Notice2026-19409
Self-Regulatory Organizations; KalshiEX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Listing Standards for Security Futures Products
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 60467-60487]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-19409]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-106422; File No. SR-KALSHIEX-2026-02]
Self-Regulatory Organizations; KalshiEX LLC; Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change Relating to Listing
Standards for Security Futures Products
September 18, 2026.
Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-7 under the Act,\2\ notice is hereby given
that on September 18, 2026, KalshiEX LLC (``Kalshi'' or ``Exchange'')
filed with the Securities and Exchange Commission (``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. Kalshi has submitted the proposed rule change to
the Commodity Futures Trading Commission (``CFTC'') for approval under
Section 5c(c) of the Commodity Exchange Act (``CEA'') \3\ on September
18, 2026. The CFTC has not yet approved the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(7).
\2\ 17 CFR 240.19b-7.
\3\ 7 U.S.C. 7a-2(c).
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I. Self-Regulatory Organization's Description and Text of the Proposed
Rule Change
Kalshi proposes to adopt Chapter 14 of its Rulebook to enable the
Exchange, pursuant to its designation by the CFTC as a contract market
(a ``DCM'') and notice-registration with the SEC as a national
securities exchange under the Act, to list contracts that convey
exposure to the price of an underlying equity security, have no pre-
specified expiration date and are designated as Perpetual SFPs in their
respective contract specifications (such contracts, ``Perpetual SFPs'')
as security futures.
Holders of long and short positions in Perpetual SFPs will exchange
periodic payment obligations in the form of ``funding payments'' that
vary based on the price of the equity security underlying a Perpetual
SFP (the ``Underlying Security'') relative to the price of the
Perpetual SFP. The method through which the Exchange will calculate
Perpetual SFP funding payment obligations and associated settlement
mechanics are set forth in Rule 14.10, discussed below.
When the price of a Perpetual SFP exceeds the price of its
Underlying Security, payment will be due from long-side holders of the
Perpetual SFP to short-side holders, and vice versa if the price of the
Underlying Security exceeds the price of the Perpetual SFP. This
funding mechanism is designed to cause the price of the Perpetual SFP
to converge to the price of the Underlying Security at each daily
settlement cycle by incentivizing market participants to take on
positions in the Perpetual SFP (long or short) that align the price of
the Perpetual SFP with the price of its Underlying Security. Holders of
Perpetual SFPs will exit their positions by offset. All transactions
involving Perpetual SFPs listed on the Exchange will be cleared by
Kalshi Klear LLC, a CFTC-registered derivatives clearing organization
(``Klear'').
Categorization of Perpetual SFPs as Security Futures Products
The CFTC has already approved Kalshi's listing of perpetual
contracts referencing Bitcoin (the ``BTCPERP Contracts'') as commodity
futures contracts.\4\ Although Perpetual SFPs differ from the BTCPERP
Contracts in that they overlie equity securities, rather than digital
commodities, the defining characteristics of commodity futures and
security futures products apart from their respective underliers are
the same. This is clearly reflected in the statutory text and structure
of the Act and the CEA.
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\4\ Order Approving KalshiEX LLC BTCPERP Futures Contract, In re
Request for Approval by KalshiEX LLC of the BTCPERP Futures Contract
(CFTC May 29, 2026).
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The CEA classifies securities as a type of ``excluded commodity,''
\5\ such that security futures are themselves a type of commodity
future. Further, the phrase ``contract of sale for future delivery''
used in the ``security future'' definition \6\ mirrors the language
used consistently throughout the CEA to reference commodity futures
contracts (``contracts of sale of a commodity for future
delivery'').\7\ There is no case law or regulatory guidance attributing
a different meaning to the phrase ``contract of sale for future
delivery'' as used in the security future definition relative to the
same phrase as used to reference commodity futures contracts elsewhere
in the CEA, and courts often interpret the meaning of words in a
statute by looking to similar phrases used elsewhere in the same
statute.\8\
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\5\ 7 U.S.C. 1a(19).
\6\ 15 U.S.C. 78c(a)(55) (defining ``security future'' as ``a
contract of sale for future delivery of a single security or of a
narrow-based security index, including any interest therein or based
on the value thereof,'' subject to exclusions not relevant here).
\7\ See, e.g., 7 U.S.C. 2(a)(1)(A).
\8\ See, e.g., Unicolors, Inc. v. H&M Hennes & Mauritz, L.P.,
595 U.S. 178, 179 (2022) (``nearby statutory provisions help confirm
that here ``knowledge'' refers to knowledge of the law as well as
the facts.''); United Sav. Ass'n of Texas v. Timbers of Inwood
Forest Associates, Ltd., 484 U.S. 365, 371 (1988) (``A provision
that may seem ambiguous in isolation is often clarified by the
remainder of the statutory scheme--because the same terminology is
used elsewhere in a context that makes its meaning clear [. . .]'').
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Like the BTCPERP Contracts, Perpetual SFPs will exhibit the ``key
characteristics of futures contracts'' identified in relevant judicial
precedent and CFTC guidance: they will trade at a fixed, standardized
unit quantity; each party's obligations will be guaranteed via novation
to Klear, a central clearing house that sets margin requirements;
holders will be able to exit their positions by offset, they will be
available to the public (subject to eligibility requirements in Rule
14.37, discussed below); they will enable their holders to shift and
assume risks associated with holding Underlying Securities without
requiring actual possession or transfer of such Underlying Securities;
and they will be traded on the centralized market of the Exchange.\9\
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\9\ See note 4 supra; CFTC v. Co Petro Marketing Group, Inc.,
680 F.2d 573, 579-580 (9th Cir. 1982) (``Except for price, all the
futures contracts for a specified commodity are identical in
quantity and other terms. The fungible nature of these contracts
facilitates offsetting transactions by which purchasers or sellers
can liquidate their positions by forming opposite contracts.''); In
re Stovall, et al., [1977-1980 Transfer Binder] Comm. Fut. L. Rep.
(CCH) 20,941, p. 6 (CFTC Dec. 6, 1979) (describing futures contracts
as ``standardized contracts for the purchase or sale of commodities
which provide for future, as opposed to immediate, delivery, and
which are directly or indirectly offered to the general public and
generally secured by earnest money, or `margin' [and that] are
entered into primarily for the purpose of assuming or shifting the
risk of change in value of commodities, rather than for transferring
ownership of the actual commodities.''); Salomon Forex, Inc. v.
Tauber, 8 F.3d 966, 971 (4th Cir. 1993) (``To facilitate the
development of a liquid market in these transactions, these
contracts are standardized and transferrable. Trading in futures
seldom results in physical delivery of the subject commodity, since
the obligations are often extinguished by offsetting transactions
that produce a net profit or loss'').
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[[Page 60468]]
That Perpetual SFPs will lack a predetermined final settlement date
does not disqualify them from categorization as security futures
products. Although security futures contracts have traditionally
involved ``future delivery'' in the form of final settlement (in cash
or by physical delivery) of the contract on a pre-specified expiry
date, the text of the ``security future'' definition does not require
future delivery on a single, specified future date.\10\ Every court
that has specifically addressed the regulatory treatment of contracts
of indefinite duration has found them to be futures contracts where the
defining characteristics of a futures contract exist.\11\ In one such
case, the Seventh Circuit specifically addressed the treatment of
listed security derivatives of indefinite duration, holding that
contracts of ``indefinite duration'' can possess the attribute of
``futurity''--generally associated with futures contracts--because
futurity means any ``value that is set in the future.'' \12\ As future
executory payment obligations of contract holders, the periodic funding
payments associated with Perpetual SFPs constitute ``value that is set
in the future'' as much as the final settlement date of a traditional
futures contract.\13\
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\10\ See note 6, supra. Unlike elsewhere in the CEA, Congress
did not define ``security future'' to capture a contract only if it
had a single future delivery date. Contrast with 7 U.S.C. 1a(24)
(defining a foreign exchange forward as a ``transaction that solely
involves the exchange of 2 different currencies on a specific future
date at a fixed rate agreed upon on the inception of the contract
covering the exchange.'') (emphasis added).
\11\ See Standard Forex II, 1996 WL 435440, at *10, 1996 U.S.
Dist. LEXIS 14778, at *29 (E.D.N.Y. 1996). See also CFTC v. Intern.
Fin. Servs., 323 F. Supp. 2d 482, 498 (S.D.N.Y. 2004) (``As a matter
of law, defendants wrongly characterize certain indicia of futures
contract [sic] as essential features of such contracts. Principally,
they argue at length that without a fixed date for future delivery,
a transaction cannot be a futures contract within the [CFTC]'s
jurisdiction. They cite no authority for this proposition, however
[. . .]'') and CFTC v. International Foreign Curren., 334 F. Supp.
2d 305, 312 (E.D.N.Y. 2004) (``[T]he fact that Defendants' contracts
failed to have a specified future delivery date is not
determinative'').
\12\ Chicago Mercantile Exchange v. SEC, 883 F.2d 537, 541 (7th
Cir. 1989). Security futures were categorically prohibited at the
time CME v. SEC was decided. However, the opinion makes clear that
``any index''--including, in principle, a narrow-based security
index--could be used as the underlying interest for index
participations, which the CME v. SEC court held would be treated as
futures. Id. at 539. Under CME v. SEC, as applied under current law,
those contracts would constitute security futures. See also CFTC v.
First Lexington Group, LLC et al., 03 CV 9124 (GBD) (S.D.N.Y. Mar.
24, 2008).
