b. Voting Rights

Certain voting procedures would be changed under proposed Step One. Due to the deletion of certain member rules, members would no longer be able to utilize the voting by mail, special ballot and petition procedures.²³ Instead, Delaware NFP CBOT members would be able to exercise their voting rights, either in person or by proxy. The number of votes held by current members and membership interest holders would remain the same in Delaware NFP CBOT as they currently are in CBOT.²⁴

c. Member Rights and Obligations

Under Delaware corporate law, the voting rights of members of CBOT will change. Currently, under Illinois law, approval by two-thirds of those voting is necessary to authorize charter amendments or major corporate transactions such as a merger, a sale of all the corporate assets or a dissolution for CBOT. In contrast, Delaware law allows approval by a simple majority of the outstanding voting shares.

2. Transfer, Sale, or Lease of the Memberships of Delaware NFP CBOT

The current CBOT rules concerning the transfer, sale or lease of memberships would not be repealed or amended as a result of Step One.²⁵ Therefore, such rules would still govern the transfer, sale or lease of Delaware NFP CBOT memberships.

3. Liquidation and Dissolution

Under the DGCL, a merger, consolidation, dissolution, sale, lease or exchange of all of Delaware NFP CBOT�s assets would require a simple majority approval of the members holding a majority of the outstanding voting power.²⁶ Delaware NFP CBOT members would have the same rights to distributions upon dissolution and liquidation as they had under CBOT.²⁷

4. Governance

The initial members of the Delaware NFP CBOT Board of Directors would be identical to the members of the CBOT Board at the time of the completion of Step One.²⁸ The provisions of the CBOT rules and regulations relating to the CBOT Board, and the powers and obligations of its members, would be imported, substantially without change, into the Delaware NFP Certificate of Incorporation and Bylaws.²⁹ The initial executive officers of Delaware NFP CBOT will consist of all the executive officers of CBOT at the time of the completion of Step One.

At the present time, Delaware NFP CBOT plans on maintaining its current staff levels. CBOT has stated, however, that it might reduce staff based on either the CFTC-approved reduction/elimination of specific programs or CBOT consolidation of certain surveillance and enforcement activities. CBOT represents that any such revisions would be accomplished in a manner that would not compromise CBOT�s ability to carry out its self-regulatory responsibilities.³⁰

B. Proposed Rules and Rule Amendments

1. Certificate of Incorporation and Bylaws of Delaware NFP CBOT

The Certificate of Incorporation of Delaware NFP CBOT describes the size and selection of the Board of Directors for Delaware NFP CBOT, including the terms of the directors.³¹ The Bylaws of Delaware NFP CBOT cover a number of topics relating to corporate governance and incorporate by reference substantial portions of the current CBOT rules.³² CBOT represents that upon the consummation of the reincorporation merger, Delaware NFP CBOT would be the legal successor-in-interest to the CBOT, assuming all of the rights, assets, and liabilities of CBOT. Delaware NFB CBOT, therefore, would be subject to all provisions of the Act and the Commission�s regulations applicable to designated contract markets, including those related to self-regulatory responsibilities.³³ CBOT specifically states that, under Step One of the restructuring plan, Delaware NFP CBOT would continue to comply with Commission regulations regarding how contract market governing boards are selected.³⁴ For example, Regulation 1.63 prohibits a person from serving on a governing board if, within the last three years, he or she was found to have committed a �disciplinary offense.� Under the current Board selection process, the Nominating Committee screens the candidates being considered as nominees for election to the Board so that persons with a disqualifying offense are not nominated.³⁵

Similarly, Regulation 1.64 sets forth certain composition requirements for self-regulatory organization (�SRO�) governing boards. CBOT states that its current rules concerning board composition would be imported, substantially without change, into the Delaware NFP CBOT Certificate of Incorporation and Bylaws.³⁶ This would insure continued compliance with Commission Regulation 1.64.

