I hereby call to order the 2003 Annual Meeting of the Chicago Board of Trade. If there is no objection, the minutes of the last meeting are approved as written. Also, if there is no objection, the Board of Directors and officers’ actions since the 2002 Annual Meeting stand as approved.
Thank you all for taking the time to attend today’s meeting, either in person or via MemberNet.
I want to thank outgoing Board members Walt Weissman and Ron Young for their contributions, service and dedication to the CBOT®. For the first time in more than 15 years, the slate selected by the Nominating Committee is running unopposed. It is a privilege to welcome Brent Coan and Jim Donaldson to our Board of Directors, and I look forward to working with them both.
When you elected me Chairman one year ago, I made a lot of promises. I said it was a top priority for me to insure a smooth transition to our new electronic trading platform. I told you that the CBOT would implement a solution to many of your concerns about our clearing process. I also said that I would work on moving forward with our restructuring process. Finally, I said that together, we would create an even more aggressive, streamlined CBOT that was ready to take on the competition and win. Today, I am here to say that I have delivered all of those promises to you.
The exchange did have a seamless migration to our new platform powered by LIFFE CONNECT®â. Working with the Chicago Mercantile Exchange, we implemented the Common Clearing Link, which has enabled our market users to reduce capital committed to securing their clearing obligations by about $1.7 billion. And after months of negotiations, we have worked out a settlement in the lawsuit brought by certain exchange members. The final court approval of the settlement will permit us to pursue our restructuring plan.
My goals in 2003 were very clear: I wanted to grow the exchange and drive value for CBOT members. Through several major accomplishments last year, I believe that together we achieved impressive results.
For many reasons, 2003 was the best year in our history. The CBOT traded more than 454 million contracts last year – up 32 percent from our record year in 2002. Our 2003 financial results were very positive, and our Chief Financial Officer Glen Johnson, will give you more information about the exchange’s earnings in a few minutes.
CBOT’s Strong Competitive Position
As you are well aware, in recent weeks we have seen new challengers arise within our already highly competitive industry. I say with confidence that the CBOT is prepared to overcome all competition that presents itself. Our 155-year long track record of success, combined with the CBOT’s bold initiatives in 2003, have prepared us well for the challenges we face. I think one thing is clear: the value provided by CBOT’s transparent and open markets should not be underestimated.
That said, we must remember that competition should never be underestimated either. It is for that reason that the CBOT endeavors constantly to create new and innovative ways to improve upon our already superior trading environment.
The initiatives undertaken by the CBOT last year were designed to grow our business and add value to your investment in our great exchange. And thanks to your support, those efforts have reaped impressive results. In order to emerge victorious from any challenge, the CBOT must bring to the market the best product possible. I believe that we have the blueprint for success.
New Electronic Platform/Common Clearing Link
By far the most ambitious project for the exchange last year, and possibly one of the most ambitious in our entire history, was the simultaneous implementation of our new electronic trading platform and the Common Clearing Link. Many of our critics said it couldn’t be done, but they were wrong. I am proud to say that the migration to those two systems was essentially flawless. I believe that the CBOT’s electronic platform is fast and reliable, and its functionality is unmatched by any other electronic trading system currently available in the futures industry.
The positive comments from customers have been overwhelming. They have praised the CBOT for freeing up $1.7 billion in capital committed to clearing obligations, as well as for enabling them to realize other synergies within their businesses. In addition, spread credit offsets between CBOT and CME® products now reach as high as 85 percent, freeing up additional capital for our market users.
By working closely with CME Chairman Terry Duffy and staff from both exchanges, we were able to accomplish the goal of establishing a standard in clearing for the futures industry. The Link clears approximately 85 percent of all U.S. futures and futures options volume, based on 2002 data.
Increasing Access to the CBOT
Another major initiative of 2003 was to increase worldwide access to the CBOT’s complete range of products. We intend to maintain the exchange’s position as a global leader, and to that end, the CBOT Board of Directors passed several new rules in 2003 intended to further grow the amount of business conducted worldwide.
Our European permit program has been extremely well received by our intended target, the proprietary trading community abroad. The program is a part of an aggressive approach to increasing our presence throughout Europe, a region we believe has significant untapped potential. The users we are educating about our markets already are responsible for a large amount of volume on European exchanges, and we think that both European prop traders and the CBOT would benefit from their participation in our markets.
As a part of our outreach efforts in Europe, I recently was in London for the opening of our expanded European office, where I personally met with current and prospective CBOT market users. The office is an integral part of our European strategy, as it serves as a central point of distribution of CBOT products in the region. While in London, I had the chance to visit with many of our European traders, customers, and ISVs. They congratulated us on our initiatives aimed at opening market access further and told me that they look forward to broadening their participation in the CBOT’s transparent markets.
Another noteworthy action our Board took was approving the passive investor rule, designed to encourage CBOT market participation by an even broader range of users. The exchange now has expanded eligibility for member firm registration and transaction fee treatment, allowing pools, hedge funds, mutual funds, pension funds and investment companies to receive significant savings on their exchange transactions in return for purchasing seats at the CBOT.
The Board also recently passed new pricing for our U.S. Treasury products. This transaction fee schedule will be reviewed by the Board after it is in place for six months. As I said earlier, our Board, along with Bernie Dan, the rest of the management team, and myself, are focused on growing the exchange, in terms of volume, revenues, and our global presence. I believe that the fee reductions are a strategic, necessary measure to make the CBOT an even more formidable competitor.
