Cboe Global Markets
Annual Report 2003

Plain-text annual report

In 2003, CBOE redefined In 2003, CBOE redefined In 2003, CBOE redefined how options are traded. how options are traded. how options are traded. Here's how we did it. Here's how we did it. Here's how we did it. Chicago Board Options Exchange Annual Report 2003 Chicago Board Options Exchange Annual Report 2003 Chicago Board Options Exchange Annual Report 2003 CBOEdirect® HyTS™ On June 12, 2003, the Chicago Board Options Exchange® (CBOE®) introduced CBOEdirect HyTS, a revolutionary hybrid trading system. CBOE is the first exchange to truly marry the speed and efficiency of screen-based trading with the liquidity and price discovery of a competitive, open outcry marketplace. cv3 • CBOE 2003 By launching CBOEdirect HyTS, CBOE has created a unique trading model, unlike that of any other options exchange. The robust technology encompassed in CBOEdirect HyTS combines the best features of screen-based trading and floor-based markets. By crafting a multi- faceted trading environment that combines the key elements of each, CBOE now offers customers and market makers a groundbreaking “best of both worlds” options marketplace. 01 • CBOE 2003 02 • CBOE 2003 C B O E H yT S T E R M I N A L CBOE partnered with Belzberg Technologies, Inc. to co-brand the CBOE Hybrid Trading System (HyTS) Terminal, a universal access, multifunctional, trading solution workstation. The HyTS Terminal serves as an order management tool, and provides CBOE customers with immediate point-and-click access to CBOE markets. Increased Efficiency and Speed CBOEdirect HyTS offers powerful new features which provide customers with efficiency, speed and market quality unparalleled in the options industry. Individual Market Makers’ Streaming Quotes CBOEdirect HyTS allows in-crowd market makers to input real-time, streaming quotes into CBOEdirect, the system’s trade engine. CBOE disseminates the resulting, composite best bid and offer, including the total size available at the best price. Customers benefit from tight, guaranteed markets that can be immediately accessed electronically. The ability for market makers to stream live quotes, to post “quotes with size” and to more quickly execute orders allows CBOE market makers to better show- case the quality of markets found at CBOE. Point-and-Click Execution for Customers The HyTS Terminal is a universal access, multifunctional workstation that provides electronic access and order routing to U.S. options exchanges, as well as complete access to market data, real-time quotes and order management—all on a single screen. Terminal users may also obtain similar functionality for futures and stock exchanges. Additionally, the CBOE HyTS Terminal serves as a portal into the CBOE Hybrid Trading System. 03 • CBOE 2003 C B O E M A K E S M A R K E T S CBOE’s trading floor houses the most traders and the greatest pool of liquidity of any options exchange. Within this highly-liquid marketplace, opportunities for price improvement are plentiful. Potential for Price Improvement CBOE believes in the inherent value of the face-to-face, open outcry marketplace and also recognizes the beneficial features of electronic trading. The Hybrid Trading System, CBOEdirect HyTS, is more than just the sum of its parts. The system offers customers synergistic benefits by uniting the advantages of both types of marketplaces. With nearly 1,400 well- capitalized market makers, CBOE features more options traders in one place than any other exchange. This vast pool of expertise and liquidity creates deep markets where abundant opportunities for price discovery allow for price improvement. Open Access to the Limit Order Book Because individual market makers now have electronic quoting capability, CBOE, for the first time, allows for the “opening of the Limit Order Book” to customer, firm and Broker/Dealer orders. Orders entered in the Book are afforded priority according to price and are eligible for electronic matching. Customer priority is retained. n o h p e l e T Orders s r e d e O r > ENTER ORDERS HyTS Terminal Member Firm Systems KEY BART–Booth Automated Routing Terminal BERS–Booth Entry Routing System DPM–Designated Primary Market Maker FBW–Floor Broker Workstation ORS–Order Routing System PAR–Public Automated Routing System 04 • CBOE 2003 > > ORDER CONFIRMATION HyTS Terminal Member Firm Systems R E D R O X E L P M R T S E P E T I T I V C O M C O O NIC TR C E L E H A N D L I N G OPEN BOOK ULTIM AT E E A M I N G Q U OTES FROM LIQUIDIT Y P R O M A T C H I N V I D E R S ELECTRONIC ENVIRONMENT G A L G O R I T H M Orders > ORS C H O I C E T O H A V E F L O O R B R O K E R S FIRM BOOTH: BART BERS FBW > > > PAR > > > Telephone Fills F ill s > ORS Fills E l e c t r o n i c T r a d e N o t i f i c a t i o n > CBOEdirect TRADE ENGINE s r e d r O > > F i l l s g n i m a e r t S s e t o u Q > > > OPEN OUTCRY/ TRADING CROWD FLOATING BROKERS DPMs/ MARKET MAKERS IN-CROWD BROKERS T N E M E V O R P M I E C I R P R O F S W O L L A Y R E V O R E P R E S E N T L A R G E O R C O M PLEXORDERS IN P E R S O N E P U S M O R E O P TIO N TRADERS IN ONE PLA C E T H A N A N Y O T H C DIS R IC E G E N A H C P X R E R I O R E 05 • CBOE 2003 06 • CBOE 2003 C B O E T R A D I N G F L O O R CBOE’s market makers compete aggressively, producing tight, deep markets. Enhanced Access to CBOE’s Markets An open auction market combined with the benefits of electronic trading provides customers with easy access to CBOE’s deep, transparent markets. Floor brokers can walk into a trading crowd and request markets on their customers’ behalf. Ultimate Matching Algorithm The CBOEdirect HyTS ultimate matching algorithm retains the priority to public customer orders that CBOE has always afforded. Additionally, participation rights are awarded to other market participants based on a formula that rewards deep liquidity, as well as competitive pricing. 07 • CBOE 2003 Fiscal Year Events and Highlights J U LY 1 , 2 0 0 2 – J U N E 3 0 , 2 0 0 3 J U LY 1 9 , 2 0 0 2 CBOE launches Large Order Utility (LOU) to allow customers to instanta- neously secure CBOE’s disseminated quote for large size orders that were not eligible for electronic execution. J U LY 2 3 , 2 0 0 2 The CBOE Volatility Index® (VIX®) closes at 50.48, marking the first time VIX has closed above 50 since November 11, 1987. J U LY 3 1 , 2 0 0 2 S E P T E M B E R 3 0 , 2 0 0 2 New records set for monthly volume in options on the S&P 500® Index (SPXSM)—3,859,734 contracts and options on the Dow Jones Industrial AverageSM (DJX)—1,485,582 contracts. Volume in options on DIAMONDS® (DIA) increases by 37%. Introduced on May 20, 2002, options on DIA is one of the most successful new product launches in CBOE history. N O V E M B E R 8 , 2 0 0 2 OneChicago, LLC, a joint venture exchange between CBOE, CBOT and CME, launches trading of securities futures. D E C E M B E R 3 1 , 2 0 0 2 For the calendar year, CBOE trades a total of 267,616,496 contracts, making 2002 the fourth busiest year in CBOE history. 