Notice2026-17465
Self-Regulatory Organizations; MEMX LLC; Notice of Filing of a Proposal To Adopt Rules for the Listing and Trading of Securities Event Contracts on the Exchange
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
August 27, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 165 (Thursday, August 27, 2026)</title>
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[Federal Register Volume 91, Number 165 (Thursday, August 27, 2026)]
[Notices]
[Pages 55384-55403]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-17465]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-106182; File No. SR-MEMX-2026-25]
Self-Regulatory Organizations; MEMX LLC; Notice of Filing of a
Proposal To Adopt Rules for the Listing and Trading of Securities Event
Contracts on the Exchange
August 24, 2026.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 11, 2026, MEMX LLC (the ``Exchange'') filed with the
Securities and Exchange Commission (the ``Commission'') the proposed
rule change as described in Items I, II, and III, below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing with the Commission a proposed rule change
to adopt new Chapter 30 of the Exchange Rules to provide for the
listing and trading of securities event contracts on the Exchange's
options platform (``MEMX Options''). The text of the proposed rule
change is provided in Exhibit 5 and is available on the Exchange's
website at <a href="https://info.memxtrading.com/regulation/rules-and-filings/">https://info.memxtrading.com/regulation/rules-and-filings/</a>.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
Prediction markets recently have experienced significant growth and
increasing customer interest as platforms for obtaining exposure to,
and hedging risks associated with, objectively determinable events.
These markets generally have developed on exchanges regulated by the
Commodity Futures Trading Commission (``CFTC'') as designated contract
markets and have offered event contracts referencing a broad range of
political, economic, commercial, and other outcomes. At the same time,
the Exchange believes that similar products would be valuable to
investors in the securities markets by: (1) providing more tailored
investment and hedging opportunities for both retail and institutional
investors; and (2) creating valuable data that can then be used by
investors in the pricing of the underlying securities or other
derivatives such as standardized options.
Against this backdrop, the Exchange's proposal responds to this
growing market demand for event-based products by establishing a
framework for the listing and trading of securities event contracts as
standardized options on the Exchange. In doing so, the proposal would
bring these securities products within the established regulatory
infrastructure applicable to listed options, including exchange trading
and surveillance, standardized disclosure, and centralized clearance
and settlement through a registered clearing agency, as further
described below. To implement this framework, the Exchange proposes to
adopt new Chapter 30 of the Exchange Rules governing the listing and
trading of securities event contracts on MEMX Options.
Securities event contracts are cash-settled, European-style binary
options that are based on the outcome of an event question related to
the financial performance of an issuer of an NMS stock. A securities
event contract provides a fixed payout if the condition specified in
the contract terms occurs in the manner specified in the contract terms
and expires without a payout if that condition does not occur. The
proposed rules are intended to support securities event contracts based
on
[[Page 55385]]
objective, verifiable events relating to the financial performance of
the issuer of an underlying security. Under the proposal, the Exchange
would initially list securities event contracts based on an underlying
financial metric,\3\ such as whether an issuer announces earnings,
revenues, sales, or another key financial metric that is equal to or
exceeds a specified threshold. At the same time, the proposed framework
preserves flexibility for the Exchange to propose additional securities
event contract types in the future, including contracts based on other
events affecting the issuer's financial performance that may not
involve an underlying financial metric, subject to a separate proposed
rule change.
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\3\ For purposes of this filing and the Rules proposed herein,
references to a ``financial metric'' include both financial and
operating metrics relating to an issuer. Although certain metrics
may be characterized as operating metrics, such metrics generally
reflect, influence, or otherwise relate to the issuer's financial
performance and are therefore included within the broader concept of
a financial metric as used herein. Similarly, references to an
issuer's ``financial performance'' include the issuer's operating
performance because operating performance generally reflects,
influences, or is otherwise associated with the issuer's financial
performance.
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The proposal is designed to provide market participants with a more
targeted means of obtaining exposure to, or hedging risks associated
with, discrete issuer events that are material to the value of an
underlying NMS stock. Existing listed options generally allow investors
to express views or hedge risks based on movements in the market price
of an underlying security or index. Certain investment or hedging
views, however, may relate more directly to a particular issuer event
or component of issuer performance--such as reported earnings,
revenues, sales, or another objectively determinable financial metric
or development affecting the issuer--than to the issuer's share price
alone. Because the market price of an issuer's stock may be affected by
numerous factors unrelated to a particular event, an investor may be
correct about whether that event takes place but nevertheless receive
an imperfect result from a trade based solely on the issuer's stock
price.
Securities event contracts are intended to address that gap by
allowing investors to trade standardized options that reference an
issuer event that is material to the value of an underlying security,
rather than the security's market price itself, and whose exercise
value is determined by whether a specified event condition relating to
the underlying security is satisfied, rather than by the magnitude of a
price movement in that security. Unlike traditional listed calls and
puts, the value of a securities event contract at expiration would be
determined solely by whether the option is in-the-money, rather than
the degree to which the option is in-the-money. As a result, payout at
expiration would be all-or-nothing, providing market participants with
a defined outcome and a fixed payout. Securities event contracts also
would provide market participants with a known amount at risk at the
time the position is entered. Additionally, securities event contracts
would be cleared through a registered clearing agency, which would
serve as the central counterparty to each transaction and facilitate
risk mitigation through established clearing, settlement, contract
adjustment, and other standardized operational processes.
The Exchange notes that Cboe Exchange, Inc. (``Cboe'') has filed a
proposed rule change to permit the listing and trading of ``binary KPI
options,'' which are binary options based on issuer-reported key
performance indicators (``KPIs'').\4\ Like the Cboe KPI Proposal, the
Exchange's proposal is intended to permit market participants to obtain
targeted exposure to specified issuer financial metrics through
standardized, exchange-traded binary options that are resolved using
objective issuer disclosures. The Exchange's proposal, however,
establishes its own securities event contract framework and adopts
different approaches in certain areas that the Exchange believes are
more appropriately tailored to the characteristics of these products.
Those differences are reflected in various aspects of the proposed Rule
framework and are discussed in the relevant Rule-specific sections
below.
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\4\ See Securities Exchange Act Release No. 105877 (July 10,
2026), 91 FR 43418 (July 15, 2026) (SR-CBOE-2026-061) (Notice of
Filing of a Proposed Rule Change to Amend its Rules to Permit the
Listing of Binary Options Overlying Key Performance Indicators
Reported by Certain Issuers of Stock) (the ``Cboe KPI Proposal'').
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Proposed Rule 30.1--Application of Securities Event Contract Rules
Proposed Rule 30.1 provides that Chapter 30 would apply only to
securities event contracts traded on MEMX Options. The Exchange's Rules
also would apply to securities event contracts unless those rules are
specifically replaced or supplemented by Chapter 30 or the context
otherwise requires. Accordingly, securities event contracts would trade
within the Exchange's existing options regulatory framework, including
applicable provisions governing access, trading conduct, surveillance,
disciplinary authority, and other requirements designed to protect
investors and the public interest.
The Exchange believes this approach is appropriate because the
Exchange's proposed securities event contracts are options, but like
other existing options products, such as index options, they have
features that require targeted product-specific rules. Chapter 30
therefore would supplement the Exchange's existing options rules with
provisions addressing product definitions, contract terms, contract
designation, expiration, exercise price selection, order entry,
contract adjustment, resolution, and position limits, each as further
described below. Where the specialized provisions in Chapter 30 address
a subject differently from the Exchange's generally applicable options
rules, the Chapter 30 provisions would control with respect to
securities event contracts.
Proposed Rule 30.2--Definitions
Proposed Rule 30.2 would define the key terms used throughout
Chapter 30, which are noted below.
The term ``binary option'' would mean a European-style option
contract having an exercise settlement amount that is fixed at the
creation of the option.
The term ``Clearing Corporation'' would mean the registered
clearing agency designated by the Exchange to clear securities event
contracts.\5\
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\5\ The definition of Clearing Corporation reflects that the
Exchange may designate the Options Clearing Corporation (``OCC'') or
another registered clearing agency to clear securities event
contracts. References in Chapter 30 and in this filing to the
Clearing Corporation therefore are intended to be clearing agency-
neutral. The proposed definition does not alter the requirement that
clearing and settlement occur through a registered clearing agency
subject to the applicable provisions of the Act and the rules and
oversight applicable to that clearing agency.
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The term ``contract type'' would mean one of the types of
securities event contracts enumerated in Rule 30.4(b).
The term ``definitive resolution source(s)'' would mean the
source(s) of information used to determine the value of the underlying
financial metric as specified in the contract terms.
The term ``event question'' would mean a binary yes-or-no question
the outcome of which determines whether a securities event contract is
considered in-the-money at expiration.
The term ``expiration date'' would mean the date on which the
outcome of an event question is determined pursuant to Rule 30.5 and
the Interpretations and Policies thereto.
[[Page 55386]]
The term ``exercise price'' would mean, where applicable, the value
of the underlying financial metric to which the settlement value is
compared to determine whether a securities event contract is considered
in-the-money at expiration.
The term ``exercise settlement amount'' would mean the amount of
cash that a holder will receive upon exercise of the contract.
The term ``no contract'' would mean a securities event contract
that is considered in-the-money at expiration if the condition
specified in the contract terms does not occur in the manner specified
in the contract terms.
The term ``securities event contract'' would mean a binary option
that is based on the outcome of an event question related to the
financial performance of an issuer of an NMS stock.
The term ``settlement value'' would mean the value of the
underlying financial metric on the expiration date as determined by an
Official \6\ pursuant to Rule 30.9.
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\6\ Proposed Rule 30.9(a) defines the term ``Official'' as an
Officer of the Exchange or such other employee designee of the
Exchange.
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The term ``underlying financial metric'' would mean the financial
metric on which the event question is based as specified in the
contract terms.
The term ``yes contract'' would mean a securities event contract
that is considered in-the-money at expiration if the condition
specified in the contract terms occurs in the manner specified in the
contract terms.
Proposed Rule 30.3--Terms of Securities Event Contracts
Proposed Rule 30.3 describes the terms by which securities event
contracts listed and traded on the Exchange are designated. Each
securities event contract would be designated by expiration date,
underlying security, contract type, event question, and, if applicable,
exercise price. The rule would also require the Exchange to make
available both yes contracts and no contracts for each securities event
contract. The yes contract and no contract for an event question
represent complementary outcomes, where a yes contract would be in-the-
money if the specified condition occurs in the manner stated in the
contract terms, while the associated no contract would be in-the-money
if that condition does not occur in that manner. Because the two
contracts reference the same event question and other material terms,
they are directly linked and together create a single market for the
two possible outcomes of that event question.
Proposed Interpretation and Policy .01 to Rule 30.3 would require
the Exchange to publish the contract terms for securities event
contracts in advance of listing and trading.
Proposed Interpretation and Policy .02 to Rule 30.3 provides that,
unless otherwise specified, each securities event contract would have
an exercise settlement amount of $1, and also provides that securities
event contracts would not have a contract multiplier. Although the
rules permit the Exchange to specify a different exercise settlement
amount where appropriate, the Exchange intends for $1 to serve as the
standard exercise settlement amount for securities event contracts, as
a $1 exercise settlement amount provides a simple and intuitive
framework for pricing the complementary contracts associated with a
particular event question, enabling market participants to readily
understand the relationship between a contract's price and its
potential payout. The Exchange believes these default terms would make
the product's economics straightforward and promote consistency and
transparency across securities event contracts by establishing a
standardized payout amount and avoiding the additional complexity
associated with contract multipliers.
Proposed Rule 30.4--Designation of Securities Event Contracts
Proposed Rule 30.4(a) would permit the Exchange from time to time
to approve for listing and trading securities event contracts based on
two categories of eligible underlying securities selected by the
Exchange. First, pursuant to proposed Rule 30.4(a)(1), the Exchange may
select the NMS stocks of no more than 25 issuers, each of which, at the
time of initial selection, is ranked in the top 25 of NMS stocks by
market capitalization, equities volume, or options volume. Second,
pursuant to proposed Rule 30.4(a)(2), the Exchange may select the NMS
stock of any issuer for which securities event contracts or similar
options are listed and traded on another national securities exchange
pursuant to rules approved by the Commission. Proposed Rule 30.4(a)(3)
provides that an issuer selected pursuant to paragraph (a)(2) would not
count toward the limitation in paragraph (a)(1). The Exchange would
identify eligible underlying securities through a notice distributed to
Members and posted on the Exchange's website.
The objective eligibility criteria in proposed Rule 30.4(a)(1)
confine the Exchange's initial selection authority to a limited
universe of issuers that rank among the largest or most actively traded
NMS stocks. Market capitalization, equities volume, and options volume
are objective measures that reflect different, but relevant, aspects of
public market interest and generally correlate with characteristics
such as broad investor participation, significant liquidity, and robust
public information and analyst coverage. A high market capitalization
generally reflects issuer scale and broad investor ownership, while
high equities or options volume reflects active participation,
liquidity, and developed price discovery in markets related to the
issuer. Allowing an issuer to qualify under any one of these criteria
recognizes that issuer significance may be reflected in different ways
and that market capitalization, equities volume, and options volume
provide objective and relevant measures for identifying issuers that
are most likely to be significant to market participants, while
maintaining a bounded and transparent framework for issuer eligibility.
