Notice2026-19407
Self-Regulatory Organizations; Coinbase Derivatives, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to the Adoption of Coinbase Derivatives, LLC's Rules Governing Cash Settled Futures on Individual Equity Securities and Exchange-Traded Fund Shares, Including Perpetual Single-Stock Futures
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
September 23, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 183 (Wednesday, September 23, 2026)</title>
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[Federal Register Volume 91, Number 183 (Wednesday, September 23, 2026)]
[Notices]
[Pages 60448-60458]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-19407]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-106420; File No. SR-COIN-2026-002]
Self-Regulatory Organizations; Coinbase Derivatives, LLC; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change
Relating to the Adoption of Coinbase Derivatives, LLC's Rules Governing
Cash Settled Futures on Individual Equity Securities and Exchange-
Traded Fund Shares, Including Perpetual Single-Stock Futures
September 18, 2026.
Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934
(the ``Act''),\1\ notice is hereby given that on September 18, 2026,
Coinbase Derivatives, LLC (``CDE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change 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. CDE has also filed this proposed rule change
concurrently with the Commodity Futures Trading Commission (``CFTC'').
The Exchange on September 18, 2026 submitted the proposed rule change
to the CFTC for approval. The CFTC has not yet approved the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(7).
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I. CDE's Description and Text of the Proposed Rule Change
CDE is registered with the CFTC as a designated contract market
under the CEA. CDE is making this filing in its capacity as a national
securities exchange for security futures products (``SFPs'') registered
pursuant to the notice registration provisions of Section 6(g) of the
Act \2\ to establish the rules governing the SFPs it plans to list for
trading. Under its notice registration, CDE plans to list cash settled
futures on individual equity securities and exchange-traded fund
shares, including perpetual single-stock futures, as set forth in this
proposed rule change.
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\2\ 15 U.S.C. 78f(g). On September 1, 2026, CDE, in its capacity
as a designated contract market under the Commodity Exchange Act,
submitted a Form 1-N notice filing to the Commission to register as
a national securities exchange for security futures products
pursuant to the notice registration provisions of Section 6(g) of
the Act. On September 8, 2026, the Commission issued a notice
acknowledging receipt of such written notice and effectiveness of
CDE's notice registration as a national securities exchange
contemporaneously with CDE's submission of the 1-N notice on
September 1, 2026. See Acknowledgement of Receipt of Notice of
Registration as a National Securities Exchange Pursuant to Section
6(g) of the Securities Exchange Act of 1934 by Coinbase Derivatives,
LLC (September 8, 2026) [Release No. 34-106295; File No. 10-252],
available at <a href="https://www.sec.gov/files/rules/other/2026/34-106295.pdf">https://www.sec.gov/files/rules/other/2026/34-106295.pdf</a>.
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CDE is adopting new Chapter 12 (Security Futures Products) of the
CDE Rulebook to establish the listing standards, contract terms,
corporate-action adjustment procedures, and trading, clearing, and
settlement rules pursuant to which the Exchange will list and trade
cash settled futures on individual equity securities and exchange-
traded fund shares, including perpetual single-stock futures
(collectively, the ``Proposed Rules''). Unlike a security futures
product that provides for a fixed expiration and a scheduled final
settlement, the contracts that CDE proposes to list under Chapter 12
(each, a ``Contract'') are perpetual security futures products that
have no fixed expiration date; the Contracts are cash settled and do
not provide for delivery of, or convey ownership in, the underlying
security.
II. CDE'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. CDE's Statement of the Purpose of, and Statutory Basis for the
Proposed Rule Change
1. Purpose
CDE proposes to adopt Chapter 12 (Security Futures Products) of the
CDE Rulebook to allow the listing and trading of cash settled futures
on individual equity securities and exchange-traded fund shares,
including perpetual single-stock futures. Chapter 12 establishes, as an
integrated framework, the listing standards, contract specifications,
corporate-action adjustments, and trading, clearing, and settlement
rules applicable to the Contracts. Proposed Chapter 12 comprises Rules
1201 through 1225. The Exchange will adopt under a separate rule filing
pursuant to Section 19(b)(2) of the Act and Rule 19b-4
[[Page 60449]]
thereunder proposed rules addressing margin.\3\
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\3\ Proposed Rule 1215 will address customer margin, and Rules
1212(c), 1213(e) and (f), and 1221(c) clarify the application of the
margin rules in specific contexts.
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As detailed further below, the proposed Chapter 12 specifies the
scope and application of the Chapter (Rule 1201); defines terms used in
the Chapter (Rule 1202); establishes initial and continued listing
standards for the underlying securities (Rule 1203); provides for the
publication of a contract-specific Product Appendix for each Contract
(Rule 1204); and sets out rules governing trading hours (Rule 1205),
participant access and order entry (Rule 1206), regulatory halts and
trading halts (Rule 1207), position limits and position accountability
(Rule 1208), daily settlement prices and price controls (Rule 1209),
the absence of a scheduled final settlement (Rule 1210), the
determination of an index price (Rule 1211), funding payments (Rule
1212), adjustments for corporate actions (Rule 1213), wind-down,
termination, and delisting (Rule 1214), U.S. withholding tax and
participant eligibility (Rule 1216), the prohibition on trading by
certain persons (Rule 1217), reporting and publication (Rule 1218),
block trades and basis trades (Rule 1219), error trades and price
adjustments (Rule 1220), clearing (Rule 1221), approved securities
(Rule 1222), amendments, additions, suspensions, and delistings (Rule
1223), participant disclosures (Rule 1224), and data publication (Rule
1225).\4\
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\4\ In addition, CDE proposes to amend Rule 101 to add the
defined term ``SEC'' to mean the U.S. Securities and Exchange
Commission.
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Rule 1201. Scope and Application
Rule 1201 provides that Chapter 12 governs the listing, trading,
clearing, adjustment, and settlement on the Exchange of security
futures products as defined in Section 1a(45) of the CEA and Section
3(a)(56) of the Act, including perpetual futures contracts on
individual equity securities and exchange-traded fund shares. The rule
further provides that all rules of the Exchange apply to the Contracts,
but in the event of any conflict, Chapter 12 governs. Matters not
specifically addressed in Chapter 12 shall be governed by the other
rules of the Exchange, the rules of Nodal Clear, LLC (the ``Clearing
House''), and applicable law.
Rule 1202. Definitions
Rule 1202 proposes adding defined terms to be used in Chapter 12.
Among other terms, Rule 1202 defines:
<bullet> ``Clearing House'' to mean Nodal Clear, LLC, or any
successor clearing organization designated by the Exchange in
accordance with applicable law.
<bullet> ``Contract Unit'' to mean the number of shares of the
Underlying Security represented by one Contract, as specified in the
applicable Product Appendix.
<bullet> ``Corporate Action'' to mean any stock split, reverse
split, fractional split, stock dividend, stock distribution, cash
dividend, extraordinary or special dividend, rights offering, spin-off,
merger, acquisition, tender offer, ticker change, name change,
delisting, suspension, or other event affecting the economics,
reference price, or continued listing of a Contract.
<bullet> ``Corporate Action Circular'' to mean a notice published
by the Exchange on the Exchange website describing the treatment of a
Corporate Action affecting a Contract.
<bullet> ``Corporate Action Reference Price'' to mean the price of
the Underlying Security or other relevant value, in each case as
determined by the Exchange at the time of the relevant Corporate Action
pursuant to the applicable Product Appendix, Corporate Action Circular,
or other Exchange procedures.
<bullet> ``Daily Settlement Price'' to mean the daily settlement
price for a Contract determined under Exchange Rule 1209.
<bullet> ``Exchange Act'' to mean the Act.
<bullet> ``Funding Interval'' means the interval specified in the
applicable Product Appendix or identified Market Reference Materials
for calculation of Funding Rates and Funding Payments.
<bullet> ``Funding Payment'' to mean the amount debited or credited
to an open position under Exchange Rule 1212.
<bullet> ``Funding Rate'' to mean the rate determined pursuant to
the applicable Product Appendix or identified Market Reference
Materials.
