committee. This committee will design
an appropriate and fair allocation of value to Board of
Trade members within the framework of restructuring. This
recommendation, which will include the allocation of shares
in the two new companies will then be brought to the duly
elected Board of Directors for approval. This
2
<PAGE>
independent allocation committee is comprised of public
directors of our Board and it is chaired by Governor
Thompson. The committee is completely independent, and has
hired its own legal counsel. It was decided that this
process is the most efficient and unbiased way for the Board
of Directors to determine what is fair for all members while
legally protecting the restructuring initiative. It is a
process that is commonly used by companies under these
circumstances. Most importantly, this membership will know
the allocation prior to any vote, so that you can make an
informed decision. Another issue I've heard questioned
around the floor pertains to the CBOE exercise right. This
Restructuring Plan provides for increased focus and
investment in the open outcry company that will strengthen
and modernize open outcry trading. Based upon what we have
been told by our legal advisors, the Restructuring Plan
conforms to the 1992 Agreement with CBOE. We have briefed
CBOE on the plan and in the future I would expect that a
restructuring will possibly bring these two organizations
closer together as we wrestle with many of the same
challenges as industries. The final question that I want to
address is that of valuation. What is the plan worth to me.
Legal and regulatory prudence prevents us from having a
final valuation number today. The investment bank has
advised us that to maximize our valuation, we need to have
approximately, or at least nine months of operating
performance. The market conditions that exist at that point
will determine the final valuation. Any projection at this
point would be misleading and ultimately hurt our valuation
possibly. The valuation information will be provided to you
before the second vote. There are a number of other
questions I know you want answered, many of these will be
addressed in the following presentation. Some of them are
questions that are being addressed as part of the
preparation of the membership ballot materials. You will
also receive a handout as you leave the floor today that
will provide you with some more detail around the plan. An
implementation committee of Directors of the Board has been
created to prepare the ballot and present it to the Board of
Directors for their approval. That committee is comprised of
the following members: Charlie Carey, Harold Lavender, Peter
Lee, Veda Levin, Jamie McMillan, Joe Niciforo, Mike Ryan,
Flip Filipowski and myself. We are meeting on almost a daily
basis to prepare the details that will be included in this
ballot. We currently expect to have the ballot prepared for
Board approval in the next couple of weeks. We will continue
to get information out to the membership as it becomes
available, and I will begin scheduling smaller follow-up
meetings with the members to share new developments and
answer more questions. I, along with the implementation
committee, will also begin next week to meet with the
management team to keep them informed and insure that retain
our top performers. I want to emphasize just one final
point. Time is of the essence! We have the opportunity here
to seize the future. If we don't modernize our structure, we
may not survive. I support and the Board supports this
3
<PAGE>
plan that you will hear about today. I encourage you to ask
questions and understand its merits since I am convinced
that it is our best option for the future. This is
everyone's future we are talking about here. Pay very close
attention, focus on the facts and judge for yourself. At
this point I'd like to introduce Tom to say a few words.
Mr. Donovan: Thank you Chairman Brennan. First of all I like to commend
Chairman Brennan and the task force and the Board of
Directors for all the hard work and effort they put into
this. They come a long way. It goes back to a meeting in
July when the Board of Directors approved a task force with
a goal to bringing back a plan to the Board of Directors.
That plan was brought back approximately a week ago, was
approved by the Board overwhelmingly and a process was put
in place. Let me say three things. First of all, I support
restructuring. Secondly, I support the plan. Thirdly, I
support the process. The process as I see it is one of
bringing the information to you in a timely fashion so that
you can make the decision. The task force that Chairman
Brennan talked about the implementation task force has a
tremendous job ahead of them. But they're working tirelessly
just as the previous task force had done to bring the
initial plan about. They have a lot of questions and they
will bring the answers back to the Board of Directors. The
Board of Directors than will vote on it and they will bring
them back to you for your full consideration. It is not an
accident that every exchange in the world, worth a salt, is
looking at restructuring. It's not an accident that as they
do this they look at what's happening with the trading
business and they look at the growth in electronic trading
and they say "if the business is changing, how do I take
advantage of this growth and how to protect what I have."
And the answer is you have to look at a way to protect
yourself with a trading right and an equity right. That is
what we are about to do. The plan lays it out clearly, its
bold, every exchange has a little different idea on how to
do it. I thing this is a good plan and it's going to give us
the opportunity to give you the potential to make the right
decision and participate in the growth in the future. I been
very supportive of restructuring, whether it's in television
interview, an interview with the media, discussing this with
you, the staff or with our management team, and to that end
we pledge, I, myself and the management team to work with
Chairman Brennan very closely throughout this process, to
help it bring it forward and to quote Chairman Brennan,
literally "that if the membership has the right information
they'll make the right decision," and I am a firm believer
in that to. And I've always believed in the collective
wisdom of the membership. It's our job now to bring the
information back to you in a timely fashion so you can
analyze it and to do what, so someone I worked with a long
time ago, Mayor Daley said, when he made the decision C "To
get the best information, you analyze it, you make the
decision and you don't look back." Thank you.
4
<PAGE>
Chairman Brennan: Now, I like to introduce Cliff Lewis and Brian Sterling to
give an industry prospective. Those who don't know Brian is
a managing director in Merrill Lynch. Merrill Lynch is one
of the top investment banks with significant experience in e
business and with exchanges. Brian is currently working with
the New York Stock Exchange on their restructuring
initiative. Cliff.
Mr. Lewis: I will go over a couple of slide shows, showing the
competitive situation and basically passing it over to Brian
to talk a little bit of some of the activities in terms of
capital markets and exchange reform. Essentially my purpose
in showing this slide is very simple. It's not to try to
compare what we do with what Eurex does. It's not to try to
compare the sort of volume you have in a pit environment to
environment of electronic trading. Because, quite frankly,
it's completely different kinds of businesses. I will say
two things about the numbers, obviously Eurex is growing
quite quickly. Our partner Eurex, I should say, is growing
quite quickly. The compound average growth rate is about 60%
a year. Now, even more important than that or the fact that
they actually past us, in terms of volume, last year is two
very simple data points. First point, you can argue about
where the volume comes from in Eurex, and as I say, it
doesn't equate directly in the kind of business that's done
on the floor. But one thing is very clear from their
financials, for every single transaction they do they net,
they net $.30. This is an extremely profitable machine.
Second point I want to make is in some ways more important
to our circumstances, which are different than Eurex, unlike
Eurex we run two markets. We run an electronic market and an
open out-cry market. The purpose is to sustain and grow both
those markets. One of the important lessons out of Eurex is
that over 70% of their volume is business that never came to
an exchange floor. 70% of their business is from customers
interested in experience only with electronic trading. And I
would make the point with generally, that we see in the
equity world experience with electronic systems where
trading volumes increase. Not in the expense of open outcry,
but just increase overall. Second point I want to emphasis,
is that the cash debt market is changing very rapidly, it's
basically going electronic. In 1997, there were 11
electronic systems trading cash governing securities and
other fixed income. Today there are almost 40 electronic
systems. I've listed some of the bigger ones on this screen.
eSpeed is, you know, the Cantor Fitzgerald system. eSpeed in
futures, which we're watching very carefully, is making no
in-roads against our open outcry system. We got them cold.
eSpeed is making tremendous in roads in the cash trading of
govies. The growth rate is literally exponential, in terms
of their business. And eSpeed is not alone, in terms of
electronic trading of cash govies. There is a variety of
these things, MarketNext with J. P. Morgan Chase, Bears
Stern has created trade web, which is really created by the
founders of BrokerTec. All of these have a somewhat
different market need, all of these are
5
<PAGE>
moving ahead. The key thing to remember is that, right now,
I don't know, maybe less than 10% of fix income govies are
traded on screens in the cash market that is growing
quickly. By the end of the year it could be 30%, it could be
more than 30% of that total market. As it goes to a screen
with a central limit order book other futures, it is going
to fundamentally change the way business goes on here. The
next thing is a simple comparison of costs, and this is one
element, it's not the only element, our markets remain more
liquid than the cash market B period. End of story! Equity
has tremendous value. People who work in a possession, they
basically know our markets are more liquid and they trade
accordingly today. Now, what is also true that ten years
ago, our markets were cheaper to use cash markets,
significantly cheaper, both in terms of transaction fees and
in terms of text sizes. In terms of transaction fees, that
is no longer the case. Basically what we are showing here is
a comparison between what the biggest preparatory traders
paid had member firms, internally. So guys are paying less
than $5 per 100th thousand to do business over there.
eSpeed, Cantor, list price for these kind of customers, $2
per 100th thousand. In fact, the kinds of discounts that are
being offered to the big traders, mean the guys, the biggest
players are doing significantly less. They are trading for
significantly less, they are trading for significantly less
than a $1 per 100th thousand. In fact, Cantor is
increasingly moving to a flat price approach, you pay a
couple of million bucks, you have zero marginal transaction
cost, and by the way they're throwing in their future
business for free as an add-on on top of that. And I don't
want to give the impression that this trend is limited only
to financials, on the contrary, it's less visible, it gets a
little less hype, but the trend is that if anything, even
faster in the agricultural market, basically the world is
changing. It's not so visible, we remain the central
vehicle, prices are discovered for beans right here, but the
cash business is increasingly moving the screens. And this
is going to have a tremendous implication, again, for us. I
list a couple of the examples of the .coms that are going
into the ag business. The first one is International
Commodities Exchanges in some ways the most interesting.
This is the equivalent of BrokerTec which we are going to
talk about in a minute. A number of the major commercial
houses along with venture funds are bank rolling this on-
line system that is going to trade cash and forwards and
what next in our markets duplicates of our products. Right
now there are a ton of bulletin board systems out there. I
listed some of them here markets, direct act. The point that
I want to make that Brian can come back to in a minute is
the whole so called area of business to business (B to B)
transactions is an extremely hot area in the market. Free
markets.com went to the market and said we are going to
trade commodities including agriculture market
capitalization after IPO $9 billion. I list some of these
Vertical Net, Commerce One (inaudible) Vertical Net $10
billion Market cap, Commerce One $13 billion market cap.
These are all guys looking
6
<PAGE>
at trading commodities on the screen. I like to now turn to
Brian for a minute to talk a little bit about one of the
most interesting of these recent IPO's which is Cantor
Fitzgerald's eSpeed.
Mr. Sterling: Thank you Cliff. The Cantor IPO of eSpeed is very
interesting. They came out and sold the company in December,
with the story that what they were doing in the cash markets
they could do to dominate the cash markets as well as other
related products to the same customer base. The company
makes no money and it losses a great deal of money. It was
priced coming out of the box at what was estimated to be
about 10 times year 2000 revenues without the prospect of
earnings in that year. The stock has taken off since then it
is trading today at over 2 2 billion dollars. It is roughly
20 to 25 times revenues. The view is that this is a focused
business to business play using technology to reduce cost,
to reduce execution speed, turn around speed, and to capture
significant volume in all the markets that its customers
currently trade. And for that they are being accorded a very
significant B to B kind of multiple in the markets. Again
there is no prospect of earnings this year, the earnings
expectations are out several years but it is on the
geometric growth in those revenues. The view that once they
do get up to a significant revenue level they will generate
tremendous operating leverage and huge profitability in the
future that is driving the stock price up.
