Federal Register / Vol. 65, No. 223 / Friday, November 17, 2000 / Notices 69585

21See Section 17A(b)(3)(A) of the Exchange Act,

15 U.S.C. 78q–1(b)(3)(A). 22 17 CFR 200.30–3(a)(16).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Letter from Nancy L. Nielsen, Assistant

Corporate Secretary, CBOE, to Nancy Sanow,

Assistant Director, Division of Market Regulation

(‘‘Division’’), Commission (October 10, 2000).

Amendment No. 1 supersedes the original filing in

its entirety.

the national clearance and settlement

system).

In the Matching Release, the

Commission stated that an entity that

limited its clearing agency functions to

providing matching services might not

have to be subject to the full range of

clearing agency regulation. In addition,

the Commission stated that an entity

seeking an exemption from clearing

agency registration for matching would

be required to: (1) Provide the

Commission with information on its

matching services and notice of material

changes to its matching services; (2)

establish an electronic link to a

registered clearing agency that provides

for the settlement of its matched trades;

(3) allow the Commission to inspect its

facilities and records; and (4) make

periodic disclosures to the Commission

regarding its operations.

GJVMS’s matching service would be

the only clearing agency function that it

would perform under an exemptive

order. While the Commission believes

that GJVMS’s matching services could

have a significant impact on the

national clearance and settlement

system, the Commission does not

believe that GJVMS’s matching services

raise all of the concerns raised by an

entity that performs a wider range of

clearing agency functions. GJVMS

represents in its Form CA–1 that as a

condition of its exemption, it will

comply with the conditions suggested

by the Commission in the Matching

Release. Therefore, the Commission

believes that it may not be necessary to

require GJVMS to satisfy all of the

standards required of registrants under

Section 17A.

The Commission anticipates that in

addition to considering the public

interest and the protection of investors,

the primary factor in evaluating

GJVMS’s application will be whether

GJVMS is so organized and has the

capacity to be able to facilitate prompt

and accurate matching services subject

to the specific conditions that it has

proposed.21 In particular, GJVMS has

represented that, among other things, it

will provide the Commission with (1) an

independent audit report that addresses

all the areas discussed in the

Commission’s ARPs prior to beginning

commercial operations and annually

thereafter, (2) on-site inspection rights,

and (3) a current balance sheet and

income statement prior to beginning

operations.

The Commission expects that any

exemption from clearing agency

registration for GJVMS would contain

all of the conditions that GJVMS has

proposed in its Form CA–1. The

Commission requests comment on

whether these conditions are sufficient

to promote the purposes of Section 17A

and to allow the Commission to

adequately monitor the effects of

GJVMS’s proposed activities on the

national system for the clearance and

settlement of securities transactions. In

addition, the Commission invites

commenters to address whether granting

GJVMS an exemption from clearing

agency registration would impose any

burden on competition that is not

necessary or appropriate in furtherance

of Section 17A of the Exchange Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing

application by December 18, 2000. Such

written data, views, and arguments will

be considered by the Commission in

deciding whether to grant GJVMS’s

request for exemption from registration.

Persons desiring to make written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW., Washington, DC 20549–

0609.

Reference should be made to File No.

[600–32]. Copies of the application and

all written comments will be available

for inspection and copying at the

Commission’s Public Reference Room,

450 Fifth Street, NW., Washington, DC

20549. Comments also may be

submitted electronically at the following

E-mail address: rule-comments@sec.gov.

Electronically submitted comment

letters will be posted on the

Commission’s Internet web site (http://

www.sec.gov).

For the Commission by the Division of

Market Regulations, pursuant to delegated

authority.22

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–29447 Filed 11–16–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43521; File No. SR–CBOE–

00–44]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Incorporated Relating to an

Interpretation of Paragraph (b) of

Article Fifth of Its Certificate of

Incorporation

November 3, 2000.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on August

31, 2000, the Chicago Board Options

Exchange, Incorporated (‘‘CBOE’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the CBOE. On October 10,

2000, the CBOE submitted Amendment

No. 1 to the proposed rule change.3 The

Commission is publishing this notice to

solicit comments on the proposed rule

change, as amended, from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE proposes to adopt a rule

change consisting of an interpretation of

Article Fifth of the CBOE Certificate of

Incorporation, as interpreted in the

agreement between the CBOE and the

Chicago Board of Trade (‘‘CBOT’’) dated

September 1, 1992 (the ‘‘1992

Agreement’’), which is incorporated in

CBOE Rule 3.16(b), concerning the

effect of the proposed restructuring of

the CBOE or other action that may be

taken by the CBOT to change its trading

rules or procedures on the right of the

1,402 full members of the CBOT to

become members of CBOE without

having to purchase a CBOE membership

(the ‘‘exercise right’’). The CBOE’s

proposed rule change also embodies a

plan to enable CBOE to continue to

provide fair and orderly markets in the

securities traded on the Exchange in the

event the exercise right is extinguished

as a result of action taken by the CBOT.

Below is the text of the proposed rule

change. New language is italicized.

69586 Federal Register / Vol. 65, No. 223 / Friday, November 17, 2000 / Notices

Special Provisions Regarding

Memberships

Rule 3.16(a)–(b) No change.