<bullet> ``Index Price'' to mean the reference price for the
Underlying Security determined under Exchange Rule 1211.
<bullet> ``Mark Price'' to mean the mark price of a Contract as
determined by the Exchange.
<bullet> ``Market Reference Materials'' to mean Exchange-published
materials identified in the applicable Product Appendix that set forth
Index Price methodology, funding methodology, price fluctuation limits,
trading parameters, or related operational terms for a Contract.
<bullet> ``NMS security'' by reference to the meaning set forth in
Rule 600 under the Act.
<bullet> ``Primary Listing Exchange'' to mean the national
securities exchange on which the Underlying Security is primarily
listed.
<bullet> ``Product Appendix'' to mean the contract-specific
appendix, specification, or other contract terms published by the
Exchange for a Contract pursuant to Exchange Rule 1204.
<bullet> ``Regulatory Halt'' to mean a halt, pause, suspension, or
similar regulatory trading interruption in the Underlying Security,
including any halt under the Plan to Address Extraordinary Market
Volatility, NYSE Rule 7.12, Nasdaq Rule 4121, or successor provisions.
<bullet> ``Underlying Security'' to mean the equity security,
including an exchange-traded fund share or other eligible equity
security, to which a Contract relates.
Rule 1203. Listing Standards
Rule 1203 sets out the standards pursuant to which the Exchange
will list Contracts. The proposed listing standards are similar to the
sample listing standards published in Staff Legal Bulletin No. 15 \5\
except that Rule 1203:
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\5\ SEC Division of Market Regulation: Staff Legal Bulletin No.
15: Listing Standards for Trading Security Futures Products
(September 5, 2001).
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i. Provides for the trading of perpetual futures contracts on
individual equity securities and exchange-traded fund shares as SFPs.
ii. Includes more stringent listing standard requirements,
including that the Underlying Security's estimated deliverable supply,
determined consistent with Appendix A to Subpart C of Part 41 of the
CFTC's regulations, must exceed 20 million shares; the Underlying
Security must have a minimum market capitalization of at least $100
billion; and the Underlying Security must have a minimum average daily
value of transactions (``ADVT'') of at least $450 million over the
prior six months, except where the Underlying Security has been listed
for trading for less than six months, in which case the requirement
would be a minimum ADVT of at least $1 billion over the prior month.
iii. Includes more stringent maintenance listing standard
requirements, including that the Underlying Security must have an
estimated deliverable supply in excess of 20 million shares; the
Underlying Security must have a minimum market capitalization of at
least $50 billion; and the Underlying Security must have had a minimum
ADVT of at least $200 million over the prior calendar quarter, except
where the Underlying Security has been listed for trading for less than
[[Page 60450]]
a quarter, in which case the requirement would be a minimum ADVT of at
least $1 billion over the period traded during the calendar quarter.
Rule 1203(a) provides that the Exchange shall list a Contract only
if the Underlying Security satisfies each of the following
requirements. First, it must be a common stock or a security issued by
an exchange-traded fund (``ETF Share''), and the issuer is in
compliance with any applicable requirements of the Exchange Act.
Second, it must be registered under Section 12 of the Exchange Act, and
its issuer must be in compliance with any applicable requirements of
the Exchange Act. Third, it must be listed on a national securities
exchange or traded through the facilities of a national securities
association and reported as an NMS security. Fourth, there must be at
least seven million shares outstanding that are owned by persons other
than those required to report their security holdings pursuant to
Section 16(a) of the Act. Fifth, its estimated deliverable supply, as
reasonably determined by the Exchange consistent with Appendix A to
Subpart C of Part 41 of the CFTC's regulations, must exceed 20 million
shares. Sixth, it must have a minimum market capitalization of at least
$100 billion. Seventh, it must have a minimum ADVT of at least $450
million over the prior six months, except where the Underlying Security
has been listed for trading for less than six months, in which case the
Underlying Security must have had a minimum ADVT of at least $1 billion
over the prior month. Eighth, in the case of an Underlying Security
other than an ETF Share, there must be at least 2,000 security holders.
Ninth, in the case of an Underlying Security that is an ETF Share, it
must have had a total trading volume (in all markets in which the
Underlying Security has traded) of at least 2,400,000 shares or
receipts evidencing the Underlying Security in the preceding 12 months.
Tenth, if the Underlying Security is a ``covered security'' as defined
under Section 18(b)(1)(A) of the Securities Act of 1933 (``Securities
Act''), the market price per share of the Underlying Security has been
at least $3.00 for the previous five consecutive business days
preceding the date on which the Exchange commences to list and trade
the Contract on said Underlying Security. For purposes of this
condition, the market price of such Underlying Security is measured by
the closing price reported in the primary market in which the
Underlying Security is traded. Eleventh, if the Underlying Security is
not a ``covered security'' as defined under Section 18(b)(1)(A) of the
Securities Act, the market price per share of the Underlying Security
must be at least $7.50 for the previous five consecutive business days
preceding the date on which the Exchange commences to list and trade
the Contract on said Underlying Security. As with the tenth condition,
for purposes of the eleventh condition, the market price of the
Underlying Security is measured by the closing price reported in the
primary market in which the Underlying Security is traded. Lastly, the
Exchange shall not list for trading any Contract where the Underlying
Security is a ``Restructure Security,'' as defined below, that is not
yet issued and outstanding, regardless of whether the Restructure
Security is trading on a ``when issued'' basis or on another basis that
is contingent upon the issuance or distribution of shares.
In addition, Rule 1203(a) includes interpretations for requirements
(4), (8), (10), and (11). Interpretation of Rule 1203(a)(4) provides
that ``[i]n the case of an equity security that a company issues or
anticipates issuing as the result of a spin-off, reorganization,
recapitalization, restructuring or similar corporate transaction
(`Restructure Security'), the Exchange may assume that this requirement
is satisfied if, based on a reasonable investigation, the Exchange
determines that, on the product's intended listing date: (A) at least
40 million shares of the Restructure Security will be issued and
outstanding; or (B) the Restructure Security will be listed on an
exchange or automated quotation system that is subject to an initial
listing requirement of no less than seven million publicly owned
shares.'' The interpretation further provides that ``[i]n the case of a
Restructure Security issued or distributed to the holders of the equity
security that existed prior to the ex-date of a spin-off,
reorganization, recapitalization, restructuring or similar corporate
transaction (`Original Equity Security'), the Exchange may consider the
number of outstanding shares of the Original Equity Security prior to
the spin-off, reorganization, recapitalization, restructuring or
similar corporate transaction (`Restructuring Transaction').''
Interpretation of Rule 1203(a)(8) provides that ``[i]f the security
under consideration is a Restructure Security, the Exchange may assume
that this requirement is satisfied if, based on a reasonable
investigation, the Exchange determines that, on the product's intended
listing date: (A) at least 40 million shares of the Restructure
Security will be issued and outstanding; or (B) the Restructure
Security will be listed on an exchange or automated quotation system
that is subject to an initial listing requirement of at least 2,000
shareholders.'' The interpretation further provides that ``[i]n the
case of a Restructure Security issued or distributed to the holders of
the Original Equity Security, the Exchange may consider the number of
shareholders of the Original Equity Security prior to the Restructuring
Transaction.''
