[Federal Register: September 4, 2008 (Volume 73, Number 172)]
[Notices]
[Page 51652-51668]
[DOCID:fr04se08-67]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58425; File No. SR-CBOE-2008-88]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of a Proposed Rule Change Relating to
the Demutualization of Chicago Board Options Exchange, Incorporated

August 26, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\
notice is hereby given that on August 21, 2008, the Chicago Board
Options Exchange, Incorporated (``CBOE'' or ``Exchange'') filed with
the Securities and Exchange Commission (the ``Commission'' or ``SEC'')
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by CBOE. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    CBOE is filing this proposed rule change in connection with its
plan to restructure from a Delaware non-stock corporation to a Delaware
stock corporation that will be a wholly owned subsidiary of CBOE
Holdings, Inc. (``CBOE Holdings''), a holding company organized as a
Delaware stock corporation. As part of this Restructuring Transaction,
a Certificate of Incorporation and Bylaws will be adopted for CBOE
Holdings.\3\ In addition, the Exchange's Certificate of Incorporation
and Constitution will be replaced with a new Certificate of
Incorporation and Bylaws as a result of the Restructuring Transaction.
Finally, the Exchange's Rules will be amended to address, among other
things, trading access to the Exchange after the Restructuring
Transaction.\4\
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    \3\ The term ``Restructuring Transaction'' is defined in
proposed CBOE Rule 1.1(hhh) as ``the restructuring of the Exchange
from a non-stock corporation to a stock corporation and wholly owned
subsidiary of CBOE Holdings, Inc.''
    \4\ The substance of the proposed rule change and its filing
under Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)),
and Rule 19b-4 thereunder (CFR 240.19b-4), have been approved by the
Board of Directors of the Exchange. The Exchange must obtain, but
has not yet obtained, formal approval from the Board of Directors of
the Exchange, as well as approval from the membership, for the
changes set forth in this proposed rule change. Once it has obtained
those approvals, the Exchange plans to file a technical amendment to
this proposed rule change to reflect those approvals. Once those
approvals are obtained, no further action by the Exchange in
connection with this proposed rule change will be required.
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    The text of the proposed Certificate of Incorporation of CBOE
Holdings, the proposed Bylaws of CBOE Holdings, the proposed
Certificate of Incorporation of the Exchange, the proposed Bylaws of
the Exchange, the proposed amendments to the Rules of the Exchange, the
proposed Voting Agreement between CBOE Holdings and the Exchange, and
the proposed deletion of the Constitution of the Exchange is available
on CBOE's Web site (http://www.cboe.org/Legal), at CBOE's Office of the
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, CBOE included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. CBOE has prepared summaries, set forth in Sections A, B,
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

Purpose
(1) The Restructuring Transaction
    CBOE is filing this proposed rule change in connection with its
plan to restructure from a Delaware non-stock corporation owned by its
members to a

Delaware stock corporation that will be a wholly owned subsidiary of
CBOE Holdings, a holding company organized as a Delaware stock
corporation. After the Restructuring Transaction, the owners of
membership interests will become stockholders of CBOE Holdings through
the conversion of their memberships into shares of common stock of CBOE
Holdings. CBOE Holdings will hold all of the outstanding common stock
of CBOE. CBOE will continue to function as a self-regulatory
organization (``SRO'') and to operate its exchange business and
facilities.
    The Restructuring Transaction will be completed through the
following steps:
     The creation of CBOE Holdings as a first-tier, Delaware
stock, for-profit subsidiary corporation of CBOE; and the creation of
CBOE Merger Sub, Incorporated as a second-tier, Delaware stock, for-
profit subsidiary corporation of CBOE (CBOE Merger Sub will be a first-
tier subsidiary of CBOE Holdings).\5\
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    \5\ CBOE Holdings and CBOE Merger Sub have already been created.
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     Pursuant to the Agreement and Plan of Merger to be entered
into in the future, CBOE Merger Sub, Incorporated will merge with and
into CBOE, with CBOE surviving the merger as a Delaware stock, for-
profit corporation, which is referred to as the ``Merger.''
     Upon the effectiveness of the Merger, the outstanding
stock of CBOE Merger Sub, Incorporated will be converted into common
stock of CBOE, the memberships in CBOE existing on the date of the
Restructuring Transaction will be converted into Class A common stock
of CBOE Holdings (described below) and the CBOE Holdings common stock
held by CBOE will be cancelled. As a result, CBOE Holdings will become
the sole stockholder of CBOE and will be entitled to the exclusive
right to receive all dividends and distributions, including proceeds
upon liquidation, from CBOE and all associated voting rights.
     Immediately following the Merger, CBOE will dividend up to
CBOE Holdings all of the shares or interests CBOE owns in its
subsidiaries (CBOE Futures Exchange, LLC, Chicago Options Exchange
Building Corporation, CBOE, LLC, CBOE II, LLC, DerivaTech Corporation,
Market Data Express, LLC and The Options Exchange, Incorporated) other
than CBOE Stock Exchange, LLC, making them first-tier, wholly-owned
subsidiaries of CBOE Holdings.\6\ CBOE Stock Exchange, LLC (``CBSX'')
will remain a facility of CBOE in which CBOE holds a 50% interest.\7\
CBSX is an equity trading facility of CBOE.
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    \6\ These entities engage in the following activities: CBOE
Futures Exchange, LLC operates an electronic futures exchange;
Chicago Options Exchange Building Corporation owns the building in
which CBOE operates; CBOE, LLC holds a 24.01% interest in
OneChicago, LLC, a security futures exchange; CBOE II, LLC recently
sold its interest in HedgeStreet, Inc., a derivatives market
regulated by the Commodity Futures Trading Commission; DerivaTech
Corporation owns certain educational software; Market Data Express,
LLC distributes various types of market data; and The Options
Exchange, Incorporated currently has no assets or activities. CBOE
is in the process of establishing CBOE Execution Services, LLC as a
broker-dealer. CBOE Execution Services, LLC will perform various
functions in that capacity and will be a first-tier, wholly-owned
subsidiary of CBOE Holdings immediately following the Merger.
    \7\ The remaining 50% interest in CBSX currently is owned by
five registered broker-dealers.
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    As part of the Restructuring Transaction, each membership in CBOE
existing on the date of the Restructuring Transaction will be converted
into a certain number of shares of Class A common stock of CBOE
Holdings, divided by thirds into shares of Series A-1 common stock,
Series A-2 common stock and Series A-3 common stock.\8\ As a result,
the owners of CBOE memberships outstanding immediately prior to the
Restructuring Transaction will own shares of Class A common stock of
CBOE Holdings immediately following the Restructuring Transaction.
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    \8\ As of the effective time of the Restructuring Transaction,
CBOE Holdings will be authorized to issue (i) a certain number of
shares of unrestricted common stock, $0.01 par value per share, (ii)
a certain number of shares of Class A common stock, $0.01 par value
per share, initially divided into three series of restricted Class A
common stock, designated Series A-1, A-2 and A-3, (iii) a certain
number of shares of Class B non-voting common stock, $0.01 par value
per share, initially divided into three series of Class B non-voting
common stock, designated Series B-1, B-2 and B-3, and (iv) up to
20,000,000 shares of preferred stock, $0.01 par value per share. The
unrestricted common stock and the Class A common stock will have the
same rights and privileges, except the Class A common stock will be
subject to certain transfer restrictions. The unrestricted common
stock will be freely transferable. The three series of Class A
common stock will be identical, except that the transfer
restrictions associated with each series will be of a different
duration. The three series of Class B non-voting common stock will
be identical, and will have no voting privileges or rights except in
certain limited circumstances. The three series of Class B non-
voting common stock will convert into Class A common stock upon the
public offering of CBOE Holdings Common Stock (defined for purposes
of this rule filing as the unrestricted common stock, the Class A
common stock and the Class B non-voting common stock). The Class B
non-voting common stock will be issued as part of a settlement of
certain litigation, which is discussed below. CBOE Holdings will
have the ability to issue preferred stock and unrestricted common
stock, including in connection with a public offering of shares of
stock to investors who were not members of CBOE prior to the
Restructuring Transaction and are not holders of Trading Permits in
CBOE following the Restructuring Transaction. CBOE Holdings has no
current intention to issue any shares of its preferred stock.
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    The Class A common stock of CBOE Holdings will represent an equity
ownership interest in CBOE Holdings and will have traditional features
of common stock, including equal per share dividend, voting and
liquidation rights. This stock, however, will not provide its holders
with physical or electronic access to CBOE and its trading facilities.
Following the Restructuring Transaction, physical and electronic access
to CBOE and its trading facilities will be available to individuals and
organizations that have obtained a Trading Permit from CBOE. Trading
Permits are described in more detail below.
    (2) Reasons for the Restructuring Transaction
    CBOE believes that changing its focus to that of a for-profit
business, along with modifying its corporate and governance structures
to be more like those of other for-profit businesses, will provide CBOE
with greater flexibility to respond to the demands of a rapidly
changing business environment. In addition, by being structured as a
stock, for-profit corporation, CBOE will be able to pursue strategic
opportunities to engage in business combinations and joint ventures
with other organizations and to access capital markets in ways that are
not available to non-stock, membership corporations. CBOE believes that
the Restructuring Transaction will move it one step closer to achieving
its key objectives of providing its owners a more liquid investment and
creating a framework for a possible future public offering of CBOE
Holdings Common Stock.
    CBOE also believes, among other things, that the restructuring of
the Exchange will enable it to enhance its competitiveness with other
options exchanges while preserving its ability to provide trading
benefits and opportunities to persons with trading access to the
Exchange.
(3) Paragraph (b) of Article Fifth of the CBOE Certificate of
Incorporation and the Settlement of Litigation
    In connection with the Merger, the Exchange's Certificate of
Incorporation and Constitution will be replaced by a new Certificate of
Incorporation and Bylaws. While the content of the Exchange's new
Certificate of Incorporation and Bylaws will be similar to the content
of the Exchange's old Certificate of Incorporation and Constitution,
the new Certificate of Incorporation will not contain, among other
things, paragraph (b) of Article Fifth of the CBOE Certificate of