The limitation to no more than 25 issuers selected under proposed
Rule 30.4(a)(1) is intended to provide the Exchange with sufficient
flexibility to offer contracts on a meaningful range of issuers while
maintaining a limited and manageable initial universe as the Exchange
and its Members gain experience with trading in this new product. The
proposed rule provides for assessing eligibility only at the time of
initial selection and does not require that an issuer remain in the
applicable top-25 ranking after selection. The Exchange may later
determine to increase the number of issuers on which securities event
contracts may be listed and, if it decides to do so, will file such
change with the Commission as a proposed rule change.
Proposed Rule 30.4(b) provides that each securities event contract
will specify the event question, the underlying financial metric, if
applicable, and the definitive resolution source(s) that will be used
to determine whether the event has or has not occurred. The rule would
permit the Exchange to list four categories of contract types: Earnings
Contracts, Revenue Contracts, Sales Contracts, and Other Key Financial
Metric Contracts. Earnings Contracts would be based on whether an
issuer announces earnings that are equal to or exceed a specified
exercise price. Revenue Contracts would be based on whether an issuer
announces revenues for the company, or a division, segment or product
within the company, that are equal to or exceed a specified exercise
price. Sales
[[Page 55387]]
Contracts would be based on whether an issuer announces sales for the
company, or a division, segment or product within the company, that are
equal to or exceed a specified exercise price. Other Key Financial
Metric Contracts would be based on whether an issuer announces a
specified key financial metric other than earnings, revenues, or sales
that is equal to or exceeds a specified exercise price, provided the
metric is reported in the issuer's periodic reports filed with the
Commission and is objectively determinable from those reports. Such
metrics may include, for example, metrics relating to customers, users,
subscribers, production, margins, cash flows, or other aspects of the
issuer's financial performance.
The proposed contract types encompass earnings, revenues, sales,
and other key financial metrics that are objective, quantifiable
measures of an issuer's financial performance. Other Key Financial
Metric Contracts would be limited to metrics reported by the issuer in
its periodic reports filed with the Commission and objectively
determinable from those reports. This category is directed to ``key''
financial metrics--measures used to describe significant aspects of the
issuer's financial condition, results of operations, or business
performance. In light of the nature of those measures and the
disclosure framework through which they are reported, eligible metrics
will bear a meaningful relationship to the issuer's business and
financial performance and will be material to the value of the
underlying NMS stock. The requirement that an eligible metric be
reported in an applicable Commission report provides a reasonable and
objective basis for identifying measures that are significant to
investors' evaluation of the issuer. The Commission's disclosure
framework is designed to provide investors with information relevant to
evaluating an issuer's financial condition, results of operations,
business performance, and securities. Consistent with that framework,
Commission requirements and guidance direct issuers to focus on
material information and key variables relevant to understanding its
financial condition, results of operations, and business performance,
including financial metrics that management uses to manage or monitor
the business.\7\
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\7\ See, e.g., Item 303(a) of Regulation S-K, 17 CFR 229.303(a)
(stating that the objective of MD&A is to provide material
information relevant to an assessment of financial condition and
results of operations and that the discussion must address financial
statements and other statistical data the registrant believes will
enhance a reader's understanding); Rule 12b-20 under the Act, 17 CFR
240.12b-20 (requiring further material information necessary to make
required statements, in light of the circumstances in which they are
made, not misleading); Commission Guidance on Management's
Discussion and Analysis of Financial Condition and Results of
Operations, Securities Act Release No. 33-10751 and Exchange Act
Release No. 34-88094 (Jan. 30, 2020), 85 FR 10568, 10569-70 (Feb.
25, 2020) (noting that companies should consider whether key
variables management uses are material to investors and generally
expecting disclosure of a metric to explain why it is useful to
investors and how management uses it).
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Eligible metrics may include, for example, GAAP and non-GAAP
financial measures, as well as operating measures relating to the
issuer's business activities, products, customer base, production
levels, or business segments. Because these metrics are publicly
reported by the issuer in its Commission filings, they reflect
information that is either required to be disclosed under the
Commission's reporting framework or that the issuer has deemed
sufficiently important to disclose to investors. Consequently, such
metrics are commonly used by investors, analysts, and other market
participants to evaluate issuer performance and the value of the
underlying stock. Accordingly, this proposed category is limited to
metrics that bear a meaningful relationship to the issuer's business,
financial performance, and market valuation, and are therefore material
to the value of the underlying NMS stock.
The proposed categories would permit contracts on consolidated
company results as well as divisions, segments, products, or other
components of the issuer's business where the applicable metric is
reported in the issuer's periodic filings, thereby permitting market
participants to obtain targeted exposure to the particular aspect of
the issuer's financial performance relevant to their investment or
hedging view.
Proposed Interpretation and Policy .01 to Rule 30.4 would require
the contract terms for contracts listed pursuant to Rule 30.4(b) to
identify the reporting period to which the underlying financial metric
relates (for example, Q3 2027) and designate as the definitive
resolution source the first periodic report (on Form 8-K, Form 10-Q or
Form 10-K, as applicable) filed with the Commission that reports the
applicable metric for that reporting period. This approach is intended
to ensure that the contract terms identify with specificity both the
financial period and the issuer disclosure that will resolve the event
question and to anchor settlement to the issuer's initial public
disclosure of the relevant metric through the Commission's reporting
framework.
The Exchange intends for Chapter 30 to provide a flexible framework
that can support other securities event contracts relating to an
underlying security if the Exchange later determines that there is
customer demand for additional contract types. Such contracts could be
based on objective events that are not underlying financial metrics and
therefore may not require an exercise price because the yes/no event
question itself would determine whether the contract is in-the-money at
expiration. In any case, the event question would be resolved by
reference to the definitive resolution source(s) specified in the
contract terms, which is intended to ensure that each contract can be
settled by applying objective, pre-published criteria to public,
verifiable information. The proposal does not permit the Exchange to
list such additional contract types under the currently proposed rule.
If the Exchange later seeks to add an additional contract type, it
would file a proposed rule change with the Commission.
Proposed Rule 30.4(c) provides that securities event contracts
listed and traded on the Exchange would constitute a separate class
from other options overlying the same underlying NMS stock and
constitute a separate class from other securities event contracts with
different underlying financial metrics for the same issuer.
Proposed Rule 30.5--Expiration Date
Proposed Rule 30.5(a) would permit the Exchange, after approving a
particular securities event contract class for listing and trading, to
designate and open for trading series that expire from one day up to 12
months from the date they are listed. The Exchange believes it is
appropriate to permit listing of securities event contracts that expire
up to 12 months from the time they are listed to accommodate different
issuer reporting periods (including semiannual reporting if the
Commission approves recently proposed rules to permit such reporting),
as well as to permit the Exchange to list expirations for consecutive
calendar quarter periods or for one or more calendar quarters and an
annual reporting period at the same time. Issuers disclose financial
metrics in their periodic reports submitted to the Commission on
periodic reporting cycles, and a 12-month outer limit would permit the
Exchange to offer contracts corresponding to those cycles without
providing the substantially longer-dated expirations available for
certain traditional options.
[[Page 55388]]
Proposed Rule 30.5(b) provides that securities event contracts
based on an underlying financial metric would expire on the date the
metric is first publicly announced in a definitive resolution source.
That rule also provides that when listing a securities event contract,
the Exchange would establish the expiration date by reference to the
anticipated timing of the announcement of the relevant underlying
financial metric, with the specific expiration date to be finalized
when the issuer announces the date on which it will disclose the
relevant metric for the applicable reporting period.
This proposed rule would permit the Exchange to list series that
expire on the date the issuer announces its financial results for the
applicable reporting period (such as a calendar quarter). The
expiration date for a securities event contract would be the date on
which an issuer discloses the applicable financial metric in its
financial results (for example, the date on which it issues an earnings
results press release) for the specified reporting period, with the
specific expiration date to be finalized when an issuer announces the
date on which it will disclose its financial results for that reporting
period.\8\
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\8\ For example, for a securities event contract series, the
Exchange may designate the reporting period for a series to be the
fourth quarter of 2026. The expiration date for that series would be
the date on which the applicable issuer establishes as the date it
will announce financial results for that quarter. The Exchange will
issue a notice to Members when the specific expiration date for a
securities event contract is finalized.
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While an expiration date for a securities event contract would be a
specific date, as is the case for traditional options, the Exchange's
proposed designation of expiration dates for securities event contracts
would differ to reflect standard issuer disclosure practices. In some
instances, an issuer might not establish the specific date on which it
will announce its financial results for a reporting period until weeks
prior to the release date. Consequently, unlike standard equity and
index options that have an exact expiration date when series are first
listed, a securities event contract would be listed for trading with a
placeholder expiration date if the date the underlying financial metric
will be released by the issuer is not publicly known. If a placeholder
expiration date is required, it would be set as the first trading day
that is three months following the date of the prior quarterly release
date for a financial metric (for financial metrics announced quarterly)
and six months following the date of the prior semiannual release date
for a financial metric (for financial metrics announced semiannually,
if the Commission approves proposed rules that would permit such
reporting). Once the issuer announces the release date of the relevant
financial metric, the expiration date would be updated as the finalized
expiration date of the securities event contract. Ultimately, however,
the expiration date for a securities event contract is an issuer's
financial results release date (even if the exact date is not known in
advance).
Proposed Interpretation and Policy .01 to Rule 30.5 provides that
the expiration date determines the last possible date for an event to
occur before a securities event contract is resolved. That rule further
provides that, notwithstanding the announced expiration date, if an
event question can be resolved before that date pursuant to the
contract terms, the contract will expire as of the date and time the
contract can first be resolved pursuant to public announcement in a
definitive resolution source. This provision is designed to align
contract expiration with the availability of the information necessary
to resolve the contract and to prevent trading from continuing after
the event question has become objectively resolvable pursuant to the
contract terms.
The Exchange recognizes that information regarding an underlying
financial metric may also become publicly available through a source
other than the definitive resolution source before the announced
expiration date. If there is such an unofficial disclosure of the
metric before expiration, Interpretation and Policy .01 also provides
that the Exchange may halt trading in the applicable series pursuant to
Rule 20.3 (Trading Halts) while it evaluates the information. This
authority is intended to address the unusual circumstance in which
relevant information appears to have become publicly available through
a source other than an official definitive resolution source. If the
Exchange determines that the unofficial information is unreliable or
insufficient to resolve the event question, trading may resume until
the contract otherwise expires.
Proposed Interpretation and Policy .02 to Rule 30.5 provides that
the last day of trading for securities event contracts based on an
underlying financial metric would be determined by reference to the
time that the issuer discloses its financial results for the relevant
reporting period. If the issuer discloses its financial results for the
relevant reporting period after the close of trading, the last day of
trading would be the day of expiration. If the issuer discloses its
financial results for the relevant reporting period prior to the
opening of trading, the last day of trading would be the trading day
before expiration. This approach is designed to permit trading through
the final regular trading session before the information necessary to
resolve the event question becomes public, while preventing trading
after market participants have access to that information.
The Cboe KPI Proposal addresses the same timing issue by
designating binary KPI options as A.M.-settled or P.M.-settled
depending on whether the issuer discloses its financial results before
the opening or after the close of regular trading hours. Although the
practical timing of the final trading session under the Cboe KPI
Proposal is generally aligned with the timing contemplated by the
Exchange's proposal, the Exchange's proposal states the applicable
timing convention directly rather than characterizing securities event
contracts as A.M.-settled or P.M.-settled. In the traditional-options
context, those designations ordinarily describe whether an option's
settlement value is derived from the opening or closing price of an
underlying security or index, whereas the proposed securities event
contracts settle by reference to an issuer-reported financial metric.
Accordingly, the Exchange's proposal ties the last trading day to the
timing of the issuer's disclosure for the relevant reporting period,
allowing the rule text to identify the operative event for determining
the final trading session without requiring market participants to
infer that result from a separate settlement classification. The
Exchange believes this approach more directly describes the operation
of securities event contracts and reduces the potential for investor
confusion that may result from applying traditional A.M.- and P.M.-
settlement terminology to contracts that do not settle based on opening
or closing market prices.
Proposed Interpretation and Policy .03 to Rule 30.5 provides that,
if the applicable underlying financial metric is not reported or
otherwise unavailable on the expiration date (and will not be
reported), settlement would occur as specified in the contract terms.
Requiring the published contract terms to address this unusual
circumstance is designed to provide market participants with advance
notice of the applicable alternative settlement procedure and avoid an
ad hoc determination after trading has occurred. The precise procedure
may vary depending on the metric and the requirements of the
[[Page 55389]]
Clearing Corporation, but in all cases would be specified in the
contract terms before the series is listed.
Proposed Interpretation and Policy .03 to Rule 30.5 further
provides that, if an applicable underlying financial metric is restated
after the expiration date and settlement of a securities event
contract, the settlement value would not change. In other words, the
value of the applicable underlying financial metric as reported by the
issuer on the applicable expiration date would be final, and the amount
paid (or not paid) at settlement would not change, regardless of
whether the issuer later restates the metric. The Exchange believes
this finality is necessary to provide certainty to market participants
and the Clearing Corporation and to avoid reopening settled contracts
based on information that becomes available only after the contract has
expired.