Interpretation of Rule 1203(a)(10) provides for a ``Look-Back
Test,'' which provides that ``[i]n determining whether a Restructure
Security that is issued or distributed to the shareholders of an
Original Equity Security (but not a Restructure Security that is issued
pursuant to a public offering or rights distribution) satisfies this
requirement, the Exchange may `look back' to the market price history
of the Original Equity Security prior to the ex-date of the
Restructuring Transaction if the following Look-Back Test is satisfied:
(a) The Restructure Security has an aggregate market value of at least
$500 million; (b) The aggregate market value of the Restructure
Security equals or exceeds the Relevant Percentage (defined below) of
the aggregate market value of the Original Equity Security; (c) The
aggregate book value of the assets attributed to the business
represented by the Restructure Security equals or exceeds both $50
million and the Relevant Percentage of the aggregate book value of the
assets attributed to the business represented by the Original Equity
Security; or (d) The revenues attributed to the business represented by
the Restructure Security equals or exceeds both $50 million and the
Relevant Percentage of the revenues attributed to the business
represented by the Original Equity Security.'' The interpretation
further provides that ``[f]or purposes of determining whether the Look-
Back Test is satisfied, the term `Relevant Percentage' means: (i) 25%,
when the applicable measure determined with respect to the Original
Equity Security or the business it represents includes the business
represented by the Restructure Security; and (ii) 33-1/3%, when the
applicable measure determined with respect to the Original Equity
Security or the business it represents excludes the business
represented by the Restructure Security.'' The interpretation further
specifies that ``in calculating comparative aggregate market values,
the Exchange will use the Restructure Security's closing price on its
primary market on the last business day prior to the date on which the
Restructure Security is selected as an Underlying
[[Page 60451]]
Security for a Contract (`Selection Date'), or the Restructure
Security's opening price on its primary market on the Selection Date,
and will use the corresponding closing or opening price of the related
Original Equity Security,'' and that, ``in calculating comparative
asset values and revenues, the Exchange will use the issuer's (i)
latest annual financial statements; or (ii) most recently available
interim financial statements (so long as such interim financial
statements cover a period of not less than three months), whichever are
more recent. Those financial statements may be audited or unaudited and
may be pro forma.''
Interpretation of Rule 1203(a)(10) also provides guidance on
``Restructure Securities Issued in Public Offering or Rights
Distribution,'' providing that ``[i]n determining whether a Restructure
Security that is distributed pursuant to a public offering or a rights
distribution satisfies requirement 10, the Exchange may look back to
the market price history of the Original Equity Security if: (i) the
foregoing Look-Back Test is satisfied; (ii) the Restructure Security
trades `regular way' on an exchange or automatic quotation system for
at least five trading days immediately preceding the Selection Date;
and (iii) at the close of trading on each trading day on which the
Restructure Security trades `regular way' prior to the Selection Date,
as well as at the opening of trading on Selection Date, the market
price of the Restructure Security was at least $3.00.''
Interpretation of Rule 1203(a)(10) further provides for a
``Limitation on Use of Look-Back Test.'' Specifically, ``[e]xcept in
the case of a Restructure Security that is distributed pursuant to a
public offering or rights distribution, the Exchange will not rely upon
the market price history of an Original Equity Security for any trading
day unless it also relies upon the trading volume history for that
trading day. In addition, once the Exchange commences to rely upon a
Restructure Security's trading volume and market price history for any
trading day, the Exchange will not rely upon the trading volume and
market price history of the related Original Equity Security for any
trading day thereafter.''
Interpretation of Rule 1203(a)(11) provides for an interpretation
that is identical to the interpretation provided for requirement 10,
except that the relevant market price of the Restructure Security for
purposes of determining whether a Restructure Security that is
distributed pursuant to a public offering or rights distribution
satisfies requirement 11 is $7.50, instead of $3.00.
Rule 1203(b) provides that the Exchange shall not list additional
Contracts on an Underlying Security, and may prohibit opening purchase
transactions in an existing Contract, to the extent it deems such
action necessary or appropriate, unless the Underlying Security meets
each of the following maintenance requirements; provided that, if the
Underlying Security is an ETF Share, the applicable requirements for
initial listing of the related Contract (as described in Rule 1203(a)
above) shall apply in lieu of the following maintenance requirements.
First, it must be registered under Section 12 of the Exchange Act.
Second, there must be at least 6,300,000 shares outstanding that are
owned by persons other than those who are required to report their
security holdings under Section 16(a) of the Exchange Act. Third, there
must be at least 1,600 shareholders. Fourth, it must have had a minimum
ADVT of at least $200 million for the prior calendar quarter, except
where the Underlying Security has been listed for trading for less than
a quarter, in which case the Underlying Security must have had a
minimum average daily value of transactions of at least $1 billion over
the period traded during the calendar quarter. Fifth, its estimated
deliverable supply, as reasonably determined by the Exchange consistent
with Appendix A to Part 41 of the CFTC Regulations, must exceed 20
million shares. Sixth, it must have a minimum market capitalization of
at least $50 billion. Seventh, the market price per share must have
closed above $3.00 for five consecutive business days. The market price
per share of the Underlying Security will be measured by the closing
price reported in the primary market in which the Underlying Security
traded.
Interpretation of Rule 1203(b)(7) provides that, ``[i]f a
Restructure Security is approved for Security Futures Product trading
under the initial listing standards in Rule 1203(a), the market price
history of the Original Equity Security prior to the commencement of
trading in the Restructure Security, including `when-issued' trading,
may be taken into account in determining whether this requirement is
satisfied.''
Rule 1203(b)(7) further provides that if prior to the withdrawal
from trading of a Contract covering an Underlying Security that has
been found not to meet the Exchange's requirements for continued
approval, the Exchange determines that the Underlying Security again
meets the Exchange's requirements, the Exchange may list additional
Contracts on the Underlying Security and may lift any restriction on
opening purchase transactions.
Rule 1203(c) provides that the Exchange shall maintain coordinated
surveillance procedures with each Primary Listing Exchange and with
other markets on which related securities or derivatives trade,
sufficient to detect manipulation and insider trading.
Rule 1203(d) provides that the Exchange shall review each listed
Underlying Security against the listing standards not less frequently
than semi-annually.
Rule 1203(e) provides that whenever the Exchange announces that
approval of an Underlying Security has been withdrawn for any reason or
that the Exchange has been informed that the issuer of an Underlying
Security has ceased to be in compliance with Exchange Act reporting
requirements, each Participant Firm shall, prior to effecting any
transaction in Contracts with respect to such Underlying Security for
any Customer, inform such Customer of such fact and that the Exchange
may prohibit further transactions in such Contracts as it determines is
necessary and appropriate.
Rule 1204. Product Appendix
Rule 1204 provides that the Exchange shall publish for each
Contract a Product Appendix. The Product Appendix functions as the
specification sheet for a given Contract and specifies, as applicable,
(1) the Underlying Security; (2) the contract code; (3) the Contract
Unit; (4) the minimum price increment and tick value; (5) the trading
hours; (6) the Daily Settlement Price methodology; (7) the Index Price
source and methodology, including any identified Market Reference
Materials; (8) the Funding Rate methodology, Funding Payment treatment,
and any identified Market Reference Materials; (9) the applicable
position limit, accountability level, and reportable level; (10) the
applicable price fluctuation limits and other price controls, including
any identified Market Reference Materials; (11) the block trade minimum
quantity and related conditions, if any; (12) the fees and charges
applicable to the Contract; and (13) such other terms as the Exchange
may specify. The rule further provides that ``[e]ach Product Appendix
forms part of these Rules,'' and that ``[a]mendments to a Product
Appendix shall be made in accordance with Rule 1223 and applicable
law.'' Rule 1204(d) provides that for each Contract listed by the
Exchange, the Contract's terms shall
[[Page 60452]]
be in accordance with the schedule provided in such paragraph (d).
Rule 1205. Trading Hours
Rule 1205 establishes the defined trading hours during which the
Contracts will trade. Contracts shall trade from Sunday at 20:00
Eastern Time through Friday at 17:00 Eastern Time, except during
holidays, maintenance windows, or other periods specified by the
Exchange. The rule further provides that the Exchange may modify
trading hours for a Contract by rule, filing, certification, notice, or
other action permitted by applicable law.
Rule 1206. Participant Access and Order Entry
Rule 1206 provides that access to trading in Contracts shall be
governed by the CDE Rulebook, as filed with the Commission on September
1, 2026, concerning membership, access, customer protection, order
entry, market conduct, and supervision, except as otherwise provided in
Chapter 12. Rule 1206 further provides that only futures commission
merchants, introducing brokers, commodity trading advisors, commodity
pool operators, or associated persons subject to suitability rules
comparable to those of a national securities association registered
under Section 15A(a) of the Act may solicit, accept any order for, or
otherwise deal in any transaction in or in connection with a Contract.