2 0 0 2 L U J FY 2003 P E S V O N C E D G U A T C O A U G U S T 1 5 , 2 0 0 2 O C T O B E R 2 1 , 2 0 0 2 CBOE membership votes over- whelmingly in favor of adopting governance amendments intended to increase the role of public directors on the Exchange’s Board of Directors. A U G U S T 2 6 , 2 0 0 2 In a partnership with Chicago Public Schools, CBOE “adopts” John B. Drake Elementary School. CBOE members and staff, as part of the Working In The Schools (WITS) Program, tutor students through- out the school year. CBOE and Chicago Public Schools (CPS) hold a joint press conference to announce CPS’ new “Futures Exchange” corporate partnership program. O C T O B E R 3 1 , 2 0 0 2 New record for monthly volume in options on QQQ set with a total of 2,508,407 contracts traded. 08 • CBOE 2003 A P R I L 2 6 , 2 0 0 3 CBOE marks its 30th anniversary and the launch of listed options. To commemorate the occasion, Mayor Richard M. Daley visited the Exchange on April 22, 2003 and rang the opening bell during a special ceremony. F E B R U A RY 2 7 , 2 0 0 3 The CBOE Hybrid Trading System (HyTS) Terminal, a universal access, multifunctional, trading solution workstation, is introduced. F E B R U A RY 2 8 , 2 0 0 3 A P R I L 3 0 , 2 0 0 3 For the third consecutive month, CBOE has the largest total volume of all U.S. options exchanges in options on QQQ. The end of April marks one consecutive year in which index options’ total monthly volume exceeds the previous year’s levels. B E F R P A 3 0 0 2 N A J R A M Y A M N U J J A N U A RY 2 , 2 0 0 3 M A R C H 1 1 , 2 0 0 3 M AY 2 , 2 0 0 3 Thirty Chicago high school students spend a week at CBOE as part of the annual Diversity Representation, Education and Mentoring (DREAM) program. The DREAM program, now in its fifth year, is an ongoing effort at CBOE to expose minority youth to the financial industry. J A N U A RY 3 1 , 2 0 0 3 CBOE, along with the other U.S. options exchanges, participates in the launch of an intermarket linkage system. The 20th anniversary of index options trading at CBOE is celebrated. Standard & Poor’s® executives rang the opening bell in recognition of the milestone. Myron Scholes, 1997 Nobel Laureate in Economics for develop- ment of the Black-Scholes options pricing model, tours the CBOE trading floor and is honored at a 30th anniversary luncheon. M A R C H 2 1 , 2 0 0 3 CBOE experiences one of the busiest trading days in its history as 2,003,524 contracts trade. M A R C H 2 7 , 2 0 0 3 CBOE S&P 500® BuyWrite Index (BXMSM) is licensed to Rampart Investment Management, Inc. for a new investment vehicle to be based on the BXM. J U N E 9 , 2 0 0 3 CBOE activates application with the Commodity Futures Trading Commission to become a registered futures exchange. J U N E 1 2 , 2 0 0 3 CBOE launches its new hybrid trading system, CBOEdirect HyTS. 09 • CBOE 2003 Each chapter in CBOE’s remarkable history is chronicled by the Exchange’s ability to innovate and elevate the stan- dard for industry leadership. CBOEdirect HyTS is in keeping with that long-standing tradition. William J. Brodsky Mark F. Duffy Edward J. Joyce Letter from the Office of the Chairman Mounting competitive pressures, a prolonged bear market in equities and shaken investor confidence combined to make Fiscal Year 2003 extremely demanding for the Chicago Board Options Exchange (CBOE) and its members. In the midst of this very challenging year, CBOE celebrated 30 years of options trading and retained its position as the world’s largest options exchange based on total volume. In addition, CBOE launched a major strategic and tech- nological initiative designed to extend the Exchange’s leadership position into the future. CBOE remained the leading exchange in overall options volume in FY 2003, garnering a 33% market share. Nearly 270 million contracts were traded, with an average daily volume of 1,071,305 contracts. Total equity options volume in FY 2003 was 159.3 million contracts. Despite a decrease of 2% when compared to FY 2002, the volume in FY 2003 represented the fourth highest fiscal year total in the Exchange’s history. Impressive growth in CBOE’s options on benchmark indexes drove exchange volume in FY 2003, including: S&P 500® Index options (SPX), up 45%; S&P 100® Index options (OEX®), up 51%; options on the Dow Jones Industrial AverageSM (DJX), up 31%; Russell 2000 Index® options (RUT), up 71%; and options on the Nasdaq-100® Index Tracking Stock (QQQ), up 21%. Total index options volume was 110.6 million contracts traded, an increase of 43% over FY 2002. From May 2002 through June 2003, index options volume at CBOE posted consecutive gains each month over the same month’s year-ago level. CBOE remains committed to innovations and strategies that will foster the future growth of the Exchange. The most significant of those in 2003, as we’ve noted in the previous pages, was the launch of CBOEdirect HyTS, our new hybrid trading system. CBOEdirect HyTS was designed to capitalize on CBOE’s greatest assets—the largest pool of market-making professionals in the options industry and the deep, liquid markets found in 11 • CBOE 2003 TOTAL OPTIONS MARKET SHARE F I S CA L Y E A R 2 0 0 3 INDEX OPTIONS MARKET SHARE F I S CA L Y E A R 2 0 0 3 EQUITY OPTIONS MARKET SHARE F I S CA L Y E A R 2 0 0 3 C B O E 3 3 . 0 % ISE 23.4% A M E X 2 1 . 9 % P H LX 1 1 . 6 % P C X 1 0 . 1 % C B O E 5 5 . 7 % I S E 7 . 3 % A M E X 2 0 . 2 % P H LX 8 . 6 % P C X 8 . 2 % C B O E 2 5 . 8 % I S E 2 8 . 5 % A M E X 2 2 . 4 % P H LX 1 2 . 5 % P C X 1 0 . 8 % our trading crowds. Those assets, combined with the Exchange’s ongoing commitment to enhance the trading process through technological innovation, led to the creation of this new business model. CBOEdirect HyTS provides market makers with cutting-edge technology to display their markets in order to compete more aggressively with both screen- and floor-based competitors. We believe that CBOEdirect HyTS, with its unique marriage of traders and technology, has the capability to revolutionize the industry and change the way options are traded. The conversion to Hybrid is ongoing as individual classes continue to be phased-in throughout the remainder of 2003. By year-end, the top classes, which account for approximately 90% of the national volume in equity options, will be traded on the Hybrid. The emergence of CBOEdirect HyTS onto the competitive landscape significantly alters the options marketplace. Additionally, because CBOE both built and owns the highly-flexible technology used to power CBOEdirect HyTS, it can be easily adapted to future customer needs. It is fitting, in our 30th anniversary year, for CBOE to punctuate its great tradition of leader- ship in customer service and technological innovation with the unveiling of CBOEdirect HyTS, the trading model of tomorrow. Through the continued dedication and skilled efforts of our members and staff, we look forward to an even more productive and successful future. Sincerely, William J. Brodsky Chairman and CEO Mark F. Duffy Vice Chairman Edward J. Joyce President and COO 12 • CBOE 2003 350 300 250 200 150 100 50 0 12 10 8 6 4 2 0 3 2 1 0 CBOE TOTAL VOLUME I N M I L L I O N S , BY F I S CA L Y E A R 312.2 319.1 221.3 275.4 270.0 103.8 79.8 81.6 CBOE OPEN INTEREST I N M I L L I O N S , BY F I S CA L Y E A R 120 100 80 60 40 20 0 44.9 23.7 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 CBOE TOTAL INDEX VOLUME I N M I L L I O N S , BY F I S CA L Y E A R S&P 500 (SPX) VOLUME I N M I L L I O N S , BY F I S CA L Y E A R 6 5 4 3 2 1 0 J U L AU G S E P O C T N OV D E C J A N F E B M A R A P R M AY J U N J U L AU G S E P O C T N OV D E C J A N F E B M A R A P R M AY J U N F Y 2 0 0 2 F Y 2 0 0 3 F Y 2 0 0 2 F Y 2 0 0 3 S&P 100 (OEX) VOLUME I N M I L L I O N S , BY F I S CA L Y E A R NASDAQ-100 INDEX TRACKING STOCK (QQQ) VOLUME I N M I L L I O N S , BY F I S CA L Y E A R 3 2 1 0 J U L AU G S E P O C T N OV D E C J A N F E B M A R A P R M AY J U N J U L AU G S E P O C T N OV D E C J A N F E B M A R A P R M AY J U N F Y 2 0 0 2 F Y 2 0 0 3 F Y 2 0 0 2 F Y 2 0 0 3 CBOE Financials FY 2003 Although equities options market share and overall membership profitability continued to decline, the Exchange experienced a successful financial year. Net income for the year amounted to $7.4 million versus a loss of $5.6 million in the prior year. Total options daily volume averaged 1,071,300 contracts per day, down approximately 2% from the prior year’s average of 1,097,000 contracts per day. The current year volume level was 16% higher than budgeted volume of 925,000 contracts per day. Significant growth in index volume was the main reason current year revenues were $15.0 million higher than the prior year. Average contracts per day increases versus the prior year included Dow Jones indexes (112%), S&P 100 (51%), and S&P 500 (45%). Expenses were $1.8 million less than the prior year, mainly due to non- recurring severance expenses of $4.5 million incurred in FY02. Expense increases in FY03 were mainly in royalty fees ($2.0 million) related to higher indexes trading volume and our share of losses incurred by OneChicago ($2.7 million). The loss incurred by OneChicago in FY03 was higher than FY02 due to higher operating and marketing costs related to the November 2002 launch of trading single stock futures. Capital spending in FY03 amounted to approximately $25.0 million. Investments were primarily in the Systems Division related to the Hybrid Trading System and other trading floor enhancements. In addition, the Exchange contributed approximately $3.4 million in capital to OneChicago in FY03. Retained earnings increased to $111.1 million and total members’ equity at June 30, 2003 was $132.0 million. At year’s end, the Exchange was debt- free with working capital of $30.1 million. C O N S O L I D AT E D S TAT E M E N T S O F I N C O M E A N D R E TA I N E D E A R N I N G S Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2003 and 2002 (in thousands) Revenues: Transaction fees Other member fees Options Price Reporting Authority Income Regulatory fees Interest Equity in income of CSE Other Total Revenues Expenses: Employee costs Depreciation and amortization Data processing Outside services Royalty fees Travel and promotional expenses Facilities costs Equity in loss of OneChicago Other Communications Severance expense Total Expenses Income (Loss) Before Income Taxes Provision (Benefit) for Income Taxes: Current Deferred Total Provision for Income Taxes Net Income (Loss) Retained Earnings at Beginning of Year Retained Earnings at End of Year C O N S O L I D AT E D B A L A N C E S H E E T S 2003 $ 104,827 26,642 15,614 10,800 368 1,867 3,674 163,792 64,094 29,252 17,771 11,794 11,028 4,853 4,240 4,165 2,583 621 150,401 13,391 5,201 798 5,999 7,392 $ 2002 89,436 24,641 18,884 11,231 459 141 4,031 148,823 63,920 29,709 17,492 13,458 8,989 5,428 4,351 1,483 2,195 727 4,499 152,251 (3,428) (3,102) 5,294 2,192 (5,620) 103,670 $ 111,062 109,290 $ 103,670 Chicago Board Options Exchange, Incorporated and Subsidiaries June 30, 2003 and 2002 (in thousands) 2003 2002 Assets Current Assets: Cash and cash equivalents Accounts receivable Income taxes receivable Prepaid medical benefits Other prepaid expenses Other current assets Total Current Assets Investments in Affiliates Land Property and Equipment: Building Furniture and equipment Less accumulated depreciation and amortization Total Property and Equipment—Net Other Assets: Goodwill Software development work in progress Data processing software and other assets (less accumulated amortization— 2003, $31,854; 2002, $28,334) Total Other Assets—Net Total See notes to consolidated financial statements. 15 • CBOE 2003 $ 20,558 18,473 1,519 1,777 4,464 912 47,703 14,976 4,914 57,609 110,006 (104,577) 63,038 1,388 5,440 38,325 45,153 $ 6,861 17,207 4,361 1,028 4,406 673 34,536 13,861 4,914 57,609 170,152 (157,621) 70,140 1,388 6,455 34,412 42,255 $ 175,784 $ 165,706 C O N S O L I D AT E D B A L A N C E S H E E T S ( C O N T I N U E D ) For the Years Ended June 30, 2003 and 2002 (in thousands) 2003 2002 Liabilities and Members’ Equity Current Liabilities: Accounts payable and accrued expenses Marketing fee payable Unearned income Membership transfer deposits Total Current Liabilities Long-term Liabilities: Unearned income Deferred income taxes Total Long-term Liabilities Total Liabilities Members’ Equity Memberships Retained earnings Total Members’ Equity Total C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2003 and 2002 (in thousands) Cash Flows from Operating Activities: Net Income (Loss) Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization Long-term settlement obligations Deferred income taxes Equity in income of CSE Equity in loss of OneChicago Gain on disposition of property Changes in assets and liabilities: Accounts receivable Income taxes Prepaid medical benefits Other prepaid expenses Other current assets Accounts payable and accrued expenses Marketing fee payable Unearned income Membership transfer deposits Other deposits Net Cash Flows from Operating Activities Cash Flows from Investing Activities: Capital and other assets expenditures OneChicago investment Proceeds from disposition of property Net Cash Flows from Investing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year $ 15,173 687 1,500 200 17,560 2,000 24,228 26,228 43,788 20,934 111,062 131,996 $ 14,436 1,079 1,250 657 17,422 250 23,430 23,680 41,102 20,934 103,670 124,604 $ 175,784 $ 165,706 2003 2002 $ 7,392 $ (5,620) 29,252 798 (1,867) 4,165 (1,266) 2,842 (749) (58) (239) 737 (392) 2,000 (457) 42,158 (25,047) (3,414) (28,461) 13,697 6,861 29,709 (5,333) 5,294 (141) 1,483 (277) 5,005 (1,048) (101) (220) (119) 793 (8,095) 1,396 657 (416) 22,967 (21,871’ ) (4,388) 413 (25,846) (2,879) 9,740 $ 20,558 $ 6,861 Supplemental Disclosure of Cash Flow Information Cash paid for income taxes $ 3,875 $ 0 See notes to consolidated financial statements. 