The Delaware NFP CBOT Certificate of Incorporation would require the approval of the Board of Directors and an affirmative vote of the members to repeal the not-for-profit status of Delaware NFP CBOT.³⁷ However, Delaware NFP CBOT would not otherwise change, and would continue to enforce, the current provisions in effect for CBOT with respect to open outcry trading, electronic trading, the self-regulatory responsibilities of designated contract markets, and contract specifications.³⁸

2. Conforming Amendments to Existing Rules

Under the proposed rule changes, most of CBOT�s substantive rules would not be changed. The proposed amendments to the CBOT Rulebook chiefly involve governance issues.³⁹ Some of the current CBOT rules would be repealed or eliminated in their entirety in order to implement Step One of the restructuring. This is because they would either: (1) be expressly set forth in the Delaware NFP Certificate of Incorporation and/or Bylaws; (2) be replaced with different provisions in the Delaware NFP Certificate of Incorporation and/or Bylaws in order to achieve a similar effect under the DGCL or modernize the corporate governance of Delaware NFP CBOT; or (3) not be enforceable under, or consistent with, the DGCL.⁴⁰

III. Discussion

The Division has reviewed Step One of CBOT�s restructuring plan and, based on the foregoing, it does not believe that the proposed Reincorporation of CBOT with and into Delaware NFP CBOT would be inconsistent with the Act or the Commission�s regulations. Step One of CBOT�s restructuring plan is substantively similar to Step One of CME�s demutualization plan.⁴¹ Step One of each plan merges an Illinois not-for-profit membership corporation into a recently formed Delaware non-stock corporation. Under each plan, the rule changes almost entirely involved similar governance issues, with very few substantive changes from a regulatory perspective. Although the first steps of the plans are similar, unlike CME CBOT is not proposing to demutualize at this time.

In their submissions, CBOT and Delaware NFP CBOT represent that Delaware NFP CBOT would be the legal successor-in-interest to CBOT, would meet all the requirements for contract market designation, would assume all the assets and liabilities of CBOT and would comply with all self-regulatory requirements applicable to designated contract markets under the Act and the Commissions regulations including, but not limited to, surveillance and enforcement requirements, the governing board and disciplinary committee composition requirements, and the prohibition against conflicts of interest and insider trading.⁴² The rules and practices for complying with self-regulatory responsibilities would remain the same.⁴³ In addition, CBOT and Delaware NFP CBOT represent that none of the rules changes under the reorganization plan affect the rights and obligations of any participants with open positions transferred from CBOT to Delaware NFP CBOT and that the rule changes do not relate to how such contracts are cleared.⁴⁴ Moreover, CBOT represents that market participants have been notified of changes to the CBOT Rulebook, the transfer of contract market designations and the transfer of all open interest upon consummation of the reincorporation merger.⁴⁵

The Division believes that the Commission has the oversight ability and authority under the Act and the Commission�s regulations to hold an exchange accountable for any failure to carry out its regulatory responsibilities.⁴⁶ As noted in the CME Memo, the Commission�s oversight authority regarding the adequacy of exchange programs carrying out compliance and disciplinary regulatory responsibilities includes consideration of any lack of funding that contributes to an inadequate program. The Division recommends that the Commission remind Delaware NFP CBOT that it remains subject to self-regulatory responsibilities under the Act and the Commission�s regulations and that the Commission will continue to conduct rule enforcement reviews evaluating its fulfillment of these responsibilities.

IV. Conclusion and Recommendation

Based on the foregoing, the Division believes that Step One of CBOT�s restructuring plan, including its associated rule amendments, is not inconsistent with the Act or the Commission�s regulations. Accordingly, the Division recommends that the Commission approve the proposed Certificate of Incorporation and Bylaws of CBOT, the proposed deletion of CBOT�s current Charter and the proposed deletion of: (1) Rules 100.00, 101.00, 101.01, 102.00, 103.00, 104.00, 105.00, 106.00, 107.00, 108.00, 109.00, 111.00, 112.00, 120.00, 121.00, 122.00, 123.00, 124.00, 125.00, 125.01, 125.02, 125.03, 126.00, 127.00, 128.00, 129.00, 130.00, 131.00, 132.00, 133.00, 135.00, 140.00, 141.00, 142.00, 142.01, 143.00, 145.00, 146.00, 182.00, 183.00, 187.00, 187.01, 216.00; and (2) Interpretation of Rule 107.00, pursuant to Section 5a(a)(12)(A) of the Act and Commission Regulation 1.41(c). The Division also recommends that the Commission remind Delaware NFP CBOT that the status of each rule in the CBOT Rulebook, under the Act and the Commission�s regulations, is not affected by the consummation of Step One of the restructuring plan except insofar as they are being amended.