Interpretation and Policies

.01 Pursuant to and in accordance

with the Exercise Right embodied in

Paragraph (b) of Article Fifth of the

Exchange’s Certificate of Incorporation,

every present and future member of the

CBOT, ‘‘so long as he remains a

member’’ of CBOT, may be an exerciser

member of the Exchange. As the

Exercise Right has been interpreted in

paragraph (b) of this Rule and in the

1992 Agreement referred to therein, only

Eligible CBOT Full Members and

Eligible CBOT Full Member Delegates

have the right to become exerciser

members of the Exchange. The 1992

Agreement defines an ‘‘Eligible CBOT

Full Member’’ to mean ‘‘an individual

who at the time is the holder of one of

the One Thousand Four Hundred Two

(1,402) existing CBOT full memberships

(‘‘CBOT Full Memberships’’) and who is

in possession of all trading rights and

privileges appurtenant to such CBOT

Full Membership.’’ The term ‘‘Eligible

CBOT Full Member Delegate’’ is defined

in the 1992 Agreement to mean ‘‘the

individual to whom a CBOT Full

Membership is delegated (leased) and

who is in possession of all trading rights

and privileges appurtenant to such

CBOT Full Membership.’’ The 1992

Agreement also provides that ‘‘in the

event the CBOT splits or otherwise

divides CBOT Full Memberships into

two or more parts, all such parts and the

trading rights and privileges

appurtenant thereto, shall be deemed to

be part of the trading rights and

privileges appurtenant to such CBOT

Full Membership and must be in the

possession of an individual as either an

Eligible CBOT Full Member or an

Eligible CBOT Full Member Delegate in

order for that individual to be eligible to

be an Exerciser Member.’’ CBOT, which

since its inception has been a not-forprofit membership corporation, is

proposing to demutualize or otherwise

restructure so as to become a for-profit

stock corporation. As a part of that

restructuring, CBOT has transferred its

electronic trading system to a new

subsidiary. While not part of the current

restructuring, CBOT may in the future

distribute shares in the new subsidiary

to CBOT members (stockholders), and it

may issue additional shares in the new

subsidiary as a part of a public or

private financing. In addition, either as

part of its restructuring or in a change

to its trading rules and procedures that

it may implement apart from the

restructuring, CBOT proposes to give

direct trading access to the electronic

trading system to persons who are not

now members of CBOT, and to trade all

CBOT products on the electronic trading

system, including its agricultural

contracts and other products heretofore

traded only by CBOT Full Members on

the CBOT open-outcry trading floor.

Once CBOT becomes a stock

corporation, it will no longer have

members. Nevertheless, so long as CBOT

does no more than convert from a

membership corporation to a stock

corporation without changing its trading

rules and procedures so as to extend the

right to trade CBOT products,

electronically or otherwise, to persons

who are not CBOT full members or the

stockholder equivalent of such

members, CBOE interprets its rules to

treat persons who become stockholders

of CBOT in the restructuring as a result

of their ownership of one of the 1,402

full CBOT memberships (or their

delegates) as if they were full members

for purposes of the Exercise Right. This

means that so long as those

stockholders retain all of the stock and

other interests that may be distributed to

them in respect of their full CBOT

memberships and continue to hold all of

the trading rights and privileges in

respect of CBOT that they held in their

former status as full members of CBOT,

then those stockholders or their

delegates who satisfy the requirements

of an eligible CBOT Full Member

Delegate will be entitled to the Exercise

Right.

However, CBOE interprets the

Exercise Right to terminate immediately

for all 1,402 CBOT full members or the

stockholder-equivalent of such members

(of their delegates) if, whether as a part

of a demutualization or other

restructuring of CBOT or otherwise,

CBOT changes its trading rules and

procedures so as to extend the right to

trade all CBOT products, electronically

or otherwise, to persons who are not

CBOT Full Members or the stockholderequivalents of such members (or their

delegates) or so that, if the Exercise

Right were to continue to be available,

CBOT Full Members or the stockholderequivalents of such members (or their

delegates) would be able to trade all

CBOT products directly on CBOT at the

same time as they are trading on the

Exchange as exerciser-members.

In the event the Exercise Right is

terminated pursuant to the preceding

paragraph, the Exchange will promptly

act to develop and propose a plan that

will respond to CBOE’s ongoing need to

be able to provide fair and orderly

markets in the securities it trades, and

at the same time will be fair to the 1,402

former members of CBOT who will have

lost their exercise rights. The plan to be

developed by CBOE for this purpose will

be subject to the approval of the

Exchange membership, and to the

approval of the Securities and Exchange

Commission.

During an interim period while this

plan is being developed, the Exchange

shall interpret its rules to stay the

impact of the extinguishment of the

Exercise Right on the trading access of

those CBOT full members (or their

delegates) who were exerciser members

of the Exchange in good standing as of

the close of business on August 28, 2000

(‘‘grandfathered exercisers’’ ), and shall

permit such persons to continue to be

able to trade on the Exchange for the

duration of the interim period

notwithstanding the extinguishment of

the exercise right. This interim period

will extend for at least six months from

the date the Exchange gives notice to its

members that exercise right has been

extinguished as a result of the

restructuring of CBOT or changes to

CBOT’s trading rules or procedures as

described above, and for any additional

period until the Exchange’s permanent

plan to respond to the termination of

the Exercise Right has been approved

and implemented. However, once the

Exercise Right is terminated under this

interpretation, CBOT members or

stockholders (or their delegates) who

were not exerciser members of the

Exchange in good standing on August

28, 2000, shall not be permitted to

exercise or have access to the

Exchange’s trading floor during the

interim period. In order to continue to

have trading access to the Exchange

during this interim period,

grandfathered exercisers will be

required to maintain their status as

members or stockholders of CBOT in

good standing in accordance with the

rules of CBOT (or as the delegates of

such members or stockholders). Among

other things, this means that delegates

will need to remain in compliance with

the terms of their CBOT lease

arrangements.