16 • CBOE 2003 N OT E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S Chicago Board Options Exchange, Incorporated and Subsidiaries For the Years Ended June 30, 2003 and 2002 1 . S U M M A RY O F S I G N I F I CA N T AC C O U N T I N G P O L I C I E S Nature of Business – The Chicago Board Options Exchange (“the Exchange”) is a registered securities exchange, subject to oversight by the Securities and Exchange Commission. The Exchange’s principal business is providing a marketplace for trading equity and index options. Basis of Presentation – The consolidated financial statements include the accounts and results of operations of Chicago Board Options Exchange, Incorporated, and its wholly owned subsidiaries, Chicago Options Exchange Building Corporation and, beginning in 2002, CBOE, LLC. Inter-company balances and transactions are eliminated. Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition – Transaction Fees revenue is considered earned upon the execution of the trade and is recognized on a trade date basis. Other Member Fees revenue is recognized during the period the service is provided. OPRA income is allocated based upon the market share of the OPRA members and is received quarterly. Estimates of OPRA’s quarterly revenue are made and accrued each month. Regulatory Fees are predominately received in the month of January and are amortized monthly to coincide with the services rendered during the fiscal year. Cash and Cash Equivalents – Cash and cash equivalents include highly liquid investments with maturities of three months or less from the date of purchase. Investments – All investments are classified as available-for-sale and are reported at cost which approximates their fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Accounts Receivable – Accounts receivable consist primarily of transaction, marketing and other fees receivable from The Options Clearing Corporation (“OCC”), and the Exchange’s share of distributable revenue receivable from The Options Price Reporting Authority (“OPRA”). Investments in Affiliates – Investments in affiliates represent investments in OCC, OneChicago, (“ONE”) and The Cincinnati Stock Exchange (“CSE”). The investment in OCC (20% of its outstanding stock) is carried at cost because of the Exchange’s inability to exercise significant influence. The Exchange accounts for the investment in CSE (68% of its total certificates of proprietary membership) under the equity method due to the lack of effective control over the operating and financing activities of CSE. During 2002 the Exchange made an initial investment in ONE (approximately 40% of its outstanding stock). This investment is accounted for under the equity method. Property and Equipment – Property and equipment are carried at cost. Depreciation on building, furniture and equipment is provided on the straight-line method. Estimated useful lives are 40 years for the building and five to ten years for furniture and equipment. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining term of the applicable leases. Data Processing Software – Data processing software is carried at cost and amortized over five to seven years using the straight-line method commencing with the date the software is put in service. Goodwill – SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and separately identified intangible assets with indefinite lives no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. Separately identified intangible assets not deemed to have indefinite lives will continue to be amortized over their useful lives. Upon review by Exchange management, it was determined there has been no impairment of the intangible assets included in the financial statements. Goodwill is amortized over fifteen years for income tax purposes. Income Taxes – Income taxes are determined using the liability method, under which deferred tax assets and liabilities are recorded based on differences between the financial accounting and tax bases of assets and liabilities. Unearned Income – Unearned income represents amounts received by the Exchange for which the contracted services have not been provided. Fair Value of Financial Instruments – SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires disclosure of the fair value of certain financial instruments. The carrying values of financial instruments included in assets and liabilities are reasonable estimates of their fair value. Reclassifications – Certain prior year amounts have been reclassified to conform with the current year presentation. 17 • CBOE 2003 N OT E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D ) Recent Accounting Pronouncement – In November 2002, the FASB issued FASB Interpretation Number 45 (FIN), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” effective June 30, 2003. FIN45 is an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Exchange has determined the impact of adopting FIN45 to be immaterial. In January 2003, the FASB issued FIN46, “Consolidation of Variable Interest Entities,” effective July 1, 2003. This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest entities that meet one or all of certain preset characteristics. The Exchange has determined the impact of adopting FIN46 to be immaterial. 2 . I N V E ST M E N T I N T H E C I N C I N N AT I STO C K E XC H A N G E The investment in CSE is accounted for using the equity method. Condensed financial statements of the CSE as of and for the years ended June 30, 2003 and 2002 are as follows (in thousands): Balance Sheets Cash and cash equivalents Securities available-for-sale Other current assets Long-term securities available-for-sale Other long-term assets Total assets Current liabilities Deferred income taxes Members’ equity Total liabilities and members’ equity The Exchange’s share of members’ equity Statement of Operations Transaction revenue Other revenue Total revenues Employee costs Other expenses Total expenses Net income The Exchange’s equity in net income $ 2003 15,734 525 12,449 11,508 4,862 45,078 26,888 982 17,208 45,078 $ 2002 4,955 2,090 9,007 8,540 5,661 30,253 14,543 1,252 14,458 30,253 $ 12,175 $ 10,308 2003 4,160 14,885 19,045 2,342 13,948 16,290 2,755 1,867 $ $ 2002 2,971 5,011 7,982 2,622 5,152 7,774 208 141 $ $ 3 . R E L AT E D PA RT I E S The Exchange’s equity in the net assets of OCC exceeded its cost by approximately $8.3 million and $8.6 million at June 30, 2003 and 2002, respectively. The Exchange collected transaction and other fees of $129.0 million and $123.4 million for the years ended June 30, 2003 and 2002, respectively, by drawing on accounts of the Exchange’s members held at OCC. For the years ended June 30, 2003 and 2002, respectively, the amount collected includes $8.2 million and $19.3 million of marketing fees (see note 8). The Exchange had a receivable due from OCC of $11.9 million and $11.1 million at June 30, 2003 and 2002, respectively. The Exchange incurred rebillable expenses on behalf of CSE, for expenses such as employee costs, computer equipment and office space of $3.7 million and $2.6 million for the years ended June 30, 2003 and 2002, respectively. The Exchange had a receivable from CSE of $890 thousand and $485 thousand at June 30, 2003 and 2002, respectively. OPRA is a committee administered jointly by the five options exchanges and is authorized by the Securities and Exchange Commission to provide consolidated options information. This information is provided by the exchanges and is sold to outside news services and customers. OPRA’s operating income is distributed among the exchanges based on their relative volume of total transactions. Operating income distributed to the Exchange was $15.6 million and $18.9 million for the years ended June 30, 2003 and 2002, respectively. The Exchange had a receivable from OPRA of $4.1 million and $4.5 million at June 30, 2003 and 2002, respectively. 