Furthermore, since the effect of CBOT�s plan would be to change the ownership structure of CBOT without altering its self-regulatory rules or practices and without altering the terms and conditions of the contracts that have been designated by the Commission for trading on CBOT, the Division, after consultation with the Division of Economic Analysis, recommends that the Commission issue the attached order transferring all of CBOT�s current contract market designations to Delaware NFP CBOT, including the transfer of all existing open interest in all such contracts.⁴⁷ The transfer of these designations, and all related open interest, would take effect simultaneous with the merger itself. The Division also recommends the approval of the transfer to Delaware NFP CBOT of all contracts listed for trading by certification at CBOT, and all related open interest.⁴⁸

The Division further recommends that the Commission remind CBOT and Delaware NFP CBOT that any subsequent rule changes associated with the restructuring plan must be submitted for Commission review. In addition, the Division recommends that the Commission remind Delaware NFP CBOT that, as it agreed to in its representations, it will remain subject to all provisions of the Act and the Commission�s regulations applicable to designated contract markets, including self-regulatory responsibilities under the Act and the Commission�s regulations.

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1 In connection with the reincorporation merger, Delaware NFP CBOT would change its name to Board of Trade of the City of Chicago, Inc.

2 On January 19, 2000, the CBOT Board of Directors adopted and approved a restructuring plan consisting of several related but separate steps, including: (1) the reincorporation of the CBOT in Delaware as a Delaware nonstock, not-for-profit corporation (Step One); (2) the formation of a for-profit wholly owned subsidiary to conduct the electronic trading business of the CBOT; and (3) the conversion of Delaware NFP CBOT into a for-profit Delaware corporation. CBOT states that the demutualization step would be implemented as soon as practicable following subsequent membership approval, subject to receiving regulatory approvals from the Commission, the Securities and Exchange Commission and the Internal Revenue Service. A proxy statement/prospectus is anticipated to be submitted to the members later in the year and it is expected that the remaining steps of the restructuring strategy would be implemented later in 2000. See Letter from Celesta S. Jurkovich, Senior Vice President/Government Relations, CBOT, to Thomas J. Erickson, Commissioner (June 14, 2000) (submitting CBOT Ballot Materials) at the Ballot Disclosure (�CBOT Ballot Disclosure�) 1,3.

3 CBOT�s Board of Directors unanimously approved the details of Step One of its restructuring plan on May 16, 2000. Step One requires three separate legal actions. See supra Section II.A. for a description of the three actions making up Step One. Approval of Step One required a two-thirds majority vote of those members casting votes by proxy or in person at the meeting. CBOT membership approved the first (�part one�) and second (�part two�) legal actions of Step One at a member vote on June 28, 2000. The vote was 1,104 4/6 for 103 2/6 against. The third (�part three�) legal action of Step One was presented by proxy to a special meeting of the CBOT membership on July 7, 2000, after CBOT had effected part one and two of Step One. The vote was 1,098 1/6 for and 92 4/6 against. The proposed amendment currently before the Commission is part three of Step One.

4 CBOT and Delaware NFP CBOT also have represented that Delaware NFP CBOT will assume responsibility for maintaining the certification conditions for all contracts listed for trading by exchange certification. See Letter from Paul J. Draths, Vice President and Secretary, CBOT to Jean A. Webb, Secretary to the Commission 3 (July 12, 2000). Currently CBOT has two futures contracts that were self-certified pursuant to Commission Regulation 5.3. The two futures contracts are the Long Term Fannie Mae Benchmark Notes and Freddie Mac Reference Notes (�Long-Term Agency�) contract and the 5-Year Fannie Mae Benchmark Notes and Freddie Mac Reference Notes (�5-Year Agency�) contract. CBOT has also self-certified an option contract on each Agency futures contract. While CBOT has launched the Long-Term Agency contracts, it has not launched the 5-Year Agency contracts. As of July 26, 2000, the open interest on the Long-Term Agency futures contract was 38,128, and the open interest on the Long-Term Agency option contract was 15,779.

