CBOE chief says exchange is months, not years, from demutualization

Discussion in 'Wall St. News' started by archon, Sep 7, 2007.

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    CBOE chief says exchange is months, not years, from demutualization
    By Ragnhild Kjetland
    Last Update: 5:25 AM ET Sep 6, 2007

    MONTREUX, Switzerland (MarketWatch) -- The Chicago Board Options Exchange is months, not years, away from demutualization, Chief Executive William Brodsky said Thursday.
    Speaking at the Swiss Futures and Options Association's annual conference in Montreux, Brodsky said that whatever the outcome of its dispute with the CME Group Inc. (CME:
    cme group inc com CME557.03, -6.61, -1.2%) over the Chicago Board of Trade's exercise rights at the CBOE, "we will be in a position to be demutualized."

    "We are now talking months and not years, and we feel very comfortable with our legal position," Brodsky said.
    CBOE claims that CBOT's exercise rights, stemming from the CBOE's creation in 1973, and which give CBOT members the right to trade at the options exchange, are void in light of the CME's acquisition of CBOT.
    CME maintains that the exercise rights of eligible CBOT members entitle them to a share of the equity to be distributed in CBOE's de-mutualization, which many expect will eventually lead to an initial public offering.
    When CBOT agreed to be bought by CME, Brodsky said, the CBOE explored the matter with its lawyers and declared in a filing with the U.S. Securities and Exchange Commission that if CBOT no longer exists, it cannot have exercise rights.

    CME meanwhile has sued CBOE in a Delaware court, which in turn has said it will defer to the SEC.

    "The SEC is actively working on our filing," Brodsky said, and noted that while he can't speak for the commission "we feel very comfortable with our legal position."
    In the meantime, the CME has bought 159 exercise rights from CBOT members for $250,000 each, or a total $39.75 million.
    Brodsky said the price CME paid "was coincidentally the same kind of number" that CBOE had offered to pay exercise rights holders if the InterContinentalExchange Inc. had succeeded in buying the CBOT.
    Another important development in the dispute is that CBOT traders on CBOE's floor as of Monday are no longer exercise rights holders but are now licensees of CBOE, Brodsky said.
    Brodsky declined to give a date for a possible IPO.

    CBOE currently offers options on individual equities and on exchange-traded funds, among other products. Brodsky said that for the company's transformation into a for-profit company eligible for listing, its most important business is licensed products, such as options on the S&P 500 and the Dow Jones Industrial Average, as well as for proprietary products such as the Volatility Index.
    Brodsky announced Thursday the Sept. 27, launch of options on the CBOE NASDAQ-100 Volatility Index, and on the CBOE Russel Volatility Index.
    The two options join the CBOE Volatility Index, or VIX options, which since being launched in February, have traded nearly 20 million contracts, making "VIX options the most successful new product launch in the CBOE history," Brodsky said.
    He wouldn't say what expectations the company had for volume development in the new product, but he said its success can't be defined by volume alone.
    CBOE is licensing the methodology of the volatility index to Deutsche Boerse AG's (DB1.XE) Eurex unit and to Euronext Liffe.
    Brodsky also pointed out that the daily volume of the VIX future is still only around 5,000 a day, but that when it has its monthly settlement of the VIX future, the volume on that day in S&P 500 options explodes.
    On the VIX settlement day, the exchange sees around 300,000 S&P contracts traded at the opening print. This compares with the average 500,000 daily trading volume of the S&P 500 option.
    "We never would have understood ourselves when we invested the VIX future, how much growth we would see in our single biggest product, the S&P 500 option," Brodsky said.
    In a separate statement Thursday, the CBOE said it has signed a memorandum of understanding with the Taiwan Futures Exchange, or Taifex, to share information in the potential development of options and other derivatives products.
    "As world exchanges are seeking strategic alliances in facing increasingly furious global competition and challenges, Taifex and CBOE shall work hand-in-hand in keeping abreast with the trend," Brodsky said.
    This MoU, he said, will help the two exchanges become more global. The agreement can lay the groundwork for future business relationships, including joint marketing efforts and potential product offerings, the company said.
    Company Web site: http://www.cboe.com
    -Contact: 201-938-5400 End of Story