Incorporation (``Article Fifth(b)'').\9\ Article Fifth(b) provided the
right for full members of The Board of Trade of the City of Chicago,
Inc. (``CBOT'') to become members of CBOE without having to separately
purchase or lease a membership.\10\
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    \9\ As a result of this change, the Exchange is proposing to
delete CBOE Rule 3.16, which addresses certain issues related to
Article Fifth(b).
    \10\ On January 15, 2008, the Securities and Exchange Commission
(``SEC'' or ``Commission'') approved an interpretation of Article
Fifth(b) (``Article Fifth(b) Interpretation'') that addressed the
impact of the acquisition of CBOT by Chicago Mercantile Exchange
Holdings Inc. (``CME/CBOT Transaction'') on the eligibility of
persons to become or remain members of CBOE (``exerciser members'')
pursuant to Article Fifth(b) (the right provided under this
provision is sometimes referred to as the ``exercise right''). See
Securities Exchange Act Release No. 57159 (Jan. 15, 2008), 73 FR
3769 (Jan. 22, 2008) (order approving File No. SR-CBOE-2006-106).
Under the Article Fifth(b) Interpretation, the consummation of the
CME/CBOT Transaction resulted in no person any longer qualifying as
a member of the CBOT within the meaning of Article Fifth(b) and
therefore resulted in the elimination of any person's eligibility to
qualify thereafter to become or remain an exerciser member of the
Exchange.
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    Article Fifth(b) contains a provision that provides that no
amendment may be made to it without the prior approval of not less than
80% of (i) the regular members of the Exchange admitted pursuant to
Article Fifth(b) and (ii) the regular members of the Exchange admitted
other than pursuant to Article Fifth(b), each such category of members
voting as a separate class. CBOE has received a legal opinion from its
Delaware counsel that under Delaware law because the Restructuring
Transaction is structured as a merger, this provision of Article
Fifth(b) would not be triggered, and that the Merger and associated
amendments to the Exchange's Certificate of Incorporation and
Constitution could be effected through a simple majority vote of the
members.
    In addition, issues related to Article Fifth(b) are subject to
litigation in Delaware state court and the U.S. Court of Appeals for
the District of Columbia Circuit (``DC Circuit'').\11\ A settlement has
been reached with respect to this litigation that remains subject to
various approvals.\12\ As a result of the settlement, the trading
access of persons who are Temporary Members under Interpretation and
Policy .02 of CBOE Rule 3.19 will be preserved as further described
below. In addition, the class members in the litigation will receive
cash and Class B non-voting common stock that will convert into Class A
common stock upon the public offering of CBOE Holdings Common
Stock.\13\
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    \11\ In addition to the Delaware litigation, the Commission's
approval order of the Article Fifth(b) Interpretation has been
appealed to the DC Circuit.
    \12\ Among other things, the appeal of the Commission's approval
order of the Article Fifth(b) Interpretation to the DC Circuit would
be withdrawn as part of the settlement. CBOE will keep Commission
staff apprised regarding the status of the settlement and the legal
proceedings related to the settlement.
    \13\ In the event of such a public offering, the Class A common
stock will be subject to certain transfer restrictions as noted
above.
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(4) Request for Commission Approval Under Section 15.16 of the CBSX
Operating Agreement
    Under the CBSX Operating Agreement, CBOE is defined as one of the
``Owners'' of CBSX. Section 15.16 of the CBSX Operating Agreement
provides that in the event that a person acquires a 25% or greater
interest in an Owner that owns a 20% or greater interest in CBSX, that
person must execute an amendment to the Operating Agreement in which
that person agrees to be a party to the Operating Agreement and to
abide by all of the provisions of the Operating Agreement. Section
15.16 also provides that Commission approval under Section 19 of the
Exchange Act is required in connection with such an amendment to the
Operating Agreement.\14\ Because CBOE owns a 50% interest in CBSX, the
establishment of CBOE Holdings as the sole shareholder of CBOE would
trigger this Commission approval requirement. Consistent with this
requirement in Section 15.16 of the CBSX Operating Agreement, CBOE is
requesting as part of this proposed rule change that the Commission
provide such approval.
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    \14\ 15 U.S.C. 78s.
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(5) Summary of the Proposed Rule Change
    Following the Restructuring Transaction, the Exchange's new
Certificate of Incorporation and Bylaws will be similar to the current
Certificate of Incorporation and Constitution, except they will reflect
CBOE's new structure as a for-profit stock corporation wholly-owned by
CBOE Holdings. In this regard, they will be modified to, among other
things, streamline governance and incorporate provisions required by
the SEC in the case of for-profit exchanges. The Exchange also proposes
to adopt a Certificate of Incorporation and Bylaws for CBOE Holdings
that will address, among other things, the operation of the Exchange as
an SRO in this new structure.\15\ The Rules of the Exchange also will
be amended to reflect the use of Trading Permits to access the Exchange
and its trading facilities and to make certain conforming changes.\16\
These rule changes are discussed below.
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    \15\ While certain provisions of the Certificate of
Incorporation and Bylaws for CBOE Holdings are not related to the
operation of the Exchange, for so long as CBOE Holdings controls
CBOE, before any amendment, alteration or repeal of any provision of
the Certificate of Incorporation and Bylaws of CBOE Holdings becomes
effective, such amendment, alteration or repeal will be submitted to
the Board of Directors of CBOE, and if such amendment, alteration or
repeal must be filed with or filed with and approved by the
Commission, then such amendment, alteration or repeal will not
become effective until filed with or filed with and approved by the
Commission, as the case may be. See proposed Article Eleventh of the
CBOE Holdings Certificate of Incorporation and proposed Article 10.2
of the CBOE Holdings Bylaws.
    \16\ The Exchange is not proposing any significant change to its
existing operational and trading structure in connection with the
demutualization.
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(A) CBOE Holdings
    As mentioned above, CBOE Holdings will be the parent company and
sole shareholder of CBOE. The Certificate of Incorporation and the
Bylaws of CBOE Holdings will govern the activities of CBOE Holdings.
(i) CBOE Holdings Board of Directors
    After the Restructuring Transaction, the business and affairs of
CBOE Holdings will be managed by or under the direction of its Board of
Directors (``CBOE Holdings Board''). The CBOE Holdings Board will
consist of between 11 and 15 directors, and except with respect to the
initial CBOE Holdings Board, will be fixed by the CBOE Holdings Board
from time to time.\17\ After the Restructuring Transaction, the initial
CBOE Holdings Board will have 13 directors who will consist of the CBOE
Holdings' Chief Executive Officer and 12 other directors.\18\ That
initial CBOE Holdings Board will be selected by the Board of Directors
of the Exchange existing prior to the Restructuring Transaction
(``Prior CBOE Board'') or a committee thereof, and the composition
requirements for the CBOE Holdings Board will be satisfied in
connection with the selection of directors for that initial CBOE
Holdings Board. At all times no less than two-thirds of the directors
of CBOE Holdings will satisfy the independence requirements contained
in the listing standards of the New York Stock Exchange (``NYSE'') and
the independence requirements adopted by the CBOE Holdings Board, as
may be modified and amended from time to time.\19\
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    \17\ See proposed Article Seventh(b) of the CBOE Holdings
Certificate of Incorporation and proposed Article 3.2 of the CBOE
Holdings Bylaws.
    \18\ See proposed Article 3.2 of the CBOE Holdings Bylaws.
    \19\ See proposed Article 3.3 of the CBOE Holdings Bylaws. At
the time this rule filing was submitted to the Commission, the
requirements to qualify as an ``independent director'' under the
NYSE's listing standards were found in Sections 303A.01 and 303A.02
of the NYSE's Listed Company Manual.

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    The CBOE Holdings Board will appoint one of the directors on the
CBOE Holdings Board to serve as Chairman of the CBOE Holdings
Board.\20\ The CBOE Holdings Bylaws do not restrict the Chief Executive
Officer of CBOE Holdings from serving in this role.\21\ The CBOE
Holdings Board also may appoint an independent director to serve as
Lead Director, who will perform such duties and possess such powers as
the CBOE Holdings Board may from time to time prescribe.\22\ The CBOE
Holdings Board will be a classified board with staggered terms of
office, consisting of two classes of directors, each of which will
serve for two-year terms.\23\ There is no limit on the number of terms
a director may serve on the CBOE Holdings Board.
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    \20\ See proposed Article 3.6 of the CBOE Holdings Bylaws.
    \21\ See proposed Article 5.1 of the CBOE Holdings Bylaws.
    \22\ See proposed Article 3.7 of the CBOE Holdings Bylaws.
    \23\ See proposed Article 3.2 of the CBOE Holdings Bylaws. With
regard to the initial CBOE Holdings Board, the initial term of the
Class I directors will end with the first annual stockholders
meeting to be held by CBOE Holdings following the Restructuring
Transaction, and the initial term of the Class II directors will end
with the second annual stockholders meeting following the
Restructuring Transaction. The CBOE Holdings Board is authorized to
assign members of the CBOE Holdings Board already in office to such
classes at the time the classification becomes effective.
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    Except with respect to the initial CBOE Holdings Board, the CBOE
Holdings Board or a committee thereof each year will nominate
candidates for the class of directors standing for election at the CBOE
Holdings annual meeting of shareholders.\24\ In this regard, the
Nominating and Governance Committee, which is described below, will
nominate candidates for the CBOE Holdings Board. Each holder of CBOE
Holdings voting stock will be entitled to one vote for each share of
voting stock he or she holds, except as otherwise provided by the
General Corporation Law of the State of Delaware (``DGCL'') or the
Certificate of Incorporation or Bylaws of CBOE Holdings.\25\ At each
annual meeting of the shareholders of CBOE Holdings at which a quorum
is present, the individuals receiving a plurality of the votes cast
will be elected directors of CBOE Holdings.\26\
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    \24\ See proposed Article 2.11 of the CBOE Holdings Bylaws.
Subject to certain conditions, stockholders also have the right
under this provision to nominate persons for the CBOE Holdings
Board.
    \25\ See proposed Article 2.8 of the CBOE Holdings Bylaws.
    \26\ See proposed Article 2.10 of the CBOE Holdings Bylaws.
Except as otherwise provided by law or the Certificate of
Incorporation or Bylaws of CBOE Holdings, the holders of a majority
in voting power of the shares of the capital stock of CBOE Holdings
issued and outstanding and entitled to vote at the meeting (after
taking into account the effect of any reduction of the number of
shares entitled to vote as a result of the voting limitations
imposed by Article Sixth of the Certificate of Incorporation of CBOE
Holdings, if any), present in person or represented by proxy, will
constitute a quorum for the transaction of business. See proposed
Article 2.6 of the CBOE Holdings Bylaws. The voting limitations in
Article Sixth are discussed below.
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(ii) Committees of CBOE Holdings
    CBOE Holdings will have an Executive Committee, an Audit Committee,
a Compensation Committee, a Nominating and Governance Committee, as
well as such other committees that the CBOE Holdings Board
establishes.\27\ The Nominating and Governance Committee will consist
of at least seven directors, all of whom will be Independent Directors
and be recommended by the Nominating and Governance Committee for
approval by the CBOE Holdings Board.\28\ The initial Nominating and
Governance Committee after the Restructuring Transaction will be
selected by the Prior CBOE Board or a committee thereof, and the
composition requirements for the Nominating and Governance Committee
will be satisfied in connection with the selection of members of the
initial Nominating and Governance Committee. Members of the Executive,
Audit, and Compensation Committees of CBOE Holdings will be recommended
by the Nominating and Governance Committee for approval by the CBOE
Holdings Board.\29\
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    \27\ See proposed Article 4.1 of the CBOE Holdings Bylaws. The
CBOE Holdings Board will designate the members of these other
committees and may designate a Chairman and a Vice-Chairman thereof.
    \28\ See proposed Article 4.5 of the CBOE Holdings Bylaws.
    \29\ See proposed Articles 4.2, 4.3 and 4.4 of the CBOE Holdings
Bylaws.
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    The Executive Committee will have and may exercise all the powers
and authority of the CBOE Holdings Board in the management of the
business and affairs of CBOE Holdings, except it will not have the
power or authority of the CBOE Holdings Board in reference to, among
other things, amending the CBOE Holdings Certificate of Incorporation,
adopting an agreement of merger or consolidation, approving the sale,
lease or exchange of all or substantially all of the CBOE Holdings'
property and assets, or approving the dissolution of CBOE Holdings or a
revocation of a dissolution.\30\ The Audit, Compensation, and
Nominating and Governance Committees will have such duties and may
exercise such authority as may be prescribed by the CBOE Holdings Board
and their respective Charters as adopted by resolution of the CBOE
Holdings Board.\31\
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    \30\ See proposed Article 4.2 of the CBOE Holdings Bylaws.
    \31\ See proposed Articles 4.3, 4.4 and 4.5 of the CBOE Holdings
Bylaws.
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(iii) Officers of CBOE Holdings
    The officers of CBOE Holdings will be the Chief Executive Officer,
a Chief Financial Officer, a President, one or more Vice-Presidents
(the number thereof to be determined by the CBOE Holdings Board), a
Secretary, a Treasurer, and such other officers as the CBOE Holdings
Board may determine, including an Assistant Secretary or Assistant
Treasurer.\32\ The CBOE Holdings Board by an affirmative vote of the
majority of the board will appoint the Chief Executive Officer of CBOE
Holdings, who will have general charge and supervision of the business
of the CBOE Holdings.\33\ In general, the other officers of CBOE
Holdings will have the duties or powers or both set out in the CBOE
Holdings Bylaws, as well as such other duties or powers or both as the
CBOE Holdings Board or the Chief Executive Officer may from time to
time prescribe.\34\
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    \32\ See proposed Article 5.1 of the CBOE Holdings Bylaws. A
``Trading Permit Holder'' is defined in Section 1.1(f) of the Bylaws
of the Exchange as: ``any individual, corporation, partnership,
limited liability company or other entity authorized by the Rules
that holds a Trading Permit. If a Trading Permit Holder is an
individual, the Trading Permit Holder may also be referred to an
`individual Trading Permit Holder.' If a Trading Permit Holder is
not an individual, the Trading Permit Holder may also be referred to
as a `TPH organization.' A Trading Permit Holder is a `member'
solely for purposes of the Act; however, one's status as a Trading
Permit Holder does not confer on that Person any ownership interest
in the Exchange.''
    \33\ See proposed Articles 5.1 and 5.2 of the CBOE Holdings
Bylaws.
    \34\ See proposed Articles 5.3, 5.4, 5.5, 5.6 and 5.7 of the
CBOE Holdings Bylaws.
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(iv) Shareholder Restrictions
    In addition to the restrictions on the ability of certain CBOE
Holdings stockholders to transfer their shares prior to and after an
initial public offering if such an offering were to occur, the
Certificate of Incorporation of CBOE Holdings places certain ownership
and voting limits on the holders of CBOE Holdings stock and their
Related Persons.\35\ These restrictions are intended to address the
possibility that a person holding a controlling interest in an SRO
could use that interest to affect the SRO's regulatory responsibilities
under the