Rule 1207. Regulatory Halts and Trading Halts
Rule 1207 provides that trading in a Contract shall be halted at
all times during which a Regulatory Halt has been instituted for the
Underlying Security, and that all Contracts are subject to market-wide
circuit breakers and coordinated halts applicable to the U.S. equity
markets. The rule further provides that the Exchange may halt, pause,
suspend, reject, cancel, or restrict trading in a Contract where
necessary to maintain a fair and orderly market, including in
connection with (1) a Corporate Action; (2) a market disruption; (3) an
Index Price disruption or data outage; (4) a clearly erroneous or
aberrant market condition; or (5) a planned or unplanned wind-down,
delisting, or termination of the Contract.
Rule 1207 further provides that the Exchange shall maintain
procedures to coordinate trading halts and resumptions with the Primary
Listing Exchange, the Clearing House, and other relevant markets, and
that trading in a Contract shall resume in accordance with Exchange
procedures after the relevant halt condition has ended and the Exchange
determines that resumption is consistent with investor protection and
fair and orderly markets.
Rule 1208. Position Limits and Position Accountability
Rule 1208 provides that each Contract shall be subject to such
position limit, accountability level, and reportable level as the
Exchange establishes and publishes in the applicable Product Appendix.
Rule 1208(a) provides that limits for each Contract shall be set at
200,000 contracts in the context of 100 share contracts (or the
equivalent thereto, to the extent contracts are listed in another
size). Rule 1208 further provides that, because Contracts have no fixed
expiration date, any position limits established under the rule apply
at all times and are not limited to any period preceding expiration.
The rule provides that the Exchange shall review applicable position
limits and accountability levels not less frequently than semi-
annually, or more frequently if the Exchange determines appropriate.
Rule 1208 provides that the Exchange shall establish position
limits or accountability levels for each Contract consistent with
applicable law, including CFTC Regulation Sec. 41.25(b)(3), and may
revise such levels based on deliverable supply, trading volume, market
conditions, or other relevant factors. Where a position exceeds an
otherwise applicable limit solely as a result of an adjustment under
Rule 1213, the rule provides that such excess shall not constitute a
violation, provided that no position-increasing transactions may be
effected until the position is reduced below the applicable limit,
unless otherwise permitted by the Exchange.
The rule also provides that applications for exemptions or waivers
permitted by law shall be made to the Exchange in such form and manner
as the Exchange may prescribe, and that positions shall be aggregated,
and netting shall be permitted or prohibited, in each case as provided
by applicable law and the CDE Rulebook.
Rule 1209. Daily Settlement Price and Price Controls
Rule 1209(a) provides that the Daily Settlement Price for a
Contract shall be determined at 16:00 Eastern Time as follows, in
order: (1) the one-minute volume-weighted average price of the
Contract, rounded to the nearest tradable tick; (2) if the foregoing is
unavailable, the one-minute time-weighted average of the midpoint of
the best bid and best offer for the Contract, rounded to the nearest
tradable tick; and (3) if no two-sided market is available during the
sixty (60) seconds preceding 16:00 Eastern Time, the Index Price less
the difference between the prior day's Index Price and the prior day's
Daily Settlement Price.
Rule 1209 further provides that the Exchange may determine a Daily
Settlement Price using another methodology where necessary to reflect
an accurate price or maintain a fair and orderly market, and shall
publish notice of any such action as soon as practicable; that each
Contract shall be subject to such price fluctuation limits, dynamic
price bands, and other price controls as the Exchange establishes in
the applicable Product Appendix and identified Market Reference
Materials; and that the Exchange's generally applicable fast-market,
order-management, and market-integrity controls apply to Contracts.
Rule 1210. No Scheduled Final Settlement
Rule 1210 provides that Contracts have no fixed expiration date and
no scheduled final settlement and a Contract may be terminated and
settled in cash only upon an event specified in Rule 1213 or Rule 1214.
Convergence between the price of a Contract and the price of the
Underlying Security is effected through the funding mechanism described
in Rule 1212, the applicable Product Appendix, and identified Market
Reference Materials.\6\
---------------------------------------------------------------------------
\6\ SEC Rule 6h-1(b) and CFTC Regulation Sec. 41.25(c) provide
that the final settlement price of a cash-settled security futures
product must fairly reflect the opening price of the underlying
security or securities. Because the Contracts are perpetual security
futures products that have no fixed expiration date and do not
contemplate a final settlement price within the meaning of those
rules, those provisions do not apply.
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Rule 1211. Index Price
Rule 1211 provides that the Exchange shall determine an Index Price
for each Contract pursuant to a transparent, objective methodology
designed to reflect the price of the Underlying Security in a manner
that is reliable and resistant to manipulation. Rule 1211 provides that
the Index Price methodology for each Contract shall be set forth in the
applicable Product Appendix or identified Market Reference Materials
published prior to listing; and that the methodology may incorporate
direct equity feeds and such related inputs, validation checks,
fallbacks, and operational controls as the Exchange specifies for the
relevant Contract.
The rule further provides that where the Index Price is
unavailable, delayed, stale, erroneous, or materially inaccurate, the
Exchange may determine
[[Page 60453]]
substitute inputs, replacement values, or other measures in accordance
with the applicable Product Appendix, identified Market Reference
Materials, and such authority as may be necessary to maintain a fair
and orderly market; and that the Exchange shall provide notice of any
material change to the Index Price methodology, except where immediate
action is necessary to protect investors, the public interest, or the
fair and orderly operation of the market. Rule 1211(f) provides that
for each Contract listed by the Exchange, the Index Price shall be
calculated in accordance with the schedule provided in such paragraph
(f).
Rule 1212. Funding Payments
Rule 1212 provides that open positions are subject to Funding
Payments. The rule also provides that the Funding Rate methodology,
Funding Payment mechanics, Funding Interval, publication practices, and
operational timing for each Contract shall be set forth in the
applicable Product Appendix and identified Market Reference Materials.
The rule further provides that Funding Payments may be processed
through the Clearing House as cash adjustments separate from variation
margin; and that the Exchange may suspend, defer, modify, or decline to
publish or apply Funding Rates or Funding Payments during market
disruptions, trading halts, data outages, Corporate Actions, or other
circumstances where the Exchange determines such action is necessary to
maintain a fair and orderly market.\7\ Rule 1212 further provides that,
where a Contract is closed, paused, or halted for an entire Funding
Interval, the Exchange may decline to publish a Funding Rate for that
interval, as specified in the applicable Product Appendix or identified
Market Reference Materials. Rule 1212(f) provides that for each
Contract listed by the Exchange, Funding Payments shall be calculated
in accordance with the schedule provided in such paragraph (f).
---------------------------------------------------------------------------
\7\ Proposed Rule 1212(c) provides that ``Funding Payments may
be processed through the Clearing House as cash adjustments separate
from variation margin.'' As noted, the Exchange will adopt under a
separate rule filing pursuant to Section 19(b)(2) of the Act and
Rule 19b-4 thereunder proposed rules addressing margin.
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Rule 1213. Adjustments for Corporate Actions
Rule 1213 provides that the Exchange shall determine the treatment
of a Corporate Action affecting a Contract and shall publish a
Corporate Action Circular specifying the applicable treatment, timing,
and operational details, and that the Clearing House shall process any
resulting position adjustments, cash adjustments, settlements, or
related actions in accordance with the CDE Rulebook, its own rules, and
applicable procedures. The rule provides that the Contract Unit shall
not be redefined by any adjustment under the rule, and that an
adjustment under the rule is intended solely to preserve, as nearly as
practicable, the aggregate economic exposure represented by an open
position immediately before the relevant Corporate Action.
Rule 1213(d)-(p) specifies the treatment of particular Corporate
Actions, in the manner specified in the applicable Product Appendix or
Corporate Action Circular, including:
<bullet> Ordinary cash dividends. No adjustment shall be made for
an ordinary cash dividend. The economic effect of such dividend is
expected to be reflected through the market price and funding
mechanism.