Mr. Lewis: Just to make a point that these guys are direct competitors
(inaudible) they go to the market raise $200 million to
expand their business. They are going to be able to raise
additional capital and as a for-profit company they've got
capital which they can offer in the form of merger or
acquisitions as well. I want to go to the next slide which
is to talk for a minute about an issue that many of you have
heard about, it is called BrokerTec. I'm reporting here
purely based on public accounts published in the media
formal testimony in front of the hill that is really what
we're limited to talking about right now. Now basically
BrokerTec is a consortion made up of our largest member
firms. Let me make a very clear point none of these firms
lost any sleep when they were looking at whether they should
do BrokerTec and how it would affect the Board of Trade they
basically are investing in a range of electronic business
activities BrokerTec is only one of them. Taken together
these guys have raised about $60 million to start. The cash
system that they announced that they want to move ahead with
is basically they are talking maybe $80 million to get under
way. If you look at the kind of volume that they account for
at CBOT 73% over 70% of the open interest in the bond is
from the BrokerTec member firms. Now it is less than 50% in
fact, of the total bond order flow. My point is that these
are very serious players in our markets they have been very
successful in setting up
7
<PAGE>
electronic trading ventures in equities. They've been
extremely successful in setting this up in Europe. There is
a fixed income platform called Euro MTS. They are basically
taking that model to the United States. They have said
publicly to the press and to Congress that they are not
interested in working with membership organizations and that
if they are unable to find a partner among existing
exchanges they will set up their own exchange to try to
trade these products. I'm not predicting success, I'm not
predicting by any means that this is a lay up for anybody.
We have tremendous advantages, but I'm just saying that our
biggest financial users are looking at alternatives and are
bank rolling them. Last point before I turn it back to Brian
is just to summarize for a second. There are tremendous
numbers of threats out there. Since the year 2000 freeze
sort of came and went a lot more of these are coming and
becoming visible. They were sort of a little bit of a hold
on some of this. What they call electronic communications
networks. The whole world of ECN's and the equity business
that's beginning to transform our friends across the street
at the CBOE. All of these guys are looking at new things to
expand in. I could list three or four of them that have
announced their intention to move into derivatives and a
couple of them that have announced their intentions to move
into our products. I should also report to you that Nasdaq
has secured venture capital funding. The so-called opm,
other people's money, to begin to move ahead with their
initiative to trade futures' products. We'll be hearing more
about that. Any one of these various other business to
business initiatives can target our products and move ahead.
Brian.
Mr. Sterling: I want to take a step back and talk about the other
exchanges. As we look around the world we see all of the
exchanges facing the challenges and trying to generate the
opportunities that the CBOT is faced with. If you look at
the Merc, if you look at NYMEX, Deutscha Deutche Borse,
Nasdaq, or the New York Stock Exchange which we've had the
privilege of working with, they're all facing threats really
created by technology reducing the with people looking to
reduce their cost of trading there, with people looking to
increase the speed at which they trade. All of that has
tremendous pressure on margins. And that margin pressure is
being driven by the customers who are seeing the technology
being driven out to their end customers and looking again to
reduce time and to reduce cost. So you see tremendous margin
pressure on all of these businesses. What are they are
looking to do is to find a way to retain their existing
liquidity which is really the key to what they bring and not
be margin wise by their customers. The customers in the
forms of the big broker dealers and market makers are purely
looking for, as they say, in all the releases a way to hedge
their bets. They're unsure of where the technology is going
to go; they're unsure of where things are going to trade;
and so they're saying we've got to come up with our own
solution because we aren't sure where this solution is going
8
<PAGE>
to come out and how it's going to impact us. So what you
really see is a race. It's a race between a variety of
exchanges, race between various market participants to come
up with a solution and to generate or to create what will be
the next generation of trading platforms and of markets and
centers of liquidity. That race will be, we think, short-
lived. There's a lot of money coming into this, there's a
great deal of money at stake. It's attracting capital, it's
attracting strategic partners and what you're really faced
with, we believe here at the CBOT as we believe in all
markets, is trying to come up with a solution and to drive
and create the next market model or models. And use your
current position and your current relationships and your
current liquidity to be the springboard to that new model.
We will tell you particularly on the equity side that
Merrill Lynch has investments in five or six ECNs. And the
reason for that is because it's on the scheme of things not
a lot of money given what is at what's at stake for our own
economics and because we're not sure of the solution. I
think all the participants are looking for someone to create
a solution. And what you're really taking the opportunity to
do here is both on the open outcry and the electronic side
to create those most viable solutions for yourselves and
your customers and seize the next market platform. That
window which is currently open, we do not believe will stay
open for long. The next person going into the equity markets
telling the same story as eSpeed will not only have to tell
that story but will have to distinguish themselves and
demonstrate why they are more viable model than eSpeed. That
will already be an issue. There are a variety of strategic
partners out there looking for solutions. Those people will
not wait for you to come up with a solution, they will
continue to look and invest in others until they can find a
solution. So I think in summary I would say is there's a
tremendous opportunity for you here but it is one that has
to be pursued quickly and with a great deal of dispatch.
Chairman Brennan: Thanks gentlemen. I'd like to introduce Justin Zubrod from
AT Kearney. Justin is a senior vice president at Kearney. AT
Kearney is one of the fastest growing high-value management
consulting firms and is the leader in the consulting to
financial institutions in eCommerce companies. Justin will
present to you basically the same presentation that the
board of directors got. We gave him the margin ___or
marching orders given the same information that the board
got, so Justin.
Mr. Zubrod: Thank you David. I appreciate the introduction. David's
given me one instruction and that's to give you as much
information as we can within the time that we have today.
The version the presentation that I'm going to present is
exactly the same presentation in content that the board of
directors received at their offsite less than a week ago in
terms of debating the restructure. Let me talk first about
the process that we followed in developing this
recommendation serving the task force. This is the task
force. As you can see it had a
9
<PAGE>
number of traders that were representative of the different
constituencies here at the board of trade as well as
representatives of management bringing in their points of
view supported not only by AT Kearney but Merrill Lynch,
Kirkland and ultimately Piper, Marbury, Rudnick & Wolf. The
task force had over 12 meetings, intensive meetings after
the working hours here to debate the issues to structure the
analysis and to set the direction. We had over 13 focus
groups in which many of you participated representing over
225 people both members and members of management. We had
five board meetings including the three last week. And as I
say we had outside expertise. Our role, in addition to
facilitating the process, was to do a thorough assessment of
the marketplace that you compete in now and going forward.
And assess you today and in the future and create business
models to position the CBOT to be competitive on whatever
platform is going to succeed going forward. We also met with
a very diverse group of members and directors to gain buy-in
on virtually a weekly basis. We interviewed widely industry
experts and experts outside of the CBOT as well as within in
terms of some of the changes that Brian spoke to earlier. In
addition we open the number of communication channels,
whether it was Membernet or (inaudible) at AT Kearney, one
on one meetings, traditional suggestion boxes, memos to the
membership and just plain old e-mail to get as much
information as we could. One of the operating principals of
the task force was to open up as many and multiple
communication channels to get input and we hope that we've
been successful in crafting this plan. On this next slide, I
don't want to dwell on the issues that Brian and Cliff
talked to but clearly you're not alone. In terms of every
single exchange that you look at across the globe in
different commodities, products, and industries with
different membership styles, ownerships and governance are
facing the same issues be they changes in investor
priorities, member priorities, the onslaught of electronic
trading, the relaxation of convergence of regulatory rules
to facilitate competition and ease of entry, in the increase
of competition and the alignment of all the people in the
industry, everybody is facing the same issue. And as you
begin to look out over the future in terms of where are they
headed, be they at an exchange or an electronic marketplace,
begin to see that there is some convergence about where
everybody is trying to put a stake in the ground. You can
define it by customer segments, integrated product
offerings, differentiated pricing, trading platform access
and the like, and we spent a lot of time trying to define at
the end of this period of consolidation and restructuring,
whose going to win? The marketplace and/or exchange is going
to win going forward clearly is going to have liquidity and
transparency, efficient execution. clearing and settlement,
integrity of regulation of an important point, linkages to
other markets regardless of geography commodity or product,
a global breath of those products and markets in a very
responsive market leading product innovation and technology.
Let's step back and see how you're doing against
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those future requirements across the same criteria. You can
begin to see that there is some gaps. Some of the more
notable gaps indicated by the solid dot on that chart are in
pricing, the trading platforms that you have, governance,
ready access to capital in your legal structure as indicated
by your charter. You're member not customer focused, you
have a leading open outcry, one of the best in the world but
inadequate electronic trading platform. You have cumbersome
governance and very little if any access to capital except
what you bring in here every day and a very tight and narrow
and sometimes confining legal charter that's over a 152
years old. So what did we conclude? There are competitive
gaps given CBOT's governing structure and how it operates
today. It's just not effective. You need to invest in an
improved both the open outcry and the electronic trading
business to be competitive. You're going to continue to face
even greater competitive and market pressures that lists
that Cliff put up on the board changes every week in terms
of new people coming into this business but not all will be
successful. We also learned that there's overwhelming
support for change, both within the membership, although we
recognize everybody defines change differently than success
and management but a clear consensus around CBOT needing to
act and to make these decisions quickly because you have
neither the luxury of options nor the luxury of time. These
conclusions were broadly supported by the focus groups that
we held with many of you throughout the end of last year. As
we went up to board consideration, there was a fairly we
think robust restructuring plan that takes a bold step in
terms of putting that stake in the ground and grabbing first
mover early mover advantage. Before I talk about the
specifics of the plan which David has indicated, our fully
demutualized (inaudible) the CBOT as two distinct companies
as shown in this graphic. Let me just talk to you that the
preparation that went in to the board's consideration and
their newly unanimous vote on the direction to proceed. In
addition to the analysis that I talked about that we led and
facilitated and the support by Merrill Lynch the task force
spent a lot of time defining these two businesses open
outcry and electronic trading in terms of creating a
successful business model in defining how the two are going
to work in competition and in cooperation with each other.
The plan was unanimously approved as David mentioned by the
restructuring task force. We set out to provide the board
given the time frame and we're all under a gun on this
point, we sent the materials to the board well in advance as
I indicated we spent all day downtown here on a holiday for
most people going through the details of the plan and
lengthy discussions at two subsequent board meetings before
they took an overwhelmingly approval vote to take this site
forward. Let me tell you what they approve. As I indicated
creating two distinct companies on a fully demutualized
basis can see in the middle there, the open outcry company
is demutualized for profit and is owned privately whereas
eCorp is owned by shareholders,
11
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possibly publicly at some point in time. The new open outcry
company would be lean and cost efficient, would invest in
supporting technology, would have trading rights bundled
with ownership, would have restricted trading access, would
not be open access, is intended that a trade all current
products and pursue additional products as well. It
maintains the CBOT exercise right and has an independent
board and management. As you go to the other side and say
what is eCorp or EBOT or the electronic trading company as
it has been called, it is also for profit, publicly held to
take advantage of some of the market valuations today, cost
efficient and economical as well. It has current CBOT
members receiving shares. It separates the trading rights
from ownership and is open access. At the outset it fully
leverages the Eurex alliance and you trade all current CBOT
contracts plus additional contracts and to remain
competitive and it too has an independent board and
professional management. There are a number of things that
have to be worked out between the two companies when they go
into business. We call this Cooperative Operating Agreement.
But clearly both have to prepare and separate boards of
directors and appoint them. The new boards need to determine
the management requirements for each. They will have
separate market data services. Initially they will likely
have separate regulatory functions to get started but
possibly combine those or even outsource as many exchanges
are doing going forward. They will have fungible products at
BOTCC. They would both offer all products currently traded
at CBOT as they come into business. The Eurex agreement
would be binding on both at the outset and human resource
retention and transition plans are critical to the success
of both and need to be defined. There are some other things
that are being defined through the implementation committee.
One is, open outcry would probably be prohibited from
offering an eTrading system and competition with EBOT with
the electronic trading company for some period of time
likely three years. Financial arrangements between open
outcry and electronic trading company need to be worked out.