II. Self-Regulatory Organization’s

Statements of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

CBOE included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The CBOE has

prepared summaries, set forth in

Sections A, B, and C below, of the most

significant aspects of such statements.

Federal Register / Vol. 65, No. 223 / Friday, November 17, 2000 / Notices 69587

4See CBOT Restructuring Report (May 16, 2000).

5The CBOE has stated that it will not take any

action to limit the exercise right if the CBOT

Continued

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The purpose of the proposed rule

change is to provide an interpretation of

the rules of the CBOE concerning the

effect of the CBOT’s proposed

restructuring and of other changes that

the CBOT proposes to make to the

trading rights and privileges of its

members on the exercise right. The

proposed rule change also includes a

plan to enable the CBOE to continue to

provide fair and orderly markets if the

exercise right is extinguished because of

the consummation of certain steps of the

proposed restructuring of the CBOT or

the consummation of the other changes

to the CBOT’s trading procedures.

Background of the Exercise Right

Paragraph (b) of the Article Fifth of

the CBOE’s Certificate of Incorporation

(hereafter, ‘‘Article Fifth(b)’’) provides

in part that ‘‘every present and future

member of [CBOT] who applies for

membership in the [Exchange] and who

otherwise qualifies shall, so long as he

remains a member of said Board of

Trade, be entitled to be a member of the

[Exchange] notwithstanding any such

limitation on the number of members

and without the necessity of acquiring

such membership for consideration or

value from the [Exchange], its members

or elsewhere.’’ Paragraph 2(a) of the

1992 Agreement provides that only an

individual who is an ‘‘Eligible CBOT

Full Member’’ or an ‘‘Eligible CBOT Full

Member Delegate’’ is a member of the

CBOT within the meaning of Article

Fifth(b). Paragraph 1(a) of the 1992

Agreement defines an ‘‘Eligible CBOT

Full member’’ to mean ‘‘an individual

who at the time is the holder of one of

the One Thousand Four Hundred Two

(1,402) existing CBOT full memberships

(‘‘CBOT Full Memberships’’) and who is

in possession of all trading rights and

privileges appurtenant to such CBOT

Full Membership.’’ The term ‘‘Eligible

CBOT Full Member Delegate’’ is defined

in Paragraph 1(b) of the 1992 Agreement

to mean ‘‘the individual to whom a

CBOT Full membership is delegated

(leased) and who is in possession of all

trading rights and privileges

appurtenant to such CBOT Full

Membership.’’ (Emphasis supplied in

both definitions.) Paragraph 2(b) of the

1992 Agreement also provides that ‘‘in

the event the CBOT splits or otherwise

divides CBOT Full Memberships into

two or more parts, all such parts, and

the trading rights and privileges

appurtenant thereto, shall be deemed to

be part of the trading rights and

privileges appurtenant to such CBOT

Full Membership and must be in

possession of an individual as either an

Eligible CBOT Full Member or an

Eligible CBOT Full Member Delegate in

order for that individual to be eligible to

be an Exerciser Member.’’

These provisions reflect an

underlying intent that CBOT members

must choose at any given time to use

their CBOT membership to trade either

on the CBOT or (by exercise) on the

CBOE, but not on both exchanges at the

same time. This fundamental principle

has driven the way in which the

exercise right has been interpreted as

the CBOT’s trading procedures have

evolved over the years. When the

exercise right was first included in the

CBOE’s Certificate of Incorporation as a

right belonging to CBOT members, the

concept of exchange membership, on

the CBOT as on all exchanges, embraced

the indivisible coupling of trading

access and ownership. All of CBOT’s

owners had the right to trade there, and

the only persons who had the right to

trade on the CBOT were its owners. The

traditional integration of access and

ownership embodies in the concept of

membership was subsequently

attenuated, when ‘‘seat-leasing’’ was

permitted on the CBOT in the late 1970s

and when the CBOT proposed to allow

its members to split the trading rights of

its members by issuing evening trading

permits. In each of these cases, Article

Fifth(b) was interpreted so as to

preserve the original intent of the

exercise right. In the case of seat leasing,

the CBOE interpreted its rules to

provide that only the delegate (lessee) of

a CBOT membership who held all of the

trading rights appurtenant to full

membership would be able to exercise,

and that the owner of the CBOT

membership, by giving up his trading

rights to a delegate, has lost the right to

exercise. In response to evening trading

permits and other split-ups of the

trading rights of CBOT members, the

CBOT and the CBOE agreed in

Paragraph 2(b) of the 1992 Agreement

that, in the event of any such a split-up

or division of CBOT Full Memberships

into two or more parts, ‘‘all such parts,

and the trading rights and privileges

appurtenant thereto, * * * must be in

the possession of an individual as either

an Eligible CBOT Full Member or an

Eligible CBOT Full Member Delegate in

order for that individual to be eligible to

be an Exerciser Member [of CBOE].’’

[Emphasis supplied].

