Notice2025-00412
Self-Regulatory Organizations; Cboe Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Permit Orders Comprised of Options and Futures Legs (“Future-Option Orders”)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 13, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 7 (Monday, January 13, 2025)</title>
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[Federal Register Volume 90, Number 7 (Monday, January 13, 2025)]
[Notices]
[Pages 2759-2766]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-00412]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102126; File No. SR-CBOE-2024-042]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Permit Orders Comprised of Options and Futures
Legs (``Future-Option Orders'')
January 6, 2025.
I. Introduction
On September 17, 2024, Cboe Exchange, Inc. (the ``Exchange'' or
[[Page 2760]]
``Cboe Options'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit future-option
orders.\3\ The proposed rule change was published for comment in the
Federal Register on October 8, 2024.\4\ The Commission has received no
comments regarding the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The proposal states that a future-option order ``which is
deemed an inter-regulatory spread order for purposes of the Rules,
is an order to buy or sell a stated number of units of an underlying
or a related futures contract(s) coupled with the purchase or sale
of an option contract(s) on the Exchange. The Exchange designates in
which classes future-option orders are available.'' See proposed
Exchange Rule 1.1.
\4\ See Securities Exchange Act Release No. 101229 (Oct. 1,
2024), 89 FR 81592 (``Notice'').
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On November 18, 2024, pursuant to Section 19(b)(2) of the Exchange
Act,\5\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\6\ This order institutes proceedings under
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change.
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\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 101646 (Nov. 18,
2024), 89 FR 83723 (Nov. 22, 2024) (designating January 6, 2025, as
the date by which the Commission shall either approve, disapprove,
or institute proceedings to determine whether to disapprove the
proposed rule change).
\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change
As described more fully in the Notice,\8\ the Exchange proposes to
amend its rules to permit future-option orders, which would be
comprised of both options and futures legs.\9\ The Exchange states that
it is common for investors to engage in hedging or other investment
strategies that involve options and related futures products, and that,
to execute these strategies, investors must submit the options order to
the Exchange and separately submit the futures order to a designated
contract market (``DCM'') on which the futures trade.\10\ The Exchange
states, for example, that market participants may obtain positions in
Cboe Volatility Index (``VIX'') options through transactions on the
Exchange and hedge those positions entering into a separate transaction
on Cboe Futures Exchange, LLC's (``CFE'') centralized market in VIX
futures (``VX futures'').\11\ The Exchange states that separate
executions of this sort create additional risks, including the risk
that one order will execute while the other does not and price risk
resulting from the time it takes to complete both transactions.\12\ The
Exchange states that due to these risks and the complexities of multi-
part transactions, market participants may instead transact in the
over-the-counter (``OTC'') market or not obtain a hedge at all.\13\ The
Exchange states that the proposal would adopt a mechanism to facilitate
the execution of these cross-product transactions in a simple,
efficient manner that reduces these execution and price risks.\14\
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\8\ See supra note 4.
\9\ See Notice, 89 FR 81593.
\10\ See id.
\11\ See id.
\12\ See id.
\13\ See id.
\14\ See id.
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The proposal amends Exchange Rule 1.1 to define to define a
``future-option order'' as an order to buy or sell a stated number of
units of an underlying or a related futures contract(s) coupled with
the purchase or sale of an option contract(s) on the Exchange.\15\ The
Exchange would designate in which classes future-option orders would be
available.\16\ The Exchange states that it intends to initially permit
future-option orders overlying VIX and that it may expand the
availability of future-option orders to other underlying securities or
indexes in the future. \17\ The Exchange further states that, if
required, the Exchange would submit rule filings in connection with any
such expansion; the Exchange states, for example, that it may determine
that a different risk offset requirement (as discussed below) is
appropriate for another underlying based on the characteristics of the
overlying options and futures.\18\
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\15\ The Exchange states that a ``future-option order'' is
deemed an inter-regulatory spread order for purposes of the
Exchange's rules. The Exchange states that Exchange Rule 1.1 defines
an inter-regulatory spread order as an order involving the
simultaneous purchase and/or sale of at least one unit in contracts
each of which is subject to different regulatory jurisdictions at
stated limits, or at a stated differential, or at market prices on
the floor of the Exchange. The Exchange states that the proposed
rule change modernizes this definition to apply it to the Exchange
in general, as opposed to the floor of the Exchange (the Exchange
states that the definition of inter-regulatory spread order was
adopted when all trading on the Exchange occurred in open outcry).
See id. at footnote 3.
\16\ See Notice, 89 FR 81593. The Exchange states that the
proposed definition of a future-option order is similar to the
definition of a stock-option order, and that Exchange Rule 1.1
defines a ``stock-option order'' as an order to buy or sell a stated
number of units of an underlying or a related security coupled with
either (a) the purchase or sale of option contract(s) on the
opposite side of the market representing either the same number of
units of the underlying or related security or the number of units
of the underlying security necessary to create a delta neutral
position or (b) the purchase or sale of an equal number of put and
call option contracts, each having the same exercise price and
expiration date, and each representing the same number of units of
stock as, and on the opposite side of the market from, the
underlying or related security portion of the order. The Exchange
states that the primary difference is the stock-option order
definition requires the order to be delta neutral, while the
proposed definition of a future-option order requires the order to
have a risk offset within a specified range (as described below).