<bullet> Stock splits, reverse splits, fractional splits, stock
dividends, and similar stock distributions. The Exchange shall adjust
open position quantity by the applicable ratio and adjust the relevant
reference price inversely, so that aggregate economic exposure is
preserved as nearly as practicable.\8\
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\8\ Proposed Rule 1213(e) provides: ``Stock splits, reverse
splits, fractional splits, stock dividends, and similar stock
distributions. The Exchange shall adjust open position quantity by
the applicable ratio and adjust the relevant reference price
inversely, so that aggregate economic exposure is preserved as
nearly as practicable. Such adjustments are intended solely to
preserve the holder's existing economic exposure, as nearly as
practicable, and constitute a continuation of the holder's existing
position rather than the establishment of a new position,
liquidation of an existing position, or replacement of a Contract.
Any resulting fractional Contract shall be handled in the manner
specified in the applicable Product Appendix or Corporate Action
Circular.'' As noted, the Exchange will adopt under a separate rule
filing pursuant to Section 19(b)(2) of the Act and Rule 19b-4
thereunder proposed rules that address handling of margin.
---------------------------------------------------------------------------
<bullet> Settlement-price restatement. The Exchange may restate the
prior Daily Settlement Price where appropriate to avoid a mechanical
variation-margin gain or loss caused solely by such an adjustment.\9\
---------------------------------------------------------------------------
\9\ Proposed Rule 1213(f) provides: ``Settlement-price
restatement. Where appropriate to avoid a mechanical variation-
margin gain or loss caused solely by an adjustment under paragraph
(e), the Exchange may restate the prior Daily Settlement Price.'' As
noted, the Exchange will adopt under a separate rule filing pursuant
to Section 19(b)(2) of the Act and Rule 19b-4 thereunder proposed
rules addressing margin.
---------------------------------------------------------------------------
<bullet> Special or extraordinary cash dividends. The Exchange may
determine, in its discretion, whether an adjustment is appropriate for
a special or extraordinary cash dividend and, if so, may apply such
position, or price adjustment, as it determines appropriate by
reference to the Corporate Action Reference Price or other relevant
values determined at the time of the event.
<bullet> Rights offerings. The Exchange may adjust open position
quantity, relevant reference prices, and any resulting residual amount
in the manner specified in the applicable Product Appendix or Corporate
Action Circular.
<bullet> Spin-offs. Where the Underlying Security is subject to a
spin-off or similar separation event, the Exchange may settle open
positions at the blended value of the Underlying Security price and the
price of any spin-off Underlying Security price.
<bullet> Mergers and acquisitions. Where the Underlying Security is
subject to a merger, acquisition, tender offer, cash transaction,
stock-for-stock transaction, mixed consideration transaction, or
similar event inconsistent with continued listing of the Contract, the
Exchange may terminate the affected Contract and settle open positions
in cash using the value of the transaction consideration and any
related Underlying Security price, in each case as determined by the
Exchange at the time of the event and specified in the applicable
Corporate Action Circular. A successor Contract may be listed where
appropriate.
<bullet> Ticker and name changes. The Exchange may halt trading,
update symbology and market-data references, and reopen trading without
economic adjustment.
<bullet> Delisting or trading suspension of Underlying Security. If
the Underlying Security is delisted, suspended, or otherwise becomes
unavailable for continued listing without sufficient prior notice to
permit an orderly wind-down, trading in the affected Contract shall
halt and open positions shall be settled at a publicly published fair
value or such other value as the Exchange determines under the Rules,
after which the Contract shall be delisted.
Rules 1213(m) through (p) address the timing and operational
aspects of any adjustment or settlement, the treatment of margin across
an adjustment, the maintenance of books and records linking any
adjusted or settled position to the relevant pre-event position, and
the publication of a Corporate Action Circular for each Corporate
Action the Exchange determines to be material to a Contract.
[[Page 60454]]
Rule 1214. Wind-Down, Termination, and Delisting
Rule 1214 governs wind-down, termination, and delisting. Rule 1214
provides that, where an Underlying Security ceases to satisfy the
listing standards in Rule 1203, becomes subject to a Corporate Action
inconsistent with continued listing, is delisted from its Primary
Listing Exchange, or otherwise becomes unsuitable for continued trading
as a Contract, the Exchange may provide for an orderly wind-down,
termination, delisting, cash settlement, or forced position closure.
The rule states that, except where shorter notice is necessary to
protect investors or maintain fair and orderly markets, the Exchange
shall provide no less than 10 Business Days' notice before a planned
wind-down, termination, or delisting. Where the Exchange delists or
terminates a Contract, the last trading day shall be the trading day on
which trading in the Contract ceases, and the Daily Settlement Price
for that trading day shall be used to close out or cash settle open
positions, unless the Exchange determines that an alternative procedure
is necessary. Rule 1214 further specifies that this rule governs
planned or orderly wind-downs, in contrast to Rule 1213(l), which
governs unanticipated delistings or suspensions of the Underlying
Security that make an orderly wind-down impracticable. The rule further
provides that the Exchange shall publish a notice describing any wind-
down, termination, or delisting under this rule.
Rule 1216. U.S. Withholding Tax and Participant Eligibility
Rule 1216 provides that the Exchange may establish participant or
Clearing Member eligibility requirements, certifications,
representations, or undertakings relating to U.S. withholding tax,
dividend-equivalent withholding, FATCA, qualified intermediary status,
qualified derivatives dealer status, or related matters applicable to
Contracts.
Rule 1217. Prohibition on Trading by Certain Persons
Rule 1217 states that no person may trade in a Contract if
prohibited from doing so by applicable law, including any person who is
a director or officer, subject to Section 16 of the Act, of an issuer
of an Underlying Security, to the extent prohibited by law, or who is
in possession of material non-public information regarding such issuer
and is prohibited by law from trading.
Rule 1218. Reporting and Publication
Pursuant to Rule 1218, the Exchange shall comply with applicable
CFTC and SEC reporting requirements relating to Contracts, including
Parts 16 and 17 of the CFTC's regulations and any successor provisions.
The Exchange shall publish for each Contract such market information as
may be required by law or by the Exchange's applicable filings,
including Daily Settlement Price, trading volume, open interest, and
such funding and reference-price information as the Exchange specifies
in the applicable Product Appendix or identified Market Reference
Materials. The rule provides that the Exchange shall maintain and
submit such files, reports, and records as are required by applicable
law and by the Exchange's regulatory obligations for Contracts.
Rule 1219. Block Trades and Basis Trades
Rule 1219 provides that block trades in Contracts are permitted,
subject to such minimum quantity thresholds, participant eligibility
requirements, reporting times, price-reasonability requirements, and
other conditions as the Exchange may establish in the applicable
Product Appendix or by notice. The rule reserves the treatment of basis
trades.
Rule 1220. Error Trades and Price Adjustments
Rule 1220 states that Contracts are subject to the CDE Rulebook
governing error trades, trade cancellations, price adjustments, and
clearly erroneous executions, except as otherwise provided in Chapter
12.
Rule 1221. Clearing
Rule 1221 provides that all Contracts shall be cleared by the
Clearing House, and that the Exchange shall maintain such linked and
coordinated clearing arrangements, risk-management procedures,
communication protocols, and operational processes with the Clearing
House as are required by law and by the Exchange's applicable filings.
The rule further provides that nothing in Chapter 12 would limit the
authority of the Clearing House under its own rules with respect to
margin collection, settlement processing, default management, or other
clearing functions, except as otherwise required by law.\10\
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\10\ Proposed Rule 1221(c) provides that ``Nothing in this
Chapter limits the authority of the Clearing House under its own
rules with respect to margin collection, settlement processing,
default management, or other clearing functions, except as otherwise
required by law.'' As noted, the Exchange will adopt under a
separate rule filing pursuant to Section 19(b)(2) of the Act and
Rule 19b-4 thereunder proposed rules addressing margin.