The common thread in each of these

situations is that full CBOT members

must choose at any given time whether

to use their CBOT memberships to trade

CBOE products and, while they are

doing so, not to trade CBOT products.

In other words, the exercise right

consistently has been interpreted as

imposing a practical cost on its use,

because a CBOT member must be

willing to give up trading access to

CBOT products during any time that

member is trading on the CBOE as an

exerciser member. It always has been a

fundamental assumption of the exercise

right that this constraint, together with

the related difficulties in managing the

risk of trading while moving back and

forth between the CBOT and the CBOE

floors, would limit the number of

exerciser members. In fact, over the past

twenty years the number of full CBOT

members (or delegates) who have been

exerciser members of CBOE has

fluctuated between approximately 450

and 700 individuals. In other words, at

least 50% of the CBOT full members (or

delegates) eligible to exercise at any

given time have chosen not to do so,

and instead have chosen to trade (or to

lease the right to trade) as members of

CBOT only. A principal purpose of the

1992 Agreement was to prevent any

division either of the trading rights and

privileges appurtenant to a CBOT full

membership or of any division of the

CBOT full membership itself from

nullifying the practical cost associated

with the use of the exercise right.

CBOT’s Restructuring Proposal and

Changes to Electronic Trading

Procedures

Recently, the CBOT has proposed to

its members a major restructuring of the

CBOT that, if implemented, the CBOE

believes will conflict with the terms and

the purpose of the exercise right. The

CBOT described its proposed

restructuring in a ‘‘Restructuring

Report’’ distributed to the CBOT

membership on May 16, 2000,4 and in

ballot materials distributed to CBOT

members on June 1, 2000, in connection

with a membership vote on the first step

of the restructuring, and the CBOT

described a modified proposal in a letter

to its members dated September 21,

2000.

As described in these materials, the

CBOT’s restructuring consists of a

number of separate but related steps.

The first step, which has already been

accomplished, was to change the state of

incorporation of the CBOT from Illinois

to Delaware, while continuing to

preserve the status of the CBOT as a notfor-profit membership corporation.5

69588 Federal Register / Vol. 65, No. 223 / Friday, November 17, 2000 / Notices

implements no more than this step of the

restructuring. See Letter dated June 29, 2000, from

Thomas A. Bond, Vice-Chairman of CBOE, to David

Brennan, Chairman of CBOT, enclosing CBOE

Information Circular IC00–64.

6See CBOT Restructuring Report (May 16, 2000),

at p. 12.

7See CBOT Restructuring Report (May 16, 2000),

at pp. 12 and 14.

8As discussed below, the CBOT recently also

proposed, independent of any restructuring

proposal, to provide complete electronic access to

trade its agricultural contracts by allowing them to

be traded for the first time on the CBOT’s electronic

trading facility.

The next step of the proposed

restructuring, which also appears to

have taken place, was the creation of a

new, for-profit stock subsidiary of the

CBOT, to which the CBOT has

transferred its electronic trading system

and related rights and obligations. These

rights and obligations previously were

held by a partnership (the Ceres

Partnership), of which the CBOT was

the sole general partner. The new

electronic trading subsidiary owns and

operates an electronic trading system for

the trading of those CBOT products

previously traded on the electronic

trading system of the Ceres Partnership.

This subsidiary proposes ultimately to

trade all CBOT products.6 In particular,

the CBOT Restructuring Report states

not only that ‘‘CBOT members will be

afforded full trading rights and

privileges to trade at the electronic

trading company,’’ but also that

nonmembers of the CBOT, wherever

located, ‘‘will not be required to own

seats or any other type of membership

interests in order to utilize directly the

electronic trading platform.’’ 7

In other words, CBOT members no

longer would enjoy exclusive access to

trade CBOT products. Through this

reformulated electronic trading

platform, nonmembers would have

equivalent access to trade CBOT

products that previously could be

traded only by and through members.

The reformulated electronic trading

facility apparently also would afford

CBOT members (or their delegates) the

ability to trade CBOT products at the

same time as they are trading on the

CBOE pursuant to the exercise right.

According to CBOT’s materials, the

next step of the CBOT’s restructuring

will be to change the form of

organization of CBOT from a not-forprofit membership corporation to a forprofit stock corporation. When this has

been accomplished, persons who had

been members of the membership

corporation will become stockholders of

the stock corporation, in exchange for

their membership interests in the CBOT.

In the proposed restructuring that was

described in June 2000, the CBOT stated

that shares in the electronic trading

subsidiary would be distributed to the

former members of CBOT, either

concurrently with the change of CBOT

from a membership to a stock

corporation or shortly thereafter. This

action was to be followed by a public

offering of additional shares in the

electronic trading company. As more

recently described in a September 21,

2000 letter from the Chairman of the

Board to CBOT members, it now is

proposed by CBOT that the electronic

trading company would remain a

wholly-owned subsidiary of CBOT after

CBOT changes from a membership to a

stock corporation. However, the CBOT

still would continue to evaluate its

ownership structure and consider

whether to separately offer shares in the

two companies or otherwise to separate

their ownership in the future.