18 • CBOE 2003 N OT E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D ) The Exchange, the Chicago Mercantile Exchange and the Chicago Board of Trade are partners in ONE, a joint venture created to trade single stock futures. Certain ONE employees also have minority interests in the joint venture. ONE is a for-profit entity with its own management and board of directors, and is separately organized as a regulated exchange. The Exchange contributed $3.4 million and $4.4 million in capital to ONE during the years ended June 30, 2003 and 2002, respectively. The Exchange had a receivable due from ONE of $1.0 million and $391 thousand at June 30, 2003 and June 30, 2002, respectively. 4 . L E AS E S The Exchange leases office space with lease terms of six months and five years. Rent expenses related to leases during FY03 and FY02 were $735 thousand and $1.8 million, respectively. Future minimum lease payments under these noncancelable operating leases are as follows at June 30, 2003 (in thousands): 2004 2005 2006 2007 2008 Total $ 758 776 736 112 66 $ 2,448 5 . E M P L OY E E B E N E F I T S Eligible employees participate in the Chicago Board Options Exchange SMART Plan (the “SMART Plan”). The SMART Plan is a defined contribution plan, which is qualified under Internal Revenue Code Section 401(k). The Exchange contributed $3.5 million and $3.4 million to the SMART Plan for the years ended June 30, 2003 and 2002, respectively. Eligible employees participate in the Supplemental Employee Retirement Plan (the “SERP Plan”). The SERP Plan is a defined contribution plan that is nonqualified by Internal Revenue Code regulations. The Exchange contributed $788 thousand and $579 thousand to the SERP Plan for the years ended June 30, 2003 and 2002, respectively. The Exchange also has a Voluntary Employees’ Beneficiary Association (“VEBA”). The VEBA is a trust, qualifying under Internal Revenue Code Section 501(c)(9), created to provide certain medical, dental, severance, and short-term disability benefits to employees of the Exchange. Contributions to the trust are based on reserve levels established by Section 419(a) of the Internal Revenue Code. During fiscal 2003 and 2002, the Exchange contributed $2.7 million and $1.8 million, respectively, to the trust. 6 . C O M M I T M E N T S In September 2000, the Exchange reached an agreement in principle to settle a consolidated civil class action lawsuit filed against the Exchange and other U.S. options exchanges and certain market maker firms. The Exchange agreed to pay $16.0 million in three equal installments on or before October 16, 2000, July 1, 2001, and July 1, 2002. All payments have been made, and are being held in escrow pending approval of the settlement agreement by the U.S. District Court for the Southern District of New York. 7 . I N C O M E TA X E S A reconciliation of the statutory federal income tax rate to the effective income tax rate, for the years ended June 30, 2003 and 2002, is as follows: Statutory federal income tax rate State income tax rate, net of federal income tax effect Equity in income of CSE Other permanent differences, net Effective income tax rate At June 30, 2003 and 2002, the net deferred income tax liability approximated (in thousands): Deferred tax assets Deferred tax liabilities Net deferred income tax liability 2003 35.0% 4.7 0.0 5.1 44.8% 2003 11,369 35,597 24,228 $ $ 2002 34.0% 4.7 (98.0) (4.6) (63.9%) 2002 9,261 32,691 23,430 $ $ Deferred income taxes arise principally from temporary differences relating to the use of accelerated depreciation methods for income tax purposes, capitalization of software, licensing fees, funding of the VEBA trust, and beginning in 2002, undistributed earnings from the Exchange’s investment in CSE. 19 • CBOE 2003 N OT E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S ( C O N T I N U E D ) Due to CBOE’s refined strategy of possibly selling the CSE investment, management now believes that CBOE’s expected realization of its investment in CSE will most likely be through the sale of its investment in CSE, which will trigger a capital gain at CBOE’s normal tax rate. Therefore, beginning in 2002, CBOE has modified the deferred tax liability rate to match the changed disposition strategy. 8 . M A R K E T I N G F E E Even though the original Exchange-sponsored marketing fee was suspended effective August 1, 2001, the Exchange continued to facilitate the collection of payment for order flow funds from DPMs and distributed funds to order provider firms, as directed by the DPMs each month. Effective June 2, 2003, the Exchange re-instituted a new marketing fee program. As of June 30, 2003 and 2002 amounts held by CBOE on behalf of others included accounts receivable balances of $687 thousand and $1.1 million, respectively. 9 . L I T I G AT I O N A former member of the Exchange has requested compensation for losses it alleges to have incurred because the Exchange terminated that member’s appointment as a designated primary market maker. The former member states that it has suffered substantial lost profits and that it lost the opportunity to sell its business at a multiple of those profits. The Exchange has informed the former mem- ber that specific Exchange rules preclude claims of this type from being made against the Exchange. The former member has initiated no lawsuit or other formal legal proceeding. I N D E P E N D E N T A U D I T O R S ’ R E P O RT To the Board of Directors and Members of the Chicago Board Options Exchange, Incorporated: We have audited the accompanying consolidated balance sheets of the Chicago Board Options Exchange, Incorporated and subsidiaries (the “Exchange”) as of June 30, 2003 and 2002, and the related consolidated statements of income and retained earnings and of cash flows for the years then ended. These financial statements are the responsibility of the Exchange’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of The Cincinnati Stock Exchange (“CSE”) for the years ended June 30, 2003 and 2002, the Exchange’s investment in which is accounted for by use of the equity method. The Exchange’s equity of $12.2 million and $10.3 million in the CSE’s net assets at June 30, 2003 and 2002, respectively, and of $1.9 million and $141 thousand in that Exchange’s net income for the respective years then ended are included in the accompanying financial statements. The financial