---------------------------------------------------------------------------
Rule 1222. Approved Securities
Rule 1222 provides that the Underlying Securities approved as the
subject of Contracts shall be those identified in the applicable
Product Appendices or in a list published by the Exchange, as amended
from time to time in accordance with Rule 1223 and applicable law.
Rule 1223. Amendments, Additions, Suspensions, and Delistings
Rule 1223 provides that the Exchange may list, add, amend, suspend,
terminate, or delist Contracts and Product Appendices in accordance
with the Act, the CEA, applicable SEC and CFTC rules and regulations,
and the CDE Rulebook. The rule permits, without limitation, amendments
pursuant to Section 19(b)(7) or Section 19(b)(2) of the Act, CFTC
Regulation 41.24, or other applicable provisions, as required by law;
and specifies that the Exchange may suspend, terminate, or delist a
Contract in accordance with Rule 1213 or Rule 1214, or where necessary
to maintain a fair and orderly market.
Rule 1224. Participant Disclosures
Rule 1224 provides that the Exchange shall publish disclosures
covering, as applicable, (a) the cash-settled nature of the Contracts;
(b) the fact that holders do not obtain ownership of the Underlying
Security; (c) the funding mechanism; (d) extended-hours liquidity and
pricing risks; (e) the treatment of Corporate Actions; (f) the
possibility of termination, delisting, or cash settlement upon
specified events; and (g) such other matters as the Exchange determines
appropriate or as may be required by law.
Rule 1225. Data Publication
Rule 1225 provides that, for 18 months from the initial listing of
the first Contract, or for such other period as may be required by
applicable filings or exemptive relief, the Exchange shall make
publicly available in machine-readable form such data relating to
Contracts as may be required by law or by the Exchange's applicable
filings, which may include (a) Daily Settlement Prices; (b) Index
Prices, Mark Prices, Funding Rates, and related basis information; (c)
daily or periodic aggregate long and short positions by participant or
account type; (d) trading volume and open interest; and (e) such
[[Page 60455]]
other data as may be required by law, filing, order, or Exchange
rule.\11\
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\11\ In addition, the Exchange represents that it will work with
the SEC to provide data as appropriate for the SEC to evaluate
security futures products.
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The text of Chapter 12 and the rules thereunder are set forth in
Exhibit 4.
2. Statutory Basis
Section 6(h)(3) of the Act \12\ contains listing standards and
conditions for trading SFPs. The Exchange believes that the proposed
amendments to Chapter 12 are consistent with Section 6(h)(3), and that
they are designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and in
general to protect investors and the public interest.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(h)(3).
---------------------------------------------------------------------------
CDE has established and shall monitor and enforce compliance with
the listing standards for the Contracts. The proposed listing standards
require a liquid underlying market for any Contracts the Exchange will
list for trading, and therefore the proposed contracts are not readily
susceptible to manipulation. Specifically, Rule 1203(a) requires that
the Underlying Security must exceed 20 million shares in estimated
deliverable supply (Rule 1203(a)(5)), have a minimum market
capitalization of at least $100 billion (Rule 1203(a)(6)), and have had
a minimum ADVT of at least $450 million over the prior six months (or,
if listed and trading for less than six months, at least $1 billion
over the prior month) (Rule 1203(a)(7)). CDE initially intends to list
Contracts on the most highly liquid securities as measured by ADVT.
Pursuant to Rule 1203(b), CDE will not list additional Contracts on an
Underlying Security, and may prohibit opening purchase transactions in
an existing Contract, to the extent it deems such action necessary or
appropriate, if the Underlying Security does not meet the maintenance
listing standard requirements established under the rule. Under the
maintenance standards, the Underlying Security must have a market
capitalization of at least $50 billion and minimum ADVT of at least
$200 million over the prior calendar quarter (or, if listed for less
than a quarter, at least $1 billion over the prior period traded during
the calendar quarter). As such, the proposed listing standards assure a
robust market for the Underlying Security to protect against
manipulation.
Trading in the Contracts will be subject to the CDE Rulebook, which
includes prohibitions on manipulation (Rule 508). CDE Rulebook Chapters
4 and 5 contain multiple prohibitions precluding anyone subject to the
rules of the Exchange from disadvantaging their customers. As with any
product listed for trading on CDE, these rules will apply to
transactions in the Contracts, and trading activity in the Contracts
will be subject to monitoring and surveillance by CDE's Market
Regulation Department. Chapter 7 of the Rulebook contains provisions
that allow the Exchange to discipline, suspend or expel members or
market participants that violate any applicable Rules of the Exchange.
Trading in the Contracts will be subject to Chapter 7, and the Market
Regulation Department has the authority to exercise its enforcement
power in the event rule violations in these contracts are identified.
Market participants may use the arbitration provisions set forth in
Chapter 8 of the CDE Rulebook to settle disputes with respect to
trading of the Contracts.
Pursuant to Rule 1208(c), CDE will establish position limits and
accountability levels for any Contracts it lists pursuant to the
Proposed Rules as required by and consistent with CFTC Regulation Sec.
41.25(b)(3). As applicable, CDE will also follow the guidance in
Appendix A to Subpart C of Part 41--Guidance on and Acceptable
Practices for Position Limits and Position Accountability for Security
Futures Products. Transactions in the Contracts will be cleared by the
Clearing House, a derivatives clearing organization registered with the
CFTC, and will be subject to all CFTC regulations related to clearing
of futures. The Contracts will be listed for trading on the CDE's own
electronic trading platform, which provides for competitive and open
execution of transactions. The Exchange will publish daily information
regarding trading volume, open interest and price information for the
Contracts. The CDE Rulebook will be amended as of the effective date to
reflect the Proposed Rules and made publicly available on the CDE
website.
Below is a summary how CDE would comply with each requirement or
condition under Section 6(h)(3) of the Act, as applicable.
Section 6(h)(3)(A) of the Act \13\ requires that any security
underlying a SFP be registered pursuant to Section 12 of the Act.\14\
This requirement is addressed by Rules 1203(a)(1) and (a)(2), which
provide that the Exchange shall list a Contract only if the Underlying
Security is a common stock or ETF Share registered under Section 12 of
the Act, and its issuer is in compliance with any applicable
requirements of the Act.
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\13\ 15 U.S.C. 78f(h)(3)(A).
\14\ 15 U.S.C. 78l.
---------------------------------------------------------------------------
Section 6(h)(3)(B) of the Act \15\ is applicable only to physically
delivered security futures products. This requirement is therefore
inapplicable to the Contracts.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f(h)(3)(B).
---------------------------------------------------------------------------
Section 6(h)(3)(C) of the Act \16\ provides that listing standards
for SFPs must be no less restrictive than comparable listing standards
for options traded on a national securities exchange or national
securities association registered pursuant to Section 15A(a) of the
Act.\17\ CDE believes that the proposed listing standards for the
Contracts set forth in Rule 1203 are no less restrictive than
comparable listing standards for exchange-traded options.
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\16\ 15 U.S.C. 78f(h)(3)(C). The listing standards are also
consistent with the sample listing standards published in Staff
Legal Bulletin No. 15, see supra n.5.
\17\ 15 U.S.C. 78o-3(a).
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Section 6(h)(3)(D) of the Act \18\ requires that each SFP be based
on common stock or such other equity securities as the Commission and
CFTC jointly determine are appropriate. This requirement is addressed
by Rules 1203(a)(1) and (a)(2), which provide that the Exchange shall
list a Contract only if the Underlying Security is a common stock or
ETF Share registered under Section 12 of the Act, and its issuer is in
compliance with any applicable requirements of the Act.
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78f(h)(3)(D).
---------------------------------------------------------------------------
Section 6(h)(3)(E) of the Act \19\ imposes requirements with
respect to linkages and coordinated clearing with other clearing
agencies that clear SFPs, which permits the SFP to be purchased on one
market and offset on another market that trades such product. This
provision is inapplicable. The SEC and CFTC have not adopted rules
implementing this part of the statute, and only the Clearing House will
clear the Contracts that CDE proposes to list. As such, there are no
linked or coordinated clearing arrangements relating to the Contracts.