Exchange Act.\36\ In particular, these restrictions provide that:
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    \35\ The term ``Related Person'' is defined in proposed Article
Fifth(a)(ix) of the CBOE Holdings Certificate of Incorporation and
includes, among other things, persons associated with a Trading
Permit Holder.
    \36\ In 2004, the Commission proposed rules that were designed
to address conflicts of interest relating to for-profit SROs. See,
e.g., Securities Exchange Act Release No. 50699 (Nov. 18, 2004), 69
FR 71126 (Dec. 8, 2004).
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Ownership
     No person (either alone or together with its Related
Persons) may beneficially own shares of stock representing in the
aggregate more than 10% of the total outstanding shares of CBOE
Holdings stock; provided, that, in the event a public offering of
common stock is completed, the ownership percentage that a person is
permitted to beneficially own will increase from 10% to 20% of the
total outstanding shares of CBOE Holdings stock; \37\ and
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    \37\ See proposed Article Sixth(b) of the CBOE Holdings
Certificate of Incorporation.
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     In the event that a person, either alone or together with
its Related Persons, beneficially owns shares of stock representing
more than 10% of the outstanding shares of stock (or, in the event that
a public offering of common stock has been completed, 20% of the
outstanding shares of stock), such person and its Related Persons will
be obligated to sell promptly, and CBOE Holdings will be obligated to
redeem promptly, at a price equal to the par value of such shares of
stock and to the extent that funds are legally available for such
redemption, that number of shares of stock necessary so that such
person, together with its Related Persons, will beneficially own shares
of stock representing in the aggregate no more than 10% of the
outstanding shares of stock (or, in the event that a public offering of
common stock has been completed, 20% of the outstanding shares of
stock), after taking into account that such repurchased shares will
become treasury shares and will no longer be deemed to be
outstanding.\38\
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    \38\ See proposed Article Sixth(b) of the CBOE Holdings
Certificate of Incorporation. If and to the extent that shares of
CBOE Holdings stock beneficially owned by any person or its Related
Persons are held of record by any other person, this provision will
be enforced against such record owner by requiring the redemption of
shares of CBOE Holdings stock held by such record owner in a manner
that will accomplish the ownership limitation applicable to such
person and its Related Persons.
---------------------------------------------------------------------------

Voting
     No person (either alone or together with its Related
Persons) will be entitled to vote or cause the voting of shares of
stock beneficially owned by that person or those Related Persons to the
extent that those shares would represent in the aggregate more than 10%
of the total number of votes entitled to be cast on any matter, and no
person (either alone or together with its Related Persons) will be
entitled to vote more than 10% of the total number of votes entitled to
be cast on any matter by virtue of agreements entered into by that
person or those Related Persons with other persons not to vote shares
of outstanding stock; provided, that, in the event a public offering of
common stock is completed, the voting percentage that any person is
permitted to control, whether through beneficial ownership or other
agreement, will increase from 10% to 20% of the total number of votes
entitled to be cast on any matter; \39\ and
---------------------------------------------------------------------------

    \39\ See proposed Article Sixth(a) of the CBOE Holdings
Certificate of Incorporation. The voting limitation does not apply
to a solicitation of a revocable proxy by any CBOE Holdings
stockholder on behalf of CBOE Holdings or by directors or officers
of CBOE Holdings on behalf of CBOE Holdings or to a solicitation of
a revocable proxy by a stockholder in accordance with Regulation 14A
under the Exchange Act. 17 CFR 240.14A. This exception, however,
would not apply to a solicitation by a stockholder pursuant to Rule
14a-2(b)(2) under the Exchange Act, which permits a solicitation
made otherwise than on behalf of CBOE Holdings where the total
number of persons solicited is not more than 10.
---------------------------------------------------------------------------

     In the event that a person, either alone or together with
its Related Persons, is entitled to vote or cause the voting of shares
representing in the aggregate more than 10% (or, in the event that a
public offering of common stock has been completed, 20%) of the total
number of votes entitled to be cast on any matter (including if it and
its Related Persons possess this voting power by virtue of agreements
entered into with other persons not to vote shares of stock), then such
person, either alone or together with its Related Persons, will not be
entitled to vote or cause the voting of these shares of stock to the
extent that such shares represent in the aggregate more than 10% (or,
in the event that a public offering of common stock has been completed,
20%) of the total number of votes entitled to be cast on any matter,
and any such votes purported to be cast in excess of this percentage
will be disregarded.\40\
---------------------------------------------------------------------------

    \40\ See proposed Article Sixth(a) of the CBOE Holdings
Certificate of Incorporation. If and to the extent that shares of
CBOE Holdings stock beneficially owned by any person or its Related
Persons are held of record by any other person, this provision will
be enforced against such record owner by limiting the votes entitled
to be cast by such record owner in a manner that will accomplish the
voting limitation applicable to such person and its Related Persons.
---------------------------------------------------------------------------

    The CBOE Holdings Board of Directors may waive the provisions
regarding ownership and voting limits by a resolution expressly
permitting ownership or voting rights in excess of such limits (which
resolution must be filed with and approved by the SEC prior to being
effective), subject to a determination of the Board that: \41\
---------------------------------------------------------------------------

    \41\ See proposed Articles Sixth(a) and (b) of the CBOE Holdings
Certificate of Incorporation.
---------------------------------------------------------------------------

     The acquisition of beneficial ownership in excess of the
ownership limits or the exercise of voting rights in excess of the
voting limits will not impair the ability of CBOE to discharge its
responsibilities under the Exchange Act and the rules and regulations
under the Exchange Act and is otherwise in the best interests of CBOE
Holdings and its stockholders and CBOE;
     The acquisition of beneficial ownership in excess of the
ownership limits or the exercise of voting rights in excess of the
voting limits will not impair the SEC's ability to enforce the Exchange
Act;
     Neither the person obtaining the waiver nor any of its
Related Persons is subject to any statutory disqualification (as
defined in Section 3(a)(39) of the Exchange Act) if such person is
seeking to obtain a waiver above the applicable ownership or voting
percentage level; \42\ and
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78c(a)(39).
---------------------------------------------------------------------------

     For so long as CBOE Holdings directly or indirectly
controls CBOE, neither the person obtaining the waiver nor any of its
Related Persons is a Trading Permit Holder if such person is seeking to
obtain a waiver above the applicable ownership or voting percentage
level.
    In making these determinations, the CBOE Holdings Board may impose
conditions and restrictions on the relevant stockholder and its Related
Persons that it deems necessary, appropriate or desirable in
furtherance of the objectives of the Exchange Act and the governance of
CBOE Holdings.\43\
---------------------------------------------------------------------------

    \43\ See proposed Articles Sixth(a) and (b) of the CBOE Holdings
Certificate of Incorporation.
---------------------------------------------------------------------------

    The CBOE Holdings Certificate of Incorporation also provides that
the CBOE Holdings Board has the right to require any person and its
Related Persons that the Board reasonably believes (i) to be subject to
the voting or ownership restrictions summarized above, (ii) to
beneficially own shares of CBOE Holdings stock entitled to vote on any
matter in excess of the ownership restrictions discussed above, or
(iii) to beneficially own an aggregate of 5% or more of the then
outstanding shares of CBOE Holdings stock entitled to vote on any
matter, which ownership has not been reported to CBOE Holdings, to
provide to CBOE Holdings complete information as to all shares of the
stock that such stockholder beneficially owns,

as well as any other information relating to the applicability to such
stockholder of the voting and ownership requirements outlined above as
may reasonably be requested.\44\
---------------------------------------------------------------------------

    \44\ See proposed Article Sixth(d) of the CBOE Holdings
Certificate of Incorporation.
---------------------------------------------------------------------------

    CBOE has received a legal opinion that the foregoing ownership and
voting rights limitations, as well as the provisions providing for the
redemption of shares held by a person (either alone or together with
its Related Persons) in excess of the ownership limitation, are valid
under Delaware law.
(v) Self-Regulatory Function and Oversight
    The CBOE Holdings Certificate of Incorporation contains various
provisions designed to protect the independence of the self-regulatory
function of CBOE and to make clear the Commission's and CBOE's
jurisdiction with respect to CBOE Holdings. For example, pursuant to
the CBOE Holdings Certificate of Incorporation, for so long as CBOE
Holdings controls CBOE, each officer, director and employee of CBOE
Holdings must give due regard to the preservation of the independence
of the self-regulatory function of CBOE and to its obligations under
the Exchange Act.\45\ In addition, these persons are specifically
prohibited from taking any actions that they reasonably should have
known would interfere with the effectuation of any decisions by the
Board of Directors of CBOE (``CBOE Board'') relating to CBOE's
regulatory functions, including disciplinary matters, or would
adversely affect CBOE's ability to carry out its responsibilities under
the Exchange Act.\46\
---------------------------------------------------------------------------

    \45\ See proposed Article Sixteenth(c) of the CBOE Holdings
Certificate of Incorporation.
    \46\ Id.
---------------------------------------------------------------------------

    The CBOE Holdings Certificate of Incorporation also contains a
specific requirement that to the fullest extent permitted by applicable
law, all confidential information pertaining to the self-regulatory
function of CBOE (including but not limited to disciplinary matters,
trading data, trading practices and audit information) contained in the
books and records of CBOE that comes into the possession of CBOE
Holdings will: (1) Not be made available to any persons other than to
those officers, directors, employees and agents of CBOE Holdings that
have a reasonable need to know the contents thereof; (2) be retained in
confidence by CBOE Holdings and the officers, directors, employees and
agents of CBOE Holdings; and (3) not be used for any commercial
purposes.\47\ The CBOE Holdings Certificate of Incorporation also
provides that for so long as CBOE Holdings controls CBOE, the books,
records, premises, officers, directors and employees of CBOE Holdings
will be deemed to be the books, records, premises, officers, directors
and employees of CBOE for purposes of and subject to oversight pursuant
to the Act, but only to the extent that such books, records, premises,
officers, directors and employees of CBOE Holdings relate to the
exchange business of CBOE.\48\
---------------------------------------------------------------------------

    \47\ Notwithstanding this restriction, nothing in the CBOE
Holdings Certificate of Incorporation will be interpreted so as to
limit or impede the rights of the SEC or CBOE to access and examine
such confidential information pursuant to the federal securities
laws and the rules and regulations thereunder, or to limit or impede
the ability of any officers, directors, employees or agents of CBOE
Holdings to disclose such confidential information to the SEC or
CBOE. See proposed Article Fifteenth of the CBOE Holdings
Certificate of Incorporation.
    \48\ The books and records related to the exchange business of
CBOE will be subject at all times to inspection and copying by the
SEC and CBOE. Id. In addition, the CBOE Holdings Bylaws provide that
the books of CBOE Holdings must be kept within the United States.
See proposed Section 1.3 of the CBOE Holdings Bylaws.
---------------------------------------------------------------------------

    Further, the CBOE Holdings Certificate of Incorporation provides
that CBOE Holdings will take reasonable steps necessary to cause its
directors, officers and employees, prior to accepting such a position
with CBOE Holdings, to consent in writing to the applicability to them
of Article Fourteenth, Article Fifteenth and Sections (c) and (d) of
Article Sixteenth of the CBOE Holdings Certificate of Incorporation, as
applicable, with respect to their activities related to CBOE.\49\ In
addition, CBOE Holdings will take reasonable steps necessary to cause
its agents, prior to accepting such a position with CBOE Holdings, to
be subject to the provisions of Article Fourteenth, Article Fifteenth
and Sections (c) and (d) of Article Sixteenth of the CBOE Holdings
Certificate of Incorporation, as applicable, with respect to their
activities related to CBOE.
---------------------------------------------------------------------------

    \49\ See proposed Article Sixteenth(b) of the CBOE Holdings
Certificate of Incorporation.
---------------------------------------------------------------------------

    The CBOE Holdings Certificate of Incorporation also provides that
CBOE Holdings, its directors, officers, agents and employees,
irrevocably submit to the jurisdiction of the U.S. federal courts, the
SEC, and CBOE, for the purposes of any suit, action or proceeding
pursuant to U.S. federal securities laws or the rules or regulations
thereunder, commenced or initiated by the SEC arising out of, or
relating to, CBOE's activities.\50\ Further, the Certificate of
Incorporation provides that CBOE Holdings, its directors, officers,
agents and employees, waive, and agree not to assert by way of motion,
as a defense or otherwise in any such suit, action or proceeding, any
claims that they are not personally subject to the jurisdiction of the
SEC, that the suit, action or proceeding is an inconvenient forum or
that the venue of the suit, action or proceeding is improper, or that
the subject matter thereof may not be enforced in or by such courts or
agency.\51\
---------------------------------------------------------------------------

    \50\ See proposed Article Fourteenth of the CBOE Holdings
Certificate of Incorporation.
    \51\ Id.
---------------------------------------------------------------------------