Proposed Rule 30.6--Exercise Price
Proposed Rule 30.6(a) provides that the Exchange may list
securities event contracts with or without an exercise price, depending
on the contract type. When an exercise price is required pursuant to
the contract terms, the Exchange may list multiple contracts in the
same class with exercise prices that correspond to an appropriate range
of potential settlement values. For contracts that do not reference a
specific exercise price, the Exchange would publish sufficient
information in the contract terms such that market participants can
understand when a particular contract offered will be in-the-money or
out-of-the-money at expiration.
Proposed Rule 30.6(b) provides that, for each securities event
contract that has an exercise price, the exercise price would be fixed
at an amount equal to a value of the underlying financial metric
divided by a scaling factor. Because the value of certain financial
metrics may be very large (e.g., billions of dollars), the proposed
scaling factor would permit the Exchange to express the corresponding
exercise price in a manageable and readily understandable format.
Scaling would change only how the metric threshold is displayed; it
would not change the economic value represented by the exercise price
or the comparison used to determine whether the contract is in-the-
money.
Proposed Rule 30.6(b)(1) would establish the applicable scaling
factor based on the value of the underlying financial metric most
recently reported by the issuer in a periodic report filed with the
Commission as of the time the applicable class is listed, as follows:
<bullet> If the most recently reported value is greater than or
equal to one trillion, the exercise price would equal that value
divided by one trillion. For example, an exercise price of 27.00 is
equivalent to a value of the applicable underlying financial metric of
27,000,000,000,000.00.
<bullet> If the most recently reported value is greater than or
equal to one billion but less than one trillion, the exercise price
would equal that value divided by one billion. For example, an exercise
price of 112.00 is equivalent to a value of the applicable underlying
financial metric of 112,000,000,000.00.
<bullet> If the most recently reported value is greater than or
equal to one million but less than one billion, the exercise price
would equal that value divided by one million. For example, an exercise
price of 900.00 is equivalent to a value of the applicable underlying
financial metric of 900,000,000.00.
<bullet> If the most recently reported value is greater than or
equal to one thousand but less than one million, the exercise price
would equal that value divided by one thousand. For example, an
exercise price of 42.00 is equivalent to a value of the applicable
underlying financial metric of 42,000.00.
<bullet> If the most recently reported value is less than one
thousand, the exercise price would equal that value and would not be
divided by a scaling factor. For example, an exercise price of 774.00
is equivalent to a value of the applicable underlying financial metric
of 774.00.
The Exchange would apply a different scaling factor to newly listed
securities event contract series for a new expiration only after the
value of the underlying financial metric in the issuer's periodic
reports filed with the Commission has a value in a different scaling
tier for four consecutive reporting periods or if the Exchange deems it
necessary in the interests of a fair and orderly market. Application of
a different scaling factor would not affect the exercise prices of any
series of the securities event contracts previously opened. For
example, if the Exchange begins listing a new class of securities event
contracts and the most recently disclosed value of the underlying
financial metric for the issuer at the time of that listing was for the
third quarter of 2026 and was $892,000, the exercise prices for that
class of securities event contracts would be scaled by 1,000, and thus
exercise prices of 895, 995, and 1005, would represent $895,000,
$995,000, and 1,005,000, respectively. If the issuer discloses a metric
value of $1,020,000 in its fourth quarter 2026 periodic report, the
Exchange would continue to list exercise prices scaled by 1,000. If the
issuer then discloses metric values of $1,112,000, $1,237,000, and
$1,064,000 for the first, second, and third quarters, respectively, of
2027, the Exchange would begin scaling the exercise prices by 1,000,000
for the fourth quarter 2027 expirations (or for the first quarter 2028
expirations if the Exchange had already listed fourth quarter 2027
expirations prior to the disclosure of the third quarter 2027 metric
value). The Exchange believes this approach would promote consistency
in the presentation of exercise prices and avoid changing the scale
based on a temporary movement across a tier boundary, while allowing
the Exchange to update the scale to reflect sustained changes in the
issuer's reported metric. The fair-and-orderly-market exception would
permit the Exchange to make an earlier change if continued use of the
existing scale became impractical, misleading, or otherwise
inconsistent with orderly trading.
The Exchange would announce in a notice to Members if the scaling
factor applied to a securities event contract changes (for example, the
metrics will be scaled in billions rather than in millions).
Proposed Rule 30.6(b)(2) provides that the Exchange may list
securities event contract series with exercise prices representing
negative values of the underlying financial metric. It is possible for
a financial metric to have a negative value, such as earnings per share
where the issuer reports a loss per share. For these series, the
exercise price would equal the absolute value of the underlying
financial metric and would be scaled in the same manner as a positive
value, as described above. For example, if an issuer's earnings per
share in the last reporting period was -$3.58 (and thus was a loss per
share), a securities event contract for such issuer with an exercise
price of 3.58 would reflect an expected loss of $3.58 per share. The
Exchange would incorporate into symbology for securities event
contracts whether the value of the exercise price is positive or
negative, including if the Exchange lists securities event contract
series with both positive and negative exercise prices. Whether a
symbol reflects a positive or negative value would be available on
contract specifications for the specific securities event contract on
the Exchange's public website.
Proposed Interpretation and Policy .01 to Rule 30.6 provides that
appropriate exercise prices for securities event contracts that have an
exercise price may vary due to differences among issuers, contract
types, and other
[[Page 55390]]
factors. In determining which exercise prices to offer, the Exchange
would consider information published by the issuer; market expectations
that are relevant to the event question, such as information contained
in research reports published by analysts covering the underlying
security; the implied probabilities indicated by transactions in
securities event contracts that have already been listed on a
particular event question; and customer demand. The Exchange believes
consideration of these factors is reasonably designed to support the
listing of exercise prices that are responsive to market interest and
within a range that is likely to be meaningful to market participants.
The Exchange's exercise price selection framework differs from the
approach in the Cboe KPI Proposal, which would adapt a strike-interval
and listing-range framework developed from conventions applicable to
traditional options and would anchor initial listings to a band around
the issuer's most recently reported financial metric. The Exchange
believes that framework is not well suited to securities event
contracts. Traditional equity-option strike grids are generally
designed around the price of a continuously traded underlying security.
The current market price provides a near-current reference point, and
the strike intervals reflect market experience and assumptions
concerning expected movements and volatility in stock prices. An
issuer's financial metric, by contrast, is reported periodically and
generally is not continuously observable. The most recently reported
metric may be several weeks or months old and may become increasingly
stale as the next reporting date approaches. During that period, issuer
guidance, analyst reports, industry data, market conditions, and other
public information may cause prevailing expectations for the next value
to differ materially from the prior reported value. A rigid listing
range centered on the previous quarter's value therefore may omit
exercise prices that reflect the market's current view and may
concentrate listings around thresholds that are no longer economically
meaningful.
The assumptions embedded in traditional stock-price strike
intervals also do not necessarily correspond to expected movements in
issuer-reported metrics. Revenues may exhibit seasonality, margins may
move within relatively narrow ranges, production values may change in
discrete increments, subscriber measures may respond to product cycles,
and cash flows may be comparatively irregular. The expected
distribution and volatility of those values may differ substantially
both from stock-price behavior and from one metric to another. The
Exchange believes that importing a strike grid developed for a
different product and reference interest could constrain the market
before sufficient experience exists to determine appropriate listing
conventions for securities event contracts.
The Exchange therefore believes its principles-based, contract-
specific methodology is more appropriately tailored to the unique
characteristics of securities event contracts and provides a reasonable
framework for establishing exercise prices that reflect the particular
metric, event question, and reporting context of each contract. The
proposed factors permit exercise prices to reflect information and
market expectations relating to the particular metric and event
question, customer demand, and actual trading experience from
previously listed contracts on the same event question as such product
develops. This flexibility is not unbounded, however, as the Exchange
would remain obligated under the rule to list exercise prices that
correspond to an appropriate range of potential settlement values and,
in administering the rule, the Exchange would exercise its discretion
in a manner consistent with the maintenance of fair and orderly
markets. The Exchange believes this approach is more likely to produce
economically useful contract series, promote meaningful price
discovery, and respond to legitimate investor demand than a framework
anchored primarily to a potentially stale historical value and strike
conventions developed for traditional options.
Proposed Rule 30.7--Entering Positions
Proposed Rule 30.7 establishes the trading mechanics for entering
positions in securities event contracts. Proposed Rule 30.7(a) provides
that Users seeking to enter a position must enter a bid to purchase
either a yes contract or a no contract, and that to successfully
establish a position, that order must be paired with a contraside no
contract or yes contract, respectively, that references the same
underlying event question, expiration date, and exercise price.
Proposed Rule 30.7(b) provides that acceptable bid prices for
securities event contracts range from $0.01 and $0.99, subject to a
minimum pricing increment of $0.01, and the Exchange would execute a
transaction in a securities event contract when the combined bids for
the paired yes contract and no contract sum to $1.
Proposed Interpretation and Policy .01 to Rule 30.7 provides that
the Exchange would not accept offers to sell securities event
contracts. Instead, Users that wish to exit an established position in
a yes contract or no contract would enter a bid to purchase the
associated no contract or yes contract, respectively. Proposed
Interpretation and Policy .02 to Rule 30.7 provides that securities
event contracts must be paid in full when the User enters the position
pursuant to the Rules of the Clearing Corporation.
The Exchange believes the proposed long-only yes/no contract
structure provides a transparent and efficient framework for trading
complementary outcomes of a single event question. Because the paired
bids for a yes contract and associated no contract must sum to the $1
exercise settlement amount, execution prices directly reflect the
market's relative valuation of the two possible outcomes. For example,
a User that purchases a yes contract at $0.60 would be paired with a
User that purchases the associated no contract at $0.40. At expiration,
one of the two contracts would receive the $1 exercise settlement
amount and the other would not receive a payout. A holder seeking to
offset the economic exposure (or close out) of an existing position
would do so by purchasing the complementary contract rather than
entering a sell order. As a result, trading is organized around a
single event question and its two complementary outcomes rather than
around separate categories of option contracts.
This structure differs from the framework proposed for binary KPI
options in the Cboe KPI Proposal, under which call and put contracts
referencing the same event question may each be purchased or sold. The
Exchange believes the yes/no structure is more directly tailored to the
binary nature of securities event contracts because it presents the two
possible outcomes of a single event question as complementary
components of one market rather than as separate call and put markets.
Securities event contracts are designed to answer a single question
regarding whether a specified event condition is satisfied. The
Exchange believes a corresponding yes contract and no contract more
naturally reflect those two possible outcomes than a framework that
applies traditional call and put terminology and trading mechanics to a
binary event product.
The Exchange further believes that organizing trading around a
single event question promotes a more coherent market structure. Under
a framework that permits separate call and put
[[Page 55391]]
contracts referencing the same binary event question to be purchased
and sold, market participants may obtain equivalent economic exposure
through multiple instruments trading in separate markets. As a result,
trading interest relating to the same event question may become
fragmented across separate call and put markets, creating the potential
for pricing discrepancies among economically equivalent positions. Such
discrepancies may obscure the relationship between complementary
outcomes, impair pricing transparency, and create avoidable arbitrage
opportunities that do not arise from differing views regarding the
event itself but rather from inconsistencies between separate markets
for the same underlying event question. By contrast, the Exchange's
proposal directly links the two possible outcomes of a single event
question through a fixed $1 exercise settlement amount and a
requirement that the paired bids for the yes contract and associated no
contract sum to that amount. The Exchange believes this approach
concentrates trading interest in a single market, makes the
relationship between the two outcomes readily observable, promotes more
coherent pricing, and reduces the potential for pricing dislocations
and arbitrage opportunities that may arise when economically equivalent
exposures trade in separate markets.
The proposed permissible bid range also provides a product-specific
execution price protection. Because an individual bid may not exceed
$0.99 and paired bids must sum to exactly $1, no User may purchase a
securities event contract for a price that is equal to or greater than
the contract's maximum $1 exercise settlement amount. The Exchange
believes this limitation is an important investor protection because a
purchase at or above $1 would result in a guaranteed economic loss (or
no gain) even if the contract ultimately is in-the-money and the
investor correctly predicts the outcome.
The Cboe KPI Proposal, by contrast, would permit the Cboe exchange
to designate a maximum execution price above the $1 exercise settlement
amount and provides an example in which an execution above $1 is
adjusted to $1.03. The Exchange disagrees with that approach. The
Exchange does not believe that transaction, clearing, or other trading
expenses justify permitting a contract to execute at a price greater
than the maximum amount it can pay at settlement. Under the Exchange's
proposal, an execution at a price exceeding the contract's maximum
value could not occur. By contrast, the Cboe KPI Proposal contemplates
adjusting executions to a designated maximum execution price that may
remain above the contract's maximum payout. The Exchange believes that
permitting transactions to occur at prices at or greater than the
maximum possible value of the contract is inconsistent with the
economics of a binary product and that preventing such executions
altogether provides a clearer and more effective investor protection.