See id. at footnote 4.
\17\ See Notice, 89 FR at footnote 5.
\18\ See id.
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The proposed definition of a future-option order includes a risk
offset requirement and a User may submit a future-option order only if
it satisfies the applicable risk offset requirement.\19\ The Exchange
states that a risk offset requirement will provide market participants
with sufficient flexibility to execute legitimate strategies comprised
of options and futures while preventing a market participant from using
the proposed execution mechanism to execute a futures trade outside of
the normal trading process on the applicable DCM by combining the
future leg(s), for example, with an inexpensive out-of-the-money option
leg.\20\ Pursuant to paragraph (a) of the proposed definition of
future-option order, the System will accept a future-option order if
the future leg(s) provides no less than 10% and no greater than 125%
risk offset to the option leg(s).\21\ A future-option order satisfies
this risk offset requirement if the net delta value of the order is no
greater than -0.10 and no less than -1.25.\22\ The delta value of an
option leg equals the expected change in the price of that options
contract given a $1.00 change in the price of the underlying security
or index, and the delta value of a future leg equals the amount set
forth in the rules or contract specifications of the DCM on which the
future contract trades.\23\ The delta value of each option and future
leg is multiplied by the applicable multiplier.\24\ The sum of the
future legs delta values divided by the sum of the
[[Page 2761]]
option legs delta values equals the net delta value for the order.\25\
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\19\ See Notice, 89 FR at 81593.
\20\ See id.
\21\ See id. The Exchange states that the user must include a
delta value for each option leg of the order when submitting a
future-option order. See Exchange Rule 1.1 (proposed paragraph
(b)(2) of definition of future-option order). The Exchange states
that although a user may use any methodology it chooses to calculate
the delta value of option legs, the value must be reasonable and
will be subject to surveillance by the Exchange's regulatory
division. The Exchange states that the System will use the user-
submitted delta values to calculate the risk offset for the entire
order. See id. at footnote 6.
\22\ See Notice, 89 FR 81593 and paragraph (a)(1) of the
proposed definition of future-option order.
\23\ See paragraphs (a)(1)(A) and (B) of the proposed definition
of future-option order.
\24\ See paragraph (a)(1)(C) of the proposed definition of
future-option order.
\25\ See paragraph (a)(1)(D) of the proposed definition of
future-option order.
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For future-option orders overlying the Cboe Volatility Index (VIX),
the System calculates the risk offset set forth in paragraph (a) using
the net delta value for each ``group'' of option legs and future legs
with the same expiration date.\26\ The net delta value of each group
must be no greater than -0.10 and no less than -1.25.\27\ If any option
contract leg or future contract leg cannot be grouped with any future
leg(s) or option leg(s), respectively, the System rejects a VIX future-
option order.\28\
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\26\ See paragraph (a)(2) of the proposed definition of future-
option order.
\27\ See id.
\28\ See id. An example of this calculation appears in the
Notice at 89 FR 81593.
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If the System determines that a complex strategy comprised of
future and option legs satisfies the risk offset requirement, it
accepts all future-option orders for that complex strategy for the
remainder of that trading day.\29\ The Exchange states that this will
prevent a situation in which the Exchange accepts a future-option order
for a specific complex strategy on a trading day but cannot execute
against future-option orders for the same complex strategy submitted
later that trading day but no longer satisfies the risk offset
requirement because the delta values have changed since the initial
order was submitted.\30\
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\29\ See paragraph (c) [sic] of the proposed definition of
future-option order.
\30\ See Notice, 89 FR 81593-4. The Exchange states that it is
for this reason a user may not designate a future-option order
submitted for electronic processing as GTC or GTD, as provided in
proposed Exchange Rule 1.1 (proposed paragraph (b)(1) of definition
of future-option order). See id. at 81594, footnote 10.
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The Exchange states that the proposal also amends the definition of
``complex order'' in Exchange Rule 1.1 to provide that unless the
context otherwise requires, the term complex order will include future-
option orders.\31\
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\31\ See id. at 81594.
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The Exchange states that, under proposed Exchange Rule 5.33(o),
when a User submits a future-option order to the Exchange:
<bullet> if the User is also a member of the DCM on which the
applicable future trades and the Exchange has established electronic
communication with the DCM, the Exchange will electronically
communicate the future component of the future-option order to the DCM
on behalf of the User; \32\ or
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\32\ The Exchange states that, unlike stock, a future trades on
one DCM, which would make such direct communication with the DCM
possible. The Exchange states that this would only be available if
the DCM and the Exchange established electronic communication
between the two markets to permit this direct communication of the
futures component. See id. at footnote 12.