5 The proposed Certificate of Incorporation of Delaware NFP CBOT is attached to this Memorandum as Appendix D.

6 The proposed Bylaws of Delaware NFP CBOT are attached to this Memorandum as Appendix E.

7 These rule amendments are attached to this Memorandum as Appendix F. The CBOT Rulebook, as amended herein, would govern the trading activities on Delaware NFP CBOT. Most of the rules are not being amended and would apply to Delaware NFP CBOT in their current form. See infra note 40. According to CBOT, rules are being amended to bring the rules in the CBOT Rulebook into conformity with the proposed Certificate of Incorporation and Bylaws of Delaware NFP CBOT, and that most of the substantive rules are not being changed. See Letter from Paul J. Draths, Vice President and Secretary CBOT to Jean Webb, Secretary to the Commission 2,3 (June 29, 2000). As CBOT, under its restructuring plan, is carrying out a merger into a new entity, the Division of Trading and Markets (�Division�) has asked for, and received, representations from CBOT and Delaware NFP CBOT that Delaware NFP CBOT, upon completion of the mergers, will meet the requirements for contract market designation. See Letter from Paul J. Draths, supra note 4 at 4. However, unlike the contract market designation process for a new contract market, the Division reviewed the amendments of, and additions to, the CBOT Rulebook for inconsistency with the Act and the Commission�s regulations rather than reviewing a new set of rules in its entirety.

8 Two contract markets have previously submitted demutualization proposals to the Commission. The Commission approved the rules and procedures implementing the demutualization plans of the Chicago Mercantile Exchange (�CME�) and the New York Mercantile Exchange (�NYMEX�) on June 15, 2000, and July 26, 2000, respectively. See generally Letter from Jean Webb, Secretary to the Commission, to Carl Royal, Senior Vice-President and Special Counsel, CME, and Craig Donohue, Managing Director - Business Development and Corporate/Legal Affairs, Chicago Mercantile Exchange Inc. (June 15, 2000). See also Letter from Jean Webb, Secretary to the Commission, to Daniel Rappaport, Chairman of the Board, NYMEX and New York Mercantile Exchange, Inc., Christopher K. Bowen, Senior Vice-President and General Counsel, NYMEX, NYMEX Holdings Inc. and New York Mercantile Exchange, Inc. and Neil Citrone, Secretary, NYMEX Holdings, Inc. and New York Mercantile Exchange, Inc. (July 26, 2000).

9 The CBOT membership elected to be governed by the Illinois NFP Act, part one of Step One, on June 28, 2000. See supra note 3. No Commission action is necessary in response to part one.

10 CBOT submitted its proposal to amend its charter, part two of Step One, to the Division on July 6, 2000, pursuant to Section 5a(a)(12)(A) of the Act. The Division notified CBOT that it was allowing the proposed charter amendment into effect on July 6, 2000. CBOT has filed the amended charter with the state of Illinois. CBOT represents that it may not delete CBOT�s Special Charter; it may only add to it. Therefore, CBOT�s amendments added to CBOT�s current charter what is required under the Illinois NFP Act. Division staff conversation with Carol A. Burke, General Counsel, CBOT and Joseph Gromacki, CBOT outside counsel (July 6, 2000).

11 As a result of the merger, CBOT would become a Delaware non-stock, not-for-profit corporation, with a new charter, bylaws, rules and regulations. This merger would be effected under an agreement and plan of merger between CBOT and Delaware NFP CBOT.

