For CBOE and its leader William J. Brodsky the issue is simple. Once there are no longer shares of CBOT, the former shareholders won’t own CBOE exercise right privileges (ERP). The ERP can be activated by CBOT members who hold their CBOT trading right and the 27,338 class A shares that were awarded to full members when CBOT demutualized.
“They are being acquired by the [CME]. If [the sale] goes through there is nothing more to discuss. We are moving on,” Brodsky says.
The CBOT doesn’t see it that way. Ten days after CBOE filed rule changes with the SEC seeking to terminate the ERPs, CBOT filed an amended complaint in Delaware court claiming CBOE breached its contractual obligations to exercise right holders. The original complaint sought to ensure exercise rights holders who meet certain criteria participate equally in the distribution of CBOE stock as a result of its planned demutualization.
CBOE has agreed to allow the amended complaint but will seek dismissal and Federal pre-emption moving it to the SEC’s jurisdiction according to Brodsky.
Of the 1,402 former full members of the CBOT, now equity owners, entitled to the ERPs dating back to the CBOE’s creation, approximately 70 have sold that right back to the CBOE and many more don’t hold the necessary class A shares to utilize the ERP. Brodsky says currently the number of ERP exercisers is less than 300. An ERP sold for $148,000 in late December.
Uncertainty regarding the value of CBOE membership due to ERPs has been a major hindrance for the CBOE as it attempts to demutialize.
The most recent CBOE membership, sold for $1.8 million on Jan. 9, 2007, an increase of 106% over the price last January, when a membership sold for $875,000.
According to the CBOT membership Web page, the ERP, in combination with a full membership in the CBOT and 27,338 shares of Class A common stock of CBOT Holdings, allows a person to become a CBOE member without purchasing a membership on the exchange.