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<bullet> if the User is not also a member of the DCM on which the
applicable future trades or opts out of the direct communication
described above (or such direct communication is unavailable), the User
must designate a specific futures commission merchant (``FCM'') or
introducing broker (``IB'') with which it has entered into an agreement
pursuant to proposed Exchange Rule 5.33, Interpretation and Policy .05
(the ``designated FCM/IB'') to which the Exchange will communicate the
futures component of the future-option order on behalf of the User.\33\
The Exchange states that proposed Interpretation and Policy .05
provides that if the User is not also a member of the DCM on which the
applicable future trades or opts out of the direct communication (or
such direct communication is unavailable), to submit a future-option
order to the Exchange for execution, a User must enter into an
agreement with one or more FCMs or IBs that are not affiliated with the
Exchange, which FCM/IB(s) the Exchange has identified as having
connectivity to electronically communicate the futures components of
future-option orders to the DCM on which the futures trade.\34\ The
Exchange states that this will provide Users with flexibility to pick
which FCM/IB will communicate the futures components of their orders
for execution (if an FCM/IB is necessary for communication of the
futures component to the DCM).\35\
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\33\ The Exchange states that only authorized Users and
associated persons of Users may establish connectivity to and access
the Exchange to submit orders. See Exchange Rule 5.5(a). The
Exchange states that a ``User'' is defined as a Trading Permit
Holder (``TPH'') or Sponsored User who is authorized to obtain
access to the System pursuant to Exchange Rule 5.5. See Exchange
Rule 1.1 (definition of User). The Exchange states that it currently
has no Sponsored Users, so the term ``User'' at present is
synonymous with the term ``TPH.'' The Exchange states that a User
and any individuals associated with the User that submits a future-
option order must have any required futures industry registrations
and comply with applicable rules of the DCM on which the futures
trades and the Commodity Futures Trading Commission (``CFTC''). See
Notice, 89 FR at footnote 13.
\34\ The Exchange states that this requirement is substantially
identical to that required for stock-option orders. See Notice, 89
FR at footnote 14.
\35\ The Exchange states that it intends to establish an
arrangement with one or more FCMs/IBs that are members of the
applicable DCM, pursuant to which arrangement those FCMs/IBs will
have connectivity to the Exchange to receive the futures components
of future-option orders and communicate those to the applicable DCM
for execution of these futures components. See Notice, 89 FR at
footnote 15.
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The Exchange states that the proposal adds future-option orders to
the list of types of complex orders that may be accepted for electronic
trading.\36\ The Exchange states that future-option orders submitted
for electronic processing may execute pursuant to a complex order
auction (``COA'') if eligible, as described in Exchange Rule 5.33(d),
or in the complex order book (``COB'') as described in Exchange Rule
5.33(e) and will execute in the same manner as other complex orders,
except as described herein.\37\ The Exchange states that future-option
orders may also be submitted for execution (if eligible) in the complex
automated improvement mechanism (``C-AIM''), as described in Exchange
Rule 5.38, or the complex solicitation auction mechanism (``C-SAM'') as
described in Exchange Rule 5.40.\38\ The Exchange further states that
the proposal amends Exchange Rule 5.70(b) to provide that the Exchange
may make future-option orders available for flexible (FLEX) options
trading.\39\
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\36\ See Notice, 89 FR 81594.
\37\ See id.
\38\ See id. at 81595.
\39\ See id. at footnote 16.
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The Exchange states that it proposes to adopt Exchange Rule
5.33(f)(1)(C) to provide that Users may express bids and offers for a
future-option order in any decimal price the Exchange determines, which
will allow the Exchange to accommodate the available pricing of
futures.\40\ The minimum increment for the option leg(s) of a future-
option order is $0.01 or greater, which the Exchange may determine on a
class-by-class basis, regardless of the minimum increments otherwise
applicable to the option leg(s), and the future leg(s) of a future-
option order may be executed in any decimal price permitted in the DCM
on which the applicable futures trade.\41\ The Exchange states that
smaller minimum increments are appropriate for future-option orders as
the future component may be able to trade at finer decimal increments
permitted by the DCM on which the futures trade.\42\ The Exchange
states that even with the flexibility provided in the proposed rule,
the individual options legs must trade at increments allowed by the
Commission.\43\
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\40\ See Notice, 89 FR 81594.
\41\ See proposed Exchange Rule 5.33(f)(1)(C).
\42\ See Notice, 89 FR 81594.
\43\ See id.
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As described more fully in the Notice, the Exchange states that the
proposed electronic execution process of future-option orders is
substantially similar to that of stock-option orders.\44\ If a future-
option order can execute upon entry or following a COA, or if it can
execute following evaluation while resting in
[[Page 2762]]
the COB pursuant to Exchange Rule 5.33(i), the System will execute the
option component (which may consist of one or more option legs) of a
future-option order against the option component of other future-option
orders resting in the COB or COA responses pursuant to the allocation
algorithm applicable to the class, but will not immediately send the
User a trade execution report, and then will automatically communicates
the future component(s) to the DCM or the designated FCM/IB, as
applicable, for execution at the DCM on which the futures trade.\45\ If
the System receives an execution report for the future component from
the DCM or the designated FCM/IB, as applicable, the Exchange will send
the User the trade execution report for the future-option order,
including execution information for the future and option
components.\46\ If the System receives a report from the DCM or the
designated FCM/IB, as applicable, that the future component(s) cannot
execute, the Exchange will nullify the option component trade and
notify the User of the reason for the nullification.\47\ The Exchange
states that such nullification without a request from the User is
consistent with the purpose of future-option orders, as contingent
execution at or near the same time (and thus reduction in price and
execution risk) is one of the primary goals of future-option
orders.\48\ A future-option order that is not marketable will rest in
the COB (if eligible to rest) or route to PAR for manual handling,
subject to a User's instructions.\49\
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\44\ See id.
