CBOE rights debate could be overcome

A major impediment to the Chicago Board Options Exchange’s (CBOE) planned demutualisation could be overcome by a settlement it presented to its members on June 2.

The settlement addresses a dispute about claims to ownership and trading rights held by certain Chicago Board of Trade (CBOT) members since CBOE was spun off from the CBOT in 1973. In December 2006, the CBOE tried to terminate these so-called exercise rights in view of the CBOT’s coming amalgamation with the Chicago Mercantile Exchange.

This change was subsequently challenged by eligible CBOT members in a Delaware court. The action continued after the creation of CME Group in July 2007, with the consolidated exchange buying a majority of the exercise rights from some CBOT members who feared losing them.

A tentative agreement struck between the CBOE and CME Group proposes that those eligible should receive an 18% equity stake in any future demutualised CBOE, as well as a cash payment of $300 million. After demutualisation, those who qualify and remain temporary members of the exchange would be eligible for CBOE trading permits on the same basis as its ordinary members. A capped refund would also be granted to CBOT members who were eligible shortly before the CME Group merger, and have since paid access fees for using the CBOE.

Parties to the court case would have to agree there is no one who could take advantage of the exercise rights, and that all previous and future legal claims over them are dismissed.

CBOE, meanwhile, would pledge to demutualise as soon as possible.

The agreement, which has been approved by the CBOE’s board, still has to be put to its members and the Delaware court where CBOT filed its original lawsuit.

In a circular addressed to its members, CBOE said: “While we are quite comfortable with CBOE’s legal position, we also recognise that litigation is a distraction and always involves the risk of unexpected outcomes. More importantly, a protracted legal battle could significantly impede CBOE’s strategic options in a rapidly changing environment.”

Neither the CBOE nor CME Group would comment directly on the matter.

See also: CME seals deal with CBOT
ICE and CBOE reach $665m agreement over CBOE exercise rights
CBOE files for demutualisation on way to IPO
CBOE prepares for demutualisation