The Exchange's obvious error provisions would not apply to
securities event contracts. The Exchange believes the fixed exercise
settlement amount, the $0.01-to-$0.99 permissible bid range, and the
requirement that complementary bids sum to $1 provide an appropriately
tailored execution price protection that obviates the need for an
obvious error process. In particular, the Exchange's System would
prevent the most readily identifiable economically erroneous
transaction--an execution above the maximum possible payout--before it
occurs. The Exchange believes preventing such an execution is
preferable to relying on a post-trade nullification or adjustment
process.
Proposed Rule 30.8--Contract Adjustment
As described above, securities event contracts would be cleared by
the Clearing Corporation, which would serve as the central counterparty
to each transaction and facilitate standardized clearing, settlement,
and contract administration processes pursuant to its Rules. Consistent
with this centralized clearing framework, proposed Rule 30.8 provides
that securities event contracts would be subject to adjustment only in
accordance with and to the extent specified in the Rules of the
Clearing Corporation. When any such adjustment has been determined, the
Exchange will announce this adjustment, which will become effective at
the time specified in that announcement.
The Exchange believes that limiting contract adjustments to those
provided under the Rules of the Clearing Corporation provides a clear
and transparent framework under which any adjustments to securities
event contracts would be administered. A registered clearing agency
designated to clear securities event contracts would be subject to
Commission oversight and would possess expertise in the clearance and
settlement of financial products. Because securities event contracts
represent a novel product type, the Exchange anticipates that the
Clearing Corporation would develop adjustment procedures designed to
address the unique characteristics of these contracts and the types of
events that may require adjustment. To the extent the Clearing
Corporation adopts new adjustment procedures for securities event
contracts, those procedures would be subject to the applicable
regulatory process, including review and approval by the Commission, as
applicable, before the Exchange commences trading in the product.
Proposed Rule 30.9--Resolution
Proposed Rule 30.9 establishes the process for resolving securities
event contracts at expiration. Proposed Rule 30.9(a) provides that the
outcome of an event question would be determined by an Officer of the
Exchange or such other employee designee of the Exchange (an
``Official'') based on the published contract terms and the definitive
resolutions source(s) specified for the contract. The Official's role
would be limited to applying the pre-published contract terms to the
specified public resolution source. For metric-based contracts, the
settlement value would be the value reported in the applicable
Commission filing.
Proposed Rule 30.9(b) further provides that securities event
contracts would be cash settled at expiration and that in-the-money
contracts would be automatically exercised and paid in cash pursuant to
the Rules of the Clearing Corporation. A yes contract would be paid at
expiration if the condition specified in the contract terms occurs in
the manner specified in the contract terms, and a no contract would be
paid at expiration if the condition does not occur in that manner. The
Exchange believes that cash settlement is appropriate for securities
event contracts because the contracts are designed to provide exposure
to the occurrence or non-occurrence of an issuer-specific event rather
than ownership or delivery of the underlying security.
Proposed Interpretation and Policy .01 to Rule 30.9 describes how
the Exchange will determine whether a securities event contract is in-
the-money at expiration. For securities event contracts that include an
exercise price, such as the proposed contract types set forth in Rule
30.4(b), in-the-money status would be determined by comparing the
settlement value of the underlying financial metric to the specified
exercise price because the event question turns on whether that metric
satisfies a specified threshold. For securities event contracts that do
not include an exercise price, the published contract terms instead
would specify the objective event that must occur for the contract to
be in-the-
[[Page 55392]]
money because the event question would depend solely on whether a
discrete, objectively verifiable issuer event occurs in the manner
specified in the contract terms, rather than whether a financial metric
satisfies a numerical threshold. In either case, the contract terms
would specify, before trading begins, the criteria for determining
whether the contract is in-the-money, providing market participants
with a clear understanding of how the contract will be resolved and
when it will result in a cash payout.
Proposed Rule 30.10--Position Limits
Proposed Rule 30.10 establishes the position limit requirements for
securities event contracts. Proposed Rule 30.10(a) provides that, in
determining, compliance with Rule 18.7 (Position Limits), the position
limit for securities event contracts would be the same as the
applicable position limit for the stock of the issuer per expiration,
and 100 securities event contracts would equal one standard option
contract. Proposed Rule 30.10(d) would apply the same 100-to-one
conversion for purposes of the large-position report required by
paragraph (a) of Rule 18.10 (Reports Related to Position Limits).
The Exchange believes using the applicable equity-option position
limit provides an objective and familiar framework for securities event
contracts. The issuer's equity-option position limit reflects the size
and trading characteristics of the market associated with that issuer
and provides an established reference point for limiting concentrated
options exposure. At the same time, each securities event contract has
a maximum exercise settlement amount of $1 and no contract multiplier,
whereas a standard equity option generally represents 100 shares.
Treating 100 securities event contracts as one standard option contract
therefore provides proportional treatment for position limit and
reporting purposes that reflects the materially smaller fixed value of
an individual securities event contract.
Proposed Rule 30.10(b) provides that positions in securities event
contracts on the same underlying financial metric with different
expiration dates would not be aggregated (as proposed position limits
are calculated per expiration), and positions in securities event
contracts for the same issuer with different underlying financial
metrics would not be aggregated (as securities event contracts
overlying different financial metrics, even for the same issuer, would
be different classes, as described above). Accordingly, the proposed
position limit would apply separately to each combination of underlying
financial metric and expiration.
Proposed Rule 30.10(c) provides that securities event contacts
would not be aggregated with other options contracts overlying the
stock of the issuer. The Exchange believes non-aggregation is
appropriate because conventional equity options and securities event
contracts have different reference interests, payout structures,
settlement conditions, and risk profiles.
Surveillance and Regulatory Oversight
Today, the Exchange has an adequate surveillance program in place
for options. The Exchange intends to apply the same program procedures
to securities event contracts the Exchange applies to its other options
products. Additionally, the Exchange is a member of the Intermarket
Surveillance Group (``ISG'') under the Intermarket Surveillance Group
Agreement. ISG members work together to coordinate surveillance and
investigative information sharing in the stock, options, and futures
markets. In addition, the Exchange has a Regulatory Services Agreement
with the Financial Industry Regulatory Authority, Inc. (``FINRA'') for
certain market surveillance, investigation and examinations functions.
Pursuant to a multi-party 17d-2 joint plan, all options exchanges
allocate amongst themselves and FINRA responsibilities to conduct
certain options-related market surveillance that are common to rules of
all options exchanges.\9\ All options exchanges are also parties to the
Options Regulatory Surveillance Authority plan under Regulation NMS
Rule 608, pursuant to which FINRA conducts options-related insider
trading surveillance, investigations, and enforcement for the U.S.
options markets.
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\9\ Section 19(g)(1) of the Act, among other things, requires
every self-regulatory organization (``SRO'') registered as a
national securities exchange or national securities association to
comply with the Act, the rules and regulations thereunder, and the
SRO's own rules, and, absent reasonable justification or excuse,
enforce compliance by its members and persons associated with its
members. See 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section
17(d)(1) of the Act allows the Commission to relieve an SRO of
certain responsibilities with respect to members of the SRO who are
also members of another SRO (``common members''). Specifically,
Section 17(d)(1) allows the Commission to relieve an SRO of its
responsibilities to: (i) receive regulatory reports from such
members; (ii) examine such members for compliance with the Act and
the rules and regulations thereunder, and the rules of the SRO; or
(iii) carry out other specified regulatory responsibilities with
respect to such members.
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The Exchange believes its existing surveillance procedures are
designed to deter and detect possible manipulative behavior which might
potentially arise from listing and trading the proposed securities
event contracts. Further, the Exchange will implement any new
surveillance procedures it deems necessary to effectively monitor the
trading of securities event contracts, including cooperation with FINRA
to implement insider trading surveillances to incorporate the unique
characteristics of securities event contracts. The Exchange will report
any information regarding securities event contracts required to be
reported to the Consolidated Audit Trail (``CAT'') in the same manner
it reports this information to CAT for all other options the Exchange
lists.\10\ The Exchange believes that no technical changes are required
to accommodate the reporting to CAT of information regarding securities
event contracts (the Exchange represents, if later required by FINRA
CAT, the administrator of the CAT, it will adhere to any new technical
requirements FINRA CAT deems necessary to accommodate securities event
contracts).
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\10\ CAT reporting requirements will apply to broker-dealers
with respect to securities event contracts in the same manner as
they apply to any other options the Exchange lists. The Exchange
believes that there will be no changes to the reporting
specifications for broker-dealers to accommodate the reporting of
information regarding securities event contracts to CAT.
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Implementation
The Exchange has analyzed its systems capacity and represents that
it believes the Exchange has the necessary systems capacity to handle
any potential additional message traffic associated with the listing of
securities event contracts.
The Exchange will send quotation and transaction price information
for securities event contracts to The Options Price Reporting Authority
(``OPRA'') in the same manner it sends this information to OPRA for all
other options the Exchange lists. The Exchange intends to follow OPRA's
standard capacity monitoring process for securities event contracts (in
accordance with OPRA instructions), which includes submission of
quarterly capacity projections (the Exchange will include its projected
securities event contracts volume in the applicable submission).
Further, the Exchange does not believe that technical changes are
required to accommodate the reporting to OPRA of quotation and
transaction information regarding securities event contracts (however,
the Exchange represents, if later required by OPRA, it will adhere to
any new technical
[[Page 55393]]
requirements OPRA deems necessary to accommodate securities event
contracts). The Exchange does not believe Members will experience any
capacity issues as a result of this proposal and represents that it
will monitor the trading volume associated with securities event
contracts and the effect (if any) of securities event contracts on the
capacity of the Exchange's automated system.
Pursuant to the Options Order Protection and Locked/Crossed Market
Plan (``Linkage Plan''),\11\ participant exchanges to the Linkage Plan
established a framework to provide order protection. The Linkage Plan
(and Exchange Rules 27.1 through 27.3 regarding intermarket linkage)
applies during all trading sessions during which multiply listed
options trade. Rule 21.9 (Order Routing) addresses order routing away
from the Exchange to promote compliance with the Linkage Plan. If the
proposed securities event contracts become multiply listed options,
Users may designate an order for routing (or not available for
routing), and the Exchange System is designed to, at all times, prevent
trade-throughs and avoid displaying locked/crossed markets in
accordance with the Linkage Plan (and Exchange Rules 27.1 through 27.3
regarding intermarket linkage).
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\11\ The Linkage Plan requires U.S. options exchanges to
establish a framework for providing order protection and addressing
locked and crossed markets in eligible options classes. The Linkage
Plan is a national market system plan approved by the Commission
pursuant to Section 11A of the Act and Rule 608 thereunder. The full
text of the Linkage Plan is available at <a href="https://www.theocc.com/getcontentasset/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/dfc3d011-8f63-43f6-9ed8-4b444333a1d0/options_order_protection_plan.pdf">https://www.theocc.com/getcontentasset/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/dfc3d011-8f63-43f6-9ed8-4b444333a1d0/options_order_protection_plan.pdf</a>.
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The Options Listings Procedure Plan (the ``OLPP'') sets forth
procedures to facilitate the listing and trading of standardized
options. This plan currently describes procedures with respect to
options issued by and cleared at the OCC. The Exchange will take steps
necessary and within its authority to amend the OLPP to reflect listing
procedures applicable to securities event contracts to the extent not
cleared by the OCC.
The Exchange represents it will not list for trading securities
event contracts until the registered clearing agency designated as the
Clearing Corporation is authorized and operationally ready to clear the
contracts and until all applicable filings and documents of the
Clearing Corporation related to securities event contracts being
cleared through the Clearing Corporation are approved by the Commission
or effective after review by the Commission, as applicable.
As discussed in further detail below, the Exchange intends for
securities event contracts to be treated as listed standardized
options. Rule 9b-1 under the Act establishes a disclosure framework for
standardized options pursuant to which investors receive a disclosure
document describing the terms, characteristics, and risks of the
product before trading. Depending on which registered clearing agency
is designated as the Clearing Corporation, the applicable Rule 9b-1
disclosure document may be based on an existing options disclosure
document utilized by that clearing agency, as modified or supplemented,
as appropriate, or another comparable disclosure document prepared in
connection with the clearance of securities event contracts. In either
case, the disclosure document would contain substantially similar
information regarding the terms, characteristics, risks, settlement
mechanics, and other material features of securities event contracts
and would be tailored, as necessary, to address the product's unique
features and distinctions from traditional listed options. The Exchange
believes that disclosure through the Rule 9b-1 framework would better
serve the informational needs of investors than a traditional
prospectus because securities event contracts are standardized options
for which the principal investor considerations relate to the
contract's terms, payout structure, settlement mechanics, and trading
characteristics rather than the disclosure typically provided in
connection with an offering of a corporate issuer's securities.
The Exchange will not commence listing and trading of securities
event contracts until a registered clearing agency is authorized and
operationally ready to clear the contracts; the applicable disclosure
document under Rule 9b-1 is in place; any necessary changes relating to
CAT, FINRA, OPRA, the Linkage Plan, and OLPP have been completed; and
the Exchange has issued an implementation notice to Members.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\12\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \13\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \14\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
\14\ Id.