    In addition, the CBOE Holdings Certificate of Incorporation and
Bylaws provide that, before any amendment or repeal of any provision of
the Certificate of Incorporation and Bylaws of CBOE Holdings becomes
effective, such amendment or repeal will be submitted to the Board of
Directors of CBOE, and if such amendment or repeal must be filed with
or filed with and approved by the Commission, then such amendment or
repeal will not become effective until filed with or filed with and
approved by the Commission, as the case may be.\52\ The CBOE Holdings
Certificate of Incorporation also contains a provision that requires
each director of the Board of CBOE Holdings to take into consideration
the effect that CBOE Holdings' actions would have on CBOE's ability to
carry out its responsibilities under the Exchange Act.\53\
---------------------------------------------------------------------------

    \52\ See proposed Article Eleventh of the CBOE Holdings
Certificate of Incorporation and proposed Article 10.2 of the CBOE
Holdings Bylaws.
    \53\ See proposed Article Sixteenth(d) of the CBOE Holdings
Certificate of Incorporation.
---------------------------------------------------------------------------

(B) CBOE
    Following the demutualization, CBOE will become a Delaware for-
profit stock corporation that will be wholly-owned by CBOE Holdings.
CBOE will issue a total of 1,000 shares of common stock, all of which
will be owned by CBOE Holdings immediately following the
demutualization transaction.\54\ CBOE, not CBOE Holdings, will continue
to be the entity registered as a national securities exchange under
Section 6 of the Exchange Act and, accordingly, CBOE will continue to
be an SRO.\55\ The proposed CBOE Certificate of Incorporation, Bylaws
and Rules will govern the activities of CBOE. CBOE's

current Certificate of Incorporation, Constitution (which will be
replaced by the proposed Bylaws) and Rules are proposed to be amended
to reflect, among other things, CBOE's status as wholly-owned
subsidiary of CBOE Holdings, its management by the CBOE Board and its
designated officers, and its self-regulatory responsibilities under
Section 6 of the Exchange Act.\56\
---------------------------------------------------------------------------

    \54\ Any sale, transfer or assignment by CBOE Holdings of any
shares of CBOE common stock will require an amendment to the
proposed CBOE Certificate of Incorporation and consequently will be
subject to prior approval by the Commission pursuant to the rule
filing procedure under Section 19 of the Act (15 U.S.C. 78s). See
proposed Article Fourth of the CBOE Certificate of Incorporation.
    \55\ 15 U.S.C. 78f.
    \56\ Id.
---------------------------------------------------------------------------

(i) CBOE Board of Directors
    After the Restructuring Transaction, the business and affairs of
CBOE will be managed by or under the direction of the CBOE Board. The
CBOE Board will consist of between 11 and 15 directors, and except with
respect to the initial board of 13 directors as discussed below, will
be fixed by the CBOE Board from time to time.\57\ After the
Restructuring Transaction, the CBOE Board will be reduced from 23
directors to 13 directors. This initial CBOE Board will have 13
directors who will consist of the CBOE's Chief Executive Officer, seven
Non-Industry Directors and five Industry Directors.\58\ The initial
CBOE Board will be selected by the Prior CBOE Board or a committee
thereof, and the composition requirements for the CBOE Board will be
satisfied in connection with the selection of directors for the initial
CBOE Board. It is anticipated that the same individuals will be on the
CBOE Holdings Board and the CBOE Board immediately following the
Restructuring Transaction.
---------------------------------------------------------------------------

    \57\ See proposed Article Fifth(b) of the CBOE Certificate of
Incorporation and proposed Section 3.1 of the CBOE Bylaws.
    \58\ See proposed Section 3.1 of the CBOE Bylaws. A ``Non-
Industry Director'' is defined as a person who is not an Industry
Director. An ``Industry Director'' is defined as any director who
(i) is a holder of a Trading Permit or otherwise subject to
regulation by the Exchange; (ii) is a broker-dealer or an officer,
director or employee of a broker-dealer or has been in any such
capacity within the prior three years; (iii) is, or was within the
prior three years, associated with an entity that is affiliated with
a broker-dealer whose revenues account for a material portion of the
consolidated revenues of the entities with which the broker-dealer
is affiliated; (iv) has a material ownership interest in a broker-
dealer and has investments in broker-dealers that account for a
material portion of the director's net worth; (v) has a consulting
or employment relationship with or has provided professional
services to the Exchange or any of its affiliates or has had such a
relationship or has provided such services within the prior three
years; or (vi) provides, or has provided within the prior three
years, professional or consulting services to a broker-dealer, or to
an entity with a 50% or greater ownership interest in a broker-
dealer whose revenues account for a material portion of the
consolidated revenues of the entities with which the broker-dealer
is affiliated, and the revenue from all such professional or
consulting services accounts for a material portion of either the
revenues received by the director or the revenues received by the
director's firm or partnership. Notwithstanding the foregoing, a
director will not be deemed to be an ``Industry Director'' solely
because either (A) the person is or was within the prior three years
an outside director of a broker-dealer or an outside director of an
entity that is affiliated with a broker-dealer, provided that the
broker-dealer is not a holder of a Trading Permit or otherwise
subject to regulation by the Exchange, or (B) the person is or was
within the prior three years associated with an entity that is
affiliated with a broker-dealer whose revenues do not account for a
material portion of the consolidated revenues of the entities with
which the broker-dealer is affiliated, provided that the broker-
dealer is not a holder of a Trading Permit or otherwise subject to
regulation by the Exchange. At all times, at least one Non-Industry
Director will be a Non-Industry Director exclusive of the exceptions
provided for in the immediately preceding sentence and will have no
material business relationship with a broker or dealer or the
Exchange or any of its affiliates. For purposes of proposed Section
3.1 of the CBOE Bylaws, an ``outside director'' is a director of an
entity who is not an employee or officer (or any person occupying a
similar status or performing similar functions) of such entity. The
CBOE Board or the Nominating and Governance Committee will make all
of the foregoing materiality determinations. In addition, in
determining under (iii), (vi) and (B) above whether a broker-
dealer's revenues account for a material portion of the consolidated
revenues of the entities with which the broker-dealer is affiliated,
the revenues of the broker-dealer will be compared with the
consolidated revenues of all of the entities affiliated with the
broker-dealer as well as the broker-dealer (i.e., all of the
entities in the broker-dealer's corporate family, inclusive of the
broker-dealer). A director will qualify as a Non-Industry Director
only so long as such director meets the requirements for that
position.
---------------------------------------------------------------------------

    This initial CBOE Board will be smaller than the Prior CBOE Board
and will have a majority of public directors (i.e., Non-Industry
Directors). In comparison, as indicated above, the Prior CBOE Board has
23 directors. Eleven of these directors are Public Directors,\59\ two
are At-Large Directors,\60\ four are Floor Directors,\61\ one is a
Lessor Director,\62\ four are Off-Floor Directors,\63\ and one is the
Chairman of the Board (who is also the Chief Executive Officer of the
Exchange).\64\ Thus, the Prior CBOE Board consists of eleven public
directors, eleven directors from the industry, and the Chairman of the
Board.\65\
---------------------------------------------------------------------------

    \59\ See Section 6.1 of the current Constitution of the
Exchange. A ``Public Director'' is a non-member who is not a broker-
dealer or person affiliated with a broker-dealer.
    \60\ Id. For purposes of Class II of the Prior CBOE Board, an
``At-Large Director'' is a person who functions as a member in any
recognized capacity either individually or on behalf of a member
organization, who is a CBSX Permit holder or an executive officer of
a CBSX Permit holder, or who is an Interim Trading Permit holder or
executive officer of an Interim Trading Permit holder. For purposes
of Class III of the Prior CBOE Board, an ``At-Large Director'' is a
member who functions as a member in any recognized capacity either
individually or on behalf of a member organization.
    \61\ Id. A ``Floor Director'' is a member who directly or
indirectly owns and controls a membership and is primarily engaged
in business on the floor of the Exchange in the capacity of a
member.
    \62\ Id. The ``Lessor Director'' is a person who directly or
indirectly owns and controls a membership with respect to which s/he
acts solely as lessor and who is not actively engaged in business as
a broker-dealer or as a person associated with a broker-dealer as
those terms are defined in the Exchange Act.
    \63\ Id. An ``Off-Floor Director'' is an executive officer of a
member organization that primarily conducts a non-member public
customer business and who is not individually engaged in business on
the Exchange floor.
    \64\ See Sections 6.1 and 8.2 of the current Constitution of the
Exchange.
    \65\ Unlike the Prior CBOE Board, the Chairman of the CBOE Board
after the Restructuring Transaction will be defined as an Industry
Director.
---------------------------------------------------------------------------

    After the Restructuring Transaction, the number of Non-Industry
Directors and Industry Directors on the CBOE Board may be increased
from time to time by resolution adopted by the CBOE Board, but in no
event will the number of Industry Directors constitute less than 30% of
the members of the CBOE Board and in no event will the number of Non-
Industry Directors constitute less than a majority of the members of
the CBOE Board.\66\ In addition, at all times at least 20% of directors
serving on the CBOE Board shall be Industry Directors nominated (or
otherwise selected through the petition process) by the Industry-
Director Subcommittee (directors selected through this process are
referred to as ``Representative Directors'').\67\ This nomination
process is described below.
---------------------------------------------------------------------------

    \66\ See proposed Section 3.1 of the CBOE Bylaws.
    \67\ Id.
---------------------------------------------------------------------------

    The CBOE Board will appoint one of the directors on the CBOE Board
to serve as Chairman of the CBOE Board.\68\ The CBOE Bylaws do not
restrict the Chief Executive Officer of CBOE from serving in this
role.\69\ Each year following the annual election of the directors, the
CBOE Board will select, from among the Industry Directors, a Vice
Chairman of the CBOE Board to serve for a term of one year and until a
successor is elected or appointed and qualified.\70\ The CBOE Board
also may appoint one of the Non-Industry Directors to serve as Lead
Director, who will perform such duties and possess such powers as the
CBOE Board may

from time to time prescribe.\71\ The CBOE Board will continue to be a
classified board with staggered terms of office, however, the CBOE
Board will consist of two classes of directors, each of which serve for
two years, as opposed to the current board that consists of three
classes of directors, each of which serve for terms of three years.\72\
There is no limit on the number of terms a director may serve on the
CBOE Board.
---------------------------------------------------------------------------

    \68\ See proposed Section 3.6 of the CBOE Bylaws.
    \69\ See proposed Section 5.1(a) of the CBOE Bylaws.
    \70\ See proposed Section 3.7 of the CBOE Bylaws. The Vice
Chairman will: (i) Preside over the meetings of the CBOE Board in
the event the Chairman of the Board is absent or unable to do so,
(ii) serve as chair the Trading Advisory Committee, (iii) except as
otherwise provided in the Rules or resolution of the CBOE Board,
appoint, subject to the approval of the CBOE Board, the individuals
to serve on all Trading Permit Holder committees established in the
Rules or by resolution of the Board, and (iv) exercise such other
powers and perform such other duties as are delegated to the Vice
Chairman of the Board by the CBOE Board.
    \71\ See proposed Section 3.8 of the CBOE Bylaws. The Prior CBOE
Board currently has a Lead Director, and as provided in proposed
Section 3.8 of the CBOE Bylaws, CBOE has the ability to continue the
practice after the Restructuring Transaction.
    \72\ See proposed Section 3.1 of the CBOE Bylaws. With regard to
the initial CBOE Board, the initial term of the Class I directors
will end with the first annual stockholders meeting to be held by
CBOE following the Restructuring Transaction, and the initial term
of the Class II directors will end with the second annual
stockholders meeting following the Restructuring Transaction. Class
I directors will initially consist of the Chief Executive Officer,
three Non-Industry Directors and two Industry Directors (one of whom
is a Representative Director (as described below). Class II
directors will initially consist of four Non-Industry Directors and
three Industry Directors (two of whom are Representative Directors).
The CBOE Board is authorized to assign members of the Board already
in office to such classes at the time the classification becomes
effective.
---------------------------------------------------------------------------

(ii) Nomination and Election of Directors
    The Nominating and Governance Committee of CBOE will consist of at
least seven directors, including both Industry Directors and Non-
Industry Directors, and will at all times have a majority of directors
that are Non-Industry Directors.\73\ All members of the committee will
be recommended by the Nominating and Governance Committee for approval
by the Board. The initial Nominating and Governance Committee after the
Restructuring Transaction will be selected by the Prior CBOE Board or a
committee thereof, and the composition requirements for the Nominating
and Governance Committee will be satisfied in connection with the
selection of members of the initial Nominating and Governance
Committee. Subject to the discussion below, the Nominating and
Governance Committee will have the authority to nominate individuals
for election to the CBOE Board.\74\
---------------------------------------------------------------------------