\13\ The Chicago Mercantile Exchange (``CME''), beneficiary of
the CME v. SEC holding, recently initiated litigation against the
CFTC in response to the CFTC's approval of Kalshi's BTCPERP
Contract, arguing that the BTCPERP Contracts should not have been
approved for listing as futures contracts. Chicago Mercantile
Exchange Inc. v. Selig, and Commodity Futures Trading Commission,
Case No. 26-cv-02157 (D.D.C. June 18, 2026). The existence of this
litigation should not affect the Commission's regulatory treatment
of Perpetual SFPs. Not only have no merit rulings yet been delivered
in connection with CME's lawsuit, but CME's arguments are misguided
as to the text and judicial interpretation of the CEA. For example,
CME argues that perpetual contracts such as the BTCPERPs are swaps
under the CEA, but ignores the rest of the CEA's ``swap''
definition, which per se excludes futures from its scope; CME argues
that perpetual contracts are not futures contracts because they lack
a final settlement date, failing to grapple with the lack of any
binding judicial precedent supporting this conclusion and
affirmative case law contradicting it. Id. at 35. CME's arguments
also contradict positions CME itself has taken in the past. See,
e.g., Letter from Jonathan Marcus, Senior Managing Dir. & Gen.
Couns., CME Grp. Inc., to Christopher J. Kirkpatrick, Sec'y of the
Comm'n, 2 (May 21, 2025) (``certain perpetual-style derivative
contracts may accurately be classified as futures''); Letter from
Craig S. Donohue, Chief Exec. Officer, CME Grp. Inc., to David A.
Stawick, Sec'y of the Comm'n, 4 (July 22, 2011) (``under [the Dodd-
Frank Act] market participants retain the option to trade products
as either `futures' or `swaps' [. . .]'').
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Although certain regulations adopted by the Commission and the CFTC
applicable to security futures (the ``Final Settlement Rules'')
contemplate cash-settled security futures having a final settlement
price,\14\ the Final Settlement Rules do not affirmatively create a
standalone regulatory requirement that security futures, whether cash-
settled or otherwise, must have a predefined final settlement date.
Rather, the joint adopting release of the Commission and the CFTC for
the Final Settlement Rules is not only silent on the possibility that a
security future may lack a final settlement date, but the core problem
the agencies sought to address by adopting the Final Settlement Rules--
namely, liquidity constraints resulting from closing-price settlement--
does not exist for contracts that, like the Perpetual SFPs, generally
do not expire.\15\ Further, the perpetual nature of the Perpetual SFPs
is not inconsistent with the Final Settlement Rules, which generally
require that the final settlement price of a cash-settled security
futures contract must fairly reflect the opening price of the
underlying security or securities.\16\ Rather, the Perpetual SFPs will
still be subject to and the Exchange will comply with the Final
Settlement Rules to the extent Kalshi initiates delisting or
accelerated final settlement procedures pursuant to Rule 14.7 or Rule
14.30 (each as discussed below).
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\14\ 17 CFR 41.25(c); 240.6h-1(b) (the ``Final Settlement
Rules'').
\15\ SEC and CFTC Joint Final Rule, Cash Settlement and
Regulatory Halt Requirements for Security Futures Products, 67 FR
36740, 36755 (May 24, 2002) (``The SEC believes that SEC Rule 6h-
1(b)(1) should facilitate the ability of the securities markets to
handle expiration-related unwinding programs and mitigate the
liquidity strains that had previously been experienced in the
securities markets on expirations for stock index futures and
options'').
\16\ 17 CFR 41.25(c); 240.6h-1(b).
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Chapter 14 of the Exchange's Rulebook
Proposed Chapter 14 specifies rules regarding listing standards,
margin requirements, eligibility criteria, contract specifications,
membership standards and other provisions relating to Perpetual SFPs
listed on the Exchange. The full text of Proposed Chapter 14 is
included in Exhibit 4 hereto and provided in blackline format--proposed
new language is italicized; and proposed deletions are in [brackets].
The Exchange developed Chapter 14 to comply with Section 6(h) of the
Exchange Act \17\ and the criteria under Section 2(a)(1)(D)(i) of the
CEA.\18\
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\17\ 15 U.S.C. 78f(h).
\18\ 7 U.S.C. 2(a)(1)(D)(i).
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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 self-regulatory organization 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
The Exchange proposes to adopt Kalshi Rulebook Chapter 14
(``Perpetual Security Futures Products'') to allow the listing of
Perpetual SFPs as security futures products.
Listing Standards for Perpetual SFPs
Kalshi proposes adopting Rulebook Chapter 14, Part II and related
new definitions in Rule 14.2 to set out listing standards pursuant to
which it will list Perpetual SFPs for trading and procedures for
delisting. The proposed initial and maintenance listing standards are
equally or more stringent than the sample listing standards published
in Staff Legal Bulletin No. 15 (``SLB 15'').\19\ Commission staff
published SLB 15 to provide guidance
[[Page 60469]]
as to how an exchange can comply with the requirements of Section
6(h)(3) of the Act and Section 2(a)(1)(D) of the CEA, which set forth
minimum criteria for security futures products traded on national
securities exchanges. SLB 15 makes clear that, in addition to the
listing standards it sets forth, ``there may be other listing standards
that would also be consistent with the [Act].'' \20\
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\19\ SEC Division of Market Regulation, Staff Legal Bulletin No.
15: Listing Standards for Trading Security Futures Products (Sept.
5, 2001), available at <a href="https://www.sec.gov/interps/legal/mrslb15.htm">https://www.sec.gov/interps/legal/mrslb15.htm</a>.
\20\ Id.
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The proposed Perpetual SFP listing standards are identical to the
sample listing standards in SLB 15, except that they:
<bullet> Reflect the modifications to the statutory listing
standards requirements jointly adopted by the Commission and the CFTC
with respect to shares of exchange-traded funds (``ETFs'') and trust-
issued receipts (``TIRs''); \21\
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\21\ See Joint Order Modifying the Listing Standards
Requirements under Section 6(h) of the Securities Exchange Act of
1934 and the Criteria under Section 2(a)(1) of the Commodity
Exchange Act, Securities Exchange Act Release No. 34-61027 (November
19, 2009), 74 FR 61380 (November 24, 2009) (superseding Joint Order
Granting the Modification of Listing Standards Requirements,
Securities Exchange Act Release No. 46090 (June 19, 2002), 67 FR
42760 (June 25, 2002)).
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<bullet> Include more stringent listing standard requirements,
consistent with rule changes recently filed by another security futures
exchange,\22\ including that (i) the Underlying Security must have an
estimated deliverable supply in excess of 20 million shares, (ii) the
Underlying Security must have a minimum market capitalization of at
least $100 billion, and (iii) the Underlying Security must have had a
minimum average daily value of transactions (``ADTV'') 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 ADTV of at least $1 billion over the
prior month;
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\22\ See Self-Regulatory Organizations; Chicago Mercantile
Exchange Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Adoption of Chicago Mercantile
Exchange's Rules Governing Security Futures Product Listing
Standards, Adoption of Chicago Mercantile Exchange Inc.'s Rules
Governing Security Futures Adjustments, and Adoption of Chicago
Mercantile Exchange Inc.'s Rules Governing Cash Settled Single Stock
Security Futures, Exchange Act Release No. 34-105844 (July 2, 2026),
91 FR 41676 (July 7, 2026) (``CME SFP Rule Filing'').
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<bullet> Include more stringent maintenance listing standard
requirements, consistent with rule changes recently filed by another
security futures exchange,\23\ including that (i) the Underlying
Security must have an estimated deliverable supply in excess of 20
million shares, (ii) the Underlying Security must have a minimum market
capitalization of at least $50 billion and (iii) the Underlying
Security must have had a minimum ADTV 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
requirement would be a minimum ADTV of at least $1 billion over the
trading period during the calendar quarter;
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\23\ Id.
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<bullet> Categorically exclude several categories of securities
from serving as underlying securities of Perpetual SFPs, as described
below;
<bullet> Require the issuers of securities underlying Perpetual
SFPs to be current in all periodic reporting obligations under Sections
13 and 15(d) of the Act (or, if the security is an ETF share, under the
Investment Company Act of 1940 (the ``1940 Act'') and the Securities
Act of 1933) and provide that the Exchange shall verify reporting
status through review of the issuer's EDGAR filings prior to listing
and on an ongoing basis thereafter;
<bullet> Because Perpetual SFPs have no expiration date such that
the Exchange will not continually open for trading contracts for
subsequent delivery months, provide that failure of a security to
satisfy maintenance standards and failure to remedy such failure within
a 90 day cure period result in delisting of the Perpetual SFP overlying
that security;
<bullet> Provide that the Exchange shall immediately halt trading
(including the execution and reporting of block trades) in and initiate
delisting of a Perpetual SFP upon the occurrence of any of the
Immediate Delisting Events described below; and
<bullet> Contain certain provisions that reflect rule changes that
have been filed by other security futures exchanges since the adoption
of SLB 15, which vary from the sample listing standards set forth in
SLB 15.
This section describes the generalized Rule framework for Part II
of Rulebook Chapter 14 (Rules 14.3 through Rule 14.8).
Initial Listing Standards for Perpetual SFP. Rule 14.3 provides
that an equity security is eligible to serve as the Underlying Security
for a Perpetual SFP listed on the Exchange only if it satisfies the
following requirements at the time of initial listing:
Rule 14.3(h), or ``Requirement 1,'' requires that the Underlying
Security must be common stock, an American Depositary Receipt
(``ADR''), TIR or an ETF share that satisfies the requirements of Rule
14.4(e). Rule 14.4(e) categorically excludes exchange-traded notes,
closed-end fund shares, shares of other pooled investment vehicles
registered under the 1940 Act and shares of leveraged, inverse or
synthetic exchange-traded products from eligibility to serve as
Underlying Securities for Perpetual SFPs, provided that Rule 14.4(e)
does not exclude from eligibility shares of an ETF that ``(i) is
registered with the [Commission] as an open-end management investment
company or unit investment trust under the [1940 Act], (ii) issues and
redeems shares at net asset value in creation-unit aggregations, (iii)
holds or seeks to track a diversified portfolio or index of equity
securities, and (iv) is not leveraged, inverse or synthetic.''