Regardless of whether the electronic

trading company remains a whollyowned subsidiary of CBOT or its shares

are distributed to persons other than

CBOT, it appears from the CBOT

materials, as part of the restructuring or

concurrently with its implementation,

the CBOT proposed to utilize the

electronic trading company to provide

comprehensive electronic access to

trade CBOT products to individuals

who are not CBOT members.8

These next steps of the restructuring,

whether they consist only of the change

to a for-profit stock corporation or also

include the distribution of shares in the

electronic trading subsidiary, are subject

to one or more votes of the CBOT

membership. According to the CBOT

materials, these steps also are subject to

applicable regulatory approvals from the

Commodity Futures Trading

Commission and the Commission. As of

June 1, 2000, the CBOT anticipated

implementing all of the steps of the

restructuring prior to the end of the

current year. Although the statements

made by CBOT officials in announcing

the revised restructuring in September

did not mention any specific dates for

implementing the next step of the

restructuring, it was represented that the

change in strategy would accelerate the

process of demutualizing CBOT.

After announcing its revised

restructuring plan, the CBOT also

announced, in a letter dated September

20, 2000, from the Chairman of CBOT to

the CBOT members, that its Board of

Directors had approved a major change

in the way in which all of CBOT’s

agricultural contracts would be traded,

subject to the change being approved by

a vote of the CBOT members. This

change would result in all of CBOT’s

agricultural contracts, which heretofore

have been traded only by CBOT full

members by open-outcry on the CBOT

trading floor, being traded during all of

the CBOT’s hours of operation on the

electronic trading system, side-by-side

with trading in the CBOT’s open-outcry

market. Although the details of this

change have not yet been

communicated, the September 20 letter

stated that it was being proposed to

‘‘satisfy member and customer demand

for increased access to these products.’’

The Effect of CBOT’s Proposed Changes

on the Exercise Right

If and when the CBOT implements

the restructuring proposal described

above and the proposed grant of

electronic access to trade its products,

including its agricultural contracts, the

following changes will have been

effected: (1) the CBOT no longer will be

a membership corporation, but instead

will be a stock corporation, with its

former members as its stakeholders; (2)

the CBOT’s electronic trading system,

formerly a member-access only system

owned and operated by a partnership of

which the CBOT was the general

partner, will be an open-access system

owned and operated by a for-profit

subsidiary of the CBOT, although the

CBOT thereafter may distribute the

shares of that subsidiary to CBOT

members or other persons; (3) all CBOT

products will be traded side-by-side on

the existing open-outcry trading floor

(as long as that market continues to

operate) and on the open-access

electronic trading system; and (4)

members of the CBOT no longer will

enjoy exclusive access to trade directly

all products traded on the CBOT

because persons who are not members

will now be able to trade directly all

CBOT products through the CBOT’s

electronic system. Even if the CBOT

implements only the modification to the

way in which agricultural contracts are

traded, without restructuring as a forprofit stock corporation, the right to

trade these contracts, which formerly

was limited to CBOT full members on

the CBOT trading floor, will then be

shared with all persons who have access

to the new electronic trading facility.

The proposed restructuring of the

CBOT and the proposed modification of

the way in which agricultural products

are traded will extinguish the exercise

right, whether implemented together or

separately. First, as already noted, after

the CBOT restructures as a for-profit

stock corporation, the CBOT no longer

will have members, because the CBOT

will no longer be a membership

corporation. Accordingly, with specific

reference to Article Fifth(b) of the CBOE

Certificate of Incorporation, no person

Federal Register / Vol. 65, No. 223 / Friday, November 17, 2000 / Notices 69589

9See Black’s Law Dictionary at 1197 (6th Ed.

1990).

10Regardless of the effect of these developments

on the exercise right, the CBOE believes that the

exercise right would be extinguished with respect

to those CBOT members who fail to continue to

possess all of the interests in the CBOT that may

have been distributed in respect to their CBOT

memberships, including interests in CBOT’s

electronic trading facility, as required by Section

2(b) of the 1992 Agreement regarding the division

of CBOT membership into separate parts.

any longer will be within the category

of ‘‘present and future members’’ of the

CBOT who, for ‘‘so long as he remains

a member’’ is entitled to avail himself of

the exercise right. Moreover, by

destroying its membership structure, the

CBOT will have made it impossible for

its former members to hold ‘‘all trading

rights and privileges appurtenant to

such CBOT Full Membership,’’ a

requirement that Paragraphs 1(a) and

2(b) established as a fundamental

prerequisite to the continued existence

of the exercise right.

Second, once the CBOT’s electronic

trading facility may be accessed directly

by nonmembers of the CBOT for the

trading of CBOT products that

previously could be traded only by

CBOT members, CBOT members (or

their delegates) will have lost a key

‘‘privilege’’ of membership within the

meaning of the 1992 Agreement—

namely, the privilege of being able to

trade CBOT products to the exclusion of

nonmembers. A ‘‘privilege’’ is defined

as a ‘‘particular and peculiar benefit or

advantage enjoyed by a person,

company, or class, beyond the common

advantages of other citizens’’ or a

‘‘peculiar right, advantage * * * [or]

power.’’ 9 Under this definition, the

exclusive access of CBOT members to

trade CBOT products is a ‘‘privilege,’’ in

that it is a ‘‘particular or peculiar benefit

or advantage’’ that members enjoy and

that is ‘‘beyond the common

advantages’’ of nonmembers. The CBOT

members therefore will have lost an

important ‘‘privilege’’ of membership

once the electronic trading facility is

made available to nonmembers for the

trading of CBOT products. Because

CBOT members no longer will possess

all of the ‘‘rights and privileges

appurtenant’’ to their memberships,

CBOT members will cease to meet the

definitions of either an ‘‘Eligible CBOT

Full Member’’ or an ‘‘Eligible CBOT Full

Member Delegate,’’ the only categories

of persons who are entitled to become

a member of CBOE pursuant to the

exercise right.