\45\ See proposed Exchange Rule 5.33(o)(2)(A).
\46\ See proposed Exchange Rule 5.33(o)(2)(B).
\47\ See proposed Exchange Rule 5.33(o)(2)(B). The Exchange
states that the execution of the futures component must satisfy
requirements of the applicable DCM, including informational and
reporting time requirements, risk controls, and price restrictions
(such as needing to be within the daily quotation range). The
Exchange states that, pursuant to Exchange Rule 5.33(k), trading in
any complex strategy (including one that comprises a future-option
order) is suspended if any component of a complex strategy
(including a future leg) is halted. Therefore, if trading in a
future is halted, it could not execute and would result in the
future-option order not being executed. See Notice, 89 FR at
footnote 21.
\48\ See Notice, 89 FR 81595.
\49\ See proposed Exchange Rule 5.33(o)(2).
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Proposed Exchange Rule 5.33(f)(2)(C) states that for a future-
option order with one option leg, the option leg may not trade at a
price worse than the individual component price on the simple book or
at the same price as a priority customer order on the simple book. The
Exchange states that, for a future-option order with more than one
option leg, the option legs must trade at price pursuant to Exchange
Rule 5.33(f)(2)(A), which is the permissible execution prices and
priority for complex orders comprised of option legs.\50\ Therefore,
the Exchange states that the System will not execute a future-option
order at a net price: (1) that would cause any option component of the
complex strategy to be executed at a price of zero; (2) that would
cause any option component of the complex strategy to be executed at a
price worse than the individual component prices on the simple book;
(3) worse than the price that would be available if the complex order
legged into the simple book; or (4) worse than the synthetic best bid
or offer (``SBBO'') \51\ or equal to the SBBO when there is a priority
customer order on any leg comprising the SBBO and, if a conforming
complex order,\52\ at least one option component of the complex order
must execute at a price that improves the best bid or offer (``BBO'')
for that component by at least one minimum increment or, if a
nonconforming complex order,\53\ the option component(s) of the complex
order for the leg(s) with a priority customer order at the BBO must
execute at a price that improves the price of that priority customer
order(s) on the simple book by at least one minimum increment.\54\ The
Exchange states that, pursuant to the proposed changes, the option
component(s) of a future-option order will ultimately trade in the same
manner and in accordance with the same priority principles as they
would if they had been submitted without a future leg.\55\
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\50\ See Notice, 89 FR 81595 and proposed Exchange Rule
5.33(f)(2)(C)(ii).
\51\ See Notice, 89 FR 81595. The Exchange states that the
proposal revises the definition of SBBO in Exchange Rule 5.33(a) to
provide that the SBBO is the best net bid and best net offer on the
Exchange for a complex strategy calculated using, for future-option
orders, the BBO for each component (or the national best bid or
offer (``NBBO'') for a component if the BBO for that component is
not available) and the daily quotation range for each future
component. The Exchange states that the proposal revises the
definition of synthetic national best bid or offer (``SNBBO'') in
Exchange Rule 5.33(a) to provide that the SNBBO is the national best
net bid and net offer for a complex strategy calculated using, for
future-option orders, the NBBO for each option component and the
daily quotation range for each future component. See Notice, 89 FR
at footnote 22.
\52\ The Exchange states that the proposal amends the definition
of ``conforming complex order'' in Exchange Rule 1.1 to provide that
a future-option order is conforming (1) if the ratio on the options
legs is greater than or equal to one-to-three (.333) or less than or
equal to three-to-one (3.00) or (2) the options legs comprise an
Index Combo order (as defined in Exchange Rule 5.33(b)). See Notice,
89 FR at footnote 23.
\53\ The Exchange states that the proposal amends the definition
of ``nonconforming complex order'' in Exchange Rule 1.1 to provide
that a future-option order is nonconforming if the ratio of its
options legs is less than one-to-three (.333) or greater than three-
to-one (3.00) (unless the options legs comprise an Index Combo
order). See Notice, 89 FR at footnote 24.
\54\ The Exchange states that all-or-none complex orders
(including future-option orders) may only execute at prices better
than the SBBO. See Notice, 89 FR at footnote 25.
\55\ See Notice, 89 FR 81595.