We already have received appreciative comments about our fee cuts from users in all corners of the world – Dubai, Gibraltar, and Sydney. These are places where the CBOT has not traditionally focused its attention. But that has changed, since we began taking a more aggressive approach to growing our business during the last two plus years.
As I mentioned, and as Bernie and Glen will detail for you in a moment, I believe that our financial position is strong. I know that some of you were confused about the announcement that the exchange was levying a one-time operating assessment after the Ceres distribution was paid. Most successful businesses direct capital toward growing those businesses, and the assessment will enable us to continue to make such investments to enhance our overall business model. Simply put, the assessment is a conservative, prudent approach to managing the CBOT’s business.
Your support of our Board has not gone unnoticed. Thanks to you, the approval of Rule 100 has allowed the Board to take action swiftly when necessary and has made the CBOT even more flexible to respond to the needs of our market users.
New Products
Exchange staff also worked very hard last year to develop several new CBOT products. These contracts are designed to tap into the success of existing CBOT products, as well as create markets for new ones. So far, we have announced our German debt futures contracts and launched mini-sized DowSM futures-options and the Dow JonesSM U.S. Total Market Index futures contract.
The mini-DowSM options contract is our first all electronic options product, and it has done very well in a short time. Since launching two weeks ago, open interest has surpassed 2,000 contracts, and activity has grown rapidly.
Restructuring Update
I would now like to take this time to update you on the status of our restructuring. After months of intense, ongoing negotiations, our Board of Directors approved an agreement that I expect to lead to the final settlement of the lawsuit brought by certain Associate Members and GIM, IDEM and COM membership interest holders regarding equity allocation in a restructured CBOT. While the CBOT was not a defendant in the lawsuit, the exchange is seeking to intervene in the litigation and gain court approval of a settlement to put this issue behind us. This agreement positions us even closer to finalizing our restructuring process, but the final decision on the settlement is ultimately up to the Court.
Demutualization will allow the CBOT to issue shares to members and I believe positions the CBOT to drive greater value for us. Additionally, I believe that a for-profit CBOT will further improve our solid competitive stance by giving us increased flexibility.
Goals/Outlook for 2004
While in 2003 we surpassed every past annual volume record in CBOT’s history, I think that the best is yet to come. I believe that we can beat last year’s record of 454 million contracts:
- In the past year, the price paid for a full seat at the exchange has risen more than 70 percent to $600,000.
- We are experiencing tremendous growth in all CBOT products:
- Volume in our agricultural futures products is up 46 percent and options activity is up 84 percent year to date.
- And volume in our financial futures is up 44 percent and options up 51 percent year to date.
- Equities product volume is up 63 percent across-the-board.
I believe that our current product mix is likely to meet greater demand in the future. For example, the Bond Market Association’s Economic Advisory Council looks for the U.S. federal deficit to increase by almost 30 percent in 2004. If so, this should fuel higher CBOT trading volume: Intensified borrowing by the U.S. Treasury means heavier underwriting flows, which should boost demand for the depth and liquidity of CBOT’s U.S. interest rate futures and options.
As for our commodity products, we have seen a renewed interest in companies opening up operations on the grain floor. Global demand for grains is surpassing production potential, a factor that is likely to increase activity in several CBOT products.
One of my primary goals in 2004 is to deliver enhanced technology to our open auction markets. We are working closely with the CME to set requirements and dates for implementing alpha numeric code and broker to broker match features. Incorporating these features into our system is a top priority, as they will streamline trading operations, and we expect to move forward with this project in 2004.
The CBOT staff has made great strides in improving our technology. Now it is a matter of delivering that technology to make our open auction markets even more efficient.
Additionally, we expect to roll out SLEDs capability for the grains on March 12. I know how important this functionality is to you, and I have appreciated your patience while the exchange worked to deliver it.
Already we have moved closer toward creating a paperless environment on the trading floor – three out of four orders in the grains are endorsed or entered electronically. I would like to see the number of orders electronically routed to the pit increase even further.
The bold steps we took in 2003 to shape the CBOT as an even more formidable competitor have already continued into 2004. Last week, I traveled to Brazil to meet with several key companies involved in the soybean market, as well as officials from banks and the BM&F Exchange, the largest futures exchange in Brazil. We at the CBOT are always interested in increasing our presence globally, and I believe there may be opportunities for further cooperation between the South American soybean market and the CBOT.
It has been an honor and a pleasure to serve as CBOT Chairman during such an exciting time for our industry. As I said initially in 2003, my goal was to grow this exchange and drive value for you, our members. That priority has not changed – in fact, I am more committed now than ever to that crucial goal. And with your ongoing support, I believe that together we can continue our great exchange’s solid track record of success.
Thank you, I would now like to introduce your President and CEO, Bernie Dan.
While CBOT Holdings, Inc. (CBOT Holdings) has filed with the SEC a Registration Statement on Form S-4, including a preliminary proxy statement and prospectus, relating to the restructuring of the Board of Trade of the City of Chicago, Inc. (CBOT), it has not yet become effective, which means it is not yet final. CBOT members are urged to read the final Registration Statement on Form S-4, including the final proxy statement and prospectus, relating to the restructuring of the CBOT referred to above, when it is finalized and distributed to CBOT members, as well as other documents which CBOT Holdings or the CBOT has filed or will file with the SEC, because they contain or will contain important information for making an informed investment decision. CBOT members may obtain a free copy of the final prospectus, when it becomes available, and other documents filed by CBOT Holdings or the CBOT at the SEC’s web site at www.sec.gov. This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of securities in any state in which offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
