, .. 

CFE 

~80£ FUTUAEll~ ANG! 

Via Electronic Mail 

Received CFTC 

Records Section 

%s-/D7 

April25, 2007 

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07-1 

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Ms. Eileen A. Donovan 

Acting Secretary 

·' r.,ll;1 ~ 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, N.W. 

Washington, D.C. 20581 

Re: Comment Letter on Regulatory Governance 

Proposed Amendments to Public Director Detinition 

Dear Ms. Donovan: 

COMMENT 

CBOE Futures Exchange, U.C ("CFE") comm~nds the Commodity Futures Trading 

Commission ("CFTC") for addressing •the important issues of futur.cs exchange governance and 

minimizing con.flicts of interest in futures exchange decision making by promulgating Acceptable 

Pmctices with regard to these issues. CH~ believes that the Acceptable Practkcs adopted by the 

CFTC will bnvc a positive impact in both of these areas and will serve to enhance the selfregulatory process. We do, however, wish to convey to the Cr-rC oomntcn:ts that we have 

regarding three aspects of the public director qualification slandards set forth im the Acceptable 

Practices as they were adopted by the CFTC (in 72 FR 6954 published on February 14, 2007) and 

as they are now proposed to be amended {in 12 FR I 4051 published on March 26, 2007). Our 

comments are below. A(lditionaJiy, as we did in our previous commenl letter regarding the 

proposed Ac~eptable Practices, we note a couple factual scenarios relating specif~ally to CFE to 

Illustrate our comments. · 

Public Director Qualification Standards Rel'ating to Puyments Received 

Our first comment relates to the proposed provision of the public director qualification 

standards that would disqualify a person from serving as a public director of a ftdures exchange if 

the director, or a "finn" of which the director is <Hl employee, ofTacer, director, or partner, receives 

more than $100,000 .in combined annual compensation tor "professional services" from the 

futures exchange, an aftiliate of the futures exchange. or a member or oflicer or director of a 

member of the futures exchange, with two exceptions for director compensation and 1.kfcrred 

compensation. CFE requests that the CFTC clarify that this provision would not prevent a person 

from serving as a public director of a futures exchange and as a public director of a regulatory 

body that provides regulatory services to the futures exchange. 

The following illustrates why the proposed provision should be clarified in this manner 

and how, without this clarification, the provision could be read in a manner that would run 

counter to the goal of improving futures exchange governance and that would detrimentally 

impact CFE in particular. 

One of CFE's current directors is Susan Phillips. Dr. Phillips is currently Dean of The 

Ill 

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400 South LaSalle Street Chicago. Illinois 60605-1023 www.cboe.cornJcfc 
,. \ 

Ms. 'Eileen A. Donovan 

Page 2 of 4 

Ge-Orge Washington University School of Business, and she previously served as CFTC 

Chaimmn and as a member of the Board of Governors of the Federal Reserve System. Dr. 

Phillips also currenlly serves as a public director of the National Futures Association ("NFA"). 

CfE d'oes not believe that reguiJatory bodies such as NFA constitute "firms". or that 

regulatory services provided to a . futures exchange by a regulatory body like NF A constitUte 

"professional services", for purposes of the public director qualification standards. Instead, CFE 

believes that the term "firm" as used in this context is intended to apply to an entity such as a law 

firm, accounting firm, consulting firm, or other similar type of firm and that the term 

"professional services" as used in this context is intended to apply to services such as legal, 

accounting, and consulting services and other similar types of services. 

However, the CFTC did not define the lenn "linn" or the l.erm "professional services" in 

this <:ontext, and therefore CFE is concerned that it is possible one could seek to interpret those 

terms to encompass re~ulatory bodies Jike Nf'A and the provision o.f regulatory services to a 

futures exchange by such a regulatory body. If that were the case, Dr. Phillips would appear to be 

disqualified from serving as a public director ofCFE because of the payments that CFE makes to 

'NFA -to act as a regulatory serV'ices provider. Such a result would not be consistent with the goal 

of improving futures exchange governance. been use CFE would lose the benefit of the experience 

and expertise that Dr. Phi.llips brings to it-s Board of DirectQrs. Dr. PhiUips' service as~ public 

director ofNFA directly benefits. CFE ilnd the self-regulatory process. Service as an NPA public 

director provides Dr. Phillips with exposure to the currc_nt regulatory issues in the futures industry 

and the approaches for addressing them and enables Dr. Phillips to apply this kno\\~'ledge and 

experience in her service as a CFE public director. Additionally, CFE does not believe it: would 

serve the interest of self-regulation if CFE's desire to retain Or. Phillips as a public director were 

to become a deterrent to utilizing NFA to provide n:gulatory services given NFA's expertise in 

the area of fut1.1res reg.ulation. 

l'herefore, CFE believes that it is important that the CFTC provide appropriate 

clarincation wi.th regard to this issue. 