12 See CBOT Ballot Disclosure, supra note 2 at 10. CBOT has also stated its intention that the Board of Directors of Delaware NFP CBOT, after the completion of Step One, would form a for-profit electronic trading company that would be a wholly-owned subsidiary of Delaware NFP CBOT. See id. at 2. The formation of the electronic trading company would not be submitted for membership approval. See id. CBOT is expected to allow its electronic trading subsidiary to trade every product it currently offers. The CBOT contracts, whether traded on CBOT�s trading floor or through its electronic trading subsidiary, would be fully fungible and would all be cleared by the Board of Trade Clearing Corporation (�BOTCC�). See Letter from Carol A. Burke, Executive Vice President and General Counsel, CBOT, to Thomas J. Erickson, Commissioner 7 (June 5, 2000). The proposed creation and development of the electronic trading company is not a part of Step One of CBOT�s subject proposed restructuring plan and therefore this memo does not consider, endorse or comment upon any plan CBOT has for the electronic trading company.

13 Division staff conversation with Carol A. Burke, General Counsel, CBOT (August 2, 2000). MidAmerica, as a subsidiary of CBOT, is a separate entity whose parent would change from CBOT to Delaware NFP CBOT as a result of Step One of the restructuring plan. In the past when ownership of a separately designated contract market has been transferred to a new entity without changes to the designated contract market itself, the Commission has not transferred contract market designations. See Division, New York Mercantile Exchange Proposed Demutualization Plan Memorandum 6 (July 26, 2000) (�NYMEX Memo�). No changes to MidAmerica rules or governance related to Step One of the restructuring plan are currently before the Commission.

14 Currently, CBOT membership interests include full memberships, associate memberships, Government Instruments Markets (�GIM�) memberships, Debt and Energy Market (�IDEM�) memberships and Commodity Options Market (�COM�) memberships. A full membership is defined by CBOT Rule 210.00 (Full member CBOE exercise privilege) and an associate membership is defined by CBOT Rule 211.00 (Associate Membership). See also infra notes 24 and 27 (comparing the voting and liquidation rights of current CBOT membership categories).

15 See CBOT Ballot Disclosure supra note 2 at 10. See infra Section II.B.1.

16 See Delaware NFP CBOT Certificate of Incorporation, Article Fifth.

17 See CBOT Ballot Disclosure, supra note 2 at 10. See also Delaware NFP CBOT Certificate of Incorporation, Article Fifth.

18 See Delaware NFP CBOT Certificate of Incorporation, Article Fourth.

19 See CBOT Ballot Disclosure, supra note 2 at 12.

20 See Delaware NFP CBOT Certificate of Incorporation, Article Fifth.

21 See CBOT Ballot Disclosure, supra note 2 at 13.

22 See Delaware NFP CBOT Certificate of Incorporation, Article Ninth. See also CBOT Rule 210.00 (Full Member CBOE Exercise Privilege). CBOE has questioned whether the restructuring plan would invalidate current CBOT members� CBOE exercise right. CBOT does not believe that Step One of the restructuring plan as proposed would have any impact on the CBOE exercise right. See also CBOT Ballot Disclosure, supra note 2 at 4. This memo does not consider, endorse or comment upon this question.

23 See CBOT Rules 105.00 (Voting by Mail), 107.00 (Amendment of Rules) and 109.00 (Other Propositions for Vote by Members).

24 Therefore, as is currently the case, full CBOT members would be entitled to one vote on each matter eligible to be voted on by the members of Delaware NFP CBOT, associate CBOT members would be entitled to one-sixth of one vote on each matter eligible to be voted on by the members and the holders of the Government Instruments Markets (�GIM�), Index, Debt and Energy Market (�IDEM�) and Commodity Options Market (�COM�) membership interest would not be entitled to vote on matters eligible to be voted on by Delaware NFP CBOT members. See Exhibit A, Section 8 of the Delaware NFP CBOT Certificate of Incorporation.

25 See CBOT Rules 249.01 - 251.00.

26 See CBOT Ballot Disclosure, supra note 2 at 19.

27 Associate members would be entitled to share in 1/6 of a full members share of the proceeds from dissolution, holders of GIM, COM and IDEM membership interest would be entitled to 0.11, 0.005 and 0.005 of a full members share, respectively. See id.