statements of CSE were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for CSE, is based solely on the report of such other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of the Exchange and its subsidiaries at June 30, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. August 15, 2003 20 • CBOE 2003 B O A R D O F D I R E C T O R S William J. Brodsky Chairman of the Board and Chief Executive Officer Leon T. Kendall Chairman (Retired) Mortgage Guaranty Insurance Corporation Public Director Scott P. Marks, Jr. Former Vice Chairman First Chicago NBD Corporation Public Director R. Eden Martin Partner Sidley Austin Brown & Wood President The Commercial Club of Chicago Public Director Roderick Palmore Senior Vice President, General Counsel & Secretary Sara Lee Corporation Public Director Thomas H. Patrick, Jr. Managing Director Equity Linked Trading for the Americas Merrill Lynch & Co., Inc. Off-Floor Director Mark F. Duffy Vice Chairman Floor Director Robert J. Birnbaum Former President New York Stock Exchange American Stock Exchange Public Director James R. Boris Chairman JB Capital Management, LLC Former Chairman and Chief Executive Officer EVEREN Securities, Inc. Public Director Silas Keehn President (Retired) Federal Reserve Bank of Chicago Public Director Daniel P. Koutris Vice President Knight Financial Products At-Large Director Duane R. Kullberg Former Chief Executive Officer, 1980–1989 Andersen Worldwide Public Director Richard F. Lynch Senior Vice President Equity Trading Prudential Securities Off-Floor Director James P. MacGilvray Executive Vice President National Financial Services, LLC Off-Floor Director S TA N D I N G C O M M I T T E E S O F T H E B O A R D Thomas A. Petrone Managing Director Global Equity Derivatives Citigroup Global Markets Inc. Off-Floor Director Susan M. Phillips Former Governor Federal Reserve Board Dean School of Business and Public Management The George Washington University Public Director William R. Power Member New York Stock Exchange Chicago Board Options Exchange Lessor Director Robert A. Rosholt Chief Financial and Investment Officer Nationwide Mutual Insurance Company Public Director John E. Smollen Managing Director SLK/Hull Derivatives, LLC Floor Director John M. Streibich Designated Primary Market Maker Susquehanna International Group At-Large Director Eugene S. Sunshine Senior Vice President for Business and Finance Northwestern University Public Director Edward T. Tilly Market Maker Botta Capital Management, LLC Floor Director Alvin G. Wilkinson Market Maker Wilkinson Management, LLC Floor Director AU D I T C O M M I T T E E Duane R. Kullberg, Chairman Silas Keehn Daniel P. Koutris Roderick Palmore Eugene S. Sunshine C O M P E N SAT I O N E X E C U T I V E G OV E R N A N C E C O M M I T T E E R. Eden Martin, Chairman James R. Boris Mark F. Duffy Daniel P. Koutris Richard F. Lynch William R. Power Robert A. Rosholt Eugene S. Sunshine C O M M I T T E E William J. Brodsky, Chairman Robert J. Birnbaum Mark F. Duffy Duane R. Kullberg James P. MacGilvray R. Eden Martin Roderick Palmore John M. Streibich Edward T. Tilly C O M M I T T E E Robert J. Birnbaum, Chairman William R. Power, Vice Chairman Leon T. Kendall Duane R. Kullberg Richard F. Lynch Scott P. Marks, Jr. R. Eden Martin Thomas A. Petrone John E. Smollen Edward T. Tilly Alvin G. Wilkinson REGULATORY OVERSIGHT C O M M I T T E E Susan M. Phillips, Chairwoman Robert J. Birnbaum Silas Keehn Leon T. Kendall C O M M I T T E E S O F T H E M E M B E R S H I P David F. Miller John P. O’Grady William J. O’Keefe Steve Tumen J. Slade Winchester A R B I T R AT I O N A N D A P P E A L S C O M M I T T E E Peter C. Guth, Co-Chairman Patrick J. McDermott, Co-Chairman Courtney T. Andrews Daniel Baldwin Thomas R. Beehler Patrick R. Carroll Michael D. Coyle Christopher Cribari Terrence E. Cullen David Dobreff Stephen P. Donahue David J. Drummond Douglas H. Edelman Brian H. Egert David A. Eglit Jonathan G. Flatow Theodoric Flemister Mark R. Fluger Matthew T. Garrity Ann Grady Allen D. Greenberg Thomas A. Hamilton Mark A. Harmon Michael P. Held William G. Hohenadel, Jr. Paul J. Jiganti Mark E. Kalas B. Michael Kelly Richard Kevin Joseph G. Kinahan John A. Koltes Craig Luce Michael Lyons Daniel R. McCarthy Brock R. McNerney Joseph D. Mueller Charles W. Palm Donald F. Pratl Douglas W. Prskalo Gregg A. Prskalo Steve Quirk Scott A. Resnick Timothy D. Rice Carlos Saez Patrick M. Seguin Bill Shimanek A L L O CAT I O N / S P E C I A L P R O D U C T AS S I G N M E N T C O M M I T T E E Daniel P. Carver, Chairman Terrence J. Andrews Jeffrey A. Cesarone William J. Ellington Jonathan G. Flatow James Gray Paul J. Jiganti Stuart J. Kipnes Gerald T. McNulty 21 • CBOE 2003 C O M M I T T E E S O F T H E M E M B E R S H I P ( C O N T I N U E D ) Mark A. Esposito, Vice Chairman Daniel P. Carver James D. Coughlan Stephen M. Dillinger Damon M. Fawcett James Gazis James A. Gray Kevin J. Hincks Frank A. Hirsch Paul J. Jiganti Stuart J. Kipnes Licia J. Leslie David F. Miller, Jr. Kenneth D. Mueller John P. O’Grady Joel A. Tenner Ex-Officio Edward T. Tilly E Q U I T Y M A R K E T D E V E L O P M E N T A N D M A R K E T P E R F O R M A N C E C O M M I T T E E John E. Smollen, Chairman Terrence J. Andrews Michael R. Benson Richard H. Bode Jeffrey A. Cesarone Terrence E. Cullen Michael A. Dalesandro Brian M. Dowd William J. Ellington Richard W. Fuller, Jr. James Gazis David A. Gilbert Monte Henige Jack Kennedy Donald H. Klein, Jr. Mark D. Oakley Robert M. O’Leary Burt J. Robinson David H. Scott Frank P. Tenerelli E X E M P T I O N C O M M I T T E E Peter M. Najarian, Chairman Jeffrey A. Cesarone, Vice Chairman Patrick J. Caffrey Corey L. Fisher S. Casey Platt Michael N. Suarez FAC I L I T I E S C O M M I T T E E Christopher M. Wheaton, Chairman Richard J. Albanese, Jr. Patrick M. Athern Daniel Condon Robert R. Fabijanowicz Jeffrey Fried Kathryn M.Gallagher Christopher Giannakopoulos Joseph Mearsheimer Joseph M. O’Donnell Alec D. Pashkow Donald F. Pratl James U. Wieties Adam J. Zechman F I N A N C I A L P L A N N I N G C O M M I T T E E Daniel P. Koutris, Chairman Dennis A. Carta Alan J. Dean Stephen P. Donahue Douglas H. Edelman William J. Ellington Fred O. Goldman Jeffrey T. Kaufmann Kevin J. Keller Timothy G. Keller Michael T. Merucci Frank A. Roszkiewicz Robert Silverstein Timothy M. Sommerfield F I N A N C I A L R E G U L ATO RY C O M M I T T E E Richard E. Schell, Chairman Margaret E. Wiermanski, Vice Chairwoman Matthew D. Abraham David J. Barclay William F. Carik Frank L. Catris David T. DeArmey Peter Dorenbos Mark E. Gannon John C. Hiatt, Sr. Steven A. O’Malley Patricia A. Pokuta Janice T. Rohr Ex-Officio Linda C. Haven Andrew J. Naughton Jacqueline L. Sloan F L O O R D I R E C TO R S C O M M I T T E E Mark F. Duffy, Chairman Daniel P. Koutris William R. Power John E. Smollen John M. Streibich Edward T. Tilly Alvin G. Wilkinson F L O O R O F F I C I A L S C O M M I T T E E Damon M. Fawcett, Chairman Raymond P. Dempsey, Vice Chairman Darryl A. Behm Patrick J. Caffrey James K. Corsey