Rule 14.3(a) requires that the Underlying Security ``must be
registered pursuant to Section 12'' of the Act (``Requirement 2'') and
``a `NMS security' as defined in Section 11A of the Exchange Act and
Rule 600(b) of SEC Regulation NMS'' and its issuer ``must be in
compliance with any applicable requirements of the'' Act (``Requirement
3''). In addition, Rule 14.3(a) provides that securities traded
exclusively on over-the-counter (``OTC'') markets, foreign exchanges
without a U.S. listing or any non-registered trading venue are not
eligible to serve as Underlying Securities for Perpetual SFPs and that,
in all cases, an Underlying Security must satisfy the requirements
applicable to securities underlying SFPs under CFTC Regulation
41.21(a).
Rule 14.3(e), or ``Requirement 4,'' requires that ``[t]he
Underlying Security must have a Public Float of not less than 7,000,000
shares.'' Rule 14.2 defines ``Public Float'' as ``the number of
outstanding shares of the Underlying Security that are not held by
officers, directors, or beneficial owners of more than 10% of the class
of securities, calculated based on the most recent publicly available
filings with the SEC.'' The corresponding requirement in the SLB 15
listing standards requires any security underlying a security futures
product based on a single security to have at least seven million
shares outstanding that are owned by persons other than those required
to report their stock holdings pursuant to Section 16(a) of the Act,
which requires reporting by ``[e]very person who is directly or
indirectly the beneficial owner of more than 10 percent of any class of
any equity security (other than an exempted security) which is
registered pursuant to
[[Page 60470]]
[Section 12], or who is a director or an officer of the issuer of such
security.'' \24\
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\24\ 15 U.S.C. 78p(a)(1).
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Rule 14.3(j), or ``Requirement 5,'' requires an Underlying
Security, other than an ETF share or a TIR, to have at least 2,000
security holders, whether of record or beneficial.
Rule 14.3(c), or ``Requirement 6,'' requires that any Underlying
Security ``have an ADTV of not less than $450,000,000 over the six
months immediately preceding the New Product Committee (``NPC'')'s
review, except where the Underlying Security has been listed for
trading for less than six months, in which case the Underlying Security
must have an ADTV of not less than $1,000,000,000 over the prior
month.'' In computing ADTV, the Exchange will use consolidated price
data from the relevant securities information processor (``SIP''). The
Exchange proposes adding this requirement, which is substantially more
stringent than the corresponding requirement in the SLB 15 listing
standards which require any security underlying a security futures
product based on a single security to have an ADTV of at least 109,000
shares in each of the preceding 12 months, in order to more effectively
protect against manipulative practices.
Rule 14.3(d), or ``Requirement 7,'' requires that ``[i]f the
Underlying Security is a `covered security' as defined under Section
18(b)(1)(A) of the Securities Act of 1933, the closing price 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 Perpetual SFP contract on such
Underlying Security.'' And, ``[i]f the Underlying Security is not a
`covered security' as defined under Section 18(b)(1)(A) of the
Securities Act of 1933, the closing price of the Underlying Security
has been at least $7.50 for the previous five consecutive business days
preceding the date on which the Exchange commences to list and trade
the Perpetual SFP contract on such Underlying Security.'' The $3.00
minimum share price requirement for Underlying Securities that are
``covered securities'' has been implemented by several other security
futures exchanges.\25\
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\25\ See, e.g., CME SFP Rule Filing at 41678; Self-Regulatory
Organizations; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change by CBOE Futures Exchange, LLC Relating to Its
Listing Standards for Security Futures Products, Exchange Act
Release No. 34-52295 (August 18, 2005), 70 FR 49691, 49692 (Aug. 24,
2005).
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In the case of an Underlying Security that is an ADR, Rule 14.3(l),
or ``Requirement 8,'' requires that one of the four conditions set
forth in requirement VIII of the SLB 15 initial listing standards for
security futures products based on a single security must be
satisfied.\26\
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\26\ See SLB 15 (``If the underlying security is an ADR: (a) The
Exchange or Association must have an effective surveillance sharing
agreement with the primary exchange in the home country where the
stock underlying the ADR is traded; (b) The combined trading volume
of the ADR and other related ADRs and securities occurring in the
U.S. ADR market, or in markets with which the Exchange or
Association has in place an effective surveillance sharing
agreement, represents (on a share equivalent basis) at least 50% of
the combined worldwide trading volume in the ADR, the security
underlying the ADR, other classes of common stock related to the
underlying security, and ADRs overlying such other stock over the
three-month period preceding the dates of selection of the ADR for
futures trading (`Selection Date'); (c)(1) The combined trading
volume of the ADR and other related ADRs and securities occurring in
the U.S. ADR market, and in markets where the Exchange or
Association has in place an effective surveillance sharing
agreement, represents (on a share equivalent basis) at least 20% of
the combined worldwide trading volume in the ADR and in other
related ADRs and securities over the three-month period preceding
the Selection Date; (2) The average daily trading volume for the
security in the U.S. markets over the three-month period preceding
the Selection Date is at least 100,000 shares; and (3) The trading
volume is at least 60,000 shares per day in the U.S. markets on a
majority of the trading days for the three-month period preceding
the Selection Date; or (d) The Securities and Exchange Commission
and Commodity Futures Trading Commission have otherwise authorized
the listing'').
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Rule 14.3(m) includes interpretations of Requirements 4 (Public
Float), 5 (Number of Shareholders), 6 (Trading Volume) and 7 (Share
Price) as applied to ``Restructure Securities,'' defined in Rule 14.2
as an ``equity security that a company issues or anticipates issuing as
the result of a spin-off, reorganization, recapitalization,
restructuring or similar corporate transaction'' consistent with the
term's definition in SLB 15. 14.3(m) interprets Requirements 4, 5, 6
and 7 as applied to Restructure Securities in a manner substantially
identical to the interpretations of the corresponding requirements in
SLB 15 to Restructure Securities, 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 a rights distribution satisfies Requirement 7--refers to the market
price of the Restructure Security being at least the minimum share
price applicable to it under Rule 14.3(d) (which may be $3.00 for
Restructure Securities that are ``covered securities'' or $7.50 for
Restructure Securities that are not ``covered securities''). Rule 14.4
categorically excludes Restructure Securities that are not yet issued
and outstanding, regardless of whether the Restructure Security is
traded on a ``when issued'' basis or on another basis that is
contingent upon the issuance or distribution of securities
(``Requirement 9'').
Rule 14.3(b), or ``Requirement 10,'' requires that any Underlying
Security must have a market capitalization of at least 100 billion U.S.
dollars, calculated as of the product of (i) the closing price on the
principal listing exchange of the security and (ii) total shares
outstanding, measured as of the most recent trading day prior to the
NPC's review of the security. The Exchange proposes adding this
requirement, which is substantially more stringent than the
corresponding requirement in the SLB 15 listing standards which do not
impose any minimum market capitalization requirement for the underlying
securities of initial listing of security futures products based on a
single security, in order to more effectively protect against
manipulative practices.
Rule 14.3(f), or ``Requirement 11,'' requires that ``[t]he
Underlying Security must have an Estimated Deliverable Supply in excess
of 20 million shares.'' Rule 14.2 defines ``Estimated Deliverable
Supply'' as the ``free float of the Underlying Security, calculated as
issued and outstanding shares less restricted shares (e.g., restricted
and control securities not registered with the SEC for public sale).''
This definition is intended to reflect the definition of ``estimated
deliverable supply'' in CFTC Regulation 41.25 and the CFTC's guidance
in Appendix A to Subpart C of Part 41 of CFTC Regulations.\27\ The
Exchange proposes adding this requirement in order to more effectively
protect against manipulative practices.
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\27\ See 17 CFR 41.25(a) (defining ``Estimated deliverable
supply'' as ``the quantity of the security underlying a security
futures product that reasonably can be expected to be readily
available to short traders and salable by long traders at its market
value in normal cash marketing channels during the specified
delivery period.''); 17 CFR Appendix A to Subpart C of Part 41
(Guidance and Acceptable Practices for Position Limits and Position
Accountability for Security Futures Products) (a)(1).
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Rule 14.3(g), or ``Requirement 12,'' requires that the issuer of an
Underlying Security ``must be current in all periodic reporting
obligations under Sections 13 or 15(d) of the [Act] (including, in the
case of a foreign private issuer whose equity securities are
represented by an ADR, the reports required on Form 20-F and Form 6-
K).'' Rule 14.3(g) further provides that the Exchange shall verify
reporting status through the Commission's EDGAR reporting system prior
to listing. With respect to Underlying Securities that are ETF
[[Page 60471]]
shares, Rule 14.3(g) provides that the ``issuer must instead be a
registered investment company that is current in the periodic reports,
financial statements, and registration-statement or prospectus updates
required of it under the [1940 Act] and the Securities Act of 1933, as
verified through the [Commission's] EDGAR system.''
In the case of an Underlying Security that is an ETF or a TIR, Rule
14.3(k), or ``Requirement 13,'' requires such an Underlying Security to
``have had a total trading volume (in all markets in which it has
traded) of at least 2,400,000 shares or receipts evidencing the
Underlying Security in the twelve (12) months preceding the NPC's
review.''