Notwithstanding that the change from

a membership to a stock corporation

would provide a sound basis for

considering the exercise right to be

extinguished, the CBOE does not

interpret the exercise right as having

been extinguished if the CBOT only

takes this single reorganizational step.

While the taking of this step and the

consequent elimination of members of

CBOT is inconsistent with the terms of

Article Fifth(b) and the 1992 Agreement,

the CBOE does not interpret Article

Fifth(b) and the 1992 Agreement so that

this step, by itself, will cause the

termination of the exercise right, so long

as the CBOT takes no further action to

erode what has been the trading rights

and privileges of its former members.

Instead, if the CBOT does no more than

to change from a Delaware not-for-profit

membership corporation to a Delaware

for-profit stock corporation and if the

1,402 CBOT full members thereby

become stockholders of CBOT, the

CBOE proposes to treat such persons in

precisely the same way that full CBOT

members are currently treated. This

means that those 1,402 stockholders of

CBOT would remain entitled to the

exercise right if they retain all of the

stock in CBOT and all other interests

that may be distributed to them in

respect of their full CBOT memberships

and if they continue to hold all of the

trading rights and privileges that they

previously held as full CBOT members.

Similarly, the CBOE proposes that

delegates of all of the trading rights and

privileges appurtenant to full CBOT

membership (but not the delegating

stockholder) would also continue to be

entitled to the exercise right.

However, whether occurring when or

after the CBOT becomes a stock

corporation, and once the right to trade

all CBOT products is made available to

persons who are not CBOT members (or

stockholders), the CBOE interprets the

exercise right as being extinguished,

because the CBOT would no longer have

members and because the CBOT

stockholders would no longer possess

all of the trading rights and privileges

appurtenant to membership. Moreover,

even if the CBOT does not restructure as

a stock corporation, the exercise right

would be extinguished once CBOT

members lose this privilege of exclusive

access to trade CBOT products.10

As set forth above, these

interpretations follow from, and are

consistent with, not only the language of

Article Fifth(b) as interpreted in the

1992 Agreement, but also the way in

which the exercise right is intended to

operate. In particular, the underlying

purpose and intent of the exercise right

has been that CBOT members need to

choose at any given time to use their

CBOT membership to trade either on the

CBOT or (by the exercise right) on the

CBOE, and may not trade on both

exchanges at the same time. Because the

exercise right has been interpreted to

require CBOT members to make this

choice, there has been a practical cost

associated with the exercise right and

therefore a natural constraint on the

number of people who exercise.

However, the CBOT proposes a

restructuring and a change in its trading

rules or procedures as a result of which,

CBOT membership no longer would be

needed to trade CBOT products directly.

If the exercise right were to survive such

changes, CBOT members (or

stockholders) would no longer have to

choose at any given time between

trading CBOT products as members or

stockholders of that exchange or trading

CBOE products as exerciser members of

the CBOE. Instead, if the exercise right

were not extinguished in the face of

these changes, it is probable that all

1,402 of the present full members of

CBOT, or their lessees, would chose to

exercise to trade on the CBOE, since

they could do so while retaining trading

access to all CBOT products by means

of the electronic trading facility.

Not only would this scenario be

inconsistent with the language and

purpose of Article Fifth(b) and the 1992

Agreement, it would inflict serious

harm on the CBOE. First, it would

undermine CBOE’s ability to maintain a

fair and orderly market. Instead of there

being approximately 1,600 members

trading on CBOE (the current 700

exercisers plus the approximately 900

persons who own a CBOE membership

directly, or their lessees), there would

likely be 2,300 persons having direct

access to CBOE. This would strain

CBOE’s facilities to the breaking point,

as it would lead to far more persons

having direct access to the CBOE trading

floor than the floor and its facilities are

capable of accommodating. This

development therefore would be

inconsistent with the maintenance of

fair and orderly markets on CBOE.

Second, the addition of 700 additional

CBOE members would allow the

exercise right to dilute the value of

CBOE memberships substantially in a

way that has never been contemplated

or allowed since the time the exercise

right was first established.

Thus it is clear both as a matter of

interpreting the language of Article

Fifth(b) and the 1992 Agreement and of

implementing the purposes intended to

be served thereby, and in order to

maintain the CBOE as a fair and orderly

securities market, the exercise right

should be extinguished once the CBOT

restructures or otherwise changes its

trading rules or procedures so as to

deprive its full members of the

exclusive trading access to its products,

69590 Federal Register / Vol. 65, No. 223 / Friday, November 17, 2000 / Notices

11Before or after the CBOT implements those

steps of its restructuring or those changes to its

trading rules or procedures that cause the exercise

right to be extinguished in accordance with the

rules interpretation reflected in this filing, the

CBOE believes that it is possible that CBOT will

take (or, unknown to the CBOE, may already have

taken) other actions that raise independent

questions concerning the continued existence of the

exercise right that are not addressed in this filing.

