A decades long battle between former members of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) over exercise right privileges (ERPs) again approached its conclusion when CME Group and CBOE announced a settlement agreement on the exercise right lawsuit on Aug. 20. The settlement terms give class members an 18% equity stake and cash payments in the aggregate amount of $300 million to end claims on CBOE membership resulting from CBOT member ERPs.
By the time you read this, CBOE members will have voted on settlement approval. If the settlement is approved by CBOE members, it would then move for approval in mid-December to the Delaware court where the suit originated. The settlement clears the way for CBOE’s demutualization, which would give it the option to go public or entertain a merger. CBOE expects to be demutualized by the end of the first quarter of 2009.
“There’s a sense of relief that we finally have some closure to this issue. It’s a shame it had to go this far. It must be a fair settlement because I don’t think anybody feels they won,” says Paul Richards, ERP holder, CBOT member and former CBOE member.
“I don’t like [the settlement], but I’m voting for it,” says CBOE seat owner Norman Friedland. “This thing has to end and we can’t continue on in limbo over this particular issue. The exchange has to move forward and if this issue is not settled, it will keep us tied up.”
Peter Bottini, executive vice president of trading at optionsXpress, says that although CBOE seems interested in finding a buyer, it will most likely go down the path of an IPO, but he adds, “[The membership] might lose their influence in a more public entity.”
Bottini is unsure of who would be interested in buying CBOE and says that regulation would play a part. “CBOE is a great brand with about 30% of the options business. I’m not sure who would be interested in them — Nasdaq and NYSE already control four of the exchanges. And CME is very hesitant to enter the SEC’s realm. The [SEC]’s approach is not exactly applauded by the options exchanges right now. They see the futures exchanges as having a major advantage on the regulation side.”
CBOE declined to comment on the settlement prior to the vote, but in a letter to members CBOE Chairman Bill Brodsky said the settlement “avoids the uncertainty, expense and distraction of continued litigation and gives the exchange control over its strategic options.”
