Depending on whom you speak with, the Chicago Board Options Exchange (CBOE) may have scored some early points in its battle to end exchange-right privileges (ERPs) held by some members of the Chicago Board of Trade (CBOT). And until the Securities and Exchange Commission (SEC) decides on the validity of CBOE proposed rules changes, the judge has suspended proceedings in a Delaware Chancery Court.
Those proposed rules changes would invalidate ERPs held by CBOT B-1 members on the premise that there are no longer CBOT members to exercise those rights now that the CBOT has merged with the Chicago Mercantile Exchange and the surviving entity is the CME Group Inc. Another rule change, the Interim Access Rule, grants those ERP holders temporary membership status and allows CBOE to charge them a monthly access fee until the SEC decides on the ERP issue.
The judge denied the CBOT’s request for a temporary restraining order, and allowed the CBOE to continue implementing the rule, which according to court documents filed by CBOT lawyers, “strips away the ability of CBOT Full Members to lease and, importantly, to collect rents from the leasing of their CBOT B-1 memberships to third parties.” CBOE also created a new class of temporary trading privileges that does not require an ERP, thereby ending any opportunity for ERP holders to earn income through the leases.
“They have already achieved substantial value from [ERPs]” says Chuck Sorsby, president of Sorsby Financial Management and a CBOE member. “Our expectation is that the SEC will rule in our favor, and if they do, then the ERPs will no longer exist.”
In his memorandum, Judge John W. Noble writes, “Despite the CBOE’s urgings to the contrary, the Court retains jurisdiction to determine whether the Defendants’ actions have the operative effect of divesting the Plaintiff-class of a vested economic and property interest.”
According to the CME, the judge’s decision to wait for an SEC decision implies the court will have the final say over these matters. “We have maintained that the issue of CBOE ownership belongs in the Delaware Courts,” said Terry Duffy, CME executive chairman in a press statement. “CBOE has tried to avoid the courts by issuing its own rules at the SEC claiming these rights are gone. The Judge has now made clear that the courts, not CBOE, will decide these important economic rights.”
Not surprisingly, CBOE disagrees. In a press statement, CBOE said, “Although the Court retained jurisdiction over certain contractual issues, if any of these issues remain relevant after the SEC’s decision on eligibility, the Court in no way retained any authority to revisit or overrule the SEC’s eligibility determination.”
So there will be no restraining order and the Delaware Court will wait on an SEC decision before taking up the case. As far as the spin coming from each exchange, we won’t attempt to offer a legal opinion. The market however appears to be siding with the CBOE interpretation as a seat traded in early August for a record $2.7 million.