From a valuation standpoint, it's not attractive to burden
EBOT with an ongoing royalty or payment system because that
hurts you as a shareholder in EBOT. We also have to
determine what eCBOT which is benefitting from some legacy
investments in technology, developing Europe, uh Eurex and
other restructuring activation costs and common operating
costs, what level should the electronic trading company
share in that development that is come from CBOT today. And
on information dissemination, the common objective is to
protect and grow that total revenue although in the rapidly
changing technology and information business that will be a
challenge as well. As both Tom and David talked about the
mechanics of achieving these objectives are being finalized
now. Now what do we believe the benefits of this plan are?
One, by creating these two separate companies on the basis
that I've just described and according to the principals
that are being worked out now, it does position the
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membership to benefit from the existent open outcry business
while capitalizing on a potential growth of electronic
trading. It allows CBOT the best opportunity to capitalize
on the high market value for electronic and trading
companies out there today and as Brian indicated that window
is not going to be open long. We believe it provides both
open outcry and electronic trading the best chance to
succeed dedicated organizations whose sole focus can be on
growing and maximizing those businesses without conflicting
interests and having to trade off the future of one against
the future of the other. It provides a business focus for
decision making on a new governments platform and without
restructuring importantly the benefits of the IPO, the
proceeds cannot really be distributed to the members. You
can't get your hands on that. We did consider several
alternatives. It has been suggested that the best thing to
do is to leave open outcry alone as a mutual and just spin
off the electronic trading company. That option did not
survive consideration and debate on within the task force or
the board. Because without significant restructuring open
outcry cannot be economically viable and would be unable to
compete. Period. Further, the distribution of the benefits,
the proceeds from the sale of the spin off of the electronic
company under your current charter could not be distributed
to the members. We also looked at the holding company option
just creating an electronic subsidiary and managing the two
businesses together. Again in both the task force and the
board that option was not accepted. One, that would likely
result in more rapid demise of open outcry. There would be
pressure to close pits and move to a lower cost electronic
trading platform, you saw the charts that Cliff showed in
terms of the cost differential between electronic and open
outcry. And the market valuation of a combined entities
considerably lower if it's in a holding company form than
that of a separate electronic trading company. Now we've
been asked what do we believe. As David indicated, we had a
team here that was representative of our financial
institutions group not only here in North America but Asia
and throughout Europe and are also working with a number of
other exchanges in different areas on restructuring as well.
So what is our collective view as to what the future will
hold? One, we do not believe that open outcry will disappear
in the near term. We believe it has a strong future. We
believe that a for profit demutualized outcry is the best
way for this exchange to adapt and compete with all those
people that weren't in business a year or two ago. Creating
a robust electronic trading capability is the best long term
financial hedge for protecting both your asset value as well
as trading opportunity. We believe that the same products if
we work out the details and all the rules and the operating
agreement can trade successfully and simultaneously on two
platforms both electronic and open outcry. These changes do
not preordain the demise of open outcry but we do recognize
that there may be a difference for financial and
agricultural products which the implementation committee is
looking
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at now. This restructuring committee or plan actually
positions the members we believe to benefit regardless of
the outcome. Nobody has a crystal ball as to when things
will shift to electronic and in what mix. And it varies by
exchange and it varies by market and geography. And it
varies by the responses taken by some of the traditional
players as well as the new to stake out a new position going
forward. How both companies respond to the competitive
marketplace will determine the long term viability of each,
it's not preordained. Next, we felt that creating two
separate entities that will compete in the marketplace is
critical in terms of independence. We believe that the
electronic trading company will likely have a higher value
substantially if separate from CBOT. Separation will enable
us to bring in management talent with the eBusiness
expertise. We're a 75-year-old company, not as old as you
are, but we struggle as well as a traditional player in our
market consulting as how do you attract new people with
eBusiness capability and merge them with what we have in
terms of management? That's a challenge you have as well and
we believe that separation will help facilitate attracting
the talents you need and keeping them. Activating a separate
electronic trading company quickly creates credible
competitive response that may actually as Brian and Cliff
talked to actually convert competitors into partners going
forward. Continuing with our view. As for profit companies
both entities will have much greater financial and decision
making flexibility and the resources to make the technology
investments required in both not just in the electronic
trading company. While separate some inner connectivity may
be required to allow open outcry creators to lose electronic
trading of the global company's network. Again, two
divisions under one holding company would eventually kill
off one if not both of the businesses as you begin to starve
capital to achieve other objectives. It's important to know
from the analysis that we did, Merrill Lynch did, and the
Board of Trade did on its own, that the experience of other
electronic exchanges suggest that we're not subdividing the
pie, that the pie actually grows in which people are
competing. This is clearly the experience of the Eurex
exchange and in other markets that were actually attracting
more people to our products than divvying up the spoils of
those who have been with us for quite some time. In summary,
our restructure, this restructuring, we think, is by far the
most ambitious pursuit by any major exchange to date. Others
have taken half steps, some of them in this town but there's
an opportunity for first mover advantage for the new CBOT
and the electronic trading company. The transition will
clearly be a challenge, continuing to provide an environment
for the existing trading while establishing new two new
companies is a very difficult walk on the tightrope. While
the challenge we think is daunting I think we've been
impressed with the resolve and the dedication of not only
the task force but the management, board and the members
that we interviewed in the extensive focus groups. They give
us reasonably that the restructuring vision can be
envisioned, can be
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<PAGE>
achieved but it will be difficult. If that's the
recommendation our perspective on it, let's talk about what
these two companies need to do to be successful. First, the
new open outcry company. One, its strategic objectives is
clearly to preserve member opportunity within a poor four-
profit structure. How do they make it worthwhile to hop on
the train and come down here everyday? Provide a superior
open outcry trading platform in the new environment which
focuses on cost and efficiency as well as adding products.
Reducing costs and restructure pricing to unlock the
profitability that is inherent in the open outcry business
and preserve and enhance liquidity. Let me move now to the
strategy for the new electronic trading company. Clearly its
strategic goal is to leverage the strong brand and the
current capabilities inherent in this organization. To grow
the electronic digital trading community, to bring more
people into this environment electronically then have
participated before under the open outcry environment.
Provide a superior electronic trading platform initially
starting with Eurex and leverage strategic acquisitions and
alliances going forward and the good news is there are
people knocking at your door wanting to participate. As we
mentioned, this transition will not be easy. Clearly, you
have a number of restructuring challenges. One, moving
quickly and maintaining momentum while still meeting our
responsibilities to inform the membership and management and
get a vote to proceed. Appointing management team to lead
the change particularly in the new electronic company
because we are creating a lot of uncertainty and its going
to require a steady hand. Both have to develop a lean and
flexible costs structure considering outsourcing considering
other activities. Frankly, your going to be shareholders now
and likely not members if this plan is pursued. Redefining
the relationship between the members and management is going
to be critical and a challenge and then leveraging alliances
both have opportunities to go forward not just electronic
trading, but open outcry as well. We think that there are
some risks that can be managed. We think that one of the
major one is taking a half step, going slowly and losing
that first mover advantage. As Brian indicated, the second
and third person in line has to tell the same story, but
better with more differentiation and there is a cost to
that. Creating special incentives for members that damage
value. Walking that line between defining a new relationship
with the membership and creating special benefits will be a
challenge. In going too far over the line erodes value in
both enterprises. Continuing to deplete resources or
incurring debt if this takes too long, you all know that the
financial condition of this organization and enterprise it
is a challenge in and of itself without this restructuring.
Taking too long could make that situation a lot worse with
no answer and not providing a clear separation between CBOT
and electronic trading that the market place will require
and as Brian and Cliff indicated, some of the potential
partners, like BrokerTec, say they will not work with member
organizations going forward. So, charting
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<PAGE>
a path through all of those objectives and challenges will
be difficult. The activation principles adopted by the Board
and thinking about the hill we have to climb are fairly
clear. But let's approve the business strategy quickly.
Let's put a stake in the ground that this is the way we're
going to go. But we will delegate the next steps to a sub-
group which is the implementation committee on which David
reference earlier. Let's maintain a process, and this is a
mandate to all the advisors as well as the task force, that
is open to the membership and staff and seeks input. And
assure that the Board of Directors approves or ratifies all
the elements of the finalized restructuring plan going
forward prior to a member vote. Let me finish up by talking
about the process going forward. The Board now has, on the
far left-hand side of that screen, had the first approval of
the strategic direction. We expect during the first and
possibly second quarter, before the first member vote, that
the implementation committee will make further progress in
defining what to do about the Eurex costs, the series roll-
up, the fair member treatment and defining that new
relationship and the transition plan. The allocation
committee, chaired by Governor Thompson and made up of the
outside directors with separate counsel, will make its
recommendation on the best way to go forward on allocation.
The dialog with CBOE will continue because we think there
are more issues in common than there are points of
divergence for those two groups. Launch a significant
communications program which David indicated this is the
very first step and there is much more to come. And
understand as well that there are many legal steps that have
to be worked out here. It is difficult to unwind 152 year
old charter based in Illinois which may not be appropriate
for competing in the new global environment in a for profit
basis. Working your way through that maze will be a
challenge. We all hope to have that before the first member
vote which could be sometime in March, but again, that's
being worked-out as we speak. Coming out of that, the works
not done, a lot more work has to be done in terms of
initiating the CBOT restructuring and re-engineering.
Starting up E Corp., starting up and electronic trading
company in a very strong market that is demanding talent,
that has made resources scarce with E business experience,
particularly business to business experience, will be a
challenge. We have to get the regulatory approvals from the
IRS, CFTC and SEC and the mound of paperwork that goes with
that. You have to prepare for a spinoff and timing is very
important in the story you have to tell and hence the nine
month track record that we're being advised would be
appropriate for the electronic company. And then the final
valuation and fairness opinions that will be required before
the spinoff. That will require a second vote by the board to
approve all that documentation and then a second member vote
to approve going forward in an implement. That will probably
be in the third, more likely the forth quarter depending
upon our progress as the implementation committee.
Ultimately, we will be able to complete the CBOT
restructuring after that, complete the
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<PAGE>
spinoff and at that point you get a chance to distribute the
equity. So you can see there's a sense of urgency because
there are so many things that have to be done before you are
able to actually take advantage of some of the opportunities
out there in terms of valuation. So let me finish by
saying... One, we clearly believe the tasks force believe
and the Board endorse that belief that restructuring is a
benefit to all of you. Clearly for the institution, we
believe that this plan, while bold and putting a stick
fairly out-forward compared to other exchanges, provides
both open outcry in electronic trading the best chance to
succeed. It capitalizes on the high market value for
electronic technology companies that we are seeing in the
paper daily and provides a business focus for decision
making that we require to be competitive. For the members,
for the majority of the Board of Trade members, we believe
that restructuring will provide a better financial future
and the sooner the better. The creation of an E-Corp unlocks
the ownership value that you're resting on today and that's
really the only way to do that. FCM's and clearing firms
will benefit from improved throughput and lower trading
costs. Some local are expected to do quite well as they
would in any environment going forward. And we do not
believe that lessors would be adversely impacted because
both open outcry and the CBOE exercise right will be
preserved. Thank you very much.
Chairman Brennan: Thanks Justin. I just want to introduce, there's three
directors over to my right that are going to get up and they
have bravely agreed to stand up here and speak and I'm not
sure in what order, but I think everybody knows Joe
Niciforo, Veda Levin and Charlie Carey, and I'm not sure
what order. Joe's going first so, come on Joe.