Categorical Exclusions from Eligibility. In addition to these
requirements, Rule 14.4 categorically excludes from eligibility as an
Underlying Security for a Perpetual SFP listed on the Exchange: (i) any
security whose issuer has filed a bankruptcy petition or has been the
subject of an involuntary petition (or is subject to analogous foreign
insolvency proceedings, (ii) any security that is subject (or, in the
prior 10 trading days has been subject) to a trading halt, suspension
or revocation of listing by its principal listing exchange or by the
Commission pursuant to Section 12(k) of the Act,\28\ or that is subject
to a suspension of the effectiveness of, or revocation of, its
registration by the Commission pursuant to Section 12(j) of the
Act,\29\ (iii) any security issued by a blank check company or special
purpose acquisition company that has not completed a qualifying de-SPAC
business combination or that remains in the pre-combination trust
period, (iv) any security whose issuer is or is controlled by entities
in a sanctioned jurisdiction or is subject to sanctions, (v) other than
qualifying ETF shares, exchange-traded notes, closed-end fund shares,
pooled investment vehicles registered under the 1940 Act and leveraged,
inverse or synthetic exchange-traded products, (vi) rights, warrants,
subscription receipts, units consisting of multiple component
securities or similar derivative or hybrid equity instruments and (vii)
subject to exemptions which may be granted by the NPC, any security for
which a material corporate action has been publicly announced and is
pending completion, where such action, if completed with respect to the
underlying security of a Perpetual SFP, could result in accelerated
final settlement of the Perpetual SFP.
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\28\ 15 U.S.C. 78l(k).
\29\ 15 U.S.C. 78l(j).
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The Exchange proposes adding these categorical exclusions in order
to more effectively protect against manipulative practices.
New Product Approvals. Rule 14.8 sets forth the Exchange's new
product approval process for Perpetual SFPs. Prior approval of the NPC
is required for any new Perpetual SFP to be listed on the Exchange. The
NPC shall consist of at least three members, including the Exchange's
Head of Markets (or his or her designee) and requires the NPC to
maintain written records of all product determinations. For each
proposed Perpetual SFP listing, the NPC shall verify that the
Underlying Security satisfies all initial listing criteria under Rule
14.3, confirm that no categorical exclusion under Rule 14.4 applies,
evaluate the susceptibility of the Underlying Security to manipulation,
assess the adequacy of the proposed contract specifications, review the
availability and reliability of data sources necessary for settlement
and margining and document the basis for its determination in a written
approval memorandum. The NPC shall specifically factor anti-
manipulation considerations into their determination of whether to
approve a new Perpetual SFP for listing on the Exchange and may deny or
condition approval on enhanced position limits, margin requirements or
other risk controls upon identification of elevated manipulation risk.
The NPC retains discretion to decline to list a Perpetual SFP on any
Underlying Security notwithstanding such security's satisfaction of any
criteria set forth in Chapter 14. Additionally, Rule 14.3(i) states
that, for an issuer with multiple classes of common stock, each class
shall be assessed independently against the criteria in Rule 14.3. The
NPC may elect to list Perpetual SFPs on more than one class of an
issuer's stock.
Following NPC approval, the Exchange shall certify or submit for
voluntary approval the new Perpetual SFP with or to the CFTC pursuant
to either (i) CFTC Regulations 40.2 and 41.23(a) \30\ or (ii) CFTC
Regulations 40.3 and 41.23(b),\31\ and, where applicable, certify or
submit corresponding rule changes with or to the CFTC pursuant to CFTC
Regulation 40.5 or CFTC Regulation 40.6,\32\ in each case as
applicable. The Exchange shall ensure that the listing process for and
trading of Perpetual SFPs comply with all Commission and CFTC
requirements applicable to security futures products. The Exchange
shall publish and maintain current on its website a table (the
``Approved Securities Table'') setting forth the Underlying Securities
that have been approved to underlie Perpetual SFPs listed on the
Exchange.
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\30\ 17 CFR 40.2, 41.23(a).
\31\ 17 CFR 40.3, 41.23(b).
\32\ 17 CFR 40.5, 40.6.
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Maintenance Listing Standards for Perpetual SFPs. Rule 14.6(a)
provides that the Exchange shall, on the last business day of each
calendar quarter (each such date, a ``Review Date''), ``evaluate each
listed Perpetual SFP against'' each of six maintenance requirements and
Rules 14.6(d) and 14.6(f) each set forth additional maintenance
requirements. These eight maintenance requirements are as follows, as
of each Review date: (i) the Underlying Security maintains a Public
Float of not less than 6.3 million shares (``Requirement 1.a''), (ii)
other than for ETF Shares and TIRs, there are at least 1,600 holders of
the Underlying Security, whether of record or beneficial (``Requirement
2.a''), (iii) the ADTV of the Underlying Security is not less than $200
million for the prior calendar quarter, except where the Underlying
Security has been listed for less than a quarter, in which case the
Underlying Security must have an ADTV of not less than $1 billion over
the period traded during the calendar quarter (``Requirement 3.a'');
(iv) the Underlying Security must have a closing price of not less than
$3.00 per share on each of the ten (10) consecutive trading days
immediately preceding the Review Date (``Requirement 4.a.''), (v) if
the Underlying Security is an ADR, meet one of the four criteria set
forth in Maintenance Requirement V of SLB 15 (``Requirement 5.a''),
(vi) confirmation that the issuer of the Underlying Security is current
in all periodic and other reporting obligations under Sections 13 and
15(d) of the Act \33\ (``Requirement 6.a''), (vii) the Underlying
Security has an estimated deliverable supply of at least 20 million
shares (``Requirement 7.a'') and (viii) the Underlying Security has a
market capitalization of not less than $50 billion (``Requirement
8.a'').
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\33\ 15 U.S.C. 78m, 78o(d).
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For Underlying Securities that are Restructure Securities, pursuant
to Rule 14.6(h), the ADTV and market price history of the related
equity security of the relevant company that existed prior to the ex-
date of the spin-off, reorganization, recapitalization, restructuring
or similar corporate transaction giving rise to a Restructure Security
prior to commencement of trading in the Restructure Security,
[[Page 60472]]
including when-issued trading, may be taken into account in determining
whether the corresponding maintenance requirements (i.e., Requirements
3.a and 4.a, respectively) apply.
Rule 14.6(e) provides that, for an Underlying Security that is an
ETF share or a TIR, the applicable initial listing requirements shall
apply to the ETF share or TIR instead of the maintenance requirements
described above.
Under Rule 14.6(b), if an Underlying Security fails to satisfy any
one of these maintenance requirements on a Review Date, the Exchange
shall provide notice to its participants and allow a cure period of
ninety (90) calendar days. If the Underlying Security fails to regain
compliance with all applicable maintenance requirements within this
cure period, the Exchange shall initiate delisting procedures with
respect to the Perpetual SFP overlying such Underlying Security
pursuant to Rule 14.7. Because Perpetual SFPs have no fixed expiration
date, such that they have indefinite durations and do not require
periodic contract roll-overs on a delivery month, the initiation of
delisting procedures with respect to a Perpetual SFP is the analogous
measure to refusal to open for trading a dated security futures product
with a new delivery month.
Immediate Delisting Events. Rule 14.6(c) provides that certain
events relating to an Underlying Security will result in immediate
delisting of the corresponding Perpetual SFP by the Exchange without
the ninety (90) day cure period described above. Such events include:
(i) delisting of the Underlying Security from the national securities
exchange on which the security is primarily listed for trading (the
``Primary Listing Exchange''), (ii) the issuer's entry into bankruptcy,
liquidation or insolvency proceedings, (iii) the Commission's issuance
of a trading suspension under Section 12(k) of the Act or an order
under Section 12(j) of the Act suspending the effectiveness of, or
revoking, the registration of the security, (iv) the security ceasing
to exist as a result of a completed corporate action or (v) the issuer
or its controller becoming subject to sanctions (each such event, an
``Immediate Delisting Event''). Upon the occurrence of an Immediate
Delisting Event, the Exchange shall promptly confirm that such event
has occurred and, upon such confirmation, immediately halt trading
(including the execution and reporting of block trades) in the
Perpetual SFP corresponding to the relevant Underlying Security. The
Exchange shall then publicly announce such halt and notify participants
by Exchange Notice of the applicable final settlement timeline. All
open positions in affected Perpetual SFPs shall be settled in
accordance with the delisting procedures in Rule 14.7.
Delisting Procedures. Rule 14.7 provides that, ``[w]hen the
Exchange determines that a Perpetual SFP must be delisted, the
following procedures apply.''
The Exchange shall first provide written notice to all of its
participants specifying the reason for the delisting and the applicable
timeline. For delistings involving a cure period (i.e., failure to
satisfy a maintenance requirement), the Exchange shall provide not less
than thirty (30) calendar days' notice prior to the final settlement
date of the relevant Perpetual SFPs. For Immediate Delisting Events,
the Exchange shall conduct final settlement as promptly as practicable,
but no later than five business days following the triggering Immediate
Delisting Event.
Final settlement will then proceed in a manner fully compliant with
the Final Settlement Rules. Where delisting arises from a Corporate
Action addressed under Part VII of Chapter 14 and as applicable, the
final settlement price shall be the consideration payable to holders of
the Underlying Security under the announced terms of the Corporate
Action. Otherwise, the final settlement price for a delisted Perpetual
SFP shall be the opening price of the Underlying Security on its
Primary Listing Exchange on the date of final settlement. Where such
price is not readily available, the final settlement price shall fairly
reflect the price of the Underlying Security on its Primary Listing
Exchange during the most recent regular trading session for such
Underlying Security or the next available opening price of the
Underlying Security. Notwithstanding the foregoing, as provided in the
Final Settlement Rules, where Klear, in its capacity as central
clearinghouse of the Perpetual SFPs, determines that such price is not
consistent with the protection of customers and the public interest,
taking into account the factors set forth in CFTC Regulation
41.25(c)(3) and Commission Rule 6h-1(b)(3),\34\ Klear may determine,
pursuant to its rules, an alternative final settlement price.
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\34\ 17 CFR 41.25(c)(3); 240.6h-1(b)(3).