    \73\ See proposed Section 4.5 of the CBOE Bylaws.
    \74\ Id. In performing this function, the Nominating and
Governance Committee will determine, subject to review by the Board,
whether a director candidate satisfies the applicable qualifications
for election as a director, and the decision of that committee
shall, subject to review, if any, by the Board, be final. See
proposed Section 3.1 of the CBOE Bylaws. It is anticipated that the
Nominating and Governance Committee will use director questionnaires
in connection with determining the qualifications of director
candidates.
---------------------------------------------------------------------------

    The composition of the new Nominating and Governance Committee
under the CBOE Bylaws is different than the composition of the current
Nominating Committee under the Constitution of the Exchange.\75\ In
particular, the current Nominating Committee is composed of ten
members. Eight of these members are from the industry and two of these
members are from the public. Thus, unlike the new Nominating and
Governance Committee, the current Nominating Committee consists of a
majority of members from the industry.
---------------------------------------------------------------------------

    \75\ See Section 4.1 of the current Constitution of the
Exchange. The current Nominating Committee, as the name suggests,
only has responsibility for nominations. This is different than the
responsibilities of the new Nominating and Governance Committee,
which will have authority with respect to nominations as well as
governance issues.
---------------------------------------------------------------------------

    In addition, the process for selecting the new Nominating and
Governance Committee, which is described below, is different than the
process for selecting the current Nominating Committee. In this regard,
the current Nominating Committee is not a committee of the Prior CBOE
Board, but rather a separate committee elected by the voting members of
the Exchange.
    After the Restructuring Transaction, the new Nominating and
Governance Committee will be bound to accept and nominate the
Representative Directors recommended by the Industry-Director
Subcommittee (described below), provided that the Representative
Directors so nominated by the Industry-Directorbcommittee are not
opposed by a petition candidate (described below).\76\ If such
Representative Directors are opposed by a petition candidate then the
Nominating and Governance Committee will be bound to accept and
nominate the Representative Directors who receive the most votes
pursuant to a Run-Off Election (described below).\77\ In addition, CBOE
and CBOE Holdings will enter into a Voting Agreement pursuant to which
CBOE Holdings will agree to vote in favor of the Representative
Directors recommended by the Nominating and Governance Committee.\78\
---------------------------------------------------------------------------

    \76\ See proposed Section 3.1 of the CBOE Bylaws.
    \77\ Id.
    \78\ The proposed Voting Agreement is attached as Exhibit 5F to
this proposed rule change.
---------------------------------------------------------------------------

    The Industry-Director Subcommittee of the Nominating and Governance
Committee will recommend a number of Industry Directors (i.e.,
Representative Directors) that equals 20% of the total number of
directors serving on the CBOE Board, provided that if 20% of the
directors then serving on the CBOE Board is not a whole number, such
number of Representative Directors will be rounded up to the next whole
number.\79\ Industry Directors not selected by the Industry-Director
Subcommittee will be selected by the Nominating and Governance
Committee.\80\ The Industry-Director Subcommittee will consist of all
of the Industry Directors then serving on the Nominating and Governance
Committee.\81\
---------------------------------------------------------------------------

    \79\ See proposed Section 3.2 of the CBOE Bylaws. This section
addresses the fair representation requirement for members in Section
6(b)(3) of the Exchange Act. 15 U.S.C. 78f(b)(3).
    \80\ See proposed Section 3.2 of the CBOE Bylaws.
    \81\ Id.
---------------------------------------------------------------------------

    The Industry-Director Subcommittee will provide a mechanism for
Trading Permits Holders to provide input to the Industry-Director
Subcommittee with respect to nominees for the Representative
Directors.\82\ The Industry Director-Subcommittee will issue a circular
to the Trading Permit Holders identifying the Representative Director
nominees selected by the committee not later than January 15th, or the
first business day thereafter if January 15th is not a business
day.\83\
---------------------------------------------------------------------------

    \82\ Id.
    \83\ Id.
---------------------------------------------------------------------------

    Holders of Trading Permits may nominate alternative candidates for
election to the Representative Director positions to be elected in a
given year by submitting a petition signed by individuals representing
not less than 10% of the total outstanding Trading Permits at that
time.\84\ The names of all Representative Director nominees recommended
by the Industry-Director Subcommittee and those selected pursuant to a
valid and timely petition will, immediately following their selection,
be given to the Secretary who will promptly issue a circular to all of
the Trading Permit Holders identifying all such Representative Director
candidates.\85\
---------------------------------------------------------------------------

    \84\ Id.
    \85\ Id.
---------------------------------------------------------------------------

    If one or more valid petitions are received, the Secretary will
issue a circular to all of the Trading Permit Holders identifying those
individuals nominated for Representative Director by the Industry-
Director Subcommittee and those individuals nominated for
Representative Director through the petition process as well as of the
time and date of a run-off election to determine which individuals will
be nominated as Representative Director(s) by the Nominating and
Governance Committee (the ``Run-off Election'').\86\ In any Run-off
Election, each holder of a Trading Permit will have one vote with

respect to each Trading Permit held by such Trading Permit Holder for
each Representative Director position to be filled that year; provided,
however, that no holder of Trading Permits, either alone or together
with its affiliates, may account for more than 20% of the votes cast
for a candidate, and any votes cast by a holder of Trading Permits,
either alone or together with its affiliates, in excess of this 20%
limitation shall be disregarded.\87\ The Secretary will issue a
circular to all of the Trading Permit Holders setting forth the results
of the Run-off Election.\88\ The number of individual Representative
Director nominees equal to the number of Representative Director
positions to be filled that year receiving the largest number of votes
in the Run-off Election (after taking into account the voting
limitation set forth above) will be the persons approved by the Trading
Permit Holders to be nominated as the Representative Director(s) by the
Nominating and Governance Committee for that year.
---------------------------------------------------------------------------

    \86\ Id.
    \87\ In any Run-off Election, Trading Permits representing one-
third of the total outstanding Trading Permits entitled to vote,
when present in person or represented by proxy, will constitute a
quorum for purposes of the Run-off Election. Id.
    \88\ Id.
---------------------------------------------------------------------------

(iii) Committees of CBOE
    In addition to the Nominating and Governance Committee discussed
above, CBOE will have the following CBOE Board committees: An Executive
Committee, an Audit Committee, a Compensation Committee, a Regulatory
Oversight Committee and such other standing and special committees as
may be approved by the CBOE Board.\89\ Except as may be otherwise
provided in the CBOE Bylaws or as may be otherwise provided for from
time to time by resolution of the CBOE Board, the Board may, at any
time, with or without cause, remove any member of any such committees
of the Board.\90\
---------------------------------------------------------------------------

    \89\ See proposed Section 4.1(a) of the CBOE Bylaws.
    \90\ Id.
---------------------------------------------------------------------------

    With regard to the Prior CBOE Board, it also has an Executive
Committee, an Audit Committee, a Compensation Committee, and a
Regulatory Oversight Committee. The current Executive Committee
consists of the Chairman of the Prior CBOE Board, the Vice Chairman of
that Board, and four other persons who are directors (each of which is
appointed by the Vice Chairman with the approval of the Prior CBOE
Board).\91\ At least 50% of the members of that committee (excluding
the Chairman) are Public Directors. The current Audit Committee
consists of at least three directors appointed by the Chairman of the
Prior CBOE Board with the approval of that Board, the exact number to
be determined from time to time by that Board.\92\ At least 50% of the
members of that committee are Public Directors. The current
Compensation Committee consists of the Vice Chairman of the Prior CBOE
Board, the Lessor Director, the Chairman of the Financial Planning
Committee (a committee of the Exchange), one or more Off-Floor
Directors, and such number of Public Directors that will constitute at
least 50% of the members of that committee.\93\ The Off-Floor
Director(s) and the Public Directors are appointed to that committee by
the Chairman of the Prior CBOE Board with the approval of that Board.
The current Regulatory Oversight Committee consists of at least four
directors, all of whom are Public Directors.\94\ The members of that
committee are appointed by the Chairman of the Prior CBOE Board with
the approval of that Board.
---------------------------------------------------------------------------

    \91\ See Section 7.2 of the current Constitution of the
Exchange.
    \92\ See Section 7.3 of the current Constitution of the
Exchange.
    \93\ See Section 7.4 of the current Constitution of the
Exchange.
    \94\ The current Regulatory Oversight Committee was created by a
charter.
---------------------------------------------------------------------------

    After the Restructuring Transaction, members on the new Executive,
Audit, and Compensation Committees of CBOE will be recommended by the
Nominating and Governance Committee for approval by the CBOE Board.\95\
The new Executive Committee will consist of the Chairman of the CBOE
Board, the Chief Executive Officer (if a director), the Vice Chairman
of the CBOE Board, the Lead Director (if any), at least one
Representative Director and such other number of directors that the
Board deems appropriate, provided that at all times the majority of the
directors serving on the Executive Committee are Non-Industry
Directors.\96\ CBOE notes that if the Vice Chairman is a Representative
Director, the requirement to have at least one Representative Director
on the new Executive Committee will be satisfied by the Vice Chairman's
participation on that committee. The new Audit Committee will consist
of at least three directors, all of whom will be Non-Industry
Directors.\97\ The new Compensation Committee will consist of at least
three directors, all of whom must be Non-Industry Directors.\98\ The
new Regulatory Oversight Committee will consist of at least four
directors, all of whom shall be Non-Industry Directors and all of whom
shall be recommended by the Non-Industry Directors on the Nominating
and Governance Committee for approval by the Board.\99\
---------------------------------------------------------------------------

    \95\ See proposed Sections 4.2, 4.3 and 4.4 of the CBOE Bylaws.
The selection and composition of the Nominating and Governance
Committee is discussed above.
    \96\ See proposed Section 4.2 of the CBOE Bylaws.
    \97\ See proposed Section 4.3 of the CBOE Bylaws.
    \98\ See proposed Section 4.4 of the CBOE Bylaws.
    \99\ See proposed Section 4.6 of the CBOE Bylaws.
---------------------------------------------------------------------------

    The new Executive Committee will have and may exercise all the
powers and authority of the CBOE Board in the management of the
business and affairs of CBOE, except it will not have the power and
authority of the Board to (i) approve or adopt or recommend to the
stockholders any action or matter (other than the election or removal
of directors) expressly required by Delaware law to be submitted to
stockholders for approval, including without limitation, amending the
proposed CBOE Certificate of Incorporation, adopting an agreement of
merger or consolidation, approving a sale, lease or exchange of all or
substantially all of CBOE's property and assets, or approval of a
dissolution of CBOE or revocation of a dissolution, or (ii) adopt,
alter, amend or repeal any bylaw of CBOE.\100\
---------------------------------------------------------------------------

    \100\ See proposed Section 4.2 of the CBOE Bylaws.
---------------------------------------------------------------------------

    Although the current Executive Committee (as well as the new
Executive Committee) generally can act in the place of the CBOE Board,
the practice of the current Executive Committee has been that it
generally does not make a decision unless there is a need for a CBOE
Board-level decision between CBOE Board meetings due to the time
sensitivity of the matter. In addition, in situations when the current
Executive Committee does make a decision between CBOE Board meetings,
the CBOE Board is generally aware ahead of time of the potential that
the Executive Committee may need to make the decision. This is the case
because oftentimes the decision relates to a time-sensitive issue that
is discussed by the CBOE Board at a CBOE Board meeting, but that is not
yet ripe for decision, and the CBOE Board is advised that the Executive
Committee may need to make a decision on the issue prior to the next
CBOE Board meeting. It is expected that the foregoing practices will
continue with the new Executive Committee. However, with a smaller CBOE
Board after the Restructuring Transaction (13 directors versus 23
directors), it likely will be easier to convene the CBOE Board on short
notice and there may be less of a need than there is today for the new

Executive Committee to make decisions. It may also be easier for the
CBOE Board to act by unanimous written consent. In any event, the CBOE
Board is, and after the Restructuring Transaction will be, fully
informed of any decision made by the current (and new) Executive
Committee at its next meeting and can always decide to review that
decision and take different action.
    The new Audit, Compensation, and Nominating and Governance
Committees will have such duties and may exercise such authority as may
be prescribed by the CBOE Board and their respective Charters as
adopted by resolution of the Board.\101\ Similarly, the new Regulatory
Oversight Committee will have such duties and may exercise such
authority as may be prescribed by resolution of the Board, the CBOE
Bylaws or the Rules of the Exchange.\102\ In general, the new
Regulatory Oversight Committee will be charged with overseeing the
independence and integrity of the regulatory functions of the Exchange.
---------------------------------------------------------------------------