Public Director Qualitieation Standards Relating to Overlapping Public Directors 

CFE's second comment relates to a provision of the Acceptable Practices as adopted by 

the CFTC which the CFTC is not currently proposing to revise or claril)'. Nevertheless, for the 

reasons stated below, CFE believes that the CFfC should readdress this provision. 

In CfE's previous comment letter regarding the proposed Acceptable Pmctices, CFE 

commented that the Acceptable Practices should permil a public dire·ctor of a futures exchange to 

also serve as a director of an afliliato of the futures exchange if the individual otherwise meets the 

qualification standards for a public director. The CFTC partially addressed this comment by 

including a provision in the Acceptable Practices that permits a public director of a futures 

exchange to also serve as a director of the parent company of the 1\Itures exchange if the 

individual otherwise meets the qualification standards of a public director. However, CFE docs 

not believe that this change fully addressed the issue. The following illustrates why this is the 

case, again using CFE as an example. 

Chicago Board Options Exchange, Incorporated ("Cl30E"), the parent company of CFE, 

currently has eleven public directors. At various points in time, one or more of these CBOE 

public directors have served as CFE directors. Pursuant to the provision of the Acceptable 

Practices noted in the paragraph above, an individual is able to serve as a public director of 
,, .. Ms. 'Eileen A.. Donovan 

Page 3 of' 4 

CBOE and still qualify as n public director of CFE undef CBOE's current corporate structure. 

However, as rnany qxcbanges have already done. CBOE is in the process of demutualizing and 

converting to a holding com,pany structure. Under the proposed CI30E restructuring transaction, 

CBOE and CFE w.ill. each become subsidiaries of a holding <:ompany called CBOE Holdings, Inc. 

CFE does not believe any regulatory purpose is served by precluding a CBOE public director 

from qualifying as a public director of CFE when CBOE and CFE each become subsidiaries of a 

common parent, especially given that a CDOE public director may qualify to serve as a CFE 

:public director today under CBOE's current COI])Orate structure. "fhcrc is oo material difference 

between lhc two corporate st·ruch1res from a .regulatory p~rspective and not permitting a CBOE 

public director to seli'Ve as a public director of CFE because of a non-material change in that 

structure would not further the interest of improvi'ng futures exchange governance. Specifically, 

such a result would cause CFE to lose the benefit of the experience and expertise that a CBOE 

public director brings to CFE's Board efOircecto.rs. 

AddiUonally. CFE expects that this issue wUI' become more and more prevalent as 

exchanges continue the current trend toward implementing holding company structures and 

seeking to broaden their product lines to e~ompass bolh futures and securities products which 

necessitates having both a futures exchange affiliate and a securities exchange affiliate. This 

trend mirrors the ge11eral trend that has already occurred in the financial services industry toward 

holding company structures ·in which various affHiates offer different products and services. 

Accordingly, CFE requests that the CFrc readdress this issue, and not draw an artiticial 

distinction bet.ween parent ,companies and other affiliates In this context, by amending the 

Acceptable Practices to pennit .a publi£ director of a futures exchange to al:so serve as a director 

of an affiliate of the futures ~xchange Lfthe individual otherwise meets the qualification standards 

for a public director. 

l)ublic Pirector Ql!alificarion Standards Relating to Compcnsat.ion for Director Services 

Finally, CFE requests that the CFTC broaden t.Jle proposed exception to the provision 

regarding din.-ctor payments which provjdes that compensation for services as a director of a 

futures exchange d~s not count toward the $100,000 paymel'llt limit referenced in our first 

comment above. 

The CFTC has already recognizel that a publie d·i11eotor of a futures exchange may also 

serve as a director of the parent company of the futures exchange if the individual otherwise 

meets the qualification standards of a public director. Accordingly, the CITC should revise the 

exception to the $100,000 payment limit so that tfle exception applies not only to compensation 

for services as a director of a futures exchange bur also to compensation for services as a director 

of the parent company of the futures exchange in these situations. This is particularly the case 

since a director may be more likely to l'eceive a greater amount of compensation for acting as a 

director of the holding company of a futures exchange than for acting as a director of the futures 

exchange irself. 

Similarly, the CFTC should also revise the exception to the $100,000 payment limit so 

that the exception applies to compensation for services as a director of any other affiliate of a 

futures exchange besides its parent company. For the reasons described in our prior comment 

above, a public director of a futures exchange should be permitted to serve as a director of an 

attiliatc of the futures exchange if the individual otherwise meets the qualification standards for a 

public director. Therefore, compensation for services as a director of a fururcs exchange aOiliatc 

in those situations should not be counted toward the $100,000 payment limit. 
.. Ms. Eileen A. Donovan 

Page 4 of4 

* * * * * 

CFE is available to provide any further input desired by th~ CfTC regarding these issues 

and to work cooperatively with the CFTC to address them. Please contact Arthur Reinstein in our 

Legal Division at (312) 786-7570 ifyou have any questions regarding our comments. 

Very tmly yours, 

lU ~ ~ William J. Br&i'sky 

Chairman of the Board 

CBOE Futures Exchange, LLC