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Securities Event Contracts Are Securities and Standardized Options
As an initial matter, the Exchange believes that the securities
event contracts proposed herein would be ``securities'' under the
Act.\15\ Section 3(a)(10) of the Act \16\ defines the term ``security''
to include, among other instruments, ``any . . . option . . . on any
security . . . including any interest therein or based on the value
thereof.'' \17\ Listed options that fall within this statutory
definition are subject to the Commission's jurisdiction and generally
must trade on a national securities exchange that is registered
pursuant to Section 6 of the Act.\18\
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\15\ For the same reasons discussed herein, the Exchange
believes that securities event contracts are also ``securities''
under the Securities Act of 1933, as amended (the ``Securities
Act''). See 15 U.S.C. 77b(a)(1).
\16\ 15 U.S.C. 78c(a)(10).
\17\ Id.
\18\ 15 U.S.C. 78f.
---------------------------------------------------------------------------
Today, standardized options are generally offered based on the
price of the underlying security or index and include puts, calls, and
other complex instruments whose value is based on the price of the
underlying security or securities. The Exchange's proposal would expand
the universe of listed options to include contracts based on the issuer
achieving financial metrics that are material to the price of the
underlying NMS stock rather than the stock's share price itself. Such
securities event contracts would be based on an interest in and relate
to the value of the underlying NMS stock. While the definitions in the
Act are somewhat overlapping, classifying these securities as binary
options contracts rather than security-based swaps is in keeping with
the relevant statutory definitions and the SEC's prior interpretations
thereof.
Moreover, trading such instruments as binary options would promote
a fair and orderly market and facilitate new
[[Page 55394]]
investment and hedging opportunities on a Commission-regulated
exchange. In certain cases, financial instruments may contain features
similar to both options contracts and security-based swaps. As compared
to characterizing an instrument as a security-based swap, which would
typically be traded bilaterally in the over-the-counter (``OTC'')
market, categorizing an instrument as an options contract comes with a
more robust set of regulatory requirements and market practices that
the Exchange believes would aid in the development of such securities
event contracts. To the extent there is uncertainty regarding how best
to characterize these contracts under the statute, the Exchange
believes that the best interpretation is the one that promotes
innovation and competition while providing robust investor protection
guardrails on a regulated exchange.
As discussed above, the Exchange is proposing to list securities
event contracts for trading on its registered U.S. options exchange,
MEMX Options. MEMX Options currently trades standardized options based
on the price of an underlying NMS stock, i.e., ordinary puts and calls.
Securities event contracts would be different from the contracts
currently traded on MEMX Options primarily in two separate respects:
(1) securities event contracts would have a fixed or ``binary'' payout
at expiration, regardless of the magnitude of the difference between
the option's exercise price and the settlement value for the
underlying; and (2) the price of such contracts would be based on the
issuer achieving financial metrics that are material to the price of
the underlying NMS stock rather than the stock's share price itself.
The Exchange does not believe that either of those differences is
germane to whether this product is an options contract as defined in
the Act.
Notably, options as defined in Section 3(a)(10) encompass not only
options on a security but further include options on any interest in a
security or based on the value thereof. This broad statutory language
is sufficient to support the trading of securities event contracts on a
Commission-regulated options exchange, including contracts that
reference an issuer's earnings, revenues, sales, or other financial
metrics on which investors traditionally base investment decisions.
Indeed, such options contracts would reference financial metrics that
are material to the value of the underlying security and are therefore
included in the issuer's financial reports submitted to the Commission,
including Form 8-K, Form 10-K and Form 10-Q filings.
This read of the statute is also consistent with the Commission's
own interpretation of the statute when analyzing its application to
similar products offered by another national securities exchange.
Consider the Commission's approval of proposals by Cboe to list and
trade: (1) credit default options; \19\ and (2) credit default basket
options.\20\ As the Commission explained in its order approving credit
default options for trading on Cboe, ``credit default options . . . are
binary options that are automatically exercised upon the occurrence of
specified credit events or expire worthless.'' \21\ While such products
were therefore different in certain important respects from existing
options contracts, ``[a]fter careful analysis, the Commission [found]
that credit default options are options based on the value of a
security or securities'' \22\ and also ``options on an interest in, or
based on the value of an interest in, a security or securities.'' \23\
The Commission made a similar finding when it later approved Cboe's
proposal to introduce credit default basket options.
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release No. 55871 (June 6,
2007), 72 FR 32372 (June 12, 2007) (SR-CBOE-2006-84).
\20\ See Securities Exchange Act Release No. 56275 (August 17,
2007), 72 FR 47097 (August 22, 2007) (SR-CBOE-2007-26).
\21\ See supra note 19.
\22\ Id.
\23\ Id.
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All of the above would also be true of securities event contracts
traded on MEMX Options. Similar to Cboe's credit default options and
credit default basket options, the Exchange's proposed securities event
contracts are ``binary options that are automatically exercised upon
the occurrence of specified . . . events or expire worthless.'' \24\
The Commission has repeatedly found that contracts with a binary payout
structure may nevertheless be properly classified as options contracts
under the Act and, while most options contracts have historically had a
variable payment structure, such a structure is not required by the
Act, which does not specify a particular payment structure. In
addition, while in some cases binary options offered by other
securities exchanges have referenced the price of some underlying
security or index, such binary options also encompass contracts like
the ones discussed above that are instead based ``upon the occurrence
of specified events.'' \25\
---------------------------------------------------------------------------
\24\ Id.
\25\ Id.
---------------------------------------------------------------------------
When classifying similar products in the past the Commission has
interpreted the relevant statutory language to ``include options whose
pricing in the secondary market moves in relation to the value of the
underlying security or securities.'' \26\ As was the case with Cboe's
credit default options, this requirement is satisfied where there is a
``close empirical correlation between the pricing of'' \27\ the option
contract and the relevant underlying security or securities. Like
Cboe's credit default options and credit default basket options, the
Exchange intends only to list securities event contracts that are
closely correlated with the pricing of the underlying security. Such
contracts may include contracts based on an issuer's earnings,
revenues, sales, or other financial metrics--such as metrics relating
to customers, users, subscribers, production, margins, cash flows, or
other aspects of the issuer's financial performance--reported in the
company's periodic reports filed with the Commission on Form 8-K, Form
10-K, or Form 10-Q. This information, which is reported by issuers in
their financial reports, is considered material to the price of the
underlying NMS stock and easily meets the requirement that there be a
close empirical relationship between the pricing of the option and the
underlying security. Indeed, such information is generally considered
to be the most important information disclosed to investors under the
federal securities laws and fundamental price movements often happen
following its disclosure.
---------------------------------------------------------------------------
\26\ Id.
\27\ Id.
---------------------------------------------------------------------------
Pursuant to Section 3(a)(68) of the Act,\28\ a ``security-based
swap'' \29\ is a ``swap'' \30\ as defined in the Commodity Exchange Act
that is based on: (1) ``an index that is a narrow-based security index,
including any interest therein or on the value thereof;'' \31\ (2) ``a
single security or loan, including any interest therein or on the value
thereof;'' \32\ or (3) ``the occurrence, nonoccurrence, or extent of
the occurrence of an event relating to a single issuer of a security or
the issuers of securities in a narrow-based security index, provided
that such event directly affects the financial statements, financial
condition, or financial obligations of the issuer.'' \33\ In turn, the
Commodity Exchange Act defines ``swap'' to include ``any
[[Page 55395]]
agreement, contract, or transaction . . . that is a put, call, cap
floor, collar, or similar option of any kind that is for the purchase
or sale, or based on the value, of 1 or more . . . securities.'' \34\
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78c(a)(68).
\29\ Id.
\30\ 7 U.S.C. 1a(47).
\31\ 15 U.S.C. 78c(a)(68)(A)(ii)(I).
\32\ 15 U.S.C. 78c(a)(68)(A)(ii)(II).
\33\ 15 U.S.C. 78c(a)(68)(A)(ii)(III).
\34\ 7 U.S.C. 1a(47)(A)(i).
---------------------------------------------------------------------------
All listed options contracts, including those currently traded on
MEMX Options and other U.S. options exchanges, would therefore fall
within the statutory definition of security-based swap, unless an
exclusion applies. Importantly then, the Commodity Exchange Act defines
the term ``swap'' to specifically exclude ``any . . . option . . . on
any security . . . or group or index of securities, including any
interest therein or based on the value thereof,'' that is subject to
both the Act and Securities Act.\35\ As a practical matter, this
exclusion means that listed options contracts traded on U.S. options
exchanges like MEMX Options are therefore not considered security-based
swaps under the Act, notwithstanding that they would otherwise meet the
relevant statutory definition.
---------------------------------------------------------------------------
\35\ 7 U.S.C. 1a(47)(B)(iii).
---------------------------------------------------------------------------
In determining whether a particular security is a security-based
swap under the Act, the Commission must therefore determine not only
whether the product falls within the security-based swap definition but
also whether it is an ``option . . . on any security . . . or group or
index of securities, including any interest therein or based on the
value thereof.'' \36\ If the Commission concludes that the product in
question falls within the statutory definition of an option, then the
product is excluded from the definition of security-based swap. For the
reasons discussed above, the Exchange's proposed securities event
contracts would be properly classified as options on a security,
including any interest therein or based on the value thereof, and
therefore should not be considered security-based swaps if traded on a
national securities exchange under Commission rules that apply to the
trading of options contracts.
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
The Exchange also believes that securities event contracts would be
``standardized options'' for purposes of Rule 9 b-1 under the Act.\37\
Rule 9 b-1 establishes a disclosure framework for standardized options
traded on a national securities exchange and cleared through a
registered clearing agency. Rule 9 b-1(a)(4) \38\ defines a
standardized option to include an options contract trading on a
national securities exchange that relates to an options class whose
terms are limited to specific expiration dates and exercise prices, as
well as other securities the Commission may designate by order. Under
the current proposal, securities event contracts would have
standardized terms established by Exchange rule, including specific
expiration dates and exercise prices, and therefore would fall within
the express definition of standardized options in Rule 9 b-1(a)(4).
Additionally, securities event contracts would be cleared through the
registered clearing agency designated as the Clearing Corporation,
automatically exercised if in-the-money, and cash settled pursuant to
the Rules of the Clearing Corporation. Accordingly, the Exchange
believes that securities event contracts would be appropriately
encompassed within the regulatory framework applicable to standardized
options.
---------------------------------------------------------------------------
\37\ 17 CFR 240.9b-1.
\38\ 17 CFR 240.9b-1(a)(4).
---------------------------------------------------------------------------
As noted above, the applicable Rule 9 b-1 disclosure document would
be in place before the Exchange commences listing and trading of
securities event contracts. Depending on the registered clearing agency
designated as the Clearing Corporation, the applicable Rule 9 b-1
disclosure document may be the same as or similar to an existing
options disclosure document utilized by that clearing agency, as
modified or supplemented, as appropriate, or another comparable
disclosure document prepared in connection with the clearance of
securities event contracts. In either case, the document would describe
the terms, characteristics, risks, settlement mechanics, and other
material features of securities event contracts and would be tailored,
as necessary, to address the product's unique features and distinctions
from traditional listed options.
The Exchange believes the Rule 9 b-1 disclosure framework is
appropriately tailored and would better serve the informational needs
of investors than a traditional prospectus because securities event
contracts are standardized options for which the principal investor
considerations relate to the contract's terms, payout structure,
settlement mechanics, and trading characteristics rather than the
disclosure typically provided in connection with an offering of a
corporate issuer's securities. Providing this information through the
options disclosure framework would ensure that investors receive
meaningful and appropriately tailored disclosure concerning the
characteristics and risks of the contracts in a form established for
standardized options and familiar to options market participants.
Classifying securities event contracts as securities options under
the Act is consistent with the Commission's established regulatory
framework for binary options, including investor protection objectives,
and preserves the integrity of antimanipulation restrictions, insider
trading prohibitions, and material nonpublic information (``MNPI'')
controls. More specifically, because these contracts are tied to
Commission disclosure rules and regulations and MNPI risks that are
substantially identical to those present in traditional securities
trading, aligning securities event contracts with the securities
regulatory framework preserves the integrity of insider trading
prohibitions and the Commission's disclosure regime. Listing securities
event contracts on a registered national securities exchange subjects
trading activity to SRO and Commission surveillance for, among other
things, manipulative trading and insider trading, affording investors
the full protections of the federal securities laws. Further,
classifying securities event contracts as security options under the
Act allows these contracts to be quoted by the same liquidity providers
that quote listed options today, all of whom are Commission-registered
and regulated broker-dealers who are also subject to FINRA and exchange
SRO oversight, and allows such contracts to be traded by the same
retail customer base that trade other binary options products today.
For these reasons, the Exchange believes that securities event
contracts, as proposed, are appropriately classified as binary options
eligible to trade on a registered national securities exchange and as
standardized options subject to the disclosure framework established by
Rule 9b-1. This classification reflects the economic substance and
standardized structure of the product, is consistent with the Act and
the Commission's prior interpretations, and is designed to prevent
fraudulent and manipulative acts and practices, promote just and
equitable principles of trade, foster regulatory and clearing
coordination, and protect investors and the public interest consistent
with Section 6(b)(5) of the Act.\39\
---------------------------------------------------------------------------
\39\ 15 U.S.C. 78f(b).