    \101\ See proposed Sections 4.3, 4.4 and 4.5 of the CBOE Bylaws.
    \102\ See proposed Section 4.6 of the CBOE Bylaws.
---------------------------------------------------------------------------

    In addition to these CBOE Board committees, CBOE will have as
Exchange committees a Trading Advisory Committee and such other
committees as may be provided in the CBOE Bylaws or the Rules or as may
be from time to time created by the CBOE Board.\103\ The Trading
Advisory Committee will advise the Office of the Chairman regarding
matters of interest to Trading Permit Holders.\104\ It will consist of
such number of members as set by the CBOE Board of Directors from time
to time. The majority of the members of the Trading Advisory Committee
will be individuals involved in trading either directly or through
their firms. The Vice Chairman will be the Chairman of the Trading
Advisory Committee and will appoint, with the approval of the CBOE
Board, the other members of the committee.
---------------------------------------------------------------------------

    \103\ See proposed Section 4.1(b) of the CBOE Bylaws. ``Exchange
committees'' refers to committees that are not solely composed of
directors from the CBOE Board. Except as may be otherwise provided
in the CBOE Bylaws, the Rules or the resolution of the CBOE Board
establishing any such other committee, the Vice Chairman of the
Board, with the approval of the CBOE Board, will appoint the members
of such Exchange committees (other than the committees of the CBOE
Board) and may designate, with the approval of the Board, a Chairman
and a Vice-Chairman thereof. Except as may be otherwise provided in
the Bylaws or the Rules, the CBOE Board may, at any time, with or
without cause, remove any member of any such Exchange committees.
    \104\ See proposed Section 4.7 of the CBOE Bylaws.
---------------------------------------------------------------------------

    The Trading Advisory Committee essentially will serve as a
replacement for the current Floor Directors Committee, which advises
the Prior CBOE Board and the Office of the Chairman of that Board
regarding trading and floor-related issues. The Floor Directors
Committee consists of those directors of the Prior CBOE Board who are
primarily engaged in business on the floor of the Exchange (whether
serving as Floor Directors or At-Large Directors), the Lessor Director
as a non-voting member of that committee, and such other persons as may
be appointed as voting or nonvoting members of that committee by the
Vice Chairman of the Prior CBOE Board with the approval of that
Board.\105\
---------------------------------------------------------------------------

    \105\ See Section 7.5 of the current Constitution of the
Exchange.
---------------------------------------------------------------------------

    The Exchange also will continue to have as an Exchange committee
after the Restructuring Transaction the Business Conduct Committee
(``BCC''), the functions of which are described below.\106\ With regard
to the composition of the current BCC, the Prior CBOE Board determines
the number of members of the committee. In selecting members of that
committee, the intent is to pick individuals who represent a broad
cross section of the membership of the Exchange as well as individuals
who represent the public. It is anticipated that the make-up of the BCC
will be the same after the Restructuring Transaction.
---------------------------------------------------------------------------

    \106\ See CBOE Rule 2.1(a).
---------------------------------------------------------------------------

(iv) Filling of Vacancies and Removal for Cause
    Any vacancy in the CBOE Board, however occurring, including a
vacancy resulting from an increase in the number of directors, may be
filled by vote of a majority of the directors then in office, although
less than a quorum, or by a sole remaining director, provided such new
director qualifies for the category in which the vacancy exists.\107\ A
director elected to fill a vacancy will hold office until the next
annual meeting of stockholders, subject to the election and
qualification of his or her successor and to his or her earlier death,
resignation or removal.\108\ In the event the CBOE Board fills a
vacancy resulting from a Representative Director position becoming
vacant prior to the expiration of such Representative Director's term,
or resulting from the creation of an additional Representative Director
position required by an increase in the size of the CBOE Board, the
Industry-Director Subcommittee of the Nominating and Governance
Committee will either (i) recommend an individual to the CBOE Board to
be elected to fill such vacancy or (ii) provide a list of recommended
individuals to the CBOE Board from which the Board shall elect the
individual to fill such vacancy.\109\
---------------------------------------------------------------------------

    \107\ See proposed Section 3.5(a) of the CBOE Bylaws.
    \108\ Id.
    \109\ See proposed Section 3.5(b) of the CBOE Bylaws. Any
individual recommended by the Industry-Director Subcommittee to fill
the vacancy of a Representative Director position must qualify as an
Industry Director.
---------------------------------------------------------------------------

    In addition, the CBOE Bylaws provide that no director may be
removed from office by a vote of the stockholders at any time except
for cause.\110\ For purposes of this provision, ``cause'' means only
(i) a breach of a director's duty of loyalty to CBOE (as a corporation)
or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, or (iii)
transactions from which a director derived an improper personal
benefit. Any director may be removed for cause by the holders of a
majority of the shares of stock then entitled to be voted at an
election of directors.
---------------------------------------------------------------------------

    \110\ See proposed Section 3.4(c) of the CBOE Bylaws.
---------------------------------------------------------------------------

(v) Disciplinary Matters and Trading and Disciplinary Rule Changes
    The current process for the hearing of disciplinary matters, and
the rules governing that process, will remain substantively unchanged
after the Restructuring Transaction. Under CBOE Rule 17.6(a), the
hearing of a disciplinary matter currently is conducted by one or more
members of the BCC. As indicated above, the BCC currently consists of
industry and public representatives. It has been the BCC's general
practice to use three-person BCC hearing panels that include both
industry and public representation. CBOE is not proposing to change
this process following demutualization. Consistent with CBOE Rule 17.9,
any decision of a BCC hearing panel that is not composed of at least a
majority of the BCC is reviewed by the full BCC.
    In addition, the current process for the review of appeals of
disciplinary actions, and the rules governing that process, will remain
substantively unchanged after the Restructuring Transaction. Under CBOE
Rule 17.10(b), the CBOE Board is the body vested with the authority to
review appeals of disciplinary actions. The CBOE Board may appoint a
committee of the Board composed of at least 3 directors to review the
appeal, but the decision of that committee must be ratified by the CBOE
Board. Thus, after the Restructuring Transaction, Trading Permit
Holders will have a say in the

review of such appeals by virtue of their representation on the CBOE
Board, as discussed above.\111\
---------------------------------------------------------------------------

    \111\ Prior to Restructuring Transaction, it has been the CBOE
Board's general practice to appoint a cross-section of directors to
the CBOE Board committees that review appeals of disciplinary
actions. These committees usually consist of a floor or at-large
director, an off-floor director, and a public director. CBOE is not
proposing to change this general practice and would expect that CBOE
Board committees that review disciplinary decision appeals after the
Restructuring Transaction would generally consist of an Industry
Director who or whose firm is engaged in trading on the Exchange, an
Industry Director whose firm is significantly engaged in conducting
a securities business with public customers, and a Non-Industry
Director.
---------------------------------------------------------------------------

    The current process for the review of proposed trading and
disciplinary rules also will remain substantively unchanged after the
Restructuring Transaction. Under proposed Section 10.1 of the CBOE
Bylaws, the CBOE Board will continue to be the body that is tasked with
approving rule changes, including changes to trading and disciplinary
rules. Thus, Trading Permit Holders will have a voice in the review of
these rules by virtue of their representation on the CBOE Board. In
addition, the current Floor Directors Committee reviews many of CBOE's
rule changes in an advisory capacity, particularly trading rules, but
the Floor Directors Committee has no decision-making authority with
regard to rule changes. After the Restructuring Transaction, the
Trading Advisory Committee, which is described above, will essentially
take the place of the Floor Directors Committee.\112\ It is expected
that the Trading Advisory Committee will perform the same rule review
function in an advisory capacity that has been performed by the Floor
Directors Committee. Accordingly, the Trading Advisory Committee also
will provide a mechanism for Trading Permit Holders to provide input on
trading rules.
---------------------------------------------------------------------------

    \112\ A majority of the Trading Advisory Committee will be
composed of individuals involved in trading either directly or
through their firms.
---------------------------------------------------------------------------

(vi) Officers of CBOE
    The officers of CBOE will be a Chief Executive Officer, a Vice
Chairman, a President, a Chief Financial Officer, one or more Vice-
Presidents (the number thereof to be determined by the CBOE Board of
Directors), a Secretary, a Treasurer, and such other officers as the
Board may determine, including an Assistant Secretary and Assistant
Treasurer.\113\ The CBOE Board by an affirmative vote of the majority
of the Board will appoint the Chief Executive Officer of CBOE, who will
have general charge and supervision of the business of CBOE.\114\ In
general, the other officers of CBOE will have the duties or powers or
both set out in the CBOE Bylaws, as well as such other duties or powers
or both as the CBOE Board or the Chief Executive Officer may from time
to time prescribe.\115\
---------------------------------------------------------------------------

    \113\ See proposed Section 5.1(a) of the CBOE Bylaws.
    \114\ See proposed Sections 5.1(a) and 5.2 of the CBOE Bylaws.
    \115\ See proposed Sections 5.3, 5.4, 5.5, 5.6, 5.7 and 5.8 of
the CBOE Bylaws.
---------------------------------------------------------------------------

    These officers essentially will be the same as the current officers
of the Exchange. For instance, the Exchange currently has a Chief
Executive Officer, who also serves as Chairman of the Prior CBOE Board.
After the Restructuring Transaction, the Chief Executive Officer may,
but does not have to, be a director or the Chairman of the CBOE Board.
The Exchange also currently has a Vice Chairman, although the current
Vice Chairman is elected by the membership.\116\ After the
Restructuring Transaction, the CBOE Board will select the Vice Chairman
from among the Industry Directors serving on the CBOE Board.\117\ In
addition, the Exchange currently has a Chief Financial Officer. This
position, however, is not specified in the Constitution of the
Exchange. After the Restructuring Transaction, this position will be
formally incorporated into the CBOE Bylaws.\118\
---------------------------------------------------------------------------

    \116\ See Section 8.1(a) of the current Constitution of the
Exchange.
    \117\ See proposed Section 3.7 of the CBOE Bylaws.
    \118\ See proposed Section 5.5 of the CBOE Bylaws.
---------------------------------------------------------------------------

    The CBOE Bylaws would not restrict an officer from being a Trading
Permit Holder or a person associated with a Trading Permit Holder, or a
broker or a dealer in securities or commodities or an associated person
of such broker or dealer. This is a change from the current
Constitution of the Exchange, which restricts an officer from being a
member or affiliated with a member or a broker or a dealer in
securities or commodities.\119\ The Exchange is proposing this change
because there are other protections in place that limit the potential
conflicts between the Exchange as a self-regulator and Trading Permit
Holders, including, among other things, the existence of a Regulatory
Oversight Committee as a committee of the Board that consists solely of
Non-Industry Directors.
---------------------------------------------------------------------------

    \119\ See Section 8.1(b) of the current Constitution of the
Exchange.
---------------------------------------------------------------------------

(vii) Self-Regulatory Function and Oversight
    As noted above, following the demutualization CBOE will continue to
be registered as a national securities exchange under Section 6 of the
Exchange Act and thus will continue to be an SRO.\120\ As an SRO, CBOE
will be obligated to carry out its statutory responsibilities,
including enforcing compliance by Trading Permit Holders with the
provisions of the federal securities laws and the rules of CBOE.
Further, CBOE will retain the responsibility to administer and enforce
the rules that govern the activities of CBOE and its Trading Permit
Holders. In addition, CBOE will continue to be required to file with
the Commission, pursuant to Section 19(b) of the Exchange Act \121\ and
Rule 19b-4 thereunder,\122\ any changes to its rules and governing
documents.
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 78f.
    \121\ 15 U.S.C. 78s(b).
    \122\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The proposed CBOE Certificate of Incorporation contains various
provisions designed to protect the self-regulatory functions of CBOE in
light of the new structure of the Exchange. For instance, the proposed
CBOE Certificate of Incorporation contains a provision that requires
each director of the CBOE Board to take into consideration the effect
that his or her action would have on CBOE's ability to carry out its
responsibilities under the Exchange Act.\123\ The proposed CBOE
Certificate of Incorporation also contains provisions designed to
protect confidential information pertaining to the self-regulatory
function of the Exchange.\124\
---------------------------------------------------------------------------

    \123\ See proposed Article Fifth(d) of the CBOE Certificate of
Incorporation.
    \124\ See proposed Article Eleventh of the CBOE Certificate of
Incorporation.
---------------------------------------------------------------------------