Mr. Niciforo: Thanks Dave. I guess what I'm up here for is to try to
explain what this means for open outcry in the future. After
we restructure, the attention of an entire organization will
be focused on creating the best open outcry system.
Currently, our resources are divided, we sit here in the
pits and a lot of the monies that we make go towards
developing electronic trading system. Our attention is
divided, we're unfocused because we are trying to serve two
masters, and that's really leading us to a situation which I
believe isn't tenable. We saw what happened to LIFFE when
they tried to run two exchanges. Now there are a lot of
differences what went on at LIFFE and what goes on here,
however, the demand of technology and the demands on our
financial resources are clearly strained and we don't have
access to capital markets. This plan would give that to us.
All the financial resources of the organization will be
dedicated towards open outcry trading. Last year at the
finance committee, we had to debate whether it was prudent
to spend money on order routing. I would say that in this
environment we wouldn't be having that debate, that we will
be constantly reinvesting in technology taking the proceeds
from our trading transaction volume and replowing it
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to make a better exchange. Our business decision process is
lacking under this committee system, I believe. I think we
need a better model for decision making. If we look at the
Eurex experience, the Board voted approximately ten times to
affirm Eurex. The membership voted no the first time, and
yes the second time. That process to approximately 14
months. In that time, our competitors were enboldened, our
lives were frustrated and it wound up costing the Exchange
about $20 million. I would suggest that, that is not the
correct model for operating in the future. We have to get to
a business model and we have to get away from this political
model which has served us well in the past. As I go around
the floor, a lot of people asked me what does "for profit"
mean to open outcry? I'd like to make one thing clear that
has been mentioned before, there is no way for us to legally
distribute shares in an eCompany to our members under our
current charter. We can't just spin off the electronic
trading and keep things the way they are, we have to
restructure in order to do that. More to the point, what
does "for profit" mean for [inaudible]? I'm a local, when I
wake up in the morning, I don't worry about how much money
the Exchange makes when I go in the pit, I worry about how
much money I make. The model that the task force envisioned
is very similar to what goes on at BOTCC. The Board Trade
Clearing Corporation is a for profit Delaware corporation.
It's run for the benefit of the owners just as this company
would be run for. At the end of the year, if they meet their
budget, they declare "fee holiday" and give the money back
to the owners. We envision the money to constantly be
reinvested in technology. There's also a misunderstanding
about the nature of the relationship between the electronic
trading company and the open outcry company going forward.
These two companies will not be attacking each other day
one, cannibalizing each other in some kind of death march.
In fact, for at least the first nine months, the electronic
company will be a wholly owned subsidiary of the Board of
Trade. We are carefully structuring a cooperative
relationship between the two companies that will benefit
them both. For example, we are going to deliver hit take
functionality to the members of our trading pits to link to
the electronic trading markets. That is a way that both
companies can grow, but they can become intertwined and
cooperate and it could benefit both of the people
participating the pits and the eCompany. Another area that
we are talking about is the market data systems. We are
looking at a way to make a cooperative way for these things
to go forward. We currently make about $50 million a year in
quotes and we're not going to do anything to jeopardize
that. In fact, a lot of people suggested that if we have a
business model operating here that, that money for market
data may be able to grow. We are also structuring the
agreement between the two companies so that our members can
make an orderly transition. There is a discussion going on
and (inaudible) has written a number of thoughtful letters
on the issues of member rates and non-member rates going
18
<PAGE>
forward. There is no doubt that we do not want to tie the
hands of the eCompany, but that doesn't mean that we are not
discussing a member fee differential in the short term. The
implementation committee is working on this issue and others
and we'll have the answers before your asked to vote.
Another example of the kind of thing we're looking at is a
joint block trading facility. If there is block trading, who
is it going to benefit? And we are working at the
implementation committee to craft something creative so that
both companies will benefit. In conclusion, do I think open
outcry will survive without this plan? I think it might, I
think that the liquidity in our pits, the skills of our
brokers, the fact that options are tough to put on a screen
and the fact that agriculture trades less spread product,
means it might survive. But I strongly believe that this
plan will strengthen open outcry, give it a better future
and give the members more opportunity going forward. Thank
you.
Chairman Brennan: Thanks Joe. Next, Ms. Veda Levin.
Ms. Levin: This restructuring plan is good for seat value and good for
lessors. The value of the membership as a whole is hugely
undervalued today. Partly due the future of the CBOT
relative to its competitive threats. By creating an open
outcry company, that is business focused and economically
viable, the entire membership benefits from the preservation
of the existing open outcry trading environment. For as long
as the market will support it, and sustaining and increasing
value of our current CBOT seats. In the new CBOT, the
trading rights and ownership, equity now instead of seats,
will continue to be bundled. That is, trading access will be
restricted to equity holders in the restructured CBOT. In
addition, the plan envisions and environment that would
perpetuate open outcry for as long as it can sustain itself
competitively and provide open outcry with the best possible
business model envisioned today. It also preserves the
ability to lease seats. In the restructure plan, there is no
change in the exercise right between the CBOT and the CBOE.
Our bankers and consultants have worked scrupulously to make
sure that this plan conforms to the 1992 Agreement between
these two Exchanges. On a personal note, I see among you
many colleagues, friends, and competitors and while I own a
full seat, that I lease out on the Board of Trade, I ply my
business daily on the CBOE and work daily with all four
option exchanges as well as all stock exchanges. I can tell
you personally and unequivocally the CBOE is the best option
exchange in the country if not the world and as a full
director on the Board, I would work very hard to foster and
facilitate new avenues of relationships with the CBOE to
find new areas of mutual concern to build our business even
larger. A restructured CBOT will enhance this forging
relationship. By creating a separate eCBOT owned by the
membership a new and very valuable enterprise is created. As
a listed company, an eCBOT
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can raise money from the capital markets and enter into
business alliances with strong, aggressive and deep pocketed
partners. You have only to look around to see what the .coms
are doing right now. Can we really afford not to be part of
what's going on? And look to these valuations. We know are
competitors are looking at this and we know that failing to
create an eCBOT really puts our entire business at risk.
Most importantly, how can we not justify getting the best
possible value for our current seat holders? Almost half of
our membership currently leases out their seats. This deal
will have no effect on current leases while creating huge
upside potential. As a full member lessor, as a member of
your Board of Directors, I hardily endorse this
restructuring plan and hope your will as well. Thank you Mr.
Chairman.
Mr. Chairman: Thanks Veda. Charlie Carey.
Mr. Carey: Thanks David. As a member of the committee, restructuring
committee, as Chairman of the finance committee, I feel that
various questions about the viability of this plan going
forward and while I may not be able to plug in the numbers
today, I've heard some of the fears and concerns of the
members. This plan's a secret plan and open outcry. This
plan will saddle the Board of Trade with all the debt and no
sources of revenue forcing the pits to close down. This is
just a sneaky way of closing down open outcry because the
guys on this committee will benefit if it goes all
electronic. While I'm one of those guys and I didn't sign on
for that duty. As Chairman of the finance committee, I'd
like to set the record straight. eCBOT will be freeing open
outcry from having to pay for investments in electronic
trading. Currently we are funding the Eurex Alliance
Development costs out of our cash flows. As we negotiate the
terms of separation, we envision the electronic trading
company will pay the open outcry company the total costs of
the Eurex development. This should provide the open outcry
company with adequate cash to cover implementation costs of
restructuring and pay down some of the debt that currently
exists. The implementation committee is also looking at the
possibility of leaving a percentage of eCBOT in the general
partner CBOT. This should delay any fear that you are going
to lose the open outcry exchange in the virtual positioning
of having to close its doors. This would give the Board of
Trade a much stronger position than it has today and the
flexibility of fine working capital in equity or in capital
markets. Funding of the electronic company will require seat
investment by outsiders. Strategic equity investors and
venture capitalists. Because of these requirements, it is
imperative to act quickly to establish strategic alliance
and partnerships necessary to fund the development of the
electronic company. Additionally, the electronic trading
company will be able to go public by an IPO to both unlock
the value for members and raise capital. We have an
investment banker working with us to guide us through the
various financing alternatives. But even more
20
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important, running open outcry like a business will lead to
significant cost savings. As a mutual, virtually every
member will have the right to direct some part of the
Chicago Board of Trade budget. We see the results of that
process today. Cutting back on the Board of Trade's open
outcry expenses is a process that will start immediately.
The advantage really goes to open outcry in terms of timing
we start the restructuring with our existing business and
eCBOT actually goes into operation later in the year. In the
interim, the Board of Trade's Board of Directors will
oversee both institutions. A major part of the restructure
work has been to design a more competitive open outcry
market. We will increase the investment and technology from
current levels. Taken as a whole, the Board of Trade and
open outcry in particular will be in a much better financial
position after restructuring. We also needed to understand
that the new open outcry will be a closely held company. It
will continue to be concerned with member opportunity. That
was the whole idea by keeping it owned by those who trade
here. We are drafting a for profit structure to be
efficiently run. My bottom line is simple, I believe we
should restructure and take advantage of the potential
opportunities presented to us. Thanks. Thanks David. Thank
you.
Chairman Brennan: Thanks Charlie. Joe, Veda and Charlie thank you. They are
all on the implementation committee currently working and I
thank you for your efforts. They have been working really
full-time at this. Before we open this up to questions, I'd
just like to turn it over to Brian Sterling for one more
comment.
Mr. Sterling: Before we go to questions and answers I did want to just
briefly review from financial advisors perspective what you
have now and what you'll get after the restructuring. What
you have today really is, in you seat ownership, is really
broken down into four components as we see it. The first,
which probably most pertinent, is the right to trade or to
lease your seat here on the CBOT as well as the access right
at the CBOT. So it really generates for you trading,
leasing, revenues. The second is membership vote, and as
that's been expressed here at the CBOT over time, it is
something that we call in shorthand negative control. What
this really means is its difficult to get things done, but
the members can through for the petition process and
otherwise block actions from being taken. So it looks really
in that vote, more of a veto right than it is a vote to move
things forward or to make changes. Third, you've got equity
ownership. However, that is not currently realizable. It's
really a function of the current Illinois Charter. There's
really no way to unlock that value unless you sell the
entire seat. So you can't unlock that value separate from
the right to trade here or lease out that seat. You can only
get that value frankly, if the organization is liquidated.
The exchange can't pay dividends, it can't make
distributions. Fourth, the full members have the rights to
exercise at the CBOE. As we look at it, next slide please,
what you'll get after
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the restructuring is what you have today, excuse me, as well
as additional value and rights. As the plan is being
constructed, the CBOT and the eCBOT, trading, leasing and
access rights are unchanged particularly at the CBOT. And in
addition, members will have access rights at the new
electronic trading venue. The shareholder vote will no
longer be negative control, it will be the same as all
corporations in the United States, its full voting rights,
each share will come with a vote. So it is shareholder
democracy as we've seen throughout the U.S. The equity
ownership in the CBOT will no longer just be a liquidation
right, there will be the right to realize economic value
whether it be through dividends or at the time that the
equity becomes tradable, to sell that equity ownership
separate from the leasing or trading revenues. And last as
many people have said, the CBOE exercise right would be
unchanged. But in addition to that, you will get two
additional things. First, in the eCBOT, you will get the
shareholder vote. You have the right to control that
business and destiny of that business and to drive it as a
business towards increased profitability and then last, you
get the economic value. The assumption is that we would
access the private capital market, bring in capital to fund
the build-out of that business and then shortly thereafter,
move forward and take this business public so you would have
full liquidity and the ability to sell that stock and
realize that value. All of that would be unlocked if you
would, and disconnected from the right to continue to trade
both at the CBOT and at the electronic trading venue. So as
we look at the restructuring plan, you've really addressed a
number of things here with this plan which goes further than
any other exchange that we see. You are changing the
governance to focus on profitability and long-term viability
of the business and therefore, you are also creating an
operational fix, if you will, or an operational opportunity
to address the challenges you face. And last, your putting
liquidity into the hands of your members particularly
through the eCBOT shares when they become publicly traded.