---------------------------------------------------------------------------
Proposal
The Exchange believes the proposal is consistent with Section 6(b)
of the Act,\40\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\41\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and
[[Page 55396]]
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78f.
\41\ 15 U.S.C. 78f(b).
---------------------------------------------------------------------------
The proposal would establish a comprehensive framework for the
listing and trading of securities event contracts on MEMX Options. As
described above, securities event contracts would be cash-settled,
European-style binary options based on the objective event questions
relating to the financial performance of issuers of NMS stocks. The
proposed rules would place these products within the Exchange's
established listed-options regulatory framework while adopting product-
specific provisions addressing contract designation, eligible
underlying securities, eligible contract types, expiration, exercise
prices, trading mechanics, adjustments, resolution, settlement, and
position limits. The Exchange believes this structure is reasonably
designed to apply the protections and operational infrastructure of the
listed-options markets to issuer-related event products that constitute
securities, while tailoring the rules to the fixed-payout and event-
based characteristics of the contracts.
The proposal is not limited to creating a new investment product.
It also establishes the conditions under which such a product may be
listed, traded, resolved, cleared, surveilled, and reported. The
proposed rules therefore address the principal investor-protection and
market-integrity considerations presented by securities event
contracts: the issuer and metric on which a contract may be based; the
public information that will control resolution; the timing of
expiration and the final trading session; the manner in which exercise
prices will be selected and displayed; the prices at which transactions
may occur; the process for entering and exiting positions; the
treatment of adjustments and settlement; the limits applicable to
concentrated positions; and the surveillance and regulatory
infrastructure that will apply. The Exchange believes the proposal,
considered as a whole, is reasonably designed to provide transparent
contract terms, objective resolution, bounded Exchange discretion,
standardized trading and settlement, and effective regulatory
oversight.
The Exchange believes the proposal is designed to remove
impediments to and perfect the mechanism of a free and open market by
providing market participants with a standardized, exchange-traded
means of obtaining exposure to, or hedging risk associated with,
discrete issuer-specific financial outcomes. Existing equity and
options markets allow investors to express views concerning the market
price of an issuer's stock. The market price of a stock, however,
reflects numerous contemporaneous factors, including macroeconomic
conditions, industry developments, capital structure, interest rates,
market sentiment, and other issuer-specific information. An investor
may therefore correctly assess a particular financial outcome--such as
earnings, revenues, sales, production, margins, or subscriber levels--
while receiving an imperfect economic result through a position whose
value depends on the issuer's overall stock price.
Securities event contracts are designed to isolate the specified
financial metric or other event question as the contractual reference
point. The value of the contract at expiration would depend on whether
the stated condition is satisfied, rather than on the magnitude or
direction of the movement in the underlying stock. The Exchange
believes this targeted exposure may permit investors to implement
investment and hedging strategies that are not replicated as directly
through conventional equity options. In addition, prices for
complementary yes contracts and no contracts may convey market
participants' collective probability assessments concerning the
relevant issuer-reported outcome. The Exchange believes that
transparent, exchange-displayed prices for these contracts may
contribute to price discovery regarding issuer-specific expectations,
while the fixed settlement amount and all-or-nothing payout provide a
readily understandable risk profile.
The proposal would also bring this form of event-based exposure
within the regulated exchange environment. Securities event contracts
would trade pursuant to Exchange Rules governing access, order
handling, trading conduct, surveillance, investigations, discipline,
and other matters applicable to listed options except where Chapter 30
provides product-specific treatment. Quotation and transaction
information would be disseminated through OPRA, and, if the contracts
become multiply listed, order protection and routing would operate
pursuant to the Linkage Plan and the Exchange's linkage rules. The
Exchange believes these features promote transparency, fair access, and
competition and are therefore consistent with the protection of
investors and the public interest.
Proposed Rule 30.1--Application of Securities Event Contract Rules
Proposed Rule 30.1 would provide that Chapter 30 applies only to
securities event contracts traded on MEMX Options and that the
Exchange's Rules also apply unless specifically replaced or
supplemented by Chapter 30 or the context otherwise requires. The
Exchange believes this approach is appropriate because securities event
contracts would be classified as options but have features that require
targeted product-specific rules. Chapter 30 therefore would supplement
the existing options rules with provisions addressing product
definitions, contract terms, contract designation, expiration, exercise
prices, order entry, contract adjustment, resolution, and position
limits. Applying the Exchange's existing options rules except where
Chapter 30 provides otherwise is reasonably designed to prevent
regulatory gaps and to subject securities event contracts to the
established requirements governing, among other things, access, order
handling, trading conduct, surveillance, investigations, and
discipline. Accordingly, proposed Rule 30.1 is designed to protect
investors and the public interest and to promote just and equitable
principles of trade by applying a comprehensive and coherent body of
Exchange Rules to the product.
Proposed Rule 30.2--Definitions
Proposed Rule 30.2 would define the key terms used throughout
Chapter 30. The Exchange believes a defined terms framework is
particularly important for a novel product, and clear and consistent
definitions are reasonably designed to protect investors and promote
just and equitable principles of trade by reducing ambiguity concerning
what the product references, when it expires, how the outcome is
determined, which public source controls settlement, and when each
complementary contract is in-the-money. The definitions also facilitate
consistent administration by the Exchange, Members, the Clearing
Corporation, surveillance personnel, and other market participants.
Defining the Clearing Corporation generically as the registered
clearing agency designated by the Exchange is reasonably designed to
preserve operational flexibility while ensuring that the entity
responsible for clearance and settlement is subject to Commission
oversight.
[[Page 55397]]
Proposed Rule 30.3--Terms of Securities Event Contracts
Proposed Rule 30.3 would require each securities event contract to
be designated by expiration date, underlying security, contract type,
event question, and, if applicable, exercise price, and would require
the Exchange to make available both a yes contract and a no contract
for each event question. Proposed Interpretation and Policy .01 would
require the Exchange to publish the contract terms before listing and
trading. The Exchange believes advance publication of standardized
terms promotes just and equitable principles of trade and protects
investors because all market participants would receive the same
information concerning the reference interest, reporting period,
possible outcomes, payout criteria, expiration, and resolution
methodology before entering a position
Proposed Interpretation and Policy .02 provides that, unless
otherwise specified, each securities event contract has an $1 exercise
settlement amount and no contract multiplier. As described above, the
Exchange intends for $1 to serve as the standard settlement amount
because it provides a simple and intuitive framework for pricing the
complementary contracts associated with a particular event question and
enables market participants to readily understand the relationship
between a contract's price and its potential payout. The Exchange
believes these default terms protect investors and perfect the
mechanism of a free and open market by making the product's economics
straightforward, promoting consistency and transparency across series,
and avoiding the additional complexity associated with a contract
multiplier.
The requirement to offer both yes contracts and no contracts
reflects the two possible outcomes of the same event question and
establishes the foundation for the linked trading structure in proposed
Rule 30.7. At the contract-designation stage, that requirement protects
investors by making both sides of the binary question explicit and by
ensuring that the complementary relationship is reflected in the
standardized terms rather than requiring investors to infer the
opposite exposure from traditional call and put terminology.
Proposed Rule 30.4--Designation of Securities Event Contracts
The Exchange believes proposed Rule 30.4 is consistent with the Act
because it establishes a bounded, objective, and transparent framework
governing the issuers and underlying securities on which the Exchange
may list securities event contracts, the financial metrics that may
serve as the basis for those contracts, and the public issuer
disclosures that will govern their resolution. Taken together, these
provisions are designed to prevent fraudulent and manipulative acts and
practices, promote just and equitable principles of trade, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and protect investors and the public interest
by limiting the currently authorized products to contracts based on
objectively determinable measures of an issuer's financial performance
that are material to the value of the underlying NMS stock.
The proposed issuer-eligibility standards are designed to promote
just and equitable principles of trade, protect investors, and support
market integrity and informed trading by limiting the Exchange's
initial selection authority under proposed Rule 30.4(a)(1) to no more
than 25 issuers whose NMS stocks rank among the top 25 by market
capitalization, equities volume, or options volume. As described above,
these objective criteria identify a limited universe of issuers with
substantial public market interest, as reflected through issuer size or
active trading in the issuer's stock or related options. Such issuers
generally are more likely to have broad market participation,
significant liquidity, and robust public information and analyst
coverage. These characteristics provide market participants with
information relevant to evaluating the financial metrics underlying
securities event contracts and support the Exchange's ability to
surveil and administer the products. The limitation on the number of
Exchange-selected issuers further supports a measured introduction of
the product by maintaining a limited and manageable universe while
permitting the Exchange to offer contracts on a meaningful range of
issuers. Assessing eligibility only at the time of initial selection
avoids unnecessary disruption to outstanding products and investor
positions based solely on later changes in relative rankings, while
preserving the Exchange's discretion to determine whether and when to
list contract series on a particular eligible issuer based on issuer-
specific developments, investor interest, market conditions, and other
relevant factors.
Proposed Rule 30.4(a)(2) would permit the Exchange to select the
NMS stock of an issuer for which securities event contracts or similar
options are listed and traded on another national securities exchange
pursuant to Commission-approved rules. As described above, this
provision would allow the Exchange to compete in a product that has
already been authorized for that issuer under another exchange's
approved rules without requiring a duplicative issuer-specific rule
filing, thereby removing impediments to and perfecting the mechanism of
a free and open market.
The protections arising from the issuer-eligibility standards are
reinforced by the limitations applicable to the financial metrics on
which securities event contracts may be based. The currently authorized
contract types are limited to contracts based on objective,
quantifiable measures of an issuer's financial performance. Earnings,
revenues, and sales are widely recognized measures of issuer
performance that issuers routinely disclose in their Commission filings
and that investors and other market participants commonly consider when
evaluating an issuer's business, financial condition, and securities.
As described above, Other Key Financial Metric Contracts would be
limited to issuer-reported metrics that are objectively determinable
from the applicable filing with the Commission and material to the
value of the underlying NMS stock. Consistent with the designation of
these measures as ``key'' metrics, the Exchange would select only
metrics that bear a meaningful relationship to the issuer's business,
financial performance, and market valuation, and are therefore material
to the value of the underlying NMS stock.
The requirement that a financial metric underlying an Other Key
Financial Metric Contract be reported in the issuer's applicable
Commission filing provides a reasonable and objective standard for
establishing a baseline pool of eligible financial metrics from which
the Exchange can identify significant measures of an issuer's
performance that are material to the value of the underlying security.
Crucially, eligibility under the proposed framework does not depend
solely on a metric being reported in an issuer's Commission filings.
Rather, the category is strictly confined to key financial measures--
describing significant aspects of the issuer's financial condition,
results of operations, or business performance--that bear a meaningful
relationship to the issuer's financial performance and are therefore
material to the value of the underlying security.
[[Page 55398]]
Anchoring eligible metrics to the Commission's disclosure framework
ensures that the underlying data is subject to rigorous regulatory
disclosure requirements and Commission guidance, which, as noted above,
directs issuers to focus on material information and key variables that
management uses to monitor the business.\42\ Because these measures are
publicly reported by the issuer and represent the types of information
commonly considered by investors, analysts, and other market
participants when evaluating an issuer's financial performance and
stock value, they possess a meaningful relationship to the value of the
underlying security.
---------------------------------------------------------------------------
\42\ See supra note 7.
---------------------------------------------------------------------------
Consistent with this framework, eligible metrics include GAAP and
non-GAAP financial measures, as well as operating measures relating to
the issuer's business activities, products, customer base, production
levels, or business segments, provided they represent key indicators of
performance. Conversely, the proposed framework protects investors and
the public interest by excluding metrics that are not included in the
issuer's Commission filings, are derived from unverified third-party
sources, or are otherwise immaterial, ancillary, trivial, or lacking a
material relationship to the issuer's financial performance.
Ultimately, the Exchange believes that narrowing the scope to key,
verifiable measures of an issuer's financial performance ensures that
trading in the proposed securities event contracts is based exclusively
on objective, high-integrity financial metrics--thereby protecting
investors from market confusion, preventing fraudulent and manipulative
acts and practices, and perfecting the mechanism of a free and open
market consistent with the requirements of the Act.
By requiring the contract terms to identify the applicable
reporting period and specifying that the first applicable Commission
filing reporting the relevant metric will resolve the event question,
proposed Interpretation and Policy .01 would anchor settlement to the
issuer's initial public disclosure of that metric through the
Commission's reporting framework and prevent trading in the contract
after the relevant information capable of resolving the event question
has been publicly disclosed by the issuer. Because the resolution
source will be an issuer filing made available through the Commission's
reporting framework, the resolution process will be tied to public
information subject to the federal securities law reporting framework
applicable to issuer filings, including applicable reporting,
certification, and antifraud requirements. The Exchange believes that
these features would provide an objective, transparent, publicly
available, and reproducible basis for settlement, thereby promoting
just and equitable principles of trade and protecting investors and the
public interest.
Proposed Rule 30.4(c), which provides that securities event
contracts listed and traded on the Exchange constitute a separate class
from other options overlying the same underlying NMS stock and from
other securities event contracts with different underlying financial
metrics for the same issuer, is designed to align the classification of
each product with the underlying economic characteristics of that
product and promote clarity in the administration and trading of the
products. Securities event contracts differ from other options
overlying the same NMS stock because they are based on a specified
event question relating to the issuer rather than on the stock's market
price, while securities event contracts based on different underlying
financial metrics of the same issuer differ because each metric
presents a separate event question resolved by reference to the
applicable issuer disclosure and settlement value; in each case, the
products involve different reference interests, settlement
determinations, and economic exposures, and therefore warrant separate
class treatment.