These steps may or may not be part of the

restructuring, or the CBOT may further revise its

proposed restructuring in ways that this filing does

not address. If any such event makes it necessary

for the CBOE to further interpret its rules applicable

to the exercise right, CBOE proposes to do so

pursuant to one or more separate filings (or

amendments to this filing) under Section 19(b)(1) of

the Act. 15 U.S.C. 78s(b)(1).

12 In this respect, the decision to stay the

effectiveness of what would otherwise result in a

termination of trading access is analogous to the

right of the CBOE under CBOE Rule 3.19 (formerly

CBOE Rule 3.17) (‘‘Obligation of Terminating

Members’’). This rule authorizes the CBOE, under

circumstances when a membership would

otherwise automatically terminate on account of a

failure to satisfy certain requirements of

membership, to permit the member ‘‘to retain the

member’s status for such period of time as the

Exchange deems reasonably necessary’’ to provide

time to cure the failure.

13 15 U.S.C. 78s(b)(1).

14 15 U.S.C. 78f(b).

15 15 U.S.C. 78f(b)(5).

which has been one of the rights and

privileges appurtenant to

membership. 11

Transitional Proposal

Just as adding 700 more persons to the

floor of the CBOE would tax its physical

space and resources beyond the

breaking point, so too would the

overnight elimination of some 700

exerciser members from the CBOE

trading floor run the risk of disrupting

its market. This result would follow

because there suddenly would be 700

fewer persons on the floor acting either

as market makers to provide liquidity

and continuity for the CBOE market, or

as brokers to represent customer orders.

To prevent this risk of disruption to its

market, CBOE believes that

notwithstanding the extinguishment of

the exercise right upon the

implementation of changes described

above, the CBOE must be able to allow

CBOT members or their lessees who are

already exerciser members of the CBOE

to continue to have trading access to the

CBOE for an interim period. The CBOE

proposes to stay for an interim period

the impact of the extinguishment of the

exercise right on the trading access of

those members of CBOT (or their

delegates) who were exerciser members

of the CBOE on a designated cut-off

date, by permitting such persons to

continue to be able to trade on the CBOE

during this interim period. 12 For this

purpose, the CBOE proposes the close of

business on August 28, 2000, as the cutoff date for determining who would

have the right to continue to have

trading access to the CBOE during the

interim period. CBOT members (or their

delegates) who were exerciser members

of CBOE in good standing on that date

(‘‘grandfathered exercisers’’) would

continue to be able to trade as members

of the CBOE for the duration of the

interim period, notwithstanding the

implementation of any step of the CBOT

restructuring or other change to its

trading rules or procedures that has the

effect of extinguishing the exercise right

as described above. However, persons

who were not effective exercisers on

that cut-off date would not be permitted

to exercise or have access to the CBOE

trading floor during the interim period.

In order to continue to have trading

access to CBOE during this period,

grandfathered exercisers would be

required to maintain their status as full

members of the CBOT or as holders of

all of the stock distributed to them in

respect of full CBOT memberships (or as

the delegates of such members or

stockholders) in accordance with the

rules of CBOT. Among other things, this

means that delegates would need to

remain in compliance with the terms of

their CBOT lease arrangements.

During the interim period when

grandfathered exercisers would be

allowed to have trading access on CBOE

even after the exercise right has been

extinguished, the CBOE would propose

a permanent response to the situation

presented by the extinguishment of the

exercise right. This permanent response

would address the CBOE’s ongoing need

to be able to provide fair and orderly

markets in the securities it trades and

would be fair to the 1,402 former

members of the CBOT who will have

lost their exercise rights. This interim

period would extend for six months

from the date the CBOE gives notice that

the exercise right has been extinguished

in accordance with the interpretation of

Article Fifth(b) and the 1992 Agreement

as described above, and for such

additional period as may be needed to

develop and implement a permanent

response to the extinguishment of the

exercise right. The permanent response

would be subject to the approval of the

CBOE members under Section 2.1 of the

CBOE’s Constitution, and to the

approval of the Commission under

Section 19(b)(1) of the Act.13

2. Statutory Basis

The CBOE believes that the proposed

rule change is consistent with and

furthers the objectives of Section 6(b) of

the Act in general,14 and in particular,

with Section 6(b)(5) of the Act,15 in that

it is a reasonable interpretation of

existing rules of the Exchange that is

designed to promote just and equitable

principles of trade, to perfect the

mechanisms of a free and open market,

and to protect investors and the public

interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The CBOE does not believe that the

proposed rule change will impose any

burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

The CBOE has neither solicited nor

received written comments on the

proposed rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

99 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so funding or

(ii) as to which the CBOE consents, the

Commission will:

(A) By order approve such proposed

rule change, or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should fix six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609. Copies of

the submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the CBOE. All

submissions should refer to the File No.

Federal Register / Vol. 65, No. 223 / Friday, November 17, 2000 / Notices 69591

16 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1).

2Thomson Financial ESG is a wholly owned

subsidiary of Thomson Financial, a Thomson

Corporation subsidiary. 3 DTCC was created in 1999 as a holding

company for DTC and the National Securities

Clearing Corporation (‘‘NSCC’’).

4TISI is a wholly owned subsidiary of Thomson

Financial, a Thomson Corporation subsidiary.

Thomson Corporation is a global electronic

information company.