    In addition, CBOE will interpret its Rules to require that any
revenue it receives from regulatory fees or penalties will be applied
to fund the legal, regulatory, and surveillance operations of the
Exchange and will not be used to pay dividends to CBOE Holdings, except
in the event of liquidation of CBOE, in which case CBOE Holdings will
be entitled to the distribution of CBOE's remaining assets.
(viii) National Market System Plans
    CBOE currently is a participant in the following national market
system (``NMS'') plans: the Options Price Reporting Authority Plan
(``OPRA Plan''), the Consolidated Tape Association (``CTA''), the
Consolidated Quotation Plan (``CQ Plan''), the Nasdaq Unlisted Trading
Privileges Plan (``Nasdaq UTP Plan''), the Options Intermarket Linkage
Plan, the Options Regulatory Surveillance Authority Plan (``ORSA
Plan''), and the Options Listing Procedures Plan (``OLPP''). These
plans are joint industry plans entered into by

SROs for the purpose of providing for (i) last sale and quotation
reporting in options and equities, (ii) intermarket options trading,
(iii) the joint surveillance, investigation and detection of insider
trading on the options exchanges, and (iv) the listing of standardized
options. Following the completion of the demutualization, CBOE, in its
continuing role as the SRO, will continue to serve as the voting member
of these NMS plans, and a representative of CBOE will continue to serve
as CBOE's representative with respect to dealing with these plans.
(C) Trading Permits
    As part of the Restructuring Transaction, the rules of the Exchange
will be amended to reflect the way in which trading access will be
granted to the Exchange. Prior to the Restructuring Transaction,
Exchange memberships provided trading access to the Exchange. After the
Restructuring Transaction, Trading Permits will provide trading access
to the Exchange.
    ``Trading Permits'' are defined as licenses issued by the Exchange
that grant the holders or the holders' nominee the right to access the
Exchange or one or more of its facilities for the purpose of effecting
transactions in securities traded on the Exchange without the services
of another person acting as broker, and otherwise to access the
Exchange or its facilities for purposes of trading or reporting
transactions or transmitting orders or quotations in securities traded
on the Exchange, or to engage in other activities that, under the
Rules, may only be engaged in by holders of Trading Permits, provided
that the holder or the holder's nominee, as applicable, satisfies any
applicable qualification requirements to exercise those rights.\125\ A
Trading Permit will not convey any ownership interest in the Exchange,
will only be available through the Exchange, and will be subject to the
terms and conditions set forth in proposed Rule 3.1.
---------------------------------------------------------------------------

    \125\ See proposed CBOE Rule 1.1(ggg).
---------------------------------------------------------------------------

    As a result of the new structure of the Exchange after the
Restructuring Transaction in which ownership will be separated from
trading access, the Exchange is proposing to replace the term
``member'' throughout the rules with the term ``Trading Permit
Holder.'' \126\ As indicated above, the term ``Trading Permit Holder''
will be defined as any individual, corporation, partnership, limited
liability company or other entity authorized by the Rules that holds a
Trading Permit.\127\ Holders of Trading Permits will meet the
definition of ``member'' in Section 3(a)(3)(A) of the Exchange
Act.\128\ One's status as a Trading Permit Holder, however, does not
confer on that person any ownership interest in the Exchange.\129\ As
members under the Exchange Act, Trading Permit Holders and their
nominees will be subject to the regulatory jurisdiction of the
Exchange, including without limitation the Exchange's disciplinary
jurisdiction under Chapter XVII of the Rules.\130\
---------------------------------------------------------------------------

    \126\ This change will cause a significant number of the
Exchange's rules to be amended. In connection with this rule filing,
this change will be made in the rules in Chapters I-III, as well as
CBOE Rule 8.3. The Exchange also will make this change in its forms.
Because of the length of this rule filing and the fact that the
substantive changes to the Exchange's rules regarding trading access
are covered by this filing, the Exchange is proposing to submit a
companion filing to change the term ``member'' to ``Trading Permit
Holder'' in the remainder of the Exchange's rules, as well as to
make certain conforming changes. Subject to Commission approval of
this filing, the Exchange expects that this companion filing will be
filed upon that approval.
    \127\ See proposed Section 1.1(f) of the CBOE Bylaws and
proposed CBOE Rule 1.1(gg).
    \128\ 15 U.S.C. 78c(a)(3)(A). As described in Section (4)(B)(ii)
above (Nomination and Election of Directors), the selection process
for Representative Directors for the CBOE Board addresses the fair
representation requirement for members in Section 6(b)(3) of the
Exchange Act. 15 U.S.C. 78f(b)(3).
    \129\ See proposed Section 1.1(f) of the CBOE Bylaws and
proposed CBOE Rule 1.1(gg).
    \130\ See proposed CBOE Rule 3.1(a)(iii).
---------------------------------------------------------------------------

(i) General Features of Trading Permits
    The Exchange will have the authority to issue different types of
Trading Permits that allow holders to trade one or more products
authorized for trading on the Exchange, and to act in one or more
trading functions authorized by the Rules.\131\ Trading Permits will be
for terms as shall be determined by the Exchange from time to
time.\132\ It is currently anticipated that the Exchange will offer
Trading Permits for terms of one month, three months and a year,
although these terms may be changed in the future. Prior to the
Restructuring Transaction, the Exchange will announce in a circular the
types and terms of Trading Permits that the Exchange has determined to
issue.
---------------------------------------------------------------------------

    \131\ See proposed CBOE Rule 3.1(a)(iv).
    \132\ Id.
---------------------------------------------------------------------------

    Trading Permits will be subject to such fees and charges as are
established by the Exchange from time to time pursuant to Rule 2.20 and
the Exchange Fee Schedule.\133\ The Exchange will file proposed rule
changes under Section 19(b) of the Exchange Act,\134\ including, as
applicable, Section 19(b)(3)(A)(ii),\135\ to establish and change the
fees for the types of Trading Permits it has determined to issue. The
entire fee for a Trading Permit will be due and payable in accordance
with the Exchange Fee Schedule. A TPH organization holding a Trading
Permit will be responsible for paying all fees and charges for that
Trading Permit.\136\ In addition, an individual holding a Trading
Permit will be responsible for paying all fees and charges for that
Trading Permit.
---------------------------------------------------------------------------

    \133\ See proposed CBOE Rule 3.1(a)(v).
    \134\ 15 U.S.C. 78s(b).
    \135\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \136\ A ``TPH organization'' refers to an organization that
holds a Trading Permit, and is the replacement term for ``member
organizations.'' See proposed Section 1.1(f) of the CBOE Bylaws and
proposed CBOE Rule 1.1(gg).
---------------------------------------------------------------------------

    The Exchange will have the authority to limit or reduce the number
of any type of Trading Permit it has determined to issue.\137\
Notwithstanding this general authority, in the event the Exchange
imposes such a limitation or reduction, the Exchange will be prohibited
from eliminating or reducing the ability to trade one or more
product(s) of a person currently trading such product(s), and will be
prohibited from eliminating or reducing the ability to act in one or
more trading function(s) of a person currently acting in such trading
function(s), unless the Exchange is permitted to do so pursuant to a
rule filing submitted to Commission under Section 19(b) of the Exchange
Act.\138\ The Exchange will announce in a circular any limitation or
reduction in the number of Trading Permits it determines to impose.
---------------------------------------------------------------------------

    \137\ See proposed CBOE Rule 3.1(a)(vi).
    \138\ 15 U.S.C. 78s(b). In addition, in no event will the
Exchange act in a manner under this provision that does not comply
with the provisions of Section 6(c)(4) of the Act (15 U.S.C.
78(c)(4)). See proposed CBOE Rule 3.1(a)(vi). As noted in a letter
submitted by the Exchange to the SEC in connection with SR-CBOE-
2006-106, CBOE has been unable to locate records that reflect with
certainty the number of CBOE memberships on May 1, 1975. See Letter
dated November 2, 2007 from Joanne Moffic-Silver, Executive Vice
President, General Counsel and Corporate Secretary, CBOE, to Richard
Holley III, Senior Special Counsel, Division of Market Regulation,
SEC (http://www.sec.gov/comments/sr-cboe-2006-106/cboe2006106-
161.pdf). The closest date to May 1, 1975 for which CBOE has been
able to locate records that CBOE believes can be relied upon to
establish this information is June 30, 1975. Specifically, CBOE has
financial statements as of June 30, 1975, the end of its then fiscal
year, which set forth this information as of that date. The number
of CBOE memberships on June 30, 1975 was 1,025.
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    The Exchange also will have the authority to increase the number of
any type of Trading Permit it has determined to issue by issuing
additional Trading Permits of that type, and will announce in a
circular any such increase.\139\ In addition, the Exchange will have
the authority, pursuant to a rule filing submitted to the

Commission under Section 19(b) of the Act,\140\ to establish objective
standards that must be met to be issued, or to have renewed, a Trading
Permit.\141\
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    \139\ See proposed CBOE Rule 3.1(a)(vii).
    \140\ 15 U.S.C. 78s(b).
    \141\ See proposed CBOE Rule 3.1(a)(viii). The Exchange also has
included a savings clause in Rule 3.1 that provides that
notwithstanding Rule 3.1, as well as Rule 3.1A (which addresses the
issuance of Trading Permits to current members), nothing in those
rules will eliminate or restrict the Exchange's authority to delist
any product or to take any action (remedial or otherwise) under the
Exchange Act, the Bylaws and the Rules, including without limitation
the Exchange's authority to take disciplinary or market performance
actions against a person with respect to which the Exchange has
jurisdiction under the Exchange Act, the Bylaws and the Rules. See
proposed CBOE Rule 3.1(a)(ix).
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    Trading Permits will only be issued by the Exchange and cannot be
leased or transferred to any person under any circumstances, except in
the following situations.\142\ In this regard, a TPH organization may
change the designation of the nominee in respect of each Trading Permit
it holds in a form and manner prescribed by the Exchange.\143\ In
addition, a Trading Permit Holder may, with the prior written consent
of the Exchange, transfer a Trading Permit to a TPH organization or to
an organization approved to be a TPH organization: (A) Which is an
affiliate; or (B) which continues substantially the same business
without regard to the form of the transaction used to achieve such
continuation, e.g., merger, sale of substantially all assets,
reincorporation, reorganization or the like.\144\ For example, this
provision would allow the Exchange to approve a transfer of a Trading
Permit from an individual or TPH organization to an affiliated TPH
organization of that individual or TPH organization.
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    \142\ See proposed CBOE Rule 3.1(d)(i).
    \143\ See proposed CBOE Rule 3.1(d)(ii).
    \144\ Id.
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(ii) Issuance of Trading Permits
    In connection with the Restructuring Transaction, Trading Permits
will be issued automatically to each current member of the Exchange
that has the ability to trade. In this regard, prior to the date of the
Restructuring Transaction, a person who is, or is treated the same as,
a ``member'' of the Exchange under Sections 1.1 and 2.1 of the
Constitution of the Exchange may submit a post-Restructuring
Transaction trading application to the Exchange in accordance with such
procedures as shall be established by the Exchange.\145\ Provided the
applicant is in good standing as of the date of the Restructuring
Transaction, complies with the application procedures established by
the Exchange and pays any applicable fees, the Exchange in connection
with the Restructuring Transaction will issue to the applicant, as
applicable, a Trading Permit in respect of: (A) Each membership not
subject to an effective lease as of the date of the Restructuring
Transaction that is owned by the applicant; (B) each membership that is
leased as a lessee by the applicant as of the date of the Restructuring
Transaction; (C) each trading permit issued by the Exchange prior to
the Restructuring Transaction that is held by the applicant, provided
that in the case of a CBSX trading permit, the Exchange shall issue a
Trading Permit in respect of the CBSX trading permit that only provides
the right to effect transactions on the CBSX; \146\ and (D) each
Temporary Membership that is held by such applicant.\147\ As the
foregoing indicates, persons who are Temporary Members under
Interpretation and Policy .02 of CBOE Rule 3.19 will be guaranteed
Trading Permits in connection with the Restructuring Transaction,
provided they comply with the requirements noted above. In addition,
persons who are issued Trading Permits as set forth above will have the
ability pursuant to those Trading Permits to continue after the
Restructuring Transaction trading any product, and acting in any
trading function, that those persons traded, or acted in, at the time
of the Restructuring Transaction.\148\
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    \145\ See proposed CBOE Rule 3.1A(a).
    \146\ Holders of CBSX trading permits and holders of Interim
Trading Permits will be issued Trading Permits pursuant to this
provision. CBOE Rule 3.26, which currently provides for the issuance
of CBSX trading permits, will be deleted as part of this rule filing
because all Trading Permits after the Restructuring Transaction will
be issued under proposed CBOE Rule 3.1. For the same reason, CBOE
Rule 3.27, which currently provides for the issuance of Interim
Trading Permits, also will be deleted as part of this rule filing.
    \147\ A person who was eligible to receive Trading Permit(s)
pursuant to this provision but who failed to comply with the
application or other requirements, must submit an application for a
Trading Permit as described below and must go through the approval
process to hold a Trading Permit to be eligible to receive a Trading
Permit. See proposed CBOE Rule 3.1A(c).
    \148\ This guarantee is subject to the provision noted above
that provides that notwithstanding Rule 3.1, as well as Rule 3.1A,
nothing in those rules will eliminate or restrict the Exchange's
authority to delist any product or to take any action (remedial or
otherwise) under the Exchange Act, the Bylaws and the Rules,
including without limitation the Exchange's authority to take
disciplinary or market performance actions against a person with
respect to which the Exchange has jurisdiction under the Exchange
Act, the Bylaws and the Rules. See proposed CBOE Rule 3.1(a)(ix). In
addition, this guarantee is subject to the continuing satisfaction
of any applicable qualification requirements, as well as to the
Exchange's ability discussed above to limit or reduce the number of
any type of Trading Permit pursuant to a rule filing with the
Commission. See proposed CBOE Rules 3.1A(a) and 3.1(a)(vi).
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    At the time of Restructuring Transaction and afterwards, Trading
Permits also will be issued after an application process. Persons who
are seeking trading access to the Exchange for the first time, as well
as current Trading Permit Holders seeking to hold additional Trading
Permits, would need to go through this application process. Only a
person approved to hold a Trading Permit (a ``Qualified Person'') is
eligible to submit an application for a Trading Permit.\149\
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    \149\ See proposed CBOE Rule 3.1(b)(i). The Exchange is not
proposing to substantively change the current process to become a
``member'' of the Exchange, which after the Restructuring
Transaction will be the process to become a ``Trading Permit
Holder.'' See, e.g., CBOE Rule 3.9.
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    We expect that this application process will be a simple process
that generally will involve notifying the Exchange of the type, term
and number of Trading Permits that a Qualified Person would like to
receive.\150\ To be eligible to be issued a type of Trading Permit, a
Qualified Person must have satisfied the application requirements for
that type of Trading Permit. In addition, to be eligible to use a type
of Trading Permit, a Qualified Person must satisfy all requirements
related to that type of Trading Permit.
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    \150\ Id.
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    From time to time, the Exchange in its discretion may determine to
make available one or more of a type of Trading Permit through (i) a
process in which Trading Permits will be issued to Qualified Persons by
a random lottery (``Random Lottery Process''), or (ii) a process in
which Trading Permits will be issued to Qualified Persons based on the
order in time that such Qualified Persons applied for such Trading
Permits (``Order in Time Process'').\151\ The number of Trading Permits
that the Exchange determines to make available is referred to as the
``issuance number.'' In connection with an issuance of such Trading
Permits, and notwithstanding an application for a greater number of
such Trading Permits, a Qualified Person and any affiliated Qualified
Person will be eligible to receive no more than the greater of 10 such
Trading Permits or 20% of the issuance number of such Trading Permits.
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    \151\ See proposed CBOE Rule 3.1(b)(iii). The Exchange also will
have the authority to modify these processes or to establish any
other objective process to issue Trading Permits pursuant to a rule
filing submitted to the Commission under Section 19(b) of the Act.
15 U.S.C. 78s(b).
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    This limit, however, will not apply in the event the issuance
number of such Trading Permits exceeds the demand for such Trading
Permits.\152\ In such a situation, Trading Permits will be made