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Higher Margin Levels for Perpetual SFPs
Kalshi proposes adopting Rulebook Chapter 14, Part V and related
new definitions in Rule 14.2 (the ``Perpetual SFP Margin Rules'') to
specify customer margin requirements for Perpetual SFPs listed on the
Exchange. Specifically, the Perpetual SFP Margin Rules will establish
procedures relating to the determination and administration of customer
margin requirements for Perpetual SFPs and the applicability of those
requirements. Section 3(a)(57)(C) of the Act defines ``higher margin
level'' and ``higher level of margin,'' when such terms are used with
respect to a security futures product, as ``a margin level established
by a national securities exchange registered pursuant to [S]ection 6(g)
[of the Act] that is higher than the minimum amount established in
effect pursuant to [S]ection 7(c)(2)(B)'' of the Act.\35\ Section
7(c)(2)(B) of the Act grants the Commission and the CFTC joint
rulemaking authority to prescribe margin requirements for security
futures products.\36\ Pursuant to this authority, the Commission and
the CFTC have adopted parallel rules establishing a fifteen (15)
percent minimum initial and maintenance customer margin requirement for
long or short security future positions and permitting exchanges to
prescribe lower margin requirements for permitted offsetting positions
involving security futures and related positions.\37\ The Perpetual SFP
Margin Rules will establish ``higher margin levels,'' as defined in
Section 3(a)(57)(C) of the Act, as discussed below.
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\35\ 15 U.S.C. 78c(a)(57)(C).
\36\ 15 U.S.C. 78g(c)(2)(B).
\37\ 17 CFR 242.403(b); 41.45(b) (together, the ``Customer
Margin Rules'').
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Perpetual SFP Margin Rates. Rule 14.16(a) requires each member of
the Exchange intermediating Perpetual SFP transactions on behalf of
customers (such members, who must satisfy the eligibility requirements
set forth in Rule 14.37, ``SFP Broker Members'') that is also a futures
commission merchant that has entered into an futures commission
merchant (``FCM'') Member Agreement with Kalshi (a ``FCM SFP Broker
Member'') to collect and maintain from each of their customers, for
each Perpetual SFP position carried in such customer's account,
``margin in an amount not less than 15.50% (such percentage, the
``Perpetual SFP Margin Ratio'') of the Current Market Value of the
position'' (such amount, with respect to a Perpetual SFP, the
``Perpetual SFP Required Margin'').
Rule 14.16(b) further provides that the ``Current Market Value'' of
a position equals the product of (i) the number of Perpetual SFP
contracts comprising the position, (ii) the number of shares of the
[[Page 60473]]
Underlying Security represented by one Perpetual SFP contract, which
shall be one hundred (100) shares of the Underlying Security (the
``Contract Unit'') and (iii) the settlement value, as determined by the
Exchange pursuant to Rule 14.12(a)-(c), of the Perpetual SFP (the
``Mark Price''). Rule 14.12 describes the process by which the Exchange
shall determine the Mark Price of a Perpetual SFP as ``the following
tiered methodology, applied in descending order:
(i) Tier 1--Trade VWAP. [i]f one or more trades other than [b]lock
[t]rades in the Perpetual SFP occur during the [sixty-second]
Computation Interval, the Mark Price shall be the volume-weighted
average price (``VWAP'') of those trades (excluding any [b]lock
[t]rades executed during the Computation Interval). The VWAP
calculation shall be adjusted to exclude outliers. The Exchange
generally shall apply a Median Absolute Deviation filter but may, in
its discretion, exclude other outlier or manipulative transactions.
Tier 1 shall not apply, and the Mark Price shall instead be determined
under Tier 2 or Tier 3, as applicable, if the VWAP so calculated
differs from the Underlying Price Index as of the Mark Price
Calculation Time by more than fifty percent (50%) of that Underlying
Price Index.
(ii) Tier 2--Sampled Midpoint Average. [f]or purposes of this Tier
2, sixty (60) observation points shall occur at exactly N seconds
before the Mark Price Calculation Time for each integer N from 1
through 60 (each, an ``Observation Point''). The prevailing best bid
and prevailing best ask at an Observation Point shall be the best bid
and best ask resting on the Perpetual SFP order book as of that
instant. An Observation Point shall be ``two-sided'' if both a
prevailing best bid and a prevailing best ask are present at that
instant, and the ``Midpoint'' at a two-sided Observation Point shall be
the arithmetic mean of its prevailing best bid and prevailing best ask.
A two-sided Observation Point shall be disregarded if the difference
between its prevailing best ask and prevailing best bid exceeds ten
percent (10%) of its Midpoint. If the Mark Price is not determined
under Tier 1, whether because no trades in the Perpetual SFP occur
during the Computation Interval or because Tier 1 does not apply as
provided in paragraph (a)(1), and at least one Observation Point is
two-sided and is not disregarded, the Mark Price shall be the
arithmetic mean of the Midpoints at all two-sided Observation Points
that are not disregarded.
(iii) Tier 3. [i]f the Mark Price is not determined under Tier 1 or
Tier 2, the Mark Price shall equal the prior Mark Price plus the net
change in the Underlying Price Index between the prior Mark Price
Calculation Time and the current Mark Price Calculation Time''
(iv) If a Mark Price cannot be determined under Tiers 1-3, the
Exchange may determine the Mark Price using (a) the Underlying Price
Index, if available and reliable, or (b) such other reasonable
methodology as the Exchange determines appropriate pursuant to Rule
7.1.
Pursuant to Rule 14.12(b), ``[i]f trading in a Perpetual SFP is
halted during any portion of the Computation Interval, trades occurring
during the halt shall be excluded from Tier 1, and no Observation Point
occurring during the halt shall be considered two-sided for purposes of
Tier 2. If trading in the Perpetual SFP is halted at the Mark Price
Calculation Time, the Mark Price shall be determined under Tier 3.''
The Exchange shall not permit customer margin requirements lower
than the Perpetual SFP Required Margin (i.e., the Perpetual SFP Margin
Ratio multiplied by the Current Market Value of a Perpetual SFP
position), including for offsetting positions involving Perpetual SFPs
and related positions that would be permitted under subparagraph two
(2) of the Customer Margin Rules to be subject to margin requirements
lower than the fifteen (15) percent minimum margin requirement
established under subparagraph one (1) of those rules.\38\ Further, the
Exchange shall not exempt market makers (i.e., Exchange members that
are registered as dealers with the SEC under Section 15(b) of the Act)
or ``exempted persons'' as defined in applicable SEC and CFTC
regulations \39\ as ``customers'' for purposes of the Perpetual SFP
Margin Rules, notwithstanding that the Customer Margin Rules would
permit such exemptions.\40\ Pursuant to Rule 14.16(c), the Perpetual
SFP Margin Ratio shall apply at all times to all positions, and there
shall be ``no separate initial margin or maintenance margin rate.''
Rule 14.16(d) further provides that the total Perpetual SFP Required
Margin for a FCM SFP Broker Member's customer account shall, in all
cases, be the sum of the Perpetual SFP Required Margin for each
individual Perpetual SFP position, provided that, pursuant to Rule
14.16(e), ``[t]he Exchange may, in its discretion, impose margin
requirements in excess of the Perpetual SFP Margin Ratio for any
Perpetual SFP or class of Perpetual SFPs, effective upon such notice to
FCM SFP Broker Members as the Exchange deems appropriate.'' The
Exchange may consider factors including market volatility, liquidity
conditions, concentration risk, and the financial condition of FCM SFP
Broker Members or their customers in determining whether to impose such
higher margin requirements.
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\38\ 17 CFR 242.403(b)(2); 41.45(b)(2). Certain national
securities exchanges registered under Section 6(g) of the Act have
filed rule changes establishing customer margin requirements for
security futures with the Commission under Sections 19(b)(1) and
19(b)(2) of the Act. See Self-Regulatory Organizations; Notice of
Filing of Proposed Rule Change by the Nasdaq Liffe Markets, LLC
Relating to Margin Rules for Security Futures Products Other Than
Options on Security Futures, 67 FR 61361 (Sept. 30, 2002); Self-
Regulatory Organizations; Notice of Filing of Proposed Rule Change
by OneChicago, LLC Relating to Customer Margin Requirements for
Security Futures, 67 FR 61707 (Oct. 1, 2002); Self-Regulatory
Organizations; CBOE Futures Exchange, LLC; Notice of Filing and
Order Granting Accelerated Approval of Proposed Rule Change Relating
to Customer Margin Requirements for Security Futures, Exchange Act
Release No. 34-52381 (Sept. 2, 2005); Self-Regulatory Organizations;
Board of Trade of the City of Chicago, Inc.; Notice of Filing and
Order Granting Accelerated Approval of Proposed Rule Change Relating
to Customer Margin Requirements for Security Futures, Release No.
34-53626 (April 10, 2006); Self-Regulatory Organizations; Chicago
Mercantile Exchange Inc.; Notice of Filing of a Proposed Rule Change
Relating to Amendments to Chicago Mercantile Exchange Inc.'s Rules
Governing Performance Bond Requirements: Account Holder Level,
Exchange Act Release No. 34-105607 (June 3, 2026). However, the
rules of each such exchange contemplated margin requirements no
higher than the ``minimum amount established in effect pursuant to''
the Customer Margin Rules adopted by the Commission and CFTC
``pursuant to [S]ection 7(c)(2)(B)'' of the Act. Section 7(c)(2)(B)
of the Act grants the Commission and the CFTC joint rulemaking
authority to prescribe margin requirements for security futures
products. 15 U.S.C. 78c(a)(57)(C). Accordingly, these rules did not
result in ``higher margin levels'' as defined in Section 3(a)(57)(C)
of the Act, such that they were required to be filed under Sections
19(b)(1) and 19(b)(2) of the Act. See 15 U.S.C. 78f(g)(4)(B)(ii). By
contrast, rule changes related to higher margin requirements may be
filed by an exchange pursuant to Section 19(b)(7) of the Act. See 15
U.S.C. 78f(g)(4)(B)(i).
\39\ 17 CFR 41.43(a)(9); 17 CFR 242.401(a)(9).