David.
Chairman Brennan: Thanks Brian. Thanks to everybody and I think with that I'm
sure there's a few questions out there. So I think we should
not waste any time and open it up.
Audience Member: Any talk of lawsuits by any segment of the membership is a
last resort that we continue respectful debate, intelligent
debate, and that any talk of a lawsuit is an absolute last
resort. I think the spirit of compromise has always helped
this institution to go forward, and I would hope that it
continues. Thank you again.
Chairman Brennan: Thanks, Jay, I appreciate those comments, but it's really
been a team effort to bring it to here. There's the
restructuring taskforce, they really worked like dogs, and
of course we still have a lot more work to do but I
appreciate your comments. Mike.
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Audience Member: Real quick, I was just going to ask. I'm going to certainly
feel pretty entrusting of the new directors, the 10
directors of the open outcry, but would there be any
recourse of the general membership? If something were to
come about that a lot of people felt strong... what would be
the process of saying you know...
Chairman Brennan: Recourse in the new company?
Audience Member: Yeah. None?
Chairman Brennan: I don't know. I'm not a corporate lawyer, there's enough of
them around here that can help me out...
Audience Member: I just wondered how the structure would look.
Unidentified
Speaker: I don't think the structure of that board has been set yet,
my understanding is that it will be laid out for you in the
first set of voting material. Typically, though, boards of
directors of companies serve at the request and at the
direction of the shareholders. They are responsible to the
shareholders, they have a fiduciary duty to their
shareholders.
Chairman Brennan: Mark, and then Jake. You get one more, Jake, that's it.
Audience Member: Chairman Brennan, I've heard a lot about... we're all
hearing about BrokerTec and I'm assuming currently as we
speak that's our biggest threat. It was a little ambiguous,
but am I to assume that if we get this done quickly enough
that BrokerTec is interested in becoming, in doing something
with us instead of something to compete against us? You know
what I'm saying, that's what it seems like it's inferring.
Chairman Brennan: To your first comment, I'm not sure BrokerTec is our biggest
threat. I still don't think you can discount a guy like
Cantor? There are other threats. I will stay that non-
specific to BrokerTec but to any outside strategic partner
that you would do or hope to do something with, they will
not do it with a membership organization. That's very clear.
With a corporate-style structure, you are apt to find
different strategic partners and alliances. I think that's
very clear. That's not even specific to BrokerTec.
Audience Member: I have one other question if I may. As far as EURONEXT, you
stated that we have a five-year deal with EURONEXT
currently. In the event that somebody else, I can't say who
it would be, but if another partner came to us and we felt
that was an advantage to go with them, is there any way to
break the EURONEXT deal by some dollar amount, or some way
around that?
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Chairman Brennan: There's enough lawyers around here that can answer that, but
I think you can always... money and litigation, time and I'm
sure there's... just money, Lou's got the answer. Jake and
then Pat.
Audience Member: Thanks. You know, I appreciate the second chance, but as
long as there's questions, I hope we're allowed to ask them.
I wanted to know whether or not the Board's presentation or
the task force's assumptions involve the notion of
disintermediation, whether or not they thought that they
could capture in their calculations about what it might make
or not make cutting the FCMs out of the pie. Is that some
issue that has been discussed?
Chairman Brennan: No.
Audience Member: Ok, I'm very curious about that. I have another specific
question, and that's...
Chairman Brennan: One more, then I gotta go.
Audience Member: Well, then really I have a comment, I need to make the
comment as well. But the other specific question, and I
think it's very pertinent to everyone here is, my
understanding there was a specific proposal made, by a
venture capital firm, to buy 50% of the mid-am? Is that
true? It was made formally to the Board?
Chairman Brennan: I think you read about that in the paper? Or did you get...
Audience Member: I'm asking you a question. What difference does it make...
you know. Well, I mean, I know that there was. Do you not
remember it?
Chairman Brennan: I don't think I can comment on that. I did read a newswire
about that.
Audience Member: Well, my understanding is that the Board never responded. Is
it waiting to respond? Well, I'll tell you, it's a firm
called Battery Ventures out of Boston, and my understanding
they made a bid to the Board of Trade to take the mid am on
an e-mini basis guaranteeing that they would only do e-mini
contracts, taking 50%, shouldering... paying $50 million or
some number to the Board of Trade for that privilege,
shouldering all the costs to make it a fulsome market. Am I
crazy?
Chairman Brennan: That's two questions.
Audience Member: Maybe it's just the wrong question, I don't know.
Chairman Brennan: Well, I will say that there probably has been similar
interest to that, but
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Audience Member: Did the Board respond?
Chairman Brennan: Excuse me?
Audience Member: Did the Board respond?
Chairman Brennan: It's currently at the executive committee.
Audience Member: Ah, ok. So the Board has not responded yet.
Chairman Brennan: You're going to get all you got out of me on that one, Jake.
Audience Member: Well, I think that all of us deserve all that we can get
because there might be alternatives to the structure
proposed.
Chairman Brennan: Don't assume I'm holding anything back, I'm telling you
everything that I can legally tell you. What's your next
question?
Audience Member: I'm not...Chairman Brennan, I'm not insinuating anything
about you. Please don't suggest that. I'm asking you
questions. If you tell me... what? I know the people at
Battery Ventures. Yeah...
Chairman Brennan: Let's not have a 2-way here. One more, Jake, and then I'm
going to go to Pat.
Audience Member: I think that Pat Hillegast and Gary Sigee made some very
pertinent comments here, and they affect... we don't know...
most of the people here probably believe that electronic
trading will at some point in time in the future engulf us.
We'd all like to believe that it might not. Some of us
believe that it will not, but I think the majority of us
think that it may well. Whether it does it with our skids
greased or ungreased is something that we're in the process
of debating, and some of it we don't have any control over.
But I think that they do make some very interesting points.
And I think that one of the things that we have to think
about is right now people who lease their seates out have
the benefit of having an income an income street? The people
who don't lease their seats out get a benefit of being able
to have an opportunity to make a living as market-makers at
a favorable rate to non-members and non-market makers that
are on the floor. If open outcry goes bye-bye, at some point
in time, whether it's six months, six years or sixty years,
and we are left with our stock ownership in e-anything, I
would suggest that there won't be any cash flow to anybody
and we should know about that. As far as I know, no e-
company pays any dividends. As far as I know 98% of the e-
companies don't make any money. But let's assume that we do
make money, generally speaking dividends are not paid,
they're out of favor, what revenues are used for are to
give... invest in new technology because everybody's always
leapfrogging us, buy other exchanges to increase revenue,
give stock options, further
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<PAGE>
dilution, whatever. I'm just curious whether considerations
are being made to the members that lease their seats out and
the members who make their living on the floor, whether or
not we're being asked to convert ownership in our fate in
the future, and whether that's the only alternative to one
of effectively owning a diluted, and I think that most
venture capital firms want control which is about 50%. I
know Cantor only spun off 10% through their special
circumstances. We'll get to that when the details come out,
but I'm just you know, wondering that we are going to be
converting... And that the only way to generate income is by
being able to sell off your shares. And, right now Nasdaq is
doing great, but all of us know and Greenspan keeps telling
us that this is a balloon about to burst. And if all of a
sudden I'm holding stock or unrestricted or my stock gets
unrestricted and it used to be worth 80 bucks and it's now
worth 14 bucks because the market now valuates things again
as it did for hundreds of years on earnings as opposed to
sales or multiples of sales or whatever, or multiples of
revenues down the road... you're asking us to make an
important step, and I was just... if we don't lock in some
preferences a la Gary Sigee, in terms of grandfathering...
gee, there's not a lot of us, there's only 1400 yellow
badges, there's only 700 red badges, if we're talking about
literally hundreds of thousands if not millions of traders,
they're not going to care if we get a special benefit. You
know, maybe we ought to carve out some special benefits that
will create an income stream and create preferences to the
members because we're the ones who built up the value, and
if it explodes as we all think it's going to explode, let's
make sure we don't get screwed.
Chairman Brennan: A couple of comments before I turn it over. Whether it goes
electronic or doesn't go electronic, the restructuring
probably has nothing to do with that. The point here is to
position the current owners so that they do own it. I don't
know, I think the e-businesses are, and Brian can certainly
speak of this better than me, but they're early enough that
I don't know if they pay dividends, if they don't pay
dividends, I don't know what Greenspan thinks of the market.
The point is, we know what we know today, we know what we
think, you know, we need to do to go ahead with this
institution. So, I can't comment on what future shareholder
values or anything like that might be. So, and to the
extent... to Gary's issue of the fees, we are looking at
that. I agree, I'm very sympathetic to that. But, I don't
know if we can do it. You'll know. Pat.
Audience Member: Well, I went through a transition, not the same thing you're
recommending here, but it went through a transition from an
open outcry environment to electronic. They were existing
side-by-side and really it lasted weeks. I mean, literally,
a few weeks. My question to you is this: we don't know if
we're going to transition to an electronic environment, and
you mentioned six month, six years... we don't know if it
will be six days or six weeks. But if it were six
26
<PAGE>
weeks, or if it were six days, my question to you is, we
have a hundred million dollar debt on our building
structures. Now, if I'm a banker and you're telling me
you're going to keep your debt in one institution and your
revenues in another institution, I'm going to say no way. So
you're going to have to settle the e-commerce company with
some of the liability because your bankers aren't going to
let you do it. They're not going to let you take your
revenue and not your expenses. So how are we going to
structure this in terms of the building debt, which we're
going to have to saddle with the e-company without saddling
the e-company, because that debt's going to have to be
fungible or your banker is not going to let this fly.
Chairman Brennan: There's no question, that's what the implementation
committee is looking at right now, and you also heard I
think Charlie or Joe, one of them said that the e-company
has to pay for the Eurex development. You don't want to
settle the open outcry with that, either. So there are
financial terms on the separation that have to be worked
out.
Audience Member So is the e-company going to have a prescribed ahead-of-time
liability. For the debt on the building, because
realistically, we don't know, but this place could implode
in days. And if it does, it's because our own company put us
out of business. But we still have $100 million debt that
the bankers are not going to walk with. Somehow, is the e-
company going to have a prescribed liability on the debt?
Chairman Brennan: I don't know if we're going to know the answer to that
today, but you also have equity in real estate. Charlie, you
guys are looking at this.
Mr. Carey: That's what we're wrestling with, and that's what I tried to
address when I said the Eurex development costs will cover
restructuring costs and a portion of the debt that we
currently carry on this building or this business. You're
dead on, and I thin that's what we have to work out, and
that's gotta be part of the detailed plan.
Chairman Brennan: Joe.
Audience Member: Chairman Brennan, have you... Ceres. What's the status of
that? Currently the Board of Trade owns 10% of Ceres, the
members own 70 and the firms own 20. Are you planning on
folding that back into the Board of Trade?
Chairman Brennan: It is anticipated that Ceres would roll back into ... roll
up, the call it, into the Board of Trade. Okay, so...
Audience Member: Into the Board or the eBoard?
Chairman Brennan: Into the Board of Trade. Lou?
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<PAGE>
Audience Member: I guess my question about information and... I understand
that there's an unlimited amount of information that anybody
could ask for, and unfortunately, we can't get it all. But
I'm very hesitant about this next vote if we don't have
let's call it the significant information that will
determine what our future's going to be. I am absolutely
confident that the world is going electronic, and I think a
lot of us are. I don't know when, and I sure know if it's
going to happen, I'd like to own a part of it. Because we
can't control whether it's going to do it or not. But I'd
like to have some of the viable details before this vote.