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The Exchange states that the proposal also amends rules in Chapter
5, Section G of the Exchange's rulebook to describe the execution of
future-option orders in open outcry on the Exchange's trading floor,
which the Exchange states is substantially similar to the open outcry
process for stock-option orders.\56\ The Exchange states that the
proposal amends Exchange Rule 5.83(b) to provide that the Exchange may
make future-option orders available for PAR routing for manual
handling, and further amends this provision to provide that the
Exchange may determine to make nonconforming future-option orders not
eligible for electronic processing, in which case such orders would
only be eligible for manual handling and open outcry trading.\57\ The
Exchange states that the proposal amends Exchange Rule 5.85(g) to
provide that a bid or offer that is identified to the trading crowd as
part of a future-option order is made and accepted subject to the
following conditions (which are the same conditions applicable to
stock-option orders): (1) at the time the future-option order is
announced, the Trading Permit Holder (``TPH'') initiating the order
must disclose to the crowd all legs of the order and identify the
specific market(s) on which and the price(s) at which the non-option
leg(s) of the order is to be filled; and (2) concurrent with the
execution of the options leg of the order, the initiating TPH and each
TPH that agrees to be a contra-party on the non-option leg(s) of the
order must take steps immediately to transmit the non-option leg(s) to
the identified market(s) for execution.\58\ The Exchange states that
proposed Exchange Rule 5.85(b)(3) provides that (like the stock
component of stock-option orders) a floor broker or PAR official may,
subject to a User's instructions, route the future component of a
future-option order represented in open outcry to the DCM or an
Exchange-designated FCM/IB not affiliated with the Exchange for
execution at a DCM on
[[Page 2763]]
which the futures trade in accordance with proposed Exchange Rule 5.33,
Interpretation and Policy .05.\59\ The Exchange also proposes to add
subparagraph (5) to Exchange Rule 5.85(g) (which the Exchange states is
substantially similar to Exchange Rule 5.85(g)(4) for stock-option
orders) to provide that a TPH or PAR official may route the future
component of an eligible future-option order represented in open outcry
from PAR directly to a designated FCM/IB (as defined in Exchange Rule
5.33(o)) not affiliated with the Exchange for electronic execution at
the DCM on which the futures trade (1) in accordance with the order's
terms, and (2) as a single order or as a paired matching order
(including with orders transmitted from separate PAR workstations).\60\
The Exchange states that TPHs seeking to route the future component of
a future-option order represented in open outcry through PAR to an
Exchange-designated FCM/IB not affiliated with the Exchange for
electronic execution at the DCM on which the futures trade must comply
with proposed Exchange Rule 5.33(o).\61\ The Exchange proposes to amend
Exchange Rule 5.91(g) to provide that, as they currently can for
complex orders (including stock-option orders), floor brokers may leg
future-option orders where one of the legs is executed on the
Exchange.\62\
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\56\ See id.
\57\ See id.
\58\ See id. The Exchange states that the proposal also updates
Exchange Rule 5.85(g)(2) to provide that a trade representing
execution of the options leg of a future-option order may be
cancelled at the request of any TPH that is a party to that trade
only if market conditions in any of the non-Exchange market(s)
prevent the execution of the non-option leg(s) at the price(s)
agreed upon. See id. at footnote 26.
\59\ See Notice, 89 FR 81595-6.
\60\ See id. at 81596.
\61\ See id.
\62\ See id.
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The Exchange states that the proposal amends Exchange Rule
5.85(b)(3) to describe the priority that will apply to future-option
orders executed on the Exchange's trading floor.\63\ The Exchange
states that, under the proposal, future-option orders, like stock-
option orders, will have priority over bids (offers) of in-crowd market
participants on the trading floor but not over priority customer bids
(offers) in the book.\64\ Further, the Exchange states that the options
legs of conforming and nonconforming future-option orders may be
executed at the same net debit and credit prices as the options legs of
stock-option orders.\65\ Pursuant to proposed Exchange Rule 5.85(b)(4),
a conforming future-option order may be executed at a net debit or
credit price without giving priority to equivalent bids (offers) in the
individual series legs that are represented in the trading crowd or in
the book if the price of at least one option leg of the order improves
the corresponding bid (offer) of a priority customer order(s) in the
book by at least one minimum trading increment as set forth in Exchange
Rule 5.4(b).\66\ The Exchange states that, pursuant to proposed
Exchange Rule 5.85(b)(5), a nonconforming future-option order may be
executed at a net debit or credit price without giving priority to
equivalent bids (offers) in the individual series legs that are
represented in the trading crowd or in the book if each option leg of
the order betters the corresponding bid (offer) of a priority customer
order(s) in the book on each leg by at least one minimum trading
increment as set forth in Exchange Rule 5.4(b).\67\
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\63\ See id.
\64\ See id.
\65\ See id.
\66\ The Exchange states that if there is a priority customer
order on every leg comprising the SBBO, at least one option leg of
the future-option order must execute at a price that improves the
price of the priority customer order on the simple book for that leg
by at least one minimum increment. The Exchange states that this is
the same priority that applies to a conforming complex order
(comprised of all option legs) as set forth in Exchange Rule
5.85(b)(1), and thus the options legs of a conforming future-option
order will execute subject to the same priority as they would if
they had been submitted without a future leg. See Notice, 89 at
footnote 29.