Proposed Rule 30.5--Expiration Date
The Exchange believes proposed Rule 30.5 is consistent with the Act
because it establishes transparent and objective standards governing
the permissible duration, expiration, final trading session, early
resolution, and settlement finality of securities event contracts. The
Exchange believes the range of permissible expirations under proposed
Rule 30.5(a) would remove impediments to and perfect the mechanism of a
free and open market and a national market system because, as discussed
above, they will align with the reporting periods for which the
proposed issuers disclose financial results and submit corresponding
reports to the Commission. These expirations will, therefore, permit
investors to incorporate securities event contracts into their
investment strategies that correspond to issuers' financial results.
Further, as discussed above, the Exchange believes aligning expirations
with Commission-regulated sources will reduce the potential for
manipulation of the underlying financial metrics, which will ultimately
protect investors and the public interest.
The Exchange believes that proposed Rule 30.5(b) and Interpretation
and Policy .01 thereto would promote just and equitable principles of
trade and protect investors by tying a contract's expiration to the
issuer's first public announcement of the relevant underlying financial
metric. This approach aligns expiration with the time when the
information necessary to resolve the event question becomes available
and prevents trading after the relevant information has been released,
thereby supporting fair and orderly markets and investor protection.
Proposed Rule 30.5(b) also addresses the practical circumstance that an
issuer may not announce the precise disclosure date for a reporting
period until relatively close to the scheduled disclosure. As described
above, it would permit the Exchange to establish the anticipated
expiration date when a series is listed and use a placeholder based on
the issuer's prior reporting cycle when necessary, after which the
Exchange would revise the expiration date once the issuer announces the
relevant date. The Exchange believes this approach would promote just
and equitable principles of trade and support fair and orderly markets
by accommodating issuer disclosure practices while providing market
participants with advance information regarding expected duration of
the series.
The authority to halt trading under proposed Interpretation and
Policy .01 when information regarding the underlying financial metric
appears to have become publicly available through a source other than a
definitive resolution source provides an additional investor-protection
safeguard. A trading halt would permit the Exchange to evaluate whether
an unusual or unofficial disclosure is reliable and whether continued
trading would be consistent with a fair and orderly market. At the same
time, permitting trading to resume if the information is determined to
be unreliable or insufficient to resolve the event question would avoid
allowing incomplete information or unverified reports to prematurely
terminate legitimate trading. The Exchange believes this measured
approach is reasonably designed to protect investors while preserving
trading where the contract has not become objectively resolvable under
its terms.
The last trading day conventions in proposed Interpretation and
Policy .02 likewise are designed to protect investors and promote just
and
[[Page 55399]]
equitable principles of trade by permitting trading through the final
regular trading session before the information necessary to resolve the
event question becomes public, while preventing trading after market
participants have access to that information. Where the issuer
discloses its financial results after the close of trading, permitting
trading through the expiration date preserves the final trading session
preceding the disclosure; where the issuer discloses its financial
results before the opening of trading, establishing the prior trading
day as the last day of trading prevents trading after the relevant
information has been released.
The Exchange believes Interpretation and Policy .03 would promote
just and equitable principles of trade and protect investors by
requiring the contract terms to address in advance the unusual
circumstance in which the applicable underlying financial metric is not
reported or otherwise will be unavailable. Specifying the applicable
procedure before a series is listed would provide market participants
with advance notice of the possible settlement treatment, permit that
treatment to be reflected in trading decisions, and avoid an ad hoc
determination after trading has occurred. Although the precise
procedure may vary depending on the metric and the requirements of the
Clearing Corporation, requiring the procedure to be established in the
published contract terms prior to the commencement of trading in the
product would promote objective and consistent treatment and foster
cooperation and coordination in the clearance and settlement of
securities transactions.
The Exchange believes treating the value reported by the issuer on
the applicable expiration date as final notwithstanding a subsequent
restatement is reasonably designed to protect investors, promote just
and equitable principles of trade, and support the prompt and orderly
settlement of securities event contracts. Finalizing settlement at
expiration would provide investors and the Clearing Corporation with
certainty and avoid operational burdens associated with reversing
payments or recalculating positions after a series has expired.
Applying the same expiration-date value to all contracts would ensure
uniform treatment and provide finality to the settlement process.
Proposed Rule 30.6--Exercise Price
The Exchange believes the exercise price framework under proposed
Rule 30.6(a) is consistent with the Act because it provides a
reasonable, principles-based, and appropriately bounded method for
tailoring the exercise price structure for a particular securities
event contract to the characteristics of such contract. Permitting
securities event contracts to be listed with or without an exercise
price, depending on the contract type, avoids imposing a numerical
threshold where one is not economically relevant. Where an exercise
price is appropriate, permitting multiple contracts in the same class
with exercise prices that correspond to an appropriate range of
potential settlement values would allow market participants to express
differing views regarding the expected value of the applicable
financial metric. Where a contract does not reference a specific
exercise price, requiring the contract terms to provide sufficient
information to determine whether the contract will be in-the-money or
out-of-the-money would preserve objective administration and protect
investors. The Exchange believes this product-specific flexibility
removes impediments to and perfects the mechanism of a free and open
market while supporting economically meaningful series.
Proposed Interpretation and Policy .01 would further these
objectives by requiring the Exchange to consider information relevant
to the particular issuer, contract type, event question, and reporting
context when determining which exercise prices to offer. The Exchange
believes that requiring consideration of the factors described in that
rule would promote just and equitable principles of trade and protect
investors by helping ensure that exercise price selections reflect
current information, prevailing expectations, and actual trading
experience, thereby supporting the listing of exercise prices that are
responsive to market interest and within a range likely to be
meaningful to market participants.
The Exchange believes the scaling of exercise prices under proposed
Rule 30.6(b) is reasonable and will protect investors, as it will
permit the Exchange to list exercise price values in amounts similar to
current exercise price values for other options. As noted above, values
of certain underlying financial metrics may be large (e.g., in the
billions). The proposed scaling will permit the Exchange, for example,
to list an exercise price of 27 rather than 27,000,000,000, which the
Exchange believes will be simpler for investors to understand (as it
will be made clear that 27 will reflect billions in this example) and
consistent with current exercise price levels. The proposed scaling
also permits the exercise prices for securities event contracts to fit
within current system capabilities regarding exercise price values. The
Exchange believes scaling rather than modifying its systems (and
potentially causing investors to modify their systems) will benefit
investors by allowing them to trade securities event contracts in the
same manner as they trade other options today.
The Exchange believes applying a different scale generally only to
new expirations after the metric has remained in another scaling tier
for four consecutive reporting periods avoids changing the scale based
on a temporary movement across a tier boundary, while allowing the
Exchange to update the scale to reflect sustained changes in the
issuer's reported metric. The fair-and-orderly-market exception would
permit the Exchange to make an earlier change if continued use of the
existing scale became impractical, misleading, or otherwise
inconsistent with orderly trading.
Proposed Rule 30.7--Entering Positions
The Exchange believes proposed Rule 30.7 is consistent with the Act
because it establishes a transparent, efficient, and appropriately
protective framework for entering and managing positions in securities
event contracts, promotes fair and orderly markets, and protects
investors. The framework is tailored to the binary nature of the
product by organizing trading in a single market around complementary
yes/no outcomes of a single event question, using a transparent pricing
structure, applying objective execution parameters that protect against
economically unreasonable executions, and providing a clear means of
entering and offsetting positions.
By structuring the product as long-only positions in complementary
yes contracts and no contracts, proposed Rule 30.7(a) would promote
just and equitable principles of trade and enhance pricing
transparency. Securities event contracts are designed to address
whether a specified event condition occurs. As described above,
organizing trading around the two complementary outcomes of that single
event question, rather than separate call and put markets, would
concentrate trading interest in one market, make the relationship
between the outcomes readily observable, and reduce the potential for
pricing discrepancies or other dislocations among economically
equivalent positions. Interpretation and Policy .01 would support these
objectives by providing that Users may not sell securities event
contracts and
[[Page 55400]]
that a User seeking to offset an established position must purchase the
associated complementary contracts. This mechanism would provide a
consistent means of managing an existing position while preserving the
single-market structure and avoiding the fragmentation and potential
confusion that could result from separate purchase and sale markets for
equivalent event exposures.
The pricing requirements in proposed Rule 30.7(b) likewise are
reasonably designed to promote just and equitable principles of trade
and protect investors. Limiting bids to $0.01 through $0.99, in minimum
$0.01 increments, would provide a uniform and readily understood
pricing framework. Requiring the paired bids for the yes and no
contracts to sum to the $1 exercise settlement amount would directly
link the prices of the complementary outcomes and ensure that the price
of each contract reflects the market's relative valuation of the two
possible outcomes.
As described above, these requirements also would provide
appropriately tailored execution price protection by preventing an
investor from purchasing a contract for an amount equal to or greater
than its maximum possible settlement value. The Exchange believes this
pre-trade protection is reasonably designed to protect investors and
maintain fair and orderly markets because the fixed exercise settlement
amount, permissible bid range, and requirement that complementary bids
sum to $1 would enable the Exchange's System to prevent an execution at
or above the contract's maximum possible payout before it occurs. The
Exchange believes this protection is preferable to relying on a post-
trade nullification or adjustment process and obviates the need for the
Exchange's obvious error provisions.
Additionally, the Exchange believes excluding securities event
contracts from the obvious error provisions in Rule 20.6 is consistent
with the Act and promotes just and equitable principles of trade
because the standard obvious error framework, which evaluates whether
an execution price deviates from a ``theoretical value'' by a
prescribed amount, is incompatible with the structure of securities
event contracts. Securities event contracts have no continuously
observable theoretical value (unlike equity and index options) prior to
the date of the relevant disclosure that resolves the event question.
Rather, their exercise settlement amount is fixed at a pre-specified
dollar amount, and the corresponding value of the contract depends
entirely on whether the specified event condition is satisfied, which,
for the proposed contract types, is based on a single, publicly
verifiable financial metric disclosed in Commission filings. Applying
an obvious error framework premised on theoretical value calculations
to a product with a binary, fixed payout would be technically
inapplicable and could produce unjust or arbitrary results. Moreover,
because settlement of the proposed securities event contracts is
determined by issuer-reported financial metrics disclosed through
Commission filings (i.e., figures produced pursuant to established
accounting standards, subject to independent audit, and certified under
the Sarbanes-Oxley Act), the settlement process is itself governed by a
comprehensive external regulatory framework. The Exchange believes that
establishing any alternative dispute mechanism in this context would be
not only unnecessary, but potentially disruptive to market integrity,
as it may introduce an element of post-hoc discretion into a settlement
process that is expressly designed to be objective, verifiable, and
rule-bound.
The Exchange accordingly believes that the non-applicability of
Rule 20.6 to securities event contracts is a reasonable and justified
product-specific accommodation that promotes orderly trading and clear,
consistent treatment of transactions in these contracts.
The Exchange believes proposed Interpretation and Policy .02 would
foster cooperation and coordination with the registered clearing agency
responsible for clearing and settling securities event contracts by
requiring positions to be paid in full when they are established
pursuant to the Rules of the Clearing Corporation, i.e., on a T+1
basis, thereby reducing settlement and counterparty risk, providing the
Clearing Corporation with a fully funded obligation for each position,
and supporting the prompt and orderly clearance and settlement of the
contracts.
Proposed Rule 30.8--Contract Adjustment
The Exchange believes proposed Rule 30.8 is designed to foster
cooperation and coordination with the registered clearing agency
responsible for clearing and settling securities event contracts and to
protect investors by requiring adjustments to be administered only in
accordance with and to the extent specified in the Rules of the
Clearing Corporation. As noted above, the Exchange believes that
limiting adjustments to those provided under the Rules of the Clearing
Corporation would provide a clear and transparent framework under which
adjustments would be administered. Moreover, the Exchange believes this
centralized framework places adjustment determinations within the rules
and procedures of an entity with specialized clearing expertise and
applicable regulatory oversight, while public notice of any adjustment
and its effective time promotes uniform and predictable treatment. The
Exchange notes that the proposed approach is consistent with how
adjustments are handled for traditional equity and index options.
Proposed Rule 30.9--Resolution
The Exchange believes proposed Rule 30.9 is consistent with the Act
because it establishes a clear, objective, and pre-specified framework
for determining the outcomes of securities event contracts and settling
those contracts at expiration. The Exchange believes proposed Rule
30.9(a) would promote just and equitable principles of trade, protect
investors, and reduce the potential for inconsistent outcomes by
limiting the Official's role to applying the pre-published contract
terms to the public information contained in the applicable definitive
resolution source(s). For metric-based contracts, using the value
reported in the applicable Commission filing would provide an
objective, public, and verifiable basis for determining the settlement
value.
