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Thank you for attending this meeting, which I will use to update you on preparations for our historic launches, how we are prepared to face serious competitive challenges, and our strong competitive and financial positions.
For starters, I want to give you more details about the upcoming transition. Seldom does a market leader have the confidence and the foresight to make such fundamental and far-reaching changes to its basic infrastructure. There were many critics who said that the simultaneous implementation of a new electronic platform and the CCL was just too ambitious. Those naysayers will be proved wrong when they go live next month.
We have been testing our new electronic platform and the CCL side-by-side for months. One hundred and seven member firms are participating in simulations, and those simulations have gone extremely well. Member firms’ enthusiasm for these projects is clear -- they have either met or beat all deadlines set by the CBOT.
Additionally, launch preparations for the new electronic platform and the CCL are on time and on budget. The bottom line is, we are prepared. I cannot emphasize enough how confident I am that the transition will be seamless.
Powered by LIFFE CONNECT®, our new electronic platform will bring you increased speed of execution and greater reliability, as well as the most-advanced functionality. The system’s capabilities include:
- Full spread trading and option strategy functionality,
- Implied pricing,
- Processing time of one-half second for 99.9 percent of all orders
- And connections to the new platform will be 2,400 percent faster.
Furthermore, through the CBOT’s relationship with EuronextLiffe, our users will benefit from an expanded global liquidity pool and connectivity, which will reach deeper into European and Asian money centers.
The CBOT's integrated model includes all areas of our business, particularly our trading floors. We have more than 500 order routing and hand-held devices in use on the floor, where the majority of our agricultural and financial orders are delivered electronically. In September, 73 percent of all customer orders executed on the ag floor were electronically processed and confirmed. On the financial side, order routing devices were used to process a record of 58 percent of all fills in September.
While providing you with the most superior front-end system possible, we have also created the most efficient back-end solution available in the Common Clearing Link. Perhaps one of the most important benefits of the CCL is that it will bring very real, measurable advantages to you and your customers: Market participants will save a total of $1.6 billion from reductions in performance bond collateral, the creation of a single CME/CBOT guarantee fund and other operational efficiencies.
Another of CCL’s numerous benefits is that it gives the CBOT greater autonomy. Recently, the Commodity Futures Trading Commission approved our application to establish a Derivatives Clearing Organization (DCO). This ruling allows the CBOT to move forward in establishing its own clearing entity, creating the independence and flexibility needed to provide you with the most cost-effective clearing process possible. Establishing our own DCO will also provide the CBOT with an additional revenue stream from clearing fees.
While this is a very exciting and busy time for the CBOT, it is also a time when we face unprecedented competition. Before addressing this competitive challenge, I want to remind you that Eurex’s announcement of its attempt to compete in the U.S. was the direct result of our decision to switch to LIFFE CONNECT® to power our electronic platform.
You may have read in recent media reports that Eurex U.S. has filed a lawsuit against the CBOT and CME. The lawsuit filed is baseless and will fail. Eurex should focus its efforts on correcting the numerous deficiencies in its unprecedented application for U.S. contract market status and cease its efforts to intimidate the CBOT in our legitimate communications with CBOT clearing members.
Many of you have asked me how I can be so confident that we are prepared to fend off any competition and that we are primed to overcome all challenges we face. The answer is that we are drawing on a 155-year-long track record of success, and our strength, innovation, and transparency will continue to secure our position as a leader of the derivatives industry.
Our strength is apparent in our financials. Because of operational efficiencies made during the past two years, we continue to keep our expenses low. The CBOT's business model has been aggressive in expanding access to our markets, and those actions have supported overall revenue growth at the CBOT.
Our strength is also apparent in our volume figures. Volume at the CBOT is up 32 percent year to date, and we surpassed our all-time annual volume record on October 3, securing 2003 as the best year in the exchange’s history. Volume year-to-date is 363.4 million, versus the 2002 peak of 343.9 million contracts.
During the last several months, innovative actions taken by our Board of Directors have also made our exchange stronger, as well as even more accessible, open and competitive.
Thanks to you, the approval of Rule 100 has allowed the Board to take action swiftly when necessary. In fact, our recently announced simplified pricing structure, in the works for about six months, is one example of Rule 100 at work.
The overwhelming majority of our volume will continue to be priced at, or significantly below, that of our competitors. At the same time, we are adhering to a model that rewards those who take the risk and provide our market with the deep liquidity that ultimately benefits all participants.
The Board also has taken other steps to increase accessibility of the exchange. Refining rules of eligibility for purchasing an exchange membership will likely result in increased volume. Hedge funds, mutual funds and pension funds now can receive member rates if they commit capital to the CBOT in the form of seat purchases. One large hedge fund has already taken advantage of this change by becoming a CBOT member, and we expect others to follow suit.
Other rule refinements by our Board have made it easier for our member firms to trade at the CBOT. For example, firms no longer need to produce W-2 forms to prove the way they are compensating their employees in order to receive member rates. How our member firms decide to compensate their employees is their business; our business is that of providing customers with the very best trading environment
possible.In yet another effort to meet your and your customers’ demands, the Board also has voted to extend our exchange for swap program to the Treasury complex. This new rule will create many new trading opportunities, linking the OTC and futures markets in a seamless fashion. For example, interest rate swap dealers who want to exchange Treasury futures for an OTC swap position will have the ability to do so.
Our recent Board actions, along with the implementation of the CCL and our new electronic trading platform, are likely to generate additional revenue, create new open interest and help the CBOT maintain its competitive edge.
But our efforts do not stop there. The CBOT is also creating many opportunities for growth. Following months of strategic development, we will soon begin one of our most aggressive new product rollouts in CBOT history. Our new products, such as the mini-DowSM options and Dow JonesSM Total Stock Market Index futures, were created in response to increased demand for derivatives and will focus on areas where tremendous growth potential exists. You will be hearing a lot more about these new products in the coming months.
All of the forward-looking, proactive decisions the CBOT has made in the past year have only better positioned the exchange to meet the challenges of the future, and for this reason, I remain extremely optimistic about our outlook – financial and competitive.
As always, your participation in our exchange is the foundation of our considerable competitive strength, and I appreciate your continued support. Now, I am happy to take a few questions.
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.