And I'm very hesitant to vote if we don't. And I wanna
correct the gentleman, I think he was from Merrill-Lynch,
who pointed out that the real problem here and he uses an
example the original turn-down vote on the Eurex. I would
remind him that the reason the first vote went down is
because the membership believed it did not have its
sufficient information. When the membership believed it had
sufficient information, they voted for it. And I'll take
your yes as an 'I apologize and I was wrong'. (laughter)
Thank you.
Chairman Brennan: I didn't say it, but I apologize and I was wrong.
Audience Member: Well, good. I appreciate that. Okay I've rarely been wrong.
You know that. In any case, I have another question--and
that's about this allocation issue.
Chairman Brennan: Yes.
Audience Member: Has there been discussion about either stock or stock
options for current staff.
Chairman Brennan: No.
Audience Member: Okay. Thank you.
Chairman Brennan: And to the point about information, I wouldn't ask you to
vote unless I had all the information to you. Would that
satisfy every detail that--I'm not sure that everybody
asked--but I think that the pertinent relevant questions,
the ones that matter, you will know before you are asked to
vote.
Audience Member: Because we all have our careers on the line here. And I mean
it is a significant decision and we're damned if we do, and
damned if we don't. So, I would ask that the Board be very
liberal within the limits of strategic issues and that is
something that has been addressed and I understand that, to
give the membership as much as possible. Its one of the
disadvantages of an open system like ours, that indeed,
anything you hand out will show up with our competitors, and
we know that.
Chairman Brennan: Tom.
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Audience Member: I have a comment and then a question. My comment is to the
people that have been the legitimate concern about the
eCompany and the member fees and what does a member get out
of it if he is going to be paying higher fees. One thing you
can look at doing is having the trading plat form have an
algorithm similar to project A so that there is always a
member advantage. That it is not a first-in, first-out order
matching. Depending on what happens to fees, there will
always be some value in being a member of that e-company.
That is just something I like to throw out. My question is
the implementation task force--is there anyone on it that
has a conflict, for instance, that is involved in BrokerTec
or an easy end?
Chairman Brennan: Well, Peter Lee is on it and he's from Merrill Lynch. But I
don't see that as a conflict. Merrill Lynch is our
investment bank. These are big companies. I don't see it as
a conflict and I'm trying to think who else is on it. Who
would have a conflict. Philip is on it--I don't know if
he's got a conflict or not--but he's not... Any thing
else? Well, I appreciate everybody coming. The crowd has
thinned out. (Applause). Thank you very much.
* * * *
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The following letter was sent to CBOT members and membership interest holders on
February 2, 2000 and is currently available at the Office of the Secretary of
the CBOT.
February 2, 2000
Dear Fellow Member:
Following the announcement of the Board's approval of a restructuring proposal,
many members and membership interest holders have made inquiries as to the
"value" of their respective memberships and the amount of their interest or
shares in the new companies. The Board of Directors and Implementation
Committee will continue to discuss the restructuring proposal with CBOT members,
and restructuring will be voted upon following members' receipt of detailed
ballot materials. Upon membership approval of the proposal, the Exchange will
embark upon its implementation, which we currently expect will be completed some
time in the fourth quarter. The restructuring proposal contemplates that our
members will continue to be members in the reorganized open-outcry company while
obtaining shares in the new e-Bot. Both now and in the future, as in the past,
membership values will be determined by the seat prices discovered in our CBOT
market.
As to the amount of the interest each member will have in the new companies, the
Board of Directors intends to propose an allocation of shares in the new
companies in a manner that ensures that the restructuring is in the best
interests of the Exchange and its members and is fair to all classes of members.
To that end, the Board has appointed an independent committee composed solely of
our outside, public directors to recommend an appropriate allocation methodology
to our Board of Directors. The allocation decision will be part of the
restructuring proposal on which our members will soon vote. Until the
independent committee has made its recommendation and the Board has acted on
that recommendation, further discussion on allocation is premature.
Sincerely,
/s/ David P. Brennan
David P. Brennan
We urge CBOT 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 by means of a prospectus meeting the requirements of
Section 10 of the Securities Act of 1933, as amended.
* * * *
<PAGE>
The following letter was distributed to CBOT members and membership interest
holders on February 17, 2000 and is currently available at the Office of the
Secretary of the CBOT.
[LOGO] Chicago Board of Trade
David P. Brennan
Chairman of the Board
February 17, 2000
Dear Fellow Member:
As you know, a special committee of the independent Directors of the Chicago
Board of Trade has been established to consider the allocation of equity and
other interests among the various membership classes in connection with the
proposed restructuring of the Chicago Board of Trade. We have received inquiries
as to the most appropriate means for membership to communicate thoughts or
concerns to the Committee regarding this issue. In order to promote an orderly
exchange of information, the Committee has requested that any such
communications be made in writing and addressed to the attention of Governor
James R. Thompson, who is serving as Chairman of the Committee. Governor
Thompson's address is as follows:
Governor James R. Thompson
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
Finally, so that any information provided to the Committee may be given adequate
consideration, the Committee requests that communications be delivered as
promptly as possible and not later than March 1, 2000.
Sincerely,
/s/ David P. Brennan
David P. Brennan
141 W. Jackson Blvd.
Chicago, Illinois 60604-2994
312 435-3601
Fax: 312 341-3392
We urge CBOT 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.
* * * *
<PAGE>
The following letter and attachment thereto were distributed to CBOT members and
membership interest holders on March 2, 2000 and are currently available at the
Office of the Secretary of the CBOT.
[LOGO] Chicago Board of Trade
David P. Brennan
Chairman of the Board
March 2, 2000
Dear Fellow Member:
Today I received the attached letter from the Chairman of the Chicago Board
Options Exchange concerning CBOE's views on the CBOT exercise right at the CBOE
as it relates to our restucturing initiative. In short, it states that the
proposed CBOT restructuring plan "...would not satisfy the necessary conditions
of the 1992 Agreement for continuation of the CBOE exercise right."
Protecting the right of CBOT members to exercise their memberships at CBOE has
been the unalterable position of the restructuring task force and the CBOT Board
of Directors since the beginning of our restructuring process last year. It is
the opinion of the Board of Trade's legal advisors that the plan approved by our
Board of Directors does indeed protect the CBOE exercise right.
The 1992 CBOT/CBOE agreement expressly contemplates the possibility of
restructuring at the CBOT. As I have communicated to the membership in the past,
it is our legal view that the restructuring plan complies with the 1992
agreement. We believe we are on solid legal ground and that the CBOE viewpoint
is wrong.
However, we have always enjoyed a good working relationship with CBOE and have a
great commonality of membership. We will continue to meet with them to discuss
this important issue while we proceed with our restructuring initiative.
I will keep you apprised.
Sincerely,
/s/ David P. Brennan
David P. Brennan
141 W. Jackson Blvd.
Chicago, Illinois 6O604-2994
312 435-3601
Fax: 312 341-3392
We urge CBOT 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.
<PAGE>
[CBOE LOGO APPEARS HERE] William J. Brodsky
------------------------------ Chairman and
CHICAGO BOARD OPTIONS EXCHANGE Chief Executive Officer
------------------------------
Phone: 312-786-7001
Fax: 312-786-7407
[email protected]
March 2, 2000
Mr. David Brennan
Chairman
Chicago Board of Trade
141 W. Jackson Boulevard
Chicago, Illinois 60604
Dear David:
At today meeting of our Board of Directors I reported on our recent meetings and
last night's telephone call. Pursuant to the Board's direction, I am sending you
this letter to formally advise the Chicago Board of Trade that if it implements
the restructuring plan as described in the "Restructuring Overview" dated
January 27, 2000, the result will be to extinguish the right of CBOT members to
acquire or retain CBOE memberships by exercise pursuant to Article FIFTH of the
CBOE Certificate of Incorporation. That right is further defined in the
Agreement between CBOT and CBOE dated September 1, 1992, which includes
provisions applicable to a split or other division of CBOT Full Memberships into
two or more parts, as well as provisions applicable to the possible merger or
consolidation of CBOT with another entity. As we understand the terms of the
proposed restructuring plan, it would not satisfy the necessary conditions of
the 1992 Agreement for continuation of the CBOE exercise right.
By putting you on notice of our position in this matter, we do not mean to
suggest that CBOE is opposed to any restructuring of CBOT. However, we would
expect CBOT members themselves to be troubled by a restructuring of CBOT that,
by attempting to preserve the exercise right, is likely to dilute the value of
both CBOE and CBOT memberships.
It is our view that loss of the exercise right need not be an obstacle to CBOT's
restucturing, but instead that we should take this opportunity to arrive at an
agreement concerning what might constitute a fair and reasonable alternative to
the exercise right. This would allow CBOT to restructure in whatever way it
determines without causing any reduction in the value of CBOT memberships. We
look forward to continuing our discussions with you in an effort to reach such
an agreement.
Sincerely,
/s/ Bill
400 South LaSalle Street Chicago, Illinois 60605 www.cboe.com
* * * *
<PAGE>
The following publication was distributed to CBOT members and membership
interest holders on March 8, 2000 and is currently available at the Office of
the Secretary of the CBOT.
CBOT Restructuring
creating new value in the new millennium
--------------------------------------------------------------------------------
March 8, 2000
Restructuring
Roundtable:
Board Leaders
Answer Questions
On Historic
CBOT Plan
---------------------------------
A Special Report
To Lessors
---------------------------------
Dear CBOT Member,
Members of the Chicago Board of Trade who lease their seats have a critical
stake in the future of the CBOT. During deliberations by the Restructuring Task
Force and the Board of Directors, special emphasis was given to preserving and
enhancing long-term ownership value for current members. The plan that was
adopted by the Board is designed to position members to benefit from both open
outcry and electronic trading. It was agreed that if we do not take this
opportunity now, the value to the membership of any future restructuring
proposals could be less. Likewise, it was fully recognized that the status quo
is not a viable option.
This Special Report to Lessors has been prepared to help explain the
Restructuring proposal to current lessors, as well as active members who may
want to lease their seats in the future. The report is in the form of a question
and answer roundtable discussion with CBOT Chairman David Brennan, First Vice
Chairman Charlie Carey, Public CBOT Director Flip Filipowski and me.
The Chairman is a third generation CBOT member, a CBOE exerciser and has owned
his seat for 20 years; Mr. Carey is a third generation member, who has owned his
seat for 22 years; and Mr. Filipowski is an internet entrepreneur and visionary.
My colleagues on this panel represent some of the best aspects of the CBOT. We
are confident that this restructuring plan will grow both our open outcry and
electronic markets and unlock and maximize the value of our memberships.
In addition to this roundtable discussion, we have attached a series of
questions and answers in response to queries received from the Lessor Committee
about the restructuring. Chairman Brennan and the Board of Directors have and
will continue to provide comprehensive and accurate information on the
restructuring initiative so that you can give the proposal your thoughtful and
thorough business analysis. As the restructuring proposal progresses, we will
keep you fully informed.
Veda Kaufman Levin
Member, CBOT Board or Directors
Chairman, CBOT Lessors Committee
[LOGO] Chicago Board of Trade
<PAGE>
CBOT Restructuring
================================================================================
Roundtable
Discussion:
At a meeting February 15, the Chairman of the Lessors Committee Director Veda
Kaufman Levin with Chairman David P. Brennan, First Vice Chairman Charles P.