\40\ See 17 CFR 41.43(a)(5); 242.401(a)(5) (excluding ``exempted
persons'' from the ``customer'' definition); 17 CFR
242.400(c)(2)(v); 41.42(c)(2)(v) (permitting an exchange to adopt
rules containing specified requirements for security futures dealers
subject to which a security futures dealer's relationship with a
security futures intermediary is excluded from the customer margin
requirements of the Customer Margin Rules).
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Rule 14.22(a) further states that ``[t]he Exchange may, in an
emergency, impose special margin requirements for specific Perpetual
SFPs or accounts, or require FCM SFP Broker Members to collect margin
on an intraday basis, effective immediately upon notice to FCM SFP
Broker Members.'' The Exchange is required, pursuant to Rule 14.22(b)
to report any such emergency actions
[[Page 60474]]
taken to the Commission and the CFTC as promptly as practicable.
Perpetual SFP Margin Administration. Rule 14.17 identifies the
manner in which a customer may satisfy the Perpetual SFP Required
Margin. Consistent with Commission Rule 242.404(b) and CFTC Regulation
41.46(b),\41\ under Rule 14.17(a), acceptable types of collateral for
Perpetual SFPs include cash and, if permitted by the Exchange at its
discretion and with notice to members, margin securities (subject to
specified restrictions), exempted securities, any other assets
permitted under Regulation T of the Board of Governors of the Federal
Reserve System to satisfy a margin deficiency in a securities margin
account, and any combination thereof. Rule 14.17 further provides that
``[t]he Exchange may impose conditions on, or decline to accept, any
form of collateral.'' Pursuant to Rule 14.17(b), the collateral value
of all collateral accepted to satisfy the Perpetual SFP Required Margin
shall be determined in accordance with CFTC Regulations 41.46(c) and
41.46(e) and the parallel provisions in Commission Rules 242.404(c) and
242.404(e).\42\
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\41\ 17 CFR 242.404(b); 41.46(b).
\42\ 17 CFR 41.46(c), 41.46(e), 242.404(c), 242.404(e).
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In addition, Rule 14.18 sets forth rules relating to the Exchange's
daily mark-to-market process and Rule 14.19 details the Exchange's
process for administering margin calls to participants with under
margined Perpetual SFP positions.
Contract Terms and Trading Rules for Perpetual SFPs
Kalshi proposes adopting Rulebook Chapter 14, Parts III (Contract
Specifications and Trading Rules), VI (Position Limits and Reporting),
and related new definitions in Rule 14.2 to govern the specifications
and trading of Perpetual SFPs.
Contract Specifications. Part III of Chapter 14 (Rules 14.9 through
14.13) sets forth certain contract specifications for Perpetual SFPs,
including:
Trading Unit. Rule 14.9(a) sets forth the Contract Unit (one
hundred (100) shares of the Underlying Security) and provides that
eligible participants may trade fractional Contract Unit quantities as
provided in the applicable contract specifications for a Perpetual SFP.
For the avoidance of doubt, the Exchange does not propose to offer
Perpetual SFPs on fractional interests in Underlying Securities.
Rather, one Perpetual SFP Contract Unit will in all cases overlie one
hundred (100) shares of the Underlying Security, and the Exchange shall
permit participants to trade a fractional quantity of the Perpetual SFP
Contract Unit.
Minimum Price Fluctuation. Rule 14.9(c) specifies that the minimum
price fluctuation for Perpetual SFPs shall be one one-half of a cent
($0.005) per share. The Exchange proposes this rule in order to permit
market participants to more precisely price the equity financing
spread. The Commission has previously permitted rule changes by
OneChicago, LLC (``OneChicago'') to adopt four decimal pricing for
security futures products.\43\ As noted in the filing discussing
OneChicago's proposed rule change, ``[u]nlike securities--which are
assets--[security futures] are contingent liabilities that represent
the forward value of the underlying security. The primary difference in
pricing between securities and the [security futures] that overlay them
is the interest rate component of the forward contract.'' \44\ The
equity financing spread (i.e., the ``interest rate component'') of a
Perpetual SFP is essentially the cost of carry of the Underlying
Security, and this spread is generally quoted in basis points (i.e.,
hundredths of percentage points). Because the equity financing spread
associated with a given Perpetual SFP quoted in basis points by
reference to the notional value of a Perpetual SFP, sub-penny pricing
is necessary to ensure that that the price of a given Perpetual SFP is
sufficiently granular to accurately capture its associated equity
financing spread.
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\43\ Self-Regulatory Organizations; OneChicago, LLC; Notice of
Filing of Proposed Rule Change to Implement Four Decimal Pricing for
Outright Transactions in Single Stock Futures, Release No. 34-81022
(June 26, 2017), 82 FR 29953 (June 30, 2017).
\44\ Id. at 29953-29954.
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Perpetual SFPs will have daily settlement cycles, during which
funding payment obligations and payments will be exchanged to motivate
price convergence with the Underlying Security. As a result, the carry
component of a Perpetual SFP will reflect only a single day of
financing rather than, as would be the case with a traditional dated
future, a full month, quarter or year of financing. For example, in the
case of an Underlying Security priced at four hundred dollars ($400)
per share, a one cent tick size would represent approximately .25 basis
points on a single-day basis, or roughly 91 basis points annualized.
OneChicago cited a 141 basis point annualized spread as unreasonably
wide for a financing instrument.\45\ By contrast, the half-penny
pricing proposed by the Exchange would produce half that--a roughly 46
basis point spread on an annualized basis -, permitting a materially
more precise reflection of the equity financing spread.
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\45\ Id. at 29954.
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Furthermore, three decimal pricing for Perpetual SFPs does not
present the same concerns that motivated the Commission to limit the
tick size of certain NMS securities to a penny.\46\ The Commission
adopted Regulation NMS Rule 612 in order to address concerns to prevent
market participants from ``queue-jumping'' by ``gain[ing] priority over
existing limit orders by posting an economically insignificant price
improvement,'' thereby harming market liquidity and price discovery of
cash equity markets.\47\ Although Perpetual SFPs are not NMS securities
subject to Regulation NMS Rule 612, the Exchange has considered whether
the concerns underlying Regulation NMS Rule 612 apply to the Exchange's
proposed three decimal minimum pricing increment for Perpetual SFPs.
The Exchange does not believe that permitting Perpetual SFPs to trade
with a tick size of $0.005 will harm liquidity and price discovery for
cash equity markets or will lead to queue jumping in Perpetual SFPs.
Perpetual SFPs are structurally tethered to cash equity prices through
the daily funding mechanism, such that liquidity and price discovery of
Perpetual SFPs are driven by the cash market prices of the Underlying
Securities they reference. Where the price of a Perpetual SFP deviates
from the price of the Underlying Security, the funding mechanism
creates a strong, proven economic incentive to converge the price of
the Perpetual SFP back towards the price of the Underlying Security.
Sub-penny pricing of Perpetual SFPs would therefore be unlikely to have
any impact on cash market prices for Underlying Securities, as the
prices of Perpetual SFPs are themselves subservient to the prices of
their Underlying Securities. Further, the Exchange does not believe
that three-decimal pricing results in minimum pricing increments so
arbitrarily small as to raise queue-jumping concerns in Perpetual SFP
markets, given the impact of financing spreads as discussed above.
Also, the Commission itself recently acknowledged that, since adoption
of Regulation NMS Rule 612 over two decades ago, ``the market has
evolved
[[Page 60475]]
considerably,'' necessitating and justifying amendments to permit half-
penny tick sizes for NMS securities with sufficiently narrow bid-ask
spreads.\48\
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\46\ 17 CFR 242.612 (``NMS Rule 612'').
\47\ Regulation NMS: Minimum Pricing Increments, Access Fees,
and Transparency of Better Priced Orders, Exchange Act Release No.
101070, 89 FR 81620, 81622 (Oct. 8, 2024).
\48\ Id. at 81623.
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Settlement Method. Perpetual SFPs will be cash-settled.
Periodic Transfers and Funding Rate. As mentioned above, holders of
long and short positions in Perpetual SFPs will exchange periodic
payment obligations in the form of ``funding payments'' that vary based
on the price of the Underlying Security relative to the price of the
Perpetual SFP. Rule 14.10 sets forth the process by which the Exchange
shall calculate, administer and settle funding payment obligations and
entitlements of holders of Perpetual SFP positions.
For each successive sixty-second interval, beginning at the start
of a clock minute and ending immediately before the start of the next,
within the regular trading session of the U.S. equity cash market on a
given trading day (each such sixty-second interval, a ``Computation
Interval'' and this entire period, the ``Funding Period'') during which
the U.S. equity cash market is open for regular trading and trading in
the Underlying Security is not halted, the Exchange shall compute a
``Premium,'' which Premium shall be equal to, for a given Computation
Interval, the (i) Mark Price, calculated as of the end of the
Computation Interval, less (ii) the time-weighted average of the last
sale price of the Underlying Security as reported by the securities
information processor pursuant to the effective national market system
plan for the Underlying Security (the ``Underlying Price Index'') \49\
over the Computation Interval (the ``Reference Price''), divided by
(iii) the Reference Price.\50\
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\49\ During periods when the equity cash market is closed, the
Underlying Price Index shall instead be the official closing price
of the Underlying Security from the most recent regular trading
session of the Underlying Security.
\50\ Premiums are used to calculate daily funding obligations
associated with Perpetual SFPs, which do not constitute final
settlements of Perpetual SFPs and, accordingly, are not subject to
the Final Settlement Rules.
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Pursuant to Rule 14.10(c), calculation of the Premium shall not
take into account any block trades executed or reported to the Exchange
during a Computation Interval. Block trades are privately negotiated
transactions between Exchange participants (i.e., members or member
customers) that may only be executed on the Exchange if they comply
with the requirements of Rule 5.3(e), including that they must meet the
applicable minimum size threshold established by the Exchange and each
party must be an eligible contract participant as defined in CEA
Section 1a(18),\51\ among other requirements. To help ensure that the
mark price and funding rate calculation fairly reflect the prevailing
executable value of Perpetual SFPs in a competitive marketplace, and
given that block trades are privately negotiated, block trades in a
Perpetual SFP are excluded from the Mark Price calculation for that SFP
and, accordingly, are not reflected in Premium calculations.