28 All CBOT directors and officers as of the effective time of the completion of Step One would remain the directors and officers of Delaware NFP CBOT, and their terms and tenures would continue and be unaffected by Step One. See id at 20.

29 The Delaware NFP CBOT Board would have 27 members consisting of: (a) the Chairman of the Board (who only votes in case of a tie vote), the First Vice Chairman and the Second Vice Chairman; (b) the President of the Association (who serves as a non-voting member of the Board); (c) 15 full member directors of whom at least three shall be nonresident; (d) five non-member directors; and (e) three associate member directors. See Delaware NFP CBOT Certificate of Incorporation, Article Sixth. This composition would be identical to the Board of CBOT. See also CBOT Ballot Disclosure, supra note 2 at 20.

30 See Letter from Carol A. Burke, supra note 12 at 5. In its submission, CBOT points out that it would discuss any such modifications with appropriate CFTC staff. See id. Any staff reorganization could also necessitate rule changes that would be submitted to the Commission for prior review pursuant to Section 5a(a)(12)(A) of the Act and Commission Regulation 1.41.

31 See Delaware NFP CBOT Certificate of Incorporation, Article Sixth. See also Exhibit B, Section 5 of the Delaware NFP CBOT Certificate of Incorporation.

32 See Letter from Paul J. Draths, supra note 7 at 2, 3.

33 See id.

34 See Letter from Carol A. Burke, supra note 12 at 2.

35 See CBOT Rule 102.00 (Nominations for Elective Officers and Annual Election).

36 See Letter from Carol A. Burke, supra note 12 at 2, 3. See also Delaware NFP CBOT Certificate of Incorporation, Article Sixth. See also CBOT Rule 120.00 (Officers and Directors).

37 See Delaware NFP CBOT Certificate of Incorporation, Article Fourth.

38 See id. at 3.

39 There would be one rulebook applicable to Delaware NFP CBOT and the electronic trading company. See Letter from Carol A. Burke, supra note 12 at 1.

40 See id. at 2. Most of the rules that would be deleted from the CBOT Rulebook would be incorporated into either the Delaware NFP CBOT Bylaws or Certificate of Incorporation. Certain rules, however, would be deleted. CBOT represents that the rules to be deleted are procedural and administrative in nature and are not material to the rights and obligations of CBOT members and membership interest holders. See CBOT Ballot Disclosure, supra note 2 at 21. See CBOT Rules 125.02 (Telephone Poll), 125.03 (Recommendations of the Advisory Board of J.V. Management Inc.) and 130.00 (Rules of Order). These are the only rules that would be deleted rather than moved to the Delaware NFP CBOT Bylaws or Certificate of Incorporation.

41 See generally Division, Chicago Mercantile Exchange Proposed Demutualization Plan Memorandum 5 (June 15, 2000) (�CME Memo�).

42 See Letter from Paul J. Draths, supra note 4 at 4.

43 See Letter from Paul J. Draths, Vice President and Secretary, CBOT, to Jean A. Webb, Secretary to the Commission 4,8 (July 20, 2000). CBOT represents that Delaware NFP CBOT will have a strong business incentive to preserve its reputation as a well-regulated exchange and to maintain the highest level of market integrity at all times. See Letter from Paul J. Draths, supra note 4 at 4.

44 See Letter from Paul J. Draths, supra note 42 at 3,7.

45 See id.

46 The Act and Commission regulations impose self-regulatory responsibilities on designated contract markets. See CME Memo at 22-24.

47 See attachment to Appendix B (listing all contracts in which CBOT is currently designated).

48 The Division bases its recommendation upon the representations of CBOT and Delaware NFP CBOT that: (1) Delaware NFP CBOT would take over responsibility for maintaining the certification conditions; (2) Delaware NFP CBOT would be the legal successor-in-interest to CBOT; (3) none of the rule changes would affect the rights and obligations of any participants with open positions; and (4) the rule changes do not relate to how such contracts are cleared.