Additionally, Section 6(h)(7) of the Act states that a national
securities exchange may trade a securities futures product that does
not conform with any listing standard promulgated to meet the
requirement of Section 6(h)(3)(E) until a compliance date which must be
announced jointly by the Commission and the CFTC.\20\
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(h)(3)(E).
\20\ Compliance date is defined as the later of ``(i) 180 days
after the end of the first full calendar month period in which the
average aggregate comparable share volume for all security futures
products based on single equity securities traded on all national
securities exchanges, any national securities associations
registered pursuant to section 15A(a), and all other persons equals
or exceeds 10% of the average aggregate comparable share volume of
options on single equity securities traded on all national
securities exchanges and any national securities associations
registered pursuant to section 15A(a); or (ii) 2 years after the
date on which trading in any security futures product commences
under this title.'' See 15 U.S.C. 78f(h)(7)(C).
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[[Page 60456]]
Section 6(h)(3)(F) of the Act \21\ requires that only a broker or
dealer subject to suitability rules comparable to those of a national
securities association registered pursuant to Section 15A(a) of the Act
\22\ effect transactions in an SFP. An intermediary acting on behalf of
customers trading SFPs must be registered with the CFTC as a futures
commission merchant (``FCM'') and registered or notice registered with
the SEC as a broker-dealer. Any intermediary that is fully registered
as a broker-dealer will be a member of the Financial Industry
Regulatory Authority, Inc. (``FINRA''), and will thus be subject to
FINRA's suitability rules. In addition, the intermediary, as a
registered FCM, must also be a member of the National Futures
Association (``NFA''), which is a registered futures association under
the CEA and thus will also be subject to the suitability and sales
practice rules of NFA, which are comparable to those of FINRA.\23\
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\21\ 15 U.S.C. 78f(h)(3)(F).
\22\ 15 U.S.C. 78o-3(a).
\23\ Id.
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Section 6(h)(3)(G) of the Act \24\ requires that each SFP be
subject to the prohibition against dual trading in Section 4j of
CEA.\25\ This provision is inapplicable to the Exchange. Trading of the
Contracts will occur electronically, and the prohibition on dual
trading in SFPs under Regulation Sec. 41.27 \26\ applies to a contract
market operating an electronic trading system only if such market
provides participants with a time or place advantage or the ability to
override a predetermined matching algorithm, which features are not
present on the Exchange.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f(h)(3)(G).
\25\ 7 U.S.C. 6j.
\26\ 17 CFR 41.27.
---------------------------------------------------------------------------
Section 6(h)(3)(H) of the Act \27\ provides that trading in a SFP
must not be readily susceptible to manipulation of the price of such
SFP, nor to causing or being used in the manipulation of the price of
any Underlying Security, option on such security, or option on a group
or index including such securities. CDE believes that its listing
standards are designed to ensure that CDE SFPs and the underlying
securities would not be readily susceptible to price manipulation.
CDE's proposed Rule 1203(a) requires, among other things, that the
Underlying Security must exceed 20 million shares in estimated
deliverable supply (Rule 1203(a)(5)), have an outstanding market
capitalization of at least $100 billion (Rule 1203(a)(6)), and have had
a minimum ADVT of at least $450 million over the prior six months (or,
if listed and trading for less than six months, at least $1 billion
over the prior month) (Rule 1203(a)(7)). CDE initially intends to list
Contracts on the most highly liquid securities as measured by ADVT.
Pursuant to Rule 1203(b), CDE will not list additional Contracts on an
Underlying Security, and may prohibit opening purchase transactions in
an existing Contract, to the extent it deems such action necessary or
appropriate, if the Underlying Security does not meet the maintenance
listing standard requirements established under the rule. Under the
maintenance standards, the Underlying Security must have a minimum
market capitalization of at least $50 billion and minimum ADVT of at
least $200 million over the prior calendar quarter (or, if listed for
less than a quarter, at least $1 billion over the prior period traded
during the calendar quarter). As such, the proposed listing standards
assure a robust market for the Underlying Security to protect against
manipulation. These listing standards are also the basis for
establishing position limits based on a percentage of the estimated
deliverable supply in accordance with CFTC Regulation Sec.
41.25(b)(3)(i), which will assure the position limits are appropriately
calibrated to protect against manipulation.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78f(h)(3)(H).
---------------------------------------------------------------------------
In addition, Chapter 5 of the CDE Rulebook prohibits fraudulent
acts (Rule 505); fictitious, wash, and non-competitive transactions
(Rule 506); market disruption (Rule 507); market manipulation (Rule
508); and disruptive trading practices (Rule 509). Rules 519 through
528 govern the priority of customers' orders, handling of customer
orders, disclosure of orders, simultaneous buy and sell orders for
different beneficial owners, wash sales, prearranged, pre-negotiated,
and noncompetitive trades, responsibility for customer orders,
discretionary orders, and priority of execution, including the exposure
requirement applicable to pre-execution communications. All trading is
subject to monitoring and surveillance by the Market Regulation
Department. The disciplinary process, from preliminary inquiry through
investigation, notice of charges, hearing, and sanctions, is set out in
Chapter 7 of the CDE Rulebook. Rule 719 spells out the disciplinary
capabilities of the Exchange which include, but are not limited to, the
ability to summarily suspend, revoke, limit, condition, restrict or
qualify a participant's trading privileges and/or ability to otherwise
access the Exchange's trading system.
Section 6(h)(3)(I) of the Act \28\ requires that procedures be in
place for coordinated surveillance among the market on which a SFP is
traded, any market on which any security underlying the SFP is traded,
and other markets on which any related security is traded to detect
manipulation and insider trading. Rule 1203(c) provides that the
Exchange shall maintain coordinated surveillance procedures with each
Primary Listing Exchange and with other markets on which related
securities or derivatives trade, sufficient to detect manipulation and
insider trading, and shall maintain audit trails sufficient to support
such surveillance. CDE and the markets on which the Underlying
Securities are traded are members of the Intermarket Surveillance
Group, which facilitates the sharing of information and the
coordination of regulatory efforts among exchanges trading securities
and other products to address potential intermarket manipulation and
trading abuse. In addition, Rule 215 permits CDE to enter into
information-sharing agreements or other arrangements or procedures to
coordinate surveillance with other markets on which financial
instruments related to the contracts trade, with domestic or foreign
self-regulatory organizations, associations, boards of trade, and their
respective regulators. Accordingly, the Exchange has procedures in
place for coordinated surveillance.
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78f(h)(3)(I).
---------------------------------------------------------------------------
Section 6(h)(3)(J) of the Act \29\ requires that the market on
which the security futures product is traded has in place audit trails
necessary or appropriate to facilitate the coordinated surveillance
required in subparagraph (I), as discussed above. The Exchange's audit
trail is maintained in accordance with Core Principle 10 in CEA Section
5(d)(10) \30\ and CFTC Regulations Sec. 38.550,\31\ Sec. 38.551 \32\
and Sec. 38.552.\33\ The Exchange retains this highly granular audit
trail for a minimum of 5 years, as required by CFTC Regulation Sec.
1.31(b).\34\ Rule 524(b) requires that the
[[Page 60457]]
electronic audit trail associated with any system that accesses the
Exchange contain a complete and accurate record of all activity through
that connection, retained for five years, with timestamps at the
highest level of precision achievable by the operating system and in no
event less precise than one hundredth of a second, recorded in a form
not modifiable by the person entering the order, and produced to the
Exchange in the required format on request. CDE publishes required
audit trail file specifications for its FIX and binary interfaces. Rule
401(c) requires the Market Regulation Department to conduct annual
reviews of compliance with the Exchange's audit trail and recordkeeping
requirements by all Participants responsible for or in control of the
creation of audit trail records, including reviews of randomly selected
samples of front-end audit trail data for order routing systems, review
of the process by which user identifications are assigned and
maintained, review of usage patterns associated with user
identifications, and testing of account numbers and customer type
indicator codes for accuracy and improper use. Audit trail and
recordkeeping violations by participants are subject to the Exchange's
disciplinary rules, including Rule 401(c), which permits the Market
Regulation Department to impose summary sanctions against audit trail
violations.