---------------------------------------------------------------------------
\51\ 7 U.S.C. 1a(18).
---------------------------------------------------------------------------
The ``Funding Rate'' for a Funding Period will be equal to the
equally weighted arithmetic mean of the Premiums computed during that
Funding Period (the ``Mean Premium''), subject to adjustments as
described below. If no trades (or only block trades) in the Perpetual
SFP are executed during a Computation Interval, the Premium for that
Computation Interval is excluded from the Funding Rate calculation, and
no Premium will be computed for any Computation Interval falling in
whole or in part within any period specified in Rule 14.10(f),
including periods when the U.S. equity cash market is closed or when
trading in the Underlying Security is halted on its Primary Listing
Exchange. The Funding Rate is derived solely from observed Premiums,
the methodology contains no separate interest rate or dividend term,
and expected carry and Ordinary Dividends are reflected only to the
extent reflected in the Premium.\52\
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\52\ As noted in Rule 14.27, discussed below, ``[t]he economics
of an Ordinary Dividend shall be transferred between open interest
[in Perpetual SFPs] through the Funding Rate, and no adjustment
shall be made to the Contract Specifications, Daily Settlement
Price, Contract Unit, or number of outstanding contracts of a
Perpetual SFP to reflect an Ordinary Dividend.'' Rather, the
economics of Ordinary Dividends will be incorporated into the
calculation of Premiums, on the basis of which Funding Rates for
Perpetual SFPs are derived, due to the decline in price of the
Underlying Security subject to the Ordinary Dividend on the ex-date,
which will be reflected in the Underlying Price Index (and therefore
the Reference Price) and not otherwise offset within the Perpetual
SFP.
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The Funding Rate may be adjusted subject to a ``Deadband
Threshold'' of 0.002% and a ``Maximum Funding Magnitude'' of 2.00%,
each as defined in Rule 14.2 and applied as provided in Rule 14.10(d).
Pursuant to Rule 14.10(d), the Funding Rate will be reduced (or
increased, if the Mean Premium is negative) toward zero by the Deadband
Threshold if the absolute value of the Mean Premium for a given Funding
Period exceeds the Deadband Threshold, and will be zero where the
absolute value of the Mean Premium does not exceed the Deadband
Threshold. In other words, the Deadband Threshold will operate as a
continuous reduction in absolute value of the Mean Premium, rather than
as a discontinuous threshold, so that the Funding Rate varies
continuously with the Mean Premium. Additionally, if the absolute value
of the Funding Rate exceeds the Maximum Funding Magnitude, the Funding
Rate shall be set to the Maximum Funding Magnitude with the same sign
as the originally calculated Funding Rate. The purpose of the Deadband
Threshold is to mitigate the operational burdens of market noise and
small price deviations (including those potentially attributable to
manipulation attempts). The purpose of the Maximum Funding Magnitude is
to prevent large but transitory price deviations from triggering
disruptive funding payments.
Pursuant to Rule 14.10(e), at the scheduled close of each regular
trading session in the U.S. equity cash market (ordinarily 4:00 p.m.
ET, or the scheduled early close on early-close days) on each day on
which the cash market is open for regular trading (the ``Daily
Settlement Time''), holders of Perpetual SFPs will exchange periodic
funding payment obligations and entitlements. Specifically, if the
Funding Rate is positive, each holder of a long position shall pay, for
each Perpetual SFP Contract Unit held (including fractional Contract
Unit positions), to holders of short positions in the Perpetual SFP an
amount equal to the Funding Rate multiplied by the Mark Price as of the
Daily Settlement Time (the ``Daily Settlement Price'') multiplied by
the Contract Unit. If the Funding Rate is negative, holders of short
positions shall pay, for each Perpetual SFP Contract Unit held
(including fractional Contract Unit positions), to holders of long
positions in the Perpetual SFP an amount equal to the absolute value of
the Funding Rate multiplied by the Daily Settlement Price multiplied by
the Contract Unit. If the Funding Rate is zero, no transfer will be
made. Such periodic transfers will be computed by the Exchange and
collected and paid through Klear, as the clearing house for Perpetual
SFPs. Funding payments are separate from variation margin and any other
payment obligations due to or from a participant of the Exchange.
Pursuant to Rule 14.12(c), if a Daily Settlement Price cannot be
determined pursuant to Tiers (1) through (3) set forth in Rule 14.12,
the Exchange may determine the Daily Settlement Price pursuant to the
Underlying Price Index as of the Daily Settlement Time, if it is
available and reliable, or the Exchange's Market
[[Page 60476]]
Outcome Review Process under Rule 7.1.
Under the Market Outcome Review Process, the Exchange's Outcome
Review Committee, a standing committee consisting of three members, two
of which must be Public Directors appointed by the Exchange's
Regulatory Oversight Committee pursuant to Exchange Rule 2.7(e), would
determine the final Daily Settlement Price for a given Funding Period.
The Outcome Review Committee would review all relevant evidence and
determine a final Daily Settlement Price within a 24-hour period after
the Market Outcome Review Process is initiated, and associated funding
entitlements and obligations would be settled on the date that the
Outcome Review Committee reaches a determination on the Daily
Settlement Price. If the Market Outcome Review Process is initiated,
the Exchange will post on its website that the Perpetual SFP's Daily
Settlement Price is under review.
Trading Hours. Rule 14.11 provides that ``Perpetual SFPs shall be
available for trading from 6:00 p.m. ET on Sunday through 5:00 p.m. ET
on Friday, with a daily maintenance window from 5:00 p.m. ET to 6:00
p.m. ET during which Perpetual SFPs do not trade, subject to trading
halts as provided in Rule 14.13 and the Exchange's discretionary
authority under Rule 14.15.'' Rule 14.11 further states that ``[t]he
Exchange may establish specific trading hours for particular Perpetual
SFPs or classes of Perpetual SFPs as it deems appropriate.'' The
trading hours for Perpetual SFPs will be consistent with the 23 hours a
day, five days a week trading schedules established for cash equities
and security futures on other national securities exchanges.\53\
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\53\ See, e.g., Self-Regulatory Organizations; The Nasdaq Stock
Market LLC; Notice of Filing of Amendment Nos. 2 and 3 and Order
Granting Accelerated Approval of a Proposed Rule Change, as Amended
by Amendment Nos. 2 and 3, to Extend the Exchange's Trading Hours to
23 Hours a Day, Five Days a Week, Release No. 34-105199 (April 10,
2026); CME SFP Rule Filing at 41683.
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Coordinated Trading Halts. Rule 14.2 defines a ``Regulatory Halt''
to include any event within in the meaning of that term in (i)
Commission Rule 6h-1(a)(3) and CFTC Regulation 41.1(l) and (ii) the
``Plan to Address Extraordinary Market Volatility Submitted to the
Securities and Exchange Commission Pursuant to Rule 608 of Regulation
NMS Under the Securities Exchange Act of 1934'' approved 31 May 2012 by
the SEC, as amended from time to time (SEC, SRO Rulemaking, National
Market System Plans, File 4 631) and as implemented under New York
Stock Exchange Rule 7.12 for Trading Halts Due to Extraordinary
Volatility or under Nasdaq Stock Market Rule 4121 for Trading Halts Due
to Extraordinary Volatility. Consistent with the parallel requirements
in CFTC Regulation 41.25(b)(2) and Commission Rule 6h-1(c),\54\ Rule
14.13(a) provides that the Exchange shall ``halt trading in a Perpetual
SFP at all times during a Regulatory Halt affecting the Underlying
Security.'' Rule 14.13(a) further provides that, ``[f]or the avoidance
of doubt, no [b]lock [t]rades in a Perpetual SFP may be executed on or
reported to the Exchange during any period during which the Exchange
has halted trading in the Perpetual SFP.'' Rule 14.13(b) further
specifies that, in the event of a Regulatory Halt resulting from the
operations of a circuit breaker or trading curb procedures by a
national securities exchange or national securities association, the
levels, thresholds and durations applicable to such market-wide circuit
breaker or trading curb procedures are those established by the
applicable national securities exchange or national securities
association, as in effect from time to time. Pursuant to Rule 14.13(c),
``[s]uspension of trading due to a Regulatory Halt shall remain in
effect until the Primary Listing Exchange of the Underlying Security
resumes trading, unless the Exchange determines, in its discretion,
that additional conditions must be satisfied before trading in the
Perpetual SFP may resume.'' The Exchange shall resume trading only upon
its determination that price discovery in the Perpetual SFP can occur
on a fair and orderly basis.
---------------------------------------------------------------------------
\54\ 17 CFR 41.25(b)(2); 240.6h-1(c).
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Rule 14.13(d) authorizes the Exchange to, at its discretion, permit
members to submit, modify or cancel orders in affected Perpetual SFPs,
but clarifies that ``[n]o matching shall occur during the Regulatory
Halt.'' Rule 14.13(d) also provides that ``[a]ll market orders resting
at the time a Regulatory Halt is initiated shall be cancelled.''
Rule 14.13(e) requires the Exchange to ``promptly disseminate
notice to all Members of any coordinated trading halt and the
resumption of trading via the Exchange's notification channels and
market data feeds.''
Finally, Rule 14.13(f) authorizes the Exchange to ``at its sole
discretion, halt trading (including execution and reporting of [b]lock
[t]rades) in a Perpetual SFP at any time when trading in the Underlying
Security is halted for any reason on any national securities exchange
listing the Underlying Security.''