5 IAG is a Swiss corporate affiliate of TISI.

6The term ‘‘U.S. regulated aspects’’ of the GJV’s

activities refers to any services that would require

registration with the Commission as a clearing

agency, an exemption from such registration, or

designation as a ‘‘qualified vendor’’ as defined in

New York Stock Exchange Rule 387(a)(5), in

National Association of Securities Dealers Rule

11860(a)(5), and in similar rules of other selfregulatory organizations. Such activities, therefore,

would include the GJV’s proposed ETC and

centralized matching services for institutional

transactions settling in the U.S., including crossborder transactions between a U.S. broker-dealer

and an institution located abroad.

7Profits distributed to DTCC that are not retained

by DTCC will be available for rebate to the

participants of DTCC’s wholly-owned subsidiaries,

DTC and NSCC subject to such determination by

DTCC’s Board of Directors.

8The Commission has stated that matching is a

clearing agency function that requires an entity that

performs matching to register as a clearing agency

or obtain an exemption from registration as a

clearing agency. However, an entity that only

provides a matching services does not have to be

subject to the full range of clearing agency

regulation. Securities Exchange Act Release No.

39829 (April 6, 1998), 63 FR 17943 [File No. S7–

10–98]. In 1999, the Commission granted Thomson

an an exemption from clearing agency registration

to provide matching services. Securities Exchange

Act Release No. 41377 (May 7, 1999), 64 FR 25948

[File No. 600–31]. GJV Matching Services-US, LLC

has applied for exemption from clearing agency

registration from the Commission. Securities

Exchange Act Release No. 43540 (November 9,

2000), [File No. 600–32].

9The Commission has modified the text of the

summaries prepared by DTC.

10See, e.g., Securities Industry Association

Institutional Transaction Processing Committee

White Paper (December 1, 1999).

11 Generally, the TradeSuite Business consists of

the following products: TradeMessage, TradeMatch,

TradeSettle and TradeHub.

12 Generally, the ESG Business consists of the

following products: ALERT, OASYS, OASYS

Global, MarketMatch, and ITM Benchmarks.

SR–CBOE–00–44 and should be

submitted by December 8, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.16

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–29449 Filed 11–16–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43541; File No. SR–DTC–

00–10]

Self-Regulatory Organizations;

Depository Trust Company; Notice of

Filing of Proposed Rule Change

Relating to the Combination of the

Depository Trust Company’s

TradeSuite Institutional Trade

Processing Services With ThomsonFinancial ESG’s Institutional Trade

Processing Services

November 9, 2000.

Pursuant to section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

August 22, 2000, The Depository Trust

Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which items have been

prepared primarily by DTC. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested parties.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change being filed

by DTC is DTC’s proposal to combine its

TradeSuite family of institutional traderelated services (‘‘TradeSuite Business’’)

with the institutional trade processing

services offered by Thomson Financial

ESG (‘‘ESG Business’’) 2 in a proposed

joint venture, the Global Joint Venture

(‘‘GJV’’), between The Depository Trust

& Clearing Corporation (‘‘DTCC’’)3,

Thomson Information Services Inc.

(‘‘TISI’’) 4, and Interavia, A.G. (‘‘IAG’’).5

The proposal is as follows:

• After receipt of all necessary

regulatory approvals, DTC will transfer

existing assets of the TradeSuite

Business, TISI will transfer existing U.S.

assets of the ESG Business, and IAG will

transfer existing non-U.S. assets of the

ESG Business to the GJV between DTCC,

TISI, and IAG.

• Certain support functions and other

services will be provided to the GJV by

DTCC, DTC, and TISI pursuant to

service contracts.

• The GJV will provide post-trade,

presettlement related services, including

execution notification, allocation,

electronic trade confirmation (‘‘ETC’’),

central matching, operational and

standing databases (i.e., trade

enrichment), and communications

between trading parties and their

settlement agents.

• The GJV’s governance arrangements

will be designed to assure that the ‘‘U.S.

regulated aspects’’ of the GJV’s

activities,6 including the pricing

structure for the fees to be charged to

users of such services, will be subject to

the control of users.

• The GJV will be operated on a forprofit basis. Fifty percent of any profits

not retained by the GJV will be

distributed to DTCC.7

• The GJV will provide its ETC

service and its central matching service

through its wholly owned subsidiary,

the GJV Matching Services—US, LLC,

which has applied for an exemption

from registration as a clearing agency.8

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

DTC included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. DTC has prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of these statements.9

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The expansion of the global economy,

the tremendous growth in transaction

levels in both domestic and cross-border

markets, and the emergence of

electronic trading vehicles has resulted

in dramatic increases in securities

trading volumes. This growth in volume

is beginning to constrain the capacity of

financial institutions to process trades

efficiently so that they settle on time.

Operations professionals in both

domestic and foreign securities markets

have concluded that the current

sequential and fragmented electronic

trade confirmation/affirmation model

must be made more efficient and that

broader industry connectivity to

electronic systems must be encouraged

so that these systems will be used for

the large number of cross-border

transactions that still rely upon the

telephone and telefax for the

communication of trade and settlement

information.10

According to DTC, the combination of

the TradeSuite 11 and ESG Business 12

and the linking of their current services

and customers could produce

immediate benefits. For example, DTC

estimates that 12% of institutional

trades processed in TradeSuite are

affirmed on trade date and that only

87% are affirmed by noon of T+2. By

introducing allocations processed in the

ESG Business’ OASYS system to the

TradeSuite Business’ TradeMatch, a

much larger percentage of trades can be

affirmed earlier in the settlement cycle.