available through the Order in Time Process. Qualified Persons applying
for Trading Permits in this situation will be automatically issued such
permits until the number of permits issued equals the issuance number.
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    \152\ Id.
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    In the event the demand for Trading Permits exceeds the issuance
number, Trading Permits will be made available through the Random
Lottery Process or the Order in Time Process.\153\ In such a situation,
the Exchange in its discretion may maintain a waiting list to be used
to issue Trading Permits pursuant to the Order in Time Process.\154\ If
the Exchange maintains a waiting list, Qualified Persons will be placed
on that waiting list based on the order in time that such persons
submitted applications, and such persons may at any time voluntarily
withdraw from that waiting list. A person on the waiting list also may
submit a notification to the Exchange to adjust the number of Trading
Permits that such person would like to receive at any time prior to an
announcement of an issuance of such Trading Permits. Persons on the
waiting list will be issued Trading Permits based on the order in time
they were placed on the waiting list.
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    \153\ Id.
    \154\ See proposed CBOE Rule 3.1(b)(ii).
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(iii) Termination, Change and Renewal of Trading Permits.
    A Trading Permit Holder seeking to terminate that holder's Trading
Permit must notify the Exchange, prior to the deadline announced by the
Exchange in a circular and in a form and manner prescribed by the
Exchange, that the holder is terminating that Trading Permit at the end
of its term.\155\ In addition, a Trading Permit Holder seeking to
replace that holder's Trading Permit with a different Trading Permit
must file with the Exchange, prior to the deadline announced by the
Exchange in a circular, an application for that different Trading
Permit pursuant to the application process described above.\156\ In the
event a Trading Permit Holder does not take either of the foregoing
actions with respect to a Trading Permit, the Exchange will
automatically renew that Trading Permit for the same term as the
expiring term.\157\ In renewing that Trading Permit, the Exchange will
have the authority to issue one or more Trading Permits that represent
the same or more trading right(s) as the expiring permit.\158\
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    \155\ See proposed CBOE Rule 3.1(c)(i).
    \156\ See proposed CBOE Rule 3.1(c)(ii).
    \157\ See proposed CBOE Rule 3.1(c)(iii). This automatic renewal
provision will not limit the Exchange's authority to limit or reduce
the number of any type of Trading Permit.
    \158\ Id. To the extent the Exchange determines to issue one or
more Trading Permits that represent the same or more trading
right(s) as an expiring Trading Permit, the Exchange will provide
all holders of that type of expiring Trading Permit with the new
Trading Permit(s).\
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    In addition, a Trading Permit Holder seeking to hold an additional
Trading Permit must file with the Exchange an application for that
Trading Permit pursuant to the application process described
above.\159\ To change the term of a Trading Permit at the end of its
current term to a longer or shorter term currently offered by the
Exchange, a Trading Permit Holder must notify the Exchange of that
holder's desire to change the term prior to the deadline announced by
the Exchange in a circular and in a form and manner prescribed by the
Exchange.\160\ Such a change will be effective only at the end of the
current term of the Trading Permit.
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    \159\ See proposed CBOE Rule 3.1(c)(iv).
    \160\ See proposed CBOE Rule 3.1(c)(v).
---------------------------------------------------------------------------

(iv) Tier Appointments
    The Exchange is proposing to amend CBOE Rule 8.3 to provide for a
new type of appointment called a ``tier appointment.'' A ``tier
appointment'' is an appointment to trade one or more options classes
that must be held by a Market-Maker to be eligible to trade the options
class or options classes subject to that appointment.\161\ A Market-
Maker that seeks to trade an options class or options classes subject
to a tier appointment must submit an application for that tier
appointment in accordance with, and subject to the same terms and
conditions as, the application process for Trading Permits as described
above. Notwithstanding this application requirement, in the event a
current member of the Exchange at the time of the Restructuring
Transaction is trading an options class with respect to which the
Exchange is establishing a tier appointment, the Exchange in connection
with the Restructuring Transaction will issue to that member such a
tier appointment provided that the Exchange is notified by that member
of that member's desire to hold such a tier appointment.\162\
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    \161\ See proposed CBOE Rule 8.3(e).
    \162\ See proposed CBOE 3.1A(b).
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    Tier appointments will be in addition to the current appointment
cost process set forth in CBOE Rule 8.3, which will remain unchanged in
connection with the Restructuring Transaction. In general, under that
process, the number of memberships owned or leased by a Market-Maker
serves as the basis for determining the number/types of options classes
that the Market-Maker can trade. In this regard, each membership held
by a Market-Maker has an appointment credit of 1.0, and each option
listed on the Exchange has an assigned appointment cost. Under that
process, for example, a Market-Maker with one membership could trade
options on the Nasdaq 100 Index, which has an appointment cost of .50,
and options on the CBOE Volatility Index, which also has an appointment
cost of .50.
    Issuance of tier appointments will be in accordance with, and
subject to the same terms and conditions as, the issuance processes for
Trading Permits as described above (i.e., the Random Lottery Process or
the Order in Time Process).\163\ A Market-Maker that is issued a tier
appointment must designate to the Exchange the Trading Permit with
which that tier appointment is associated, and may designate no more
than one tier appointment per Trading Permit. A tier appointment will
be for the same term as the Trading Permit with which the tier
appointment is associated. Termination, change, renewal, and transfer
of tier appointments will be in accordance with, and subject to the
same terms and conditions as, the processes for Trading Permits as
described above. In this regard, for example, if a holder of tier
appointment does not notify the Exchange that the holder is terminating
that tier appointment and does not file an application to replace that
tier appointment, that tier appointment will be renewed along with its
associated Trading Permit for the same term as the expiring term of
that Trading Permit.
---------------------------------------------------------------------------

    \163\ See proposed CBOE Rule 8.3(e).
---------------------------------------------------------------------------

    Tier appointments will be subject to such fees and charges as are
established by the Exchange from time to time pursuant to Rule 2.20 and
the Exchange Fee Schedule. The Exchange will file proposed rule changes
under Section 19(b) of the Exchange Act,\164\ including, as applicable,
Section 19(b)(3)(A)(ii),\165\ to establish and change the fees for tier
appointments. In accordance with, and subject to same terms and
conditions as, the processes for Trading Permits as described above,
the Exchange will have the authority with respect to any type of tier
appointment it has determined to establish to limit or reduce the
number of that type of tier appointment, to increase the number of that
type of tier appointment, and to establish objective standards to be
issued, or to have

renewed, that type of tier appointment.\166\
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    \164\ 15 U.S.C. 78s(b).
    \165\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \166\ The Exchange also has included a savings clause in
proposed Rule 8.3 that provides that notwithstanding the rule,
nothing in it will eliminate or restrict the Exchange's authority to
delist any product or to take any action (remedial or otherwise)
under the Exchange Act, the Bylaws and the Rules, including without
limitation the Exchange's authority to take disciplinary or market
performance actions against a person with respect to which the
Exchange has jurisdiction under the Exchange Act, the Bylaws and the
Rules. Id.
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(D) Other Changes to the Rules
(i) Chapter I of the Rules
    As mentioned above, the Exchange is proposing to replace the term
``member'' with ``Trading Permit Holder'' throughout the Exchange's
rules. Thus, references to the terms member and membership in Chapters
I will be replaced.\167\ For instance, in Rule 1.1(f) and throughout
the rules, the term ``Clearing Member'' will be replaced with
``Clearing Trading Permit Holder.'' \168\
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    \167\ References to these terms also will be replaced in
Chapters II and III and CBOE Rule 8.3 as part of this rule filing,
and in the remaining rules as part of the companion filing noted
above.
    \168\ In this regard, any change to a defined term in Chapter I
will be reflected in Chapters II and III and CBOE Rule 8.3 as part
of this rule filing, and in the remaining rules as part of the
companion filing noted above.
---------------------------------------------------------------------------

    In addition, the Exchange has amended the definitions in Chapter I
to reflect the use of Trading Permits. In this regard, for instance,
the terms ``Lessor'' and ``Lessee'' have been deleted because these
concepts will not exist after the Restructuring Transaction. In their
place, the Exchange has added the definitions of ``person'' and
``Trading Permit Holder.'' \169\ A person is defined as an individual,
partnership (general or limited), joint stock company, corporation,
limited liability company, trust or unincorporated organization, or any
governmental entity or agency or political subdivision thereof, and a
Trading Permit Holder is defined by reference to the definition of that
term in Section 1.1 of the CBOE Bylaws. The Exchange also has added a
definition of ``Restructuring Transaction'' to reflect the point in
time at which Trading Permits will be issued.\170\
---------------------------------------------------------------------------

    \169\ See proposed CBOE Rules 1.1(ff) and (gg).
    \170\ See supra note 3.
---------------------------------------------------------------------------

    Further, the Exchange has added a definition of ``Trading Permit,''
which is discussed above, and a definition of ``TPH Department.'' \171\
The TPH Department is defined as the department or division of the
Exchange (which may be referred to by the Exchange from time to time by
a name other than the TPH Department) that has the functions set forth
in the rules for the TPH Department. The TPH Department will serve as
the successor to the current Membership Department and will continue
the functions of that department, such as processing applications for
Trading Permits (instead of applications for membership). The
definition is drafted in this manner to give the Exchange the
flexibility to call the department something other than the TPH
Department in the future without having the amend the rules.
---------------------------------------------------------------------------