Carey, an Public Director Andrew J. "Flip" Filipowski answered questions
affecting lessors, arising from the Chicago Board of Trade's restructuring
proposal.
Question: How does this plan position the CBOT's going forward?
David Brennan: This strategy takes the best of our heritage--open outcry--and
makes it stronger. Restructuring will lead us into the new business world of
e-commerce. Just as we led the City of Chicago in the creation of a
world-leading open outcry agricultural and financial marketplace, we will again
lead Chicago in creating a world-class digital and electronic exchange.
Q. How has the plan been received so far by the membership?
David: We have seen a high level of support from the membership. The floor
meeting was very effective for communicating the strategic imperative for the
plan. Members asked good questions. The vast majority of members recognize that
the status quo is not an option and this restructuring proposal is a solid
forward-moving plan. It has long been my view that if members are given all of
the facts, they will make the right business decision. I am committed to making
sure members have the answers they need to make those decisions.
Veda Kaufman Levin: From my vantage point, the real issue is enhancing the value
of our franchise and maximizing shareholder value in both of the new companies.
This plan does that, whether your immediate interest is trading every day or
leasing your trading rights. I think the members see that.
Charles Carey: I think the members are ready for this plan. They are good
business people and understand the need to adapt in order to capitalize on
changes in the industry.
Q. Where does this plan position open outcry for the future?
David: If you want open outcry to succeed, and I think it will, this
restructuring plan is the best alternative. It will create a single business
focused on open outcry, instead of the shared focus it now has with electronic
trading. The open outcry corporation would remain closely held and guided by the
membership with retained earnings directed back into the organization to make
investments, reduce costs, and provide enhanced member trading opportunity.
Veda: This solution was chosen because we believe it best maxi-
2
<PAGE>
creating new value in the new millennium
================================================================================
[PHOTO OF ROUNDTABLE PARTICIPANTS]
The Roundtable discussants (from left) Public Director Filipowski, Chairman
Brennan, Director Levin and First Vice Chairman Carey at the February meeting.
mizes value and ensures the CBOT remains the global center of liquidity. In the
new CBOT, the trading right and the ownership (equity instead of seats) will
continue to be bundled. That is, trading access will be restricted to equity
holders in the restructured CBOT. In addition, the strategy envisions an
environment that would perpetuate open outcry for as long as it can sustain
itself competitively and provide open outcry with the best possible business
model. It also preserves the opportunity to lease seats.
Andrew "Flip" Filipowski: I see first-hand every day the power of technology and
I have no doubt that the e-business will grow. Open outcry can only increase its
efficiency with the right technology investments, and it already offers the
greatest liquidity today. Open outcry in its current form is a dinosaur.
However, advancing technology could transform it into a new competitive and
viable animal. This restructuring plan offers the CBOT the opportunity to
embrace enabling technologies in order to realize this potential.
Q. How do we know that the best decision is to create our own electronic
competitor?
Flip: The market is telling us to create an electronic trading company, but if
we do not act somebody else definitely will seize this opportunity. The key is
to tap the capital markets for the electronic trading company start-up. It is
essential to tap new markets so that we can build new businesses, attract new
customers and offer new products. Having a competitive electronic company gives
us the ability to expand into new markets and seize business-to-business
opportunities, which is where the future lies. However, electronic trading is
only one component of this industry in Chicago. The restructuring can unlock new
and unknown potential of the combined power of the eCBOT and CBOT. The leaders
of the future are new companies and new faces, and the CBOT can be one of those
new leaders with this approach.
Veda: We know that failing to create an electronic trading company really puts
our whole business at risk. More importantly, how can we justify not getting the
best possible value for our current seat owners? Almost half of the full
memberships are leased
Continued on page 4
3
<PAGE>
CBOT Restructuring
================================================================================
Roundtable
continued from page 3
today. We believe that this restructuring will have no effect on current leases
while creating opportunities for the membership. The value of a CBOT full seat
rose over 20% since the restructuring plan was announced. This plan will unlock
the value that we all know our seats hold.
Q. What happens to the CBOE exercise right?
David: I recently received a correspondence from the CBOE Chairman concerning
CBOE's views on the CBOT exercise right at the CBOE as it relates to our
restructuring initiative. In short, it states that the proposed CBOT
restructuring plan "...would not satisfy the necessary conditions of the 1992
Agreement for continuation of the CBOE exercise right."
Protecting the right of CBOT members to exercise their memberships at CBOE has
been the unalterable position of the restructuring task force and the CBOT Board
of Directors since the beginning of our restructuring process last year. It is
the opinion of the Board of Trade's legal advisors that the plan approved by
our Board of Directors does indeed protect the CBOE exercise right. The 1992
CBOT/CBOE agreement expressly contemplates the possibility of restructuring at
the CBOT. As I have communicated to the membership in the past, it is our view
that the restructuring plan complies with the 1992 agreement. We believe we are
on solid legal ground and that the CBOE viewpoint is wrong.
Q. Shouldn't we take a more "go slow" approach and see what kind of competitors
emerge?
David: Time is of the essence. We know of competitors, and potential
competitors, who have announced plans to compete against us, such as Cantor,
Nasdaq and BrokerTec. But there will be more new entrants because technology
allows it. If we do not take this opportunity now, the value of any future
restructuring proposals could be less. We believe we have an early mover
advantage that we should seize now. This franchise which we enjoy today is only
ours to lose.
Flip: Companies and organizations can not afford to wait. If we do not act,
competitors will welcome the opportunity to surpass us. The CBOT needs to act
now if it wants to be one of the survivors. The electronic revolution is moving
so quickly and changes daily. The longer we wait, the more we are hurting
ourselves.
Charlie: I believe that we must restructure immediately in order to take
advantage of the opportunities being presented to us. We have an opportunity to
capitialize on first-mover advantages and to improve open outcry. It is
imperative that we change today to ensure that the CBOT will be a
4
<PAGE>
creating new value in the new millennium
================================================================================
viable entity.
Q. How will ownership be distributed?
David: The Board of Directors has adopted a thorough process to determine the
allocation of equity to the membership. An Allocation Committee comprised of all
the public directors, and chaired by Governor James Thompson, has been formed to
recommend an allocation of value to the Board. This recommendation will be
determined with respect to an appropriate and fair allocation of value among the
CBOT members in connection with the restructuring plan, including the allocation
of shares in the two new companies. The Board will review the independent
committee's recommendation, adopt an allocation and disclose such allocation in
connection with the first membership vote.
Q. Can we afford the restructuring costs?
David: First of all, we can not afford to not restructure. This plan will allow
us to make the CBOT financially sustainable for the first time in years. It is
currently envisioned that the eCBOT company will pay the open outcry company for
the cost of the Eurex development, which should provide the open outcry company
with adequate cash to cover the implementation costs of restructuring. Most
importantly, running open outcry like a business will lead to significant cost
savings.
Charlie: Funding the start-up of the eCBOT will require seed investment by
outside investors (e.g., strategic alliance partners or venture capitalists) or
through borrowing. Because of these requirements, we believe it is imperative to
act quickly to establish the strategic alliances and partnerships necessary to
fund the development of the eCBOT. In the longer-term, depending on market
conditions, we may be able to go public via an IPO to both unlock value for
members and raise capital. We have an investment bank working with us to guide
us through various financing alternatives.
Q. What are the tax implications of restructuring for lessors?
Charlie: Prior to the second membership vote, the disclosure materials relating
to the second membership vote will contain information regarding the
restructuring tax consequences for U.S. federal income tax purposes for all
members. However, everyone is urged to contact their personal tax advisor to
assess the specific consequences of the restructuring to him or her.
Q. What is the process for selecting the Board of Directors for each of the new
companies?
David: The process for selecting the Boards of Directors for the two new
companies will be shared with the membership in the first ballot upon approval
by the current CBOT Board of Directors. The Implementation Committee will
recommend to the Board a process for the selection and composition of the Boards
for the new CBOT and eCBOT.
5
<PAGE>
CBOT Restructuring
================================================================================
--------------------------------------------------------------------------------
Lessors Committee Members'
--------------------------------------------------------------------------------
Questions & Answers
These questions have been submitted by members over the past few weeks.
Q: What liability will a lessor have for a lessee's debts?
The restructuring is not intended to change the allocation of liabilities
between lessors and lessees. As a result, we currently expect that lessors will
have no more liability for a lessee's debts than they have today.
Q: Is it envisioned that lessees or lessors pay a special fee to the exchange
because they are lessees?
We do not expect this to change from the current status. Lessees and lessors
will not have to pay any special fees.
Q: Will there be any testing requirements for lessees or lessors?
The requirements will remain the same as they are today.
Q: What will happen to floor access to those who have been members for 25 years
or more?
Members who have owned their seats for more than 25 years will still be granted
access to the floor.
Q: What will happen to lessors' income stream and net worth?
We cannot predict with certainty what will happen in the future. Under the
proposed plan, current ownership in the CBOT will translate into ownership in
two companies: The new CBOT and the eCBOT. Members will still be able to lease
their trading rights in the new CBOT, with essentially the same benefits they
have today. However, the lease value in the eCBOT would be essentially
eliminated if the the proposed open access policy is implemented by the Board
and Management of the eCBOT.
Q: What happens to intra-family transfers?
We do not expect this to change from the current status. Bundled stock and
trading rights in the new CBOT company will be saleable and transferable.
Q: Can the open outcry entity align with a competitor to eCBOT?
We expect the CBOT will be restricted from having an electronic trading platform
for three years, other
6
<PAGE>
creating new value in the new millennium
================================================================================
--------------------------------------------------------------------------------
Questions Regarding Restructuring
--------------------------------------------------------------------------------
than a RAES-type system for small orders. After such time, the CBOT would be
free to enter into such strategic alliances, or establish its own electronic
trading platform as it deems appropriate.
Q: If the FIFO algorithm is inferior, must we be saddled with it?
The Board of Directors and management of eCBOT will make the final decision.
Currently the Eurex platform is FIFO, and this issue is being considered
further.
Q: Are "poison pill" and other anti-takeover protections being considered to
prevent a hostile takeover of public eCBOT shares?
Upon the successful completion of the first vote of the restructuring plan,
eCBOT will be a wholly-owned subsidiary of the CBOT. Prior to any spin-off or
offering of eCEOT shares to the public, these issues will be carefully
considered.
Q: Is there a realistic and reliable evaluation of current CBOT real and accrued
assets?
All necessary financial assessments are being conducted or will be conducted.
Q: Will lessors have any kind of a voice in the new environment?
As stockholders in both the new CBOT and eCBOT lessors will continue to have
rights to be heard.
Q: In the eCBOT IPO, how many shares have the investment bankers proposed for
issue? What price range have they targeted for original pricing?
These decisions have not been made. Initially, eCBOT will be a subsidiary of
the CBOT, and this information may be provided prior to the second vote.
================================================================================
Do You Have More Questions?
We are committed to keeping you informed throughout the restructuring process
and hope that you find this report useful. We will do our best to address your
concerns, and encourage you to send us questions and comments. We can be reached
by the following methods:
E-mail: restructuring@cbot or
[email protected]
Phone: (312) 347-5102
Fax: (312) 341-5810
Mail: CBOT Restructuring
4015 Board of Trade Building
Chicago, Illinois 60604
================================================================================
7
<PAGE>
--------------------------------------------------------------------------------
CBOT Leaders
Reach Out
To Lessors
Around the Country
--------------------------------------------------------------------------------
[PHOTO OF DIRECTOR LAVENDER AND CBOT LESSORS]
Director Harold Lavender (far left, back view) talks with CBOT lessors in
Phoenix, Arizona about the exchange's Restructuring Plan.