\67\ See Notice, 89 FR 81596. The Exchange states that if there
is a priority customer order on any leg(s) comprising the SBBO, the
component(s) of the future-option order for the option leg(s) with a
priority customer order at the BBO must execute at a price that
improves the price of that priority customer order(s) on the simple
book by at least one minimum increment. The Exchange states that
this is the same priority that applies to a nonconforming complex
order (comprised of all option legs) as set forth in Exchange Rule
5.85(b)(2), and thus the options legs of a nonconforming future-
option order will execute subject to the same priority as they would
if they had been submitted without a future leg. See id. at footnote
30.
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The Exchange states that the proposal amends Exchange Rule 6.5,
Interpretation and Policy .07 to describe how a future-option order may
qualify as an obvious error, that future-option orders will be handled
in a similar manner to stock-option orders for purposes of Exchange
Rule 6.5.\68\ The Exchange states that if the option leg of a future-
option order qualifies as an obvious error under Exchange Rule
6.5(c)(1) or catastrophic error under Exchange Rule 6.5(d)(1), then the
option leg that is an obvious or catastrophic error will be adjusted in
accordance with Exchange Rule 6.5(c)(4)(A) or (d)(3), respectively,
regardless of whether one of the parties is a customer.\69\ The
Exchange states that the option leg of any customer future-option order
will be nullified if the adjustment would result in an execution price
higher (lower) for buy (sell) transactions than the customer's limit
price on the future-option order, and the Exchange will attempt to
nullify the future leg.\70\ The Exchange states that when a DCM
nullifies the futures leg(s) of a future-option order or when the
future leg(s) cannot be executed, the Exchange will nullify the option
leg upon request of one of the parties to the transaction or in
accordance with Exchange Rule 6.5(c)(3).\71\ The Exchange states that
the proposal adds Interpretation and Policy .02 to Exchange Rule 6.6 to
clarify that TPHs may update only the option component of a future-
option order trade using Clearing Editor (and as permitted by Exchange
Rule 6.6), and that any updates to the future component would need to
be done in accordance with the Rules of the applicable DCM (if
permissible).\72\
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\68\ See Notice, 89 FR 81596.
\69\ See id.
\70\ See id.
\71\ See id.
\72\ See id.
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The Exchange states that execution of the options components of
future-option orders will be subject to Commission jurisdiction, and
execution of the futures components of future-option orders will be
subject to Commodity Futures Trading Commission (``CFTC'')
jurisdiction.\73\ The Exchange further states that each of the Exchange
and the DCM on which the futures component of a future-option order
trades will regulate conduct relating to future-option orders and
trades with respect to compliance with its rules, including bringing
disciplinary actions for violations of its rules.\74\ The Exchange
states that before authorizing a class of future-option orders to trade
on the Exchange, the Exchange would enter into an information sharing
agreement with the DCM on which the applicable future trades that
encompasses information relating to future-option orders and trades,
which would allow for the sharing of information between the Exchange
and the DCM to permit the Exchange (and the DCM) to have access to all
order, trade, regulatory, and other data relating to these orders and
trades.\75\
---------------------------------------------------------------------------
\73\ See id.
\74\ See id.
\75\ See id.
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The Exchange states that the proposal will provide investors with
greater opportunities to manage risk and will provide investors with a
more efficient mechanism to execute options and related future
products, which investors regularly trade as part of hedging and other
investment strategies.\76\ The Exchange states that the proposed
execution mechanism for future-option orders will make the trading and
hedging process for investment
[[Page 2764]]
strategies comprised of option and future components more efficient,
which will reduce execution, legging, and price drift risk that
otherwise accompanies the current execution process for these
strategies.\77\ The Exchange states that today, investors seeking to
execute an investment strategy comprised of option and future
components must do so through separate trades--one for the options and
one for the futures, which creates risk that one trade occurs but the
other does not, and which may leave an investor with an unhedged
position.\78\ In addition, the Exchange states that separate
transactions create risk because market conditions may change between
the time it takes to execute both transactions, which may make the full
package execute in an unfavorable manner for the investor.\79\ The
Exchange states that although investors may continue to execute these
strategies as separate transactions, the proposed execution process
(both electronic and open outcry) will provide investors with an
optional, alternative means to execute strategies comprised of future
and options components that will reduce these risks, as it will permit
the entire package to be priced together and will result in an
execution only if both the options and futures components are able to
trade.\80\ The Exchange states that the proposed single execution
mechanism therefore expands the ability of market participants to
engage in cross-product investment and hedging transactions, which the
Exchange believes will contribute to reduced overall market risk and
increased liquidity.\81\
---------------------------------------------------------------------------
\76\ See id. at 81597.
\77\ See id.
\78\ See id.
\79\ See id.
\80\ See id.
\81\ See id.
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The Exchange believes the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices and to promote
just and equitable principles of trade.\82\ The Exchange states that
the proposed risk offset requirement is designed to provide market
participants with sufficient flexibility to execute legitimate options
strategies comprised of options and futures while preventing misuse of
this mechanism, such as a market participant using the proposed
execution mechanism to execute a futures trade outside of the normal
trading process on the applicable DCM by combining the future leg(s),
for example, with an inexpensive out-of-the-money option leg.\83\
---------------------------------------------------------------------------
\82\ See id.
\83\ See id.