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\29\ 5 U.S.C. 78f(h)(3)(J).
\30\ 7 U.S.C. 7(d)(10).
\31\ 17 CFR 38.550.
\32\ 17 CFR 38.551.
\33\ 17 CFR 38.552.
\34\ 17 CFR 1.31(b).
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Section 6(h)(3)(K) of the Act \35\ requires that a market on which
a SFP is traded have in place procedures to coordinate trading halts
between such market and any market on which any security underlying the
SFP is traded and other markets on which any related security is
traded. Proposed Rule 1207 provides, in accordance with CFTC Regulation
Sec. 41.25(b)(2)(i),\36\ that ``[t]rading in a Contract shall be
halted at all times during which a Regulatory Halt has been instituted
for the Underlying Security.''
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\35\ 15 U.S.C. 78f(h)(3)(K).
\36\ 17 CFR 41.25(b)(2).
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Section 6(h)(3)(L) of the Act \37\ requires that the margin
requirements for a SFP comply with the regulations prescribed pursuant
to Section 7(c)(2)(B) of the Act.\38\ CDE has proposed amendments to
its margin rules generally imposing a minimum margin requirement of not
less than 15% of the current market value of the security futures
consistent with the requirements of CFTC Regulation Sec. 41.45(b)(1)
\39\ and SEC Rule 242.403(b)(1).<SUP>40 41</SUP> Thus, CDE believes
that its customer margin rules are consistent with the requirements of
the Act.
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\37\ 15 U.S.C. 78f(h)(3)(L).
\38\ 15 U.S.C. 78g(c)(2)(B).
\39\ 17 CFR 41.45(b)(1).
\40\ 17 CFR 242.403(b)(1).
\41\ See Customer Margin Rules Relating to Security Futures, 85
FR 75112 (Nov. 24, 2020).
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For the reasons described above, CDE believes that the listing
standards submitted herewith satisfy the requirements set forth in
Section 6(h)(3) of the Act. CDE also believes that its proposed rule
changes are consistent with Section 6(b) of the Act,\42\ in general,
and further the objectives of Section 6(b)(5) of the Act,\43\ in
particular, in that they are designed to remove impediments to and
perfect the mechanism for a free and open market and a national market
system, and, in general, to protect investors and the public interest,
and are not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers. In addition, the proposal is consistent
with Section 6(b)(1) and Section 6(b)(8) of the Act.\44\
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\42\ 15 U.S.C. 78f(b).
\43\ 15 U.S.C. 78f(b)(5).
\44\ 15 U.S.C. 78f(b)(1), (b)(8).
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Specifically, CDE's existing rules are designed to ensure (i) the
independence of CDE's regulatory functions, including surveillance,
investigations, and disciplinary matters; (ii) that no affiliate
receives unfair preferential treatment or competitive advantages; and
(iii) the maintenance of information barriers to protect confidential
regulatory and other non-public information.\45\ The CDE compliance
program is overseen by the Regulatory Oversight Committee (``ROC''),
which consists entirely of independent Public Directors. It oversees
the sufficiency, effectiveness, and independence of CDE's regulatory
program, including surveillance, investigations, staffing,
compensation, and the regulatory budget. The CDE Chief Regulatory
Officer reports directly to the ROC. CDE's rules disqualify affiliate
officers, Participant personnel, individuals with specified financial
relationships, and their immediate family members from serving as
Public Directors. ROC members are subject to heightened restrictions on
compensation and consulting relationships. CDE's Market Regulation
Department determines the scope of inquiries and investigations in its
sole discretion and must function independently of CDE's commercial
interests. Officials and directors are prohibited from interfering with
disciplinary actions, and conflicted individuals must recuse
themselves.
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\45\ As part of its Form 1-N filing, CDE submitted a copy of its
Rulebook to the Commission. See supra n.2.
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Rule 307 permits Coinbase Financial Markets, Inc. (``CFM''), a
CFTC-registered FCM and an affiliate of the Exchange, to be a
Participant, or customer of a Participant, for the purpose of trading
Exchange products, provided that (1) CFM shall neither receive
preferential pricing from the Exchange nor shall it have an inherent
advantage over any other Participant with respect to the Exchange's
trading system or procedures, (2) CFM shall not have access to the
Exchange's material nonpublic information, and the Exchange shall
ensure CFM's access to information is limited to public information
available to all Participants, and (3) CFM shall be subject to the same
access criteria and must abide by the same Rules as all other
Participants. Rule 307 is a filed, enforceable Exchange Rule, and
subject to Chapter 7 sanctions including censure, fine, disgorgement,
suspension, and termination. Information barriers run in both
directions, are enforced operationally, and are surveilled by a team
independent of both entities. Moreover, sensitive affiliate information
is subject to strict access controls, communications between entities
must occur at arm's length, and technological, physical, and
organizational barriers restrict access to confidential information and
surveillance systems. Compliance with these controls is reinforced
through periodic conflicts attestations and trainings, external
communications surveillance, and restrictions on trading. The rules
also require a single published fee schedule with no affiliate category
(Rules 305(a)-(b)) and fully inclusive, real-time data to all
Participants on the same terms and latency (Rule 538). Moreover, CFM is
subject to the same substantive prohibitions as any other Participant;
the Rulebook contains no affiliate carve-out from any Chapter 3 through
Chapter 9 obligation, and affiliates remain subject to CDE's oversight
and disciplinary authority to the same extent as all other market
participants. In addition, among other things, the rules impose a
standing prohibition on use or disclosure of material non-public
information by any director, officer, or committee member (Rule
213(g)), require all inspection and financial-condition data to be
treated confidentially (Rule 405), and provide that no person shall
take action based on non-public order information, however acquired
(Rule 521). Rule 207(d) further provides that the Exchange Participant
Committee ``shall
[[Page 60458]]
not, and shall not permit the Exchange to, restrict access or impose
burdens on access in a discriminatory manner, within each category or
class of Participants or between similarly-situated categories or
classes of Participants''; as such, the Rulebook assures that Exchange
structure does not burden competition.
Finally, CFM is subject to regulatory oversight by the National
Futures Association (``NFA''), an unaffiliated registered futures
association that performs CFM's financial and capital surveillance as
its designated self-regulatory organization. As a registered futures
commission merchant, CFM is subject to significant independent
oversight by NFA.
B. CDE's Statement on Burden on Competition
CDE does not believe that proposed Chapter 12 and the rule
thereunder will impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. The proposed
rule changes will simply allow CDE to list certain security futures
products, including perpetual futures on individual equity securities
and exchange-traded fund shares. Nothing in the filing restricts or
impedes another exchange from offering security futures products for
trading subject to its compliance with applicable regulatory
requirements under the Act, the CEA, and the respective rules of the
Commission and the CFTC governing security futures products.
C. CDE's Statement on Comments on the Proposed Rule Change Received
From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The proposed rule change is not yet effective because the CFTC has
not yet approved the proposed rule change. At any time within 60 days
of the date of effectiveness of the proposed rule change, the
Commission, after consultation with the CFTC, may summarily abrogate
the proposed rule change and require that the proposed rule change be
refiled in accordance with the provisions of Section 19(b)(1) of the
Act.\46\
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\46\ 15 U.S.C. 78s(b)(1).
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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#daa8afb6bff7b9b5b7b7bfb4aea99aa9bfb9f4bdb5ac"><span class="__cf_email__" data-cfemail="1b696e777e36787476767e756f685b687e78357c746d">[email protected]</span></a>. Please include
file number SR-CDE-2026-002 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-COIN-2026-002. 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="http://www.sec.gov/rules/sro.shtml">http://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-COIN-2026-002 and should be submitted on or
before October 14, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
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\47\ 17 CFR 200.30-3(a)(73).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-19407 Filed 9-22-26; 8:45 am]
BILLING CODE 8011-01-P
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