To help answer questions about the restructuring initiative, Chicago Board of
Trade leaders recently completed a three-city tour for lessors in Phoenix,
Arizona, Ft. Lauderdale and Captiva Island, Florida.
The meetings were part of an overall effort to educate the membership on the
historic restructuring plan. Twenty-one Full and AM members attended the
informational sessions, which were hosted by Board members Harold Lavender or
Jamie McMillin. The meetings included a brief presentation of the plan and a
question-answer period.
The three cities were chosen because of the relatively high concentration of
member lessors who reside in the area.
[LOGO] Chicago Board of Trade
We urge CBOT 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.
* * * *
<PAGE>
The following letter and attachment thereto were distributed to CBOT members and
membership interest holders on March 8, 2000 and are currently available at the
Office of the Secretary of the CBOT.
[LOGO] Chicago Board of Trade
David P. Brennan
Chairman of the Board
March 8, 2000
Dear Fellow Member:
The attached letter was sent to Bill Brodsky yesterday in response to his letter
regarding CBOE exercise rights.
Sincerely,
/s/ David P. Brennan
David P. Brennan
Attachment
141 W. Jackson Blvd.
Chicago, Illinois 6O604-2994
312 435-3601
Fax: 312 341-3392
We urge CBOT 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.
* * * *
<PAGE>
[LOGO] Chicago Board of Trade
David P. Brennan March 7, 2000
Chairman of the Board
William Brodsky
Chairman of the Board
Chicago Board of Options Exchange
400 S LaSalle
Chicago, Illinois 60604
Dear Bill:
Your March 2, 2000, letter must be based upon a misunderstanding of the
Chicago Board of Trade's restructuring plan. To avoid any possible
misunderstanding, let me reconfirm the outline of our plan.
As I explained to you at our meeting on January 20, 2000, today 1402 full
Board of Trade memberships carry with them the right to become members of CBOE
under Article Fifth of the CBOE Certificate of Incorporation. When the
restructuring plan is completed, those 1402 full Board of Trade members will be
preserved as the only parties qualified for the CBOE exerciser right. No change
in their current membership status is contemplated or will be effected. The
restructuring plan also calls for the creation of a separate, independent
for-profit company to focus on electronic trading of futures contracts. When
that new company is created, the 1402 full Board of Trade members will own
equity in that new company, as will others.
This restructuring plan comports fully with the 1992 CBOE-CBOT agreement
and does not dilute, in any way, the CBOE exerciser right. The Board of Trade
expects that the CBOE will reconsider its position and comply with the contact
CBOE agreed to in 1992. We would view any other position the CBOE may take as a
breach of the 1992 agreement and an effort to undermine our restructuring
process by raising legal arguments that the CBOE knows are at odds with the
plain meaning of our agreement.
To remove any doubt about this matter, I propose that three
representatives of the CBOE meet with three representatives of the Board of
Trade at your earliest convenience this week to see if we can resolve this
issue. Given the competitive concerns that drive our restructuring timetable, if
our mutual representatives reach an impasse by next Tuesday, March 14, we will
be forced to consider other alternatives.
Restructuring is of vital competitive importance to the Board of Trade's
future. As I have told our membership, time is of the essence and we must take
action now. We know that you do not want to be perceived as attempting to
compromise our ability to address our competitive future and strengthen the
derivatives industry in the City of Chicago.
I look forward to your expeditious reply.
Sincerely,
/s/ David P. Brennan
David P. Brennan
LaSalle at Jackson
Chicago, Illinois 60604-2994
312 435-3601
Fax 312 341-3392
We urge CBOT 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.
* * * *
<PAGE>
The following publication was distributed to CBOT members and membership
interest holders on March 21, 2000 and is currently available at the Office of
the Secretary of the CBOT.
[LOGO] Chicago Board of Trade
Board Secretary's Office
Meeting Bulletin
The Board of Directors of the Chicago Board of Trade at its regular meeting on
Tuesday, March 21, 2000, took the actions summarized below.
* * *
Received a status report from the Implementation Committee concerning the
CBOT(R) restructuring initiative. The report summarized the Implementation
Committee's work product to date. The Board held a preliminary discussion of
certain issues related to the report, and agreed to review the report in depth
at a later date. At the Board's direction, additional information to provide an
update on the progress of the restructuring initiative will be distributed to
the Membership shortly.
* * *
Considered reports from the Electronic Trading Advisory Committee and from
Exchange management regarding the trading algorithm to be utilized for the
initial launch of the CBOT(R)/Eurex Alliance trading platform. The Board
approved the recommendation of Exchange management, which was endorsed
unanimously by the Executive Committee, that the CBOT utilize a First-In, First-
Out ("FIFO") matching algorithm for all products for the initial launch of the
Eurex platform at the CBOT. (The Eurex "pro-rata" matching algorithm remains
available as an alternative which could be utilized at a later date.)
* * *
Reviewed and accepted the Chief Financial Officer's reports on the financial
statements of the Exchange and of Ceres Trading Limited Partnership for the two
months ended February 29, 2000.
* * *
Based on a recommendation of the Regulatory Compliance Committee, approved
revisions to Regulation 1007.02 to expand the types of accounts which are
permitted to enter new orders into the Modified Closing Call to include the
following:
(a) the proprietary accounts of non-clearing member firms; and
-MORE-
03/21/00
<PAGE>
-2-
(b) the proprietary accounts of affiliates that are wholly-owned by member
firms (subsidiaries) or that wholly-own member firms (parents).
Subject to CFTC review.
* * *
Based on a recommendation of the Regulatory Compliance Committee, approved a
revision to Regulation 352.01 to permit the use of spreads to correct executions
in the wrong commodity.
Subject to CFTC review.
* * *
Based on recommendations of the Executive and Nominating Committees, approved a
new regulation to provide for "non-trading" Exchange Floor access by those
Annual Election candidates and members of the Board of Directors (i.e. - non-
member "public" directors) who would not otherwise have Floor access.
Subject to CFTC review.
* * *
Reviewed and accepted the Mission Statement and structure of the newly formed
Lessors Committee. Further information in this regard will be provided to the
membership separately.
* * *
Reviewed and accepted an Electronic Open Outcry Mission Statement as recommended
by the Subcommittee on Trading Floor Efficiency and endorsed by the Strategy
Committee.
* * *
Approved the following changes in committee appointments:
ELECTRONIC TRADING ADVISORY COMMITTEE
-------------------------------------
Remove: James S. Froelich, Advisor
FLOOR AGRICULTURAL COMMITTEE
----------------------------
Add: Sheldon H. Gaffen
Thomas M. Shuff, Jr.
-MORE-
03/21/00
<PAGE>
-3-
FLOOR CONDUCT COMMITTEE
-----------------------
Add: Lauri L. Bloom, Advisor
FLOOR MEMBERS COMMITTEE
-----------------------
Add: Michael E. Stone
SUBCOMMITTEE ON TRADING FLOOR EFFICIENCY
----------------------------------------
Change: Kevin E. Duffy from Member to Co-Chairman
A. John Yavari from Co-Chairman to Member
LESSORS COMMITTEE
-----------------
Change: C. C. Odom, II from Member to Vice Chairman
Add: Lawrence D. Israel
William R. Power
Add:
FUTURES COMMISSION MERCHANT (FCM) COMMITTEE
-------------------------------------------
Peter C. Lee, Chairman Peter G. Johnson
Donald G. Andrew Martin L. Karlov
Larry H. Arnowitz Paul L. Krug, Jr.
John F. Benjamin Timothy J. Lankford
James F. Curley Macario Lullo
Michael Daley James A. Luxem
Bernard W. Dan Thomas Mallers
W. Robert Felker Margaret McGrath
James A. Gary Charles P. Nastro
Alan L. Genn Robert L. Palazola
Mark S. Griffiths Brian G. Scott
Joseph M. Guinan, Jr. Mark C. Styslinger
John V. Hannam Frederick G. Uhlmann
John Hartigan Didier Varlet
Ronald M. Hersch Allan Zavarro
* * *
Approved the appointment of Robert F. Corvino to the Board of Directors of the
Chicago Board of Trade Foundation (the Exchange's charitable foundation).
# # #
We urge CBOT 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.
* * * *
<PAGE>
The following publication was distributed to CBOT members and membership
interest holders on March 27, 2000 and is currently available at the Office of
the Secretary of the CBOT.
[LOGO] Chicago Board of Trade
Board Secretary's Office
Meeting Bulletin
The Board of Directors of the Chicago Board of Trade at a special meeting on
Monday, March 27, 2000, took the actions summarized below.
* * *
Conducted a further discussion of the status of the CBOT(R) restructuring
initiative. Additional information will be provided to the membership as this
initiative proceeds.
* * *
Approved, for submission to the CFTC, various CBOT regulation changes related to
the implementation of the CBOT(R)/Eurex Alliance electronic trading system. The
key areas addressed in these proposed regulations are as follows:
1. Electronic access through leased CBOT memberships -
Firms could register as member firms on the basis of delegated (leased)
Full or Associate Memberships, subject to the following conditions:
a) Such firms could engage in non-clearing business only. For clearing
status, firms would remain subject to the existing requirements of
owning Full Memberships.
b) Member firm status through leased membership would apply to electronic
trading only and would be available only to Eurex participants.
c) Firms would remain subject to membership application approval
requirements and would be required to have a designated primary
clearing member.
d) Member firm status based on Associate Membership would apply only to
those contracts eligible for execution within the Associate Membership
category.
2. Permissible order types - Addition of provisions for futures stop orders,
market orders and fill-or-kill orders.
3. Cross trades in financial options - Subject to specified requirements and
restrictions.
4. Technical regulations to maintain minimum standards which will permit the
system to operate efficiently.
-MORE-
03/27/00
<PAGE>
-2-
5. Limitations of liability - Consistent with the existing Project A(R)
provisions in this regard.
6. Exclusion of cabinet trades - To specify that the CBOT/Eurex Alliance
electronic trading system (like Project A) will not provide for the
execution of cabinet trades.
In addition, the Board determined that existing provisions for daily price
limits will remain in effect.
Further details will be forthcoming.
# # #
03/27/00
We urge CBOT 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.
* * * *
<PAGE>
The following letter was distributed to CBOT members and membership interest
holders on March 31, 2000 and is currently available at the Office of the
Secretary of the CBOT.
[LOGO] Chicago Board of Trade
David P. Brennan
Chairman of the Board
March 3l, 2000
Dear Fellow Member,
As you have heard through the media, the Chicago Board of Trade and the
Chicago Board Options Exchange are talking about the possibility of merging our
two great institutions. Although these discussions are still in their infancy, I
want to communicate to you directly about this opportunity, which could prove
mutually advantageous to both exchanges.
I am very excited about the path our talks with the CBOE have taken. It is
true that CBOT members formed the CBOE some 27 years ago. Today, however, we are
two independent and powerful exchanges that could benefit tremendously from
joining forces. The CBOE and its membership have developed an exchange well
deserving of the respect of the CBOT and the financial industry at large.
Reuniting these two great institutions could maximize the capabilities and
competitive advantages of each exchange. The CBOT/CBOE merger scenario has
strong potential to be winning partnership for both exchanges.
Our restructuring efforts are temporarily delayed while we await a report
from Allocation Committee and reach a decision on the CBOE issue. I have
resolved to move on the CBOE matter as quickly as possible so that the CBOT's
restructuring efforts, our highest priority, will remain on track. In the
meantime, this brief delay is worth the possible outcome of a partnership with
the CBOE.
Sincerely,
/s/ David P. Brennan
David P. Brennan
141 W. Jackson Blvd.
Chicago, Illinois 6O604-2994
We urge CBOT 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.
* * * *