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The Exchange states that the Commission and the CFTC will maintain
jurisdiction over execution of the options and futures components,
respectively, of future-option orders.\84\ The Exchange states that
each of the Exchange and the DCM on which the futures component of a
future-option order trades will regulate conduct relating to future-
option orders and trades with respect to compliance with its rules,
including bringing disciplinary actions for violations of its
rules.\85\ The Exchange states that it is a member of the Intermarket
Surveillance Group (``ISG''). The Exchange states that ISG members work
together to coordinate surveillance and investigative information
sharing in the futures and options markets, and that the Exchange would
therefore have access to information regarding relevant trading
activity from other ISG members, including applicable DCMs (as CFE is)
that are also members.\86\ The Exchange states that before authorizing
a class of future-option orders to trade on the Exchange, if the
applicable DCM was not a member of ISG, or if the applicable DCM was a
member of ISG but the Exchange still deemed appropriate, the Exchange
would enter into an information sharing agreement with the DCM on which
the applicable future trades that encompasses information relating to
future-option orders and trades.\87\ The Exchange states that this
would allow for the sharing of information between the Exchange and the
DCM to permit the Exchange (and the DCM) to have access to all order,
trade, regulatory, and other data relating to these orders and trades,
and thus facilitate the intermarket surveillance of future-option
orders.\88\ The Exchange states that, as a self-regulatory
organization, it recognizes the importance of surveillance, among other
things, to detect and deter fraudulent and manipulative trading
activity as well as other violations of Exchange rules and the federal
securities laws.\89\ The Exchange states that its current rules
prohibiting market manipulation and fraudulent, noncompetitive, and
disruptive trading practices will apply to future-option orders, and
that the Cboe Regulatory Division will incorporate information it
receives from the DCM into its surveillance procedures to monitor
trading of future-option orders, including to detect any manipulative
trading activity.\90\ The Exchange states that its surveillance, along
with the proposed risk offset requirement, are reasonably designed to
detect manipulative trading and enforce compliance with the proposed
rules and other Exchange Rules.\91\ The Exchange states that it
performs ongoing evaluations of its surveillance program to ensure its
continued effectiveness and will continue to review its surveillance
procedures on an ongoing basis and make any necessary enhancements and/
or modifications that may be needed for future-option orders.\92\
---------------------------------------------------------------------------
\84\ See id.
\85\ See id.
\86\ See id.
\87\ See id.
\88\ See id.
\89\ See id.
\90\ See id.
\91\ See id.
\92\ See id.
---------------------------------------------------------------------------
The Exchange states that the proposal will provide investors with
the ability to execute their investment strategies in a listed market
environment as opposed to in the unregulated OTC market and may shift
liquidity from the OTC market onto the Exchange (as well as shift swaps
and OTC combos from the OTC market onto designated contract markets in
the form of futures), which the Exchange believes would increase market
transparency as well as enhance the process of price discovery
conducted on the Exchange through increased order flow, to the benefit
of all investors.\93\ The Exchange states that it may be a more
attractive alternative to the OTC market, because of, among other
things: (1) enhanced efficiency in initiating and closing out
positions; (2) increased market transparency; and (3) heightened
contra-party creditworthiness due to clearing requirements for listed
options and futures.\94\ The Exchange states that the Commission
previously approved an Exchange proposal that permitted the trading of
inter-regulatory spreads comprised of S&P 500 Index options and CBOE 50
futures, and S&P 100 Index options and S&P 250 futures.\95\
---------------------------------------------------------------------------
\93\ See id. at 81598.
\94\ See id.
\95\ See Notice, 89 FR at footnote 38.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2024-042 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \96\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is
[[Page 2765]]
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change. Institution of proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
---------------------------------------------------------------------------
\96\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\97\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act,\98\ which requires, among other things, that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and protect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.
---------------------------------------------------------------------------
\97\ See id.
\98\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder . . . is on the
self-regulatory organization that proposed the rule change.'' \99\ The
description of a proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with applicable
requirements must all be sufficiently detailed and specific to support
an affirmative Commission finding,\100\ and any failure of a self-
regulatory organization to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Act and the
applicable rules and regulations.\101\ As discussed above, the Exchange
states that it initially proposes to make future-option orders
available for VIX, and that it may expand the availability of future-
option orders to other underlying securities or indexes in the
future.\102\ However, the proposed rules do not specifically limit the
availability of future-option orders to VIX, nor do they identify the
permissible underliers for future-option orders.\103\ In addition,
although all future-option orders would be subject to a risk offset
requirement, the proposed rules establish a methodology for calculating
the risk offset only for VIX.\104\ The Exchange states that it may
determine that a different risk offset requirement is appropriate for
another underlying based on the characteristics of the overlying
options and futures.\105\ Instituting proceedings will allow for
additional consideration and clarification of the intended scope of the
proposal, including whether the proposal should be limited to future-
option orders on underliers for which the Exchange has established a
methodology for calculating the risk offset requirement.
---------------------------------------------------------------------------
\99\ 17 CFR 201.700(b)(3).
\100\ See id.
\101\ See id.
\102\ See Notice, 89 FR at footnote 5.