The Exchange believes the cash-settlement and automatic-exercise
requirements in proposed Rule 30.9(b) would facilitate cooperation and
coordination with the Clearing Corporation and support the prompt and
orderly clearance and settlement of securities event contracts. Because
these contracts are designed to provide exposure to the occurrence or
non-occurrence of an issuer-specific event rather than ownership or
delivery of the underlying security, cash settlement is appropriately
tailored to the product. Providing for automatic exercise and cash
payment pursuant to the Rules of the Clearing Corporation also would
promote uniform treatment and reduce the potential for uncertainty in
the settlement process, thereby promoting just and equitable principles
of trade and fostering cooperation and coordination with persons
engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in securities.
The Exchange believes that proposed Interpretation and Policy .01
to Rule 30.9 would protect investors and promote fair and orderly
markets by
[[Page 55401]]
ensuring that the settlement outcome corresponds to the specified
contract terms for a particular securities event contract. For
contracts with an exercise price, comparing the settlement value with
that price would establish a clear boundary for determining whether the
issuer's reported performance satisfies the contract's specified
condition. For contracts without an exercise price, resolving the
contract by reference to the occurrence or non-occurrence of the
specified event would preserve the binary structure of the product. By
tying each resolution to the specified metric threshold or event
condition in the contract terms, these mechanics would provide an
objective and uniform basis for contract resolution, thereby supporting
orderly trading and settlement.
Proposed Rule 30.10--Position Limits
The Exchange believes the proposed amendments related to position
limits for securities event contracts are consistent with the Act
because they establish a rational position limit framework for
securities event contracts that protects against manipulation while
facilitating legitimate trading activity in a novel product. The
Exchange believes that setting the position limit for securities event
contracts as the same as the applicable position limit for the stock of
the issuer, with 100 securities event contracts equaling one standard
option contract, is appropriate. These position limits were previously
approved by the Commission as consistent with the Act for standard
equity options. Therefore, the Exchange believes these same limits are
appropriate for securities event contracts for the related equities, as
the Commission has ultimately determined that option positions on an
equity up to that amount are unlikely to permit a single investor from
influencing the value of that equity. As proposed, securities event
contracts, which have no multiplier, will count toward applicable
limits on a proportional basis relative to standard equity options on
the issuer's stock, which carry a multiplier of 100. Because the
proposed securities event contracts have no multiplier, while standard
option contracts have a multiplier of 100, the notional value of a
securities event contracts is significantly less than the notional
value of standard option contracts. For example, 250,000 contracts with
a value of $1.00 with a multiplier of 100 would equate to $2,500,000
notional value, while 250,000 securities event contracts with a value
of $1.00 (which is the default exercise settlement amount of a
securities event contract) and no multiplier would equate to $250,000
notional value. Counting 100 securities event contracts as one standard
option contract for purposes of calculating compliance with position
limits effectively calibrates these limits so that investors may hold
positions in securities event contracts in an economically equivalent
number of contracts they may hold in standard equity options.
Therefore, the Exchange believes this proposed treatment is consistent
with just and equitable principles of trade, as it counts option
positions in a manner equivalent with their value.
The Exchange further believes the proposal is reasonable given the
nature of securities event contracts and their relationship to the
underlying issuer. Because securities event contracts have a fixed
notional value (i.e., the exercise settlement amount) and settle on an
all-or-nothing basis based on an underlying financial metric of the
issuer rather than the price of the issuer's stock as with a standard
equity option, the Exchange believes the proposed position limits
appropriately reflect the distinct structure of these contracts and
limits the potential for any single market participant to exert undue
influence over securities event contract settlement. With respect to
securities event contracts, the economic risk of a position is binary,
in that the contract either settles in-the-money at $1.00 or out-of-the
money at $0.00. Additionally, with respect to securities event
contracts, the maximum notional exposure per contract is fixed in
advance; it cannot exceed the $1.00 exercise settlement amount.
Moreover, unlike stock prices or index values, securities event
contract positions would not influence a company's financial or
operational outcomes; the number of option contracts outstanding or
trading volume, for instance, has no effect on revenue or operational
metrics.
Further, the Exchange's proposal to provide that positions in
securities event contracts on the same underlying financial metric with
different expiration dates and positions in securities event contracts
for the same issuer with different underlying financial metrics are not
aggregated reflects the distinct structure of securities event
contracts. Each securities event contract expiration corresponds to a
separate event tied to a specific issuer reporting period. Thus, the
Exchange believes aggregating positions across different expiration
dates would not accurately reflect the risk profile of these positions
and would impose an unnecessary burden on market participants seeking
exposure to company financial metric events across different reporting
periods.
Similarly, the Exchange believes that position limits for
securities event contracts with respect to a single issuer but with
different underlying financial metrics should not be aggregated.
Financial metrics may measure different aspects of an issuer's
financial performance and may differ in their economic significance,
volatility, and sensitivity to issuer-specific developments. Although
some financial metrics may be closely related, positions in separate
securities event contracts would not necessarily represent equivalent
economic exposure or create the same potential for concentrated risk or
manipulation. An issuer-level aggregate limit could therefore treat
economically distinct contracts as interchangeable and unnecessarily
restrict legitimate trading without providing commensurate investor
protection. The Exchange believes that applying position limits
separately to securities event contracts referencing each financial
metric would be more appropriately tailored to the characteristics of
the relevant financial metric and consistent with the protection of
investors and the maintenance of fair and orderly markets.
Similarly, the Exchange believes it is reasonable to provide that
securities event contracts are not aggregated with other options
contracts overlying the stock of the issuer. Because securities event
contracts and equity options overlying the same issuer have different
risk profiles (i.e., securities event contracts settle based on a
financial metric of the issuer rather than its stock price), the
Exchange believes it would be inappropriate and misleading to require
aggregation of these positions for purposes of position limits. As
noted above, securities event contracts are based solely on whether a
single, specified-issuer financial metric meets a discrete threshold at
a defined future date, and their value reflects the market's
probability assessment of that singular outcome. Standard equity
options, on the other hand, reflect a broad array of factors bearing on
the price of the underlying security, including macroeconomic
conditions and sector dynamics, of which any individual financial
metric is only one component. Because the two products are not priced
off of a common reference and do not represent economically equivalent
or fungible exposures, aggregating positions across them would not
meaningfully advance the prevention of manipulative practices with
respect to the underlying security.
[[Page 55402]]
The Exchange further notes that this proposed non-aggregation
framework is not unprecedented. The rules of Cboe provide that
positions in Cboe's Single Stock Dividend Options (``SSDOs'') will not
be aggregated with positions in ordinary options overlying the stock of
the issuer underlying the SSDOs.\43\ The rationale underlying that rule
is directly analogous to the rationale supporting non-aggregation of
securities event contracts with standard listed equity options on the
same issuer. In its SSDO filing,\44\ Cboe noted that SSDOs are based
solely on expected dividends for an issuer and will reflect the forward
value of that expectation. Because the pricing of ordinary options and
SSDOs differs dramatically as a result of fundamentally different
inputs, Cboe concluded that there was no need to aggregate positions
across the two product types to prevent manipulative practices
involving the underlying. The Commission found this approach
appropriate and consistent with the Act in its approval of that
proposal.\45\
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\43\ See Cboe Rule 4.8(g).
\44\ See Securities Exchange Act Release No. 64654 (June 13,
2011), 76 FR 35503 (June 17, 2011) (SR-CBOE-2011-039).
\45\ See Securities Exchange Act Release No. 64991 (July 29,
2011), 76 FR 47280 (August 4, 2011) (SR-CBOE-2019-033).
---------------------------------------------------------------------------
The same logic applies to the proposed securities event contracts.
Like SSDOs, securities event contracts derive their value from a
single, specified variable (whether a particular issuer financial
metric meets a discrete contractual threshold at a defined date) and
their pricing reflects the market's probability assessment of that
singular outcome. In contrast, as noted above, standard equity options
on the same issuer reflect a full spectrum of factors which may affect
the underlying security's price. The pricing of securities event
contracts and standard equity options on the same issuer will therefore
differ substantially, for the same structural reasons that the
Commission found dispositive in the SSDO context. The Exchange
accordingly believes that non-aggregation of securities event contracts
with standard equity options is appropriate and consistent with the
Act.\46\
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\46\ The Exchange notes that binary option contracts (Binary
Return Derivatives (``ByRDs'')) approved for trading at NYSE
American and NYSE Arca, Inc. are similarly not aggregated with
positions in other options on the same underlying security for
purposes of determining compliance with the position limits. See
NYSE American Rule 904Byrds (b) and NYSE Arca Rule 5.86-O(b).
---------------------------------------------------------------------------
The Exchange also believes that having 100 securities event
contracts equal one standard option contract for purposes of the report
required by Exchange Rule 18.10(a), as provided in proposed Rule
30.10(d), is consistent with the Act. By establishing tailored
reporting requirements for securities event contracts, the Exchange
will be able to monitor Member positions effectively and detect any
accumulation of positions that may approach or exceed applicable
limits, to the benefit of investors. The Exchange believes it is
consistent with just and equitable principles of trade for 100
securities event contracts to equal one standard option contract for
purposes of determining whether the report in Rule 18.10(a) is required
given the size of securities event contracts. As discussed above,
proposed securities event contracts have no multiplier, while standard
option contracts have a multiplier of 100. Therefore, the notional
value of a securities event contract is significantly less than the
notional value of standard option contracts. For example, 200 contracts
with a value of $1.00 with a multiplier of 100 would equate to $20,000
notional value, while 200 securities event contracts with a value of
$1.00 (which is the default exercise settlement amount of a securities
event contract) and no multiplier would equate to $200 notional value.
Counting 100 securities event contracts as one standard option contract
for purposes of this report effectively calibrates the reporting
requirement so that investors are required to submit the report for an
economically equivalent number of contracts, which promotes just and
equitable principles of trade.
The Exchange believes the proposal will provide the Exchange and
regulators with visibility into large position concentrations in
securities event contracts, preserving the ability to identify unusual
activity and respond to any unforeseen concerns, while calibrating the
threshold to a metric that is meaningful for this contract given its
lack of multiplier, unlike standard equity options. The Exchange
believes this reporting framework, coupled with the proposed position
limits, provides a fully adequate regulatory framework for these
instruments.
Surveillance and Regulatory Oversight
As noted above, the Exchange believes it has an adequate
surveillance program in place to surveil for any potentially heightened
insider trading or manipulation risks presented by the proposed
securities event contracts. The Exchange notes that the settlement
value for the types of securities event contracts proposed herein is
determined by the relevant disclosure in the issuer's financial
results, which figures are produced through the accounting and
reporting processes of the issuer, subject to independent audit, and
disclosed in filings with the Commission. Because settlement is
decoupled from the market price of the underlying security, no amount
of trading activity in that security could alter the revenue, earnings,
sales, or other financial metric that determines contract settlement.
Any manipulation of the reported metric would constitute securities
fraud and expose the issuer to liability under federal securities law,
separate and apart from any exchange-related violation.
Moreover, the specifically proposed securities event contracts
present a more defined surveillance profile than other event contracts
available in the market today. Because settlement is tied to a well-
defined set of publicly reported issuer financial metrics, the relevant
surveillance framework operates as a focused subset of the insider
trading surveillances the Exchange already applies to standard equity
options. The legal prohibition on trading in the issuer's securities,
including options, while in possession of material non-public
information about an unreported financial metric is not novel, but
rather the same prohibition the Exchange enforces today in connection
with standard equity options overlying the same issuer.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, because securities event
contracts will be available to all market participants who wish to
trade such options on the same terms and in the same manner (including
with respect to the payout terms and amount). All market participants
will be subject to the same rules applicable to securities event
contracts, as described in this proposed rule change. Except as set
forth in the proposed rule change, securities event contracts will
trade in the same manner as other options on the Exchange.
The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, because other
options exchanges may
[[Page 55403]]
propose similar products, as evidenced by Cboe's proposal for a similar
``binary KPI option'' product in the Cboe KPI Proposal.\47\
Additionally, as noted above, substantively similar products to
securities event contracts, as proposed, are available in the OTC
market and various other markets.
---------------------------------------------------------------------------
\47\ See supra note 4.
---------------------------------------------------------------------------
The Exchange notes that it operates in a highly competitive market
in which market participants can readily direct order flow to competing
venues who offer similar products. The Exchange believes the proposed
rule change will provide investors with a comparable alternative to the
OTC market and other venues. The Exchange believes it may be a more
attractive alternative to the OTC market and certain other venues, as
market participants will benefit from being able to trade these options
in an exchange environment, which provides, among other things: (1)
enhanced efficiency in initiating and closing out positions; (2)
increased market transparency; and (3) heightened contra-party
creditworthiness. As a result, the Exchange believes that the proposed
rule change may relieve any burden on, or otherwise promote,
competition, as it will allow the Exchange to offer a securities
exchange-listed alternative to the products currently available in
these other markets.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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#9defe8f1f8b0fef2f0f0f8f3e9eeddeef8feb3faf2eb"><span class="__cf_email__" data-cfemail="2654534a430b45494b4b434852556655434508414950">[email protected]</span></a>. Please include
file number SR-MEMX-2026-25 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-MEMX-2026-25. 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 filing 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-MEMX-2026-25 and should be submitted on
or before September 17, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2026-17465 Filed 8-26-26; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.