Brian M. Dowd Timothy P. Feeney Corey L. Fisher Craig R. Johnson Thomas W. McEntegart Sean P. Moran Joseph J. Nowicki Jeffrey J. Oechsel Ronald M. Pittelkau Elizabeth A. Ruda Daniel C. Zandi I N D E X F L O O R P R O C E D U R E C O M M I T T E E Richard J. Tobin, Chairman Steven J. Pettinato, Co-Vice Chairman Michael R. Quaid, Co-Vice Chairman Jon Adler Terrence J. Brown Richard Cichy Stephen J. Climo Brian M. Connelly James D. Coughlan Matthew J. Filpovich Jonathan G. Flatow Martin Galvin Thomas P. Halliday Wayne A. Jazwierski Emmanuel L. Liontakis Michael P. McGuire Patrick E. O’Malley Nicholas C. Reilly David A. Saviski Keith G. Siemiawski James D. Sullivan Scott F. Tinervia I N D E X M A R K E T D E V E L O P M E N T A N D M A R K E T P E R F O R - M A N C E C O M M I T T E E Jonathan G. Flatow, Chairman Dennis A. Carta, Vice Chairman Donald C. Cullen David A. Filippini Michael F. Gallagher Paul Kepes I. Patrick Kernan Jeffrey L. Klein Todd A. Koster Jeffrey S. Latham Joseph A. Mareno Charles A. Maylee Michael T. Merucci Christopher Nevins Daniel I. Nicolosi Joshua G. Ortego Daniel J. O’Shea Douglas W. Prskalo Joseph F. Sacchetti Peter H. Schulte L E S S O R A DV I S O RY C O M M I T T E E William R. Power, Chairman Robert Silverstein, Vice Chairman Daniel Ambrosino Lawrence J. Blum Mark F. Duffy David J. Fikjes Peter C. Guth Paul J. Jiganti Ruth I. Kahn Jeffrey Kirsch Victor Meskin Michael Mondrus Robert Murtagh Loren H. Newman William Rosen M E M B E R F I R M O P E R AT I O N S C O M M I T T E E David F. Miller, Chairman Edward Barry, Jr. Thomas J. Berk, III Peter Bottni Peter J. Brown Jeffrey J. Bughman Daniel P. Carver Steven M. Chilow David Creagan Raymond P. Dempsey William J. Ellington Charles Feuillan Joseph A. Frehr James Gray Richard Graziadei James M. Jacobsen David Johnson Jeffrey S. Kantor Jeffrey T. Kaufmann Stuart J. Kipnes Donald Klein James C. Lavery Nicholas L. Marovich Timothy A. Martin Patrick J. McDermott Andrew McLeod Gerald T. McNulty Mark T. Morse Donald F. Pratl David B. Schmueck Timothy Watts Alan Zahtz Antanas Siuma Fred Teichert John Waterfield J. Todd Weingart Dennis M. Wetzel James U. Wieties B U S I N E S S C O N D U C T C O M M I T T E E John F. Burnside, Chairman Bruce I. Andrews Patrick J. Caffrey Raymond P. Dempsey Richard I. Fremgen Peter C. Guth Allen B. Holeman Gary P. Lahey Steven A. O’Malley Kenneth L. Wagner Margaret E. Wiermanski J. Slade Winchester John A. Witten C B O E / C B OT J O I N T A DV I S O RY C O M M I T T E E John E. Callahan, Chairman Jesse L. Stamer William J. Terman Ex-Officio Norman D. Friedman Gary P. Lahey Paul L. Richards C L E A R I N G P R O C E D U R E C O M M I T T E E John E. O’Donnell, Chairman Mark A. Baumgardner Mitchell R. Bialek Louis G. Buttny Jorene Clark James E. Halm John Hunt William J. Inglese John J. Kaminsky Anthony J. Monaco Maureen Pacocha Frank Pirih Patty Kevin-Schuler Susan Shimmin Thomas C. Smith Michael E. Trees E L E C T I O N C O M M I T T E E Joanne Moffic-Silver, Chairwoman Jaime Galvan Stanley E. Leimer E Q U I T Y F L O O R P R O C E D U R E C O M M I T T E E Anthony J. Carone, Chairman 22 • CBOE 2003 C O M M I T T E E S O F T H E M E M B E R S H I P ( C O N T I N U E D ) M E M B E R S H I P M O D I F I E D T R A D I N G SYST E M ( M T S ) A P P O I N T M E N T S C O M M I T T E E William J. O’Keefe, Chairman Anthony Arciero Daniel P. Carver, Sr. Mark F. Duffy James P. Fitzgibbons Michael B. Frazin Joseph A. Frehr Richard Fuller Kevin J. Keller Gerald T. McNulty John E. Smollen N E W P R O D U C T D E V E L O P M E N T C O M M I T T E E John M. Streibich, Chairman Boris Furman, Vice Chairman Barton Bergman Peter Bottini Edward G. Boyle Michael F. Gallagher Jean R. Hanrahan Steven Hessing David C. Ho Jason Knupp Gary P. Lahey Gavin Lowry Martin P. O’Connell Dominic Salvino Matthew Shapiro Robert C. Sheehan N O M I N AT I N G C O M M I T T E E Steven M. Chilow, Chairman Lawrence J. Blum James J. Boyle Jonathan G. Flatow Donald P. Jacobs Paul J. Jiganti Gerald T. McNulty Newton N. Minow Kenneth D. Mueller John R. Power S PX F L O O R P R O C E D U R E C O M M I T T E E Richard T. Marneris, Chairman Jeffrey J. Kupets, Vice Chairman Salvatore J. Aiello Eoin T. Callery S. Mark Cavanagh Timothy P. Feeney Michael J. Hayes I. Patrick Kernan Kraig D. Koester John J. Massarelli Michael M. Mayor Timothy S. McGugan Mark T. Morse Christopher Nevins Daniel J. Quinn David A. Scatena Joseph F. Sullivan Wayne A. Weiss STO C K S E L E C T I O N C O M M I T T E E John M. Streibich, Chairman Benjamin E. Parker, Vice Chairman David Adent Steven M. Chilow Mark G. Eddy Geoffrey D. Fahy James Gray Brock R. McNerney Steven Mennecke Joseph D. Mueller Timothy O’Donnell Scott C. Pospisil John Superson Timothy J. Werner J. Slade Winchester William Phillip Yerby David Zalesky SYST E M S C O M M I T T E E Terrance G. Boyle, Chairman Mark A. Esposito, Vice Chairman Michael E. Barry Barton Bergman Thomas J. Corbett Sam L. Eadie, Jr. David R. Glynn Mark A. Harmon David S. Kalt Mark J. Karrasch Benjamin R. Londergan Bruce R. Meegan David F. Miller Thomas J. Neil John E. O’Donnell Steven J. Pettinato Michael L. Rodnick David B. Schmueck C O M M I T T E E Robert B. Gianone, Chairman Mary Rita Ryder, Vice Chairwoman Anthony P. Arciero Kenneth J. Bellavia William E. Billings Daniel S. Caputo Matthew J. Filpovich Ian R. Galleher Joseph J. Gregory Andrew J. Hodgman Charles F. Imburgia Jeffrey H. Melgard Lloyd William Montgomery Andrew B. Newmark Philip G. Oakley Steven Padley Jason S. Paul Gregg A. Prskalo James P. Rouzan Gregg M. Rzepczynski Stuart D. Saltzberg Thomas C. Smith, III Thomas E. Stern Robert J. Wasserman TA S K F O R C E S C O R P O R AT E ST R U C T U R E TAS K F O R C E Edward T. Tilly, Chairman William J. Brodsky Mark F. Duffy Scott P. Marks, Jr. R. Eden Martin Thomas H. Patrick, Jr. Michael J. Post William R. Power Robert A. Rosholt Robert Silverstein H Y B R I D I M P L E M E N TAT I O N TAS K F O R C E Terrance G. Boyle Anthony J. Carone Mark A. Esposito Edward J. Joyce Daniel P. Koutris David F. Miller John E. Smollen John M. Streibich Edward T. Tilly A D V I S O RY C O M M I T T E E S C O M P L I A N C E I N ST I T U T I O N A L M A N AG I N G D I R E C TO R S T R A D E R S G R O U P Alan Augarten John Cassol Arnaud Desombre Gerald Donini Scott Draper Joseph Gahtan Leonard Greenbaum Kenneth MacKenzie Val Mihan Kenneth Monahan Lawrence Motola Brett Overacker Jack Skiba Daniel Waldron Simon Yates A DV I S O RY C O M M I T T E E Joseph Baggio Joseph Bile Joseph Dattolo Matthew Gelber Rich Gueren Lawrence Hanson David Johnson Ronald Kessler Richard Lynch Edward Lynn James MacGilvray Anthony McCormick Kurt Muller Kevin Murphy Henry Nothnagel A DV I S O RY PA N E L Kevin Ahearn David A. DeMuro Allen Holeman James Huff James Kehoe Pat Levy Mark Manning Michael Moran Michelle Morgan Lou Moschetta Robert Palleschi Luigi Ricciardi Mark Straubel Brian Underwood David Whitcomb 23 • CBOE 2003 Kevin Murphy Christopher Nagy Frank O’Connor Robert Paset Nancy Penwell John Sagness