\103\ The proposed definition of future-option order in Exchange
Rule 1.1 states: ``A future-option order, which is deemed an inter-
regulatory spread order for purposes of the Rules, is an order to
buy or sell a stated number of units of an underlying or a related
futures contract(s) coupled with the purchase or sale of an option
contract(s) on the Exchange. The Exchange designates in which
classes future-option orders are available.''
\104\ Paragraph (a)(1) of the proposed definition of future-
option order states: ``The System accepts a future-option order if
the future leg(s) provides no less than 10% and no greater than 125%
risk offset to the option leg(s). A future-option order satisfies
this risk offset requirement if the net delta value of the order is
no greater than -0.10 and no less than -1.25.'' Paragraph (a)(2) of
the proposed definition of future-option order states: ``For future-
option orders overlying the Cboe Volatility Index (VIX), the System
calculates the risk offset set forth in paragraph (a) [sic] above
using the net delta value for each ``group'' of option legs and
future legs with the same expiration date. The net delta value of
each group must be no greater than -0.10 and no less than -1.25. If
any option contract leg or future contract leg cannot be grouped
with any future leg(s) or option leg(s), respectively, the System
rejects a VIX future-option order.''
\105\ See Notice, 89 FR at footnote 5.
---------------------------------------------------------------------------
The Exchange states that the proposed risk offset requirement will
provide market participants with sufficient flexibility to execute
legitimate strategies comprised of options and futures while preventing
a market participant from using the proposed execution mechanism to
execute a futures trade outside of the normal trading process on the
applicable DCM by combining the future leg(s), for example, with an
inexpensive out-of-the-money option leg.\106\ The proposal provides no
discussion or analysis describing how the Exchange developed the
proposed risk offset requirement, including the permitted range of the
risk offset, or why the Exchange believes that the proposed risk offset
requirement--as opposed to another risk offset requirement or other
metric--would be an effective means for permitting the execution of
legitimate trading strategies while preventing misuse of the mechanism.
Instituting proceedings will allow for additional analysis and
consideration of issues related to the proposed risk offset
requirement, including whether the Exchange has adequately described
the operation of the proposed risk offset requirement, how the Exchange
developed and selected the proposed risk offset requirement, how the
proposed risk offset requirement will accomplish its stated purpose,
and how the Exchange will determine when a different risk offset
requirement would be appropriate.
---------------------------------------------------------------------------
\106\ See Notice, 89 FR 81593.
---------------------------------------------------------------------------
The proposal requires a User to include a reasonable delta value
for each option leg and the risk offset percentage of the order.\107\
The Exchange states that ``While a user may use any methodology it
chooses to calculate the delta value of option legs, the value must be
reasonable and will be subject to surveillance by the Exchange's
regulatory division.'' \108\ The proposal provides no discussion of how
the Exchange will determine that User-assigned delta values are
reasonable or how the Exchange will surveil for compliance with this
requirement. Instituting proceedings will allow further discussion and
consideration of how the Exchange will monitor compliance with the
requirement that Users assign a reasonable delta value to each option
leg of the order.
---------------------------------------------------------------------------
\107\ See paragraph (b)(2) of the proposed definition of future-
option order.
\108\ See Notice, 89 FR at footnote 6.
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In addition, as noted above, the Exchange states that execution of
the options components of future-option orders will be subject to
Commission jurisdiction, and execution of the futures components of
future-option orders will be subject to CFTC jurisdiction.\109\
Instituting proceedings will allow for additional analysis and
consideration of issues related to any jurisdictional issues.
---------------------------------------------------------------------------
\109\ See Notice, 89 FR 81596.
---------------------------------------------------------------------------
The Commission is instituting proceedings to allow for additional
consideration and comment on the issues discussed above. In particular,
the Commission asks commenters to address whether the proposal includes
sufficient analysis with respect to the issues discussed above to
support a conclusion that the proposal is consistent with the
requirements of Section 6(b)(5) of the Act.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other
[[Page 2766]]
concerns they may have with the proposal. In particular, the Commission
invites the written views of interested persons concerning whether the
proposal is consistent with Section 6(b)(5) or any other provision of
the Act, and the rules and regulations thereunder. Although there do
not appear to be any issues relevant to approval or disapproval that
would be facilitated by an oral presentation of views, data, and
arguments, the Commission will consider, pursuant to Rule 19b-4, any
request for an opportunity to make an oral presentation.\110\
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\110\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Acts Amendments of 1975, Senate Comm.
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by February 3, 2025. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
February 18, 2025.
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#aad8dfc6cf87c9c5c7c7cfc4ded9ead9cfc984cdc5dc"><span class="__cf_email__" data-cfemail="bccec9d0d991dfd3d1d1d9d2c8cffccfd9df92dbd3ca">[email protected]</span></a>. Please include
file number SR-CBOE-2024-042 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-CBOE-2024-042. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CBOE-2024-042 and should be
submitted on or before February 3, 2025. Rebuttal comments should be
submitted by February 18, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\111\
---------------------------------------------------------------------------
\111\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-00412 Filed 1-10-25; 8:45 am]
BILLING CODE 8011-01-P
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