Position Limits and Reporting for Perpetual SFPs
Kalshi proposes adopting Rulebook Chapter 14, Part VI and related
new definitions in Rule 14.2 to specify position limits and position
accountability levels applicable to Perpetual SFPs and related large
trader reporting obligations. Rule 14.23(a) provides that ``[e]xcept
with the prior written permission of the [Exchange's] Chief Regulatory
Officer or his designee, all Members must comply with the position
limits set forth in'' Rule 14.23. The proposed position limits and
position accountability levels are designed to ensure compliance with
CFTC Regulation 41.25(b)(3), a primary purpose of which is to ensure
comparability of position limits applicable to security futures with
those applicable to equity options.\55\
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\55\ See, e.g., Position Limits and Position Accountability for
Security Futures Products, Final Rule, 84 FR 51005, 51006 (``When
adopted, the [CFTC]'s existing [security futures products] position
limits were set at levels that were generally comparable, but not
identical, to the limits that applied to options on individual
securities at that time. However, over time, a competitive disparity
emerged between the [CFTC]'s [security futures product] position
limits and security options limits despite both serving economically
similar functions. . . . . To address this disparity, the Commission
drafted the Proposal with the goal of providing a level regulatory
playing field''.
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CFTC Regulation 41.25(b)(3) requires DCMs to have rules
establishing position limits and position accountability levels
applicable during ``the last three trading days of an expiring contract
month'' of a security future.\56\ Because the Perpetual SFPs have no
predetermined expiration date, and can have potentially indefinite
durations, the Exchange believes that the position limit requirements
of CFTC Regulation 41.25(b)(3) apply with respect to a Perpetual SFP
only during the three (3) trading days (the ``last three trading
days'') preceding the date on which the Exchange has determined that
final settlement of a Perpetual SFP will occur pursuant to Rule 14.7
(applicable to Perpetual SFPs that are delisted by the Exchange due to
the Underlying Security or its issuer failing to satisfy a maintenance
listing requirement during the applicable cure period or being subject
to an Immediate Delisting Event) and Rule 14.30 (applicable to
Perpetual SFPs subject to accelerated final settlement, discussed
below).
---------------------------------------------------------------------------
\56\ 17 CFR 41.25(b)(3).
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In order to more effectively protect against manipulation, the
Exchange shall impose position limits more stringent than those
required under CFTC Regulation 41.25(b)(3) throughout
[[Page 60477]]
the life of each Perpetual SFP. Specifically, Rule 14.23(b) provides
that, except as otherwise provided in Rule 14.23, Perpetual SFPs, which
will in each case overlie a single Underlying Security, ``shall be
equal to: (i) at all times other than the last three trading days of an
expiring contract, 50,000 Perpetual SFP [units of exposure equal to one
hundred (100) shares of the Underlying Security (each such unit, a
``Standard Contract Equivalent'')] or (ii) during the last three
trading days of an expiring contract, 25,000 Perpetual SFP Standard
Contract Equivalents.'' Rule 14.23(b) further specifies that ``[t]he
number of Standard Contract Equivalents held by a person may not exceed
the limit either net or on the same side of the market.''
Notwithstanding the foregoing, Rule 14.23(b) provides that a Perpetual
SFP position in excess of the applicable position limit that arises
solely as the result of an adjustment to a Perpetual SFP effected in
connection with a corporate action affecting the Underlying Security
pursuant to Part VII of Chapter 14 ``shall not, by reason of the
adjustment alone, constitute a violation of [Rule 14.23], provided that
the person holding the position does not increase the position on the
same side of the market after the adjustment becomes effective.'' Rule
14.23(b) further clarifies that ``[i]n no event shall the applicable
[position limit] be established or administered in a manner
inconsistent with CFTC Regulation 41.25 and applicable CFTC
regulations, guidance or orders.''
Rule 14.23(c) sets out liquidity-tiered position limit standards.
Specifically, where the estimated deliverable supply of an Underlying
Security exceeds twenty (20) million shares, the Exchange may (if
appropriate in light of the liquidity of trading in the Underlying
Security) assign the Perpetual SFP to a liquidity tier and adopt a
position limit for the Perpetual SFP no greater than the lesser of (i)
the number of Perpetual SFP Standard Contract Equivalents specified for
the applicable tier in the schedule established by the Exchange by
notice to Members and (ii) the equivalent of 12.5 percent of the
estimated deliverable supply of the Underlying Security, either net or
on the same side of the market, applicable to positions held during the
last three days of an expiring contract.
Consistent with CFTC Regulation 41.25(b)(3), for a Perpetual SFP on
an Underlying Security where the six-month total trading volume exceeds
2.5 billion shares and the estimated deliverable supply exceeds 40
million shares, the Exchange may adopt a position accountability rule
in lieu of a position limit under Rule 14.23(d). The position
accountability level shall be twenty-five thousand (25,000) Standard
Contract Equivalents, or such lower level as the Exchange may specify
with respect to such a Perpetual SFP.
For purposes of determining the applicability of Rules 14.23(c) and
14.23(d), the Exchange shall calculate, on a monthly basis, the
estimated deliverable supply and six-month total trading volume for
each Underlying Security, as provided in Rule 14.23(g). Rule 14.23(g)
also states that ``[t]he Exchange shall adjust position limits as
appropriate based on data and shall file any changes with the CFTC
pursuant to CFTC Regulation 41.24.''
Furthermore, Rule 14.23(a) specifies that, notwithstanding anything
to the contrary in Rules 14.23(c) or 14.23(d), no position or positions
aggregated in accordance with Rule 14.23(e) shall be permitted in
excess of 200,000 Perpetual SFP Standard Contract Equivalents.
Rule 14.23 also includes provisions governing position limit
exemptions and aggregation. Rule 14.23(e) generally governs how
position limits adopted by the Exchange for Perpetual SFPs apply to
market participants with respect to aggregation of positions they hold
or control. Rule 14.23(f) provides that ``[t]he Exchange may grant
exemptions from the position limits set forth in [Rule 14.23] for
Perpetual SFP positions used for qualified hedging strategies,''
requires applications for such exemptions to be filed with the Exchange
in such form as the Exchange may prescribe and authorizes the Exchange
to condition any exemption upon such terms and conditions as the
Exchange deems appropriate. Rule 14.24 governs position accountability
requirements for market participants who hold positions in Perpetual
SFPs in excess of applicable position accountability levels. In order
to be subject to position accountability levels under Rule 14.23(d), as
noted above, the Underlying Security of a Perpetual SFP must have a
six-month total trading volume exceeding 2.5 billion shares and
estimated deliverable supply in excess of 40 million shares, consistent
with CFTC Regulation 41.25(b)(3)(i)(B).\57\ Accordingly, only Perpetual
SFPs on the most liquid Underlying Securities shall be subject to
position accountability levels. Further, a position accountability rule
may not be applied in lieu of a position limit during the last three
trading days of a Perpetual SFP. Rule 14.24(b) permits the Exchange to
establish higher position accountability levels for market makers in
Perpetual SFPs where the market maker has quoting obligations, in
accordance with the Exchange's market maker program applicable to
Perpetual SFPs.
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\57\ 17 CFR 41.25(b)(3)(i)(B).
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Perpetual SFP Corporate Actions, Adjustments and Accelerated Final
Settlement
Kalshi proposes adopting Rulebook Chapter 14, Part VII and related
new definitions in Rule 14.2 to specify the Exchange's response to
events initiated by the issuer of an Underlying Security that alters
the number, form, value, or economic characteristics of outstanding
shares, including but not limited to stock splits, reverse stock
splits, stock dividends, special or extraordinary cash dividends,
rights issues, spin-offs, mergers, acquisitions, tender offers,
exchange offers, delistings, and name, ISIN or CUSIP changes
(``Corporate Actions''). Rule 14.26(c) provides that any cash or stock
dividend, stock distribution, stock split, reverse stock split, rights
offering, distribution, recapitalization, reclassification,
reorganization or similar event, or a merger, consolidation, tender or
exchange offer, dissolution, liquidation or delisting affecting the
issuer of an Underlying Security, the number of Perpetual SFP
contracts, the Daily Settlement Price, the Underlying Security or any
of the foregoing may be adjusted in accordance with Part VII of Chapter
14.
As a general matter, Rule 14.26(b) provides that ``[d]eterminations
as to whether and how to adjust the terms of a Perpetual SFP to reflect
a Corporate Action affecting the Underlying Security shall be made by
the [Exchange's Chief Regulatory Officer (the ``CRO'')], or such other
officer or committee as the [Exchange's] Board of Directors may
designate, based on the CRO's judgment as to what is appropriate for
the protection of investors and the public interest, taking into
account fairness to the buyers and sellers of the affected Perpetual
SFPs, the maintenance of a fair and orderly market, consistency of
interpretation and practice, and the preservation, to the greatest
extent practicable, of the economic equivalence of open positions
immediately before and after the Corporate Action.'' Pursuant to Rule
14.26(d), ``[t]he CRO may, in addition to determining adjustments on a
case-by-case basis, adopt interpretations of general application to
specified types of events.'' Each such determination of the CRO will be
made in the CRO's sole discretion and, in the absence of fraud or
willful misconduct, be conclusive
[[Page 60478]]
and binding on all participants and not subject to review. Rule
14.26(f) provides that the Exchange shall not be liable for any failure
to make, or delay in making, an adjustment to reflect a Corporate
Action that it does not learn of, or does not learn of in a timely
manner.
Subject to the discretion of the CRO to make exceptions in any case
or group of cases as set forth above, Part VII also sets forth the
following general rules regarding how the Exchange shall address
Corporate Actions.
Pursuant to Rule 14.26(g), adjustments under Part VII shall, as a
general rule, become effective on the ex-date, as determined by the
Primary Listing Exchange.
Rule 14.27 sets forth the general rules regarding how the Exchange
will address Ordinary Dividends (defined below), Extraordinary
Dividends (defined below) and certain other distributions affecting
Underlying Securities. Rule 14.27 provides that the economics of
regularly-scheduled cash dividends paid by the issuer of an Underlying
Security in accordance with the issuer