Greg Schebece James Schmitz Joseph Sellitto Terri Strickland-Smith Carol Zenk Michael Perry Christopher Sandel Thomas Stotts Joseph Valenza Stewart Winner R E G I O N A L F I R M A DV I S O RY C O M M I T T E E Vincent Bonato Joseph Fenton Gary Franklin Mary Hanan Sharon Jensen David Kalt Brian Killefer James Knight Dennis Moorman E X E C U T I V E O F F I C E R S A N D S TA F F O F F I C I A L S William J. White, Jr. Vice President Member Trading Services James P. Roche Vice President Market Data Services Richard Lewandowski Vice President Regulatory Services Deborah Woods Vice President Human Resources Margaret Williams Vice President Market Regulation L E G A L Joanne Moffic-Silver General Counsel and Corporate Secretary Arthur B. Reinstein Deputy General Counsel J. Patrick Sexton Assistant General Counsel R E G U L ATO RY S E RV I C E S Timothy H. Thompson Senior Vice President and Chief Regulatory Officer SYST E M S Gerald T. O’Connell Executive Vice President and Chief Information Officer James J. Neceda Vice President Systems Development Mark S. Novak Vice President and Chief Technology Officer Systems Development Larry L. Pfaffenbach Vice President Systems Planning Curt Schumacher Vice President and Chief Technology Officer Systems Operations T R A D I N G O P E R AT I O N S Philip M. Slocum Senior Vice President Gail Flagler Vice President Reporting Services John T. Johnston Vice President Execution and Reporting Services Thomas P. Knorring Vice President Trade Processing Anthony Montesano Vice President Trading Systems Development Douglas Beck Vice President Market Monitoring Roberta J. Piwnicki Vice President Systems Development Michael Todorofsky Vice President Market Operations Lawrence J. Bresnahan Vice President Financial and Sales Practice Compliance Gautam Roy Vice President Software Timothy T. Watkins Vice President Trading Systems Development C I V I C A N D G OV E R N M E N TA L A F FA I R S Amy Zisook Vice President C O R P O R AT E C O M M U N I CAT I O N S Carol E. Kennedy Vice President C O R P O R AT E P L A N N I N G A N D R E S E A R C H Richard G. DuFour Executive Vice President Joseph Levin Vice President Research and Product Development F I N A N C E A N D A D M I N I ST R AT I O N Alan J. Dean Senior Vice President and Chief Financial Officer Donald R. Patton Controller and Vice President Accounting C L E A R I N G M E M B E R F I R M S A A Sage Corporation ABN AMRO, Inc. ABN AMRO Sage Corporation A.G. Edwards & Compass Execution Services, LLC Credit Suisse First Boston Corporation Deutsche Bank Alex Instinet Clearing Services Inc. Interactive Brokers, Inc./Timber Hill J.J.B. Hilliard, W.L. Brown, Inc. Lyons, Inc. Donaldson Lufkin & J.P. Morgan Securities, Inc. K.A., Division of First Morgan Stanley Dean Options of Chicago, Inc. Witter Inc. Inc. Merrill Lynch, Pierce, Fenner & Smith, Inc. Raymond James & Associates, Inc. Merrill Lynch Professional Clearing Morgan Keegan & Company, Inc. Morgan Stanley & Company, Inc. National Financial Services, LLC National Investor Services Corp. Nomura Securities International, Inc. O’Connor & Company, PaineWebber, Inc. PAX Clearing Corporation PAX Clearing Corp.-AB Penson Financial Services, Inc. Preferred Capital Markets, Inc. RBC Dain Rauscher, Inc. RBC Dominion Securities Corporation Refco Securities, LLC Robert W. Baird & Co., Inc. Salomon Brothers, Inc. Salomon Smith Barney, SG Cowen Securities Corporation SLK-Hull Division of First Options Inc. Spear, Leeds & Kellogg Stephens, Inc. Stifel, Nicolaus & Company, Inc. Timber Hill, LLC TradeLink, LLC UBS Warburg, LLC U.S. Clearing Corp. Wachovia Securities, LLC Weiss, Peck & Greer, LLC Ziv Investment Company Jenrette Securities Corporation/Pershing Division E.D. & F. Man International, Inc. E.D. & F. Man International, Inc./Retail Customer Electronic Brokerage Fahnestock & Co., Inc. FIMAT, USA, Inc. First Clearing, LLC First Options of Chicago, Inc. Goldman, Sachs & Co. Herzog, Heine, Geduld, Inc. Knight Execution Partners, LLC K.V. Execution Services, LLC La Branche Financial Services, Inc. Lakeshore Securities, L.P. Lehman Brothers, Inc. Legent Clearing Corporation Lek Securities Corporation LIT, Division of First ING Barings Corp. Options of Chicago, Inc. Systems, LLC Ladenburg, Thalman & Co., Inc. LLC E X E C U T I V E William J. Brodsky Chairman and Chief Executive Officer Mark F. Duffy Vice Chairman Edward J. Joyce President and Chief Operating Officer B U S I N E S S D E V E L O P M E N T Edward L. Provost Executive Vice President Thomas A. Brady Vice President Member Trading Services Daniel R. Hustad Vice President Market Quality and Assurance and DPM Administration Matthew T. Moran Vice President Institutional Marketing Debra L. Peters Vice President The Options Institute Sons, Inc. Advest, Inc. Banc One Capital Markets, Inc. Bank of America Securities, LLC Bear Stearns Securities Corp. BNP Securities (U.S.A.), Inc. BNY Clearing Services, LLC BNY ESI & Co. Inc. Botta Capital Management, LLC Carr Futures, Inc. Charles Schwab & Co., Inc. CIBC World Markets Corp. 24 • CBOE 2003 CBOE,® Chicago Board Options Exchange,® CBOEdirect,® CBOE Volatility Index,® OEX,® VIX® and XEO® are registered trademarks, and BXM,SM HyTS,TM and SPXSM are trademarks of Chicago Board Options Exchange, Incorporated. Dow Jones,® DIAMONDS,® DJA,® and DJIA® are reg- istered trademarks, and Dow Jones Industrial AverageSM and Options on the DowSM are service marks of Dow Jones & Company, Inc., and have been licensed for certain purposes by Chicago Board Options Exchange, Incorporated. Options based on Dow Jones Indexes are not sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones makes no repre- sentation regarding the advisability of investing in such products. Nasdaq-100,® Nasdaq- 100 Index,® Nasdaq,® The Nasdaq Stock Market,® Nasdaq-100 Shares,SM Nasdaq-100 Index Tracking Stock,SM and Nasdaq-100 TrustSM are trademarks of The Nasdaq Stock Market, Inc. The Nasdaq-100 Index® is determined, composed and calcu- lated by Nasdaq without regard to CBOE, The Nasdaq-100 Trust,SM or the beneficial owners of Nasdaq-100 Shares.SM The corporations make no warranty, express or implied, and bear no liability with respect to The Nasdaq-100 Index,® its use, or any data included therein. The Russell 2000® Index is a registered trademark of The Frank Russell Company. Standard & Poor’s,® S&P,® S&P 100® and S&P 500® are registered trademarks of The McGraw-Hill Companies, Inc. and are licensed for use by Chicago Board Options Exchange, Incorporated. ©2003 Chicago Board Options Exchange, Incorporated. All rights reserved. Printed in the USA. Design: Liska + Associates Photography: John Zich (pp. 08–09) and Mark Battrell (p. 11). Printing: Active Graphics LaSalle at Van Buren LaSalle at Van Buren Chicago, Illinois 60605 Chicago, Illinois 60605 312.786.5600 312.786.5600 61 Broadway, Suite 1301 61 Broadway, Suite 1301 New York, New York 10006 New York, New York 10006 212.344.4110 212.344.4110 www.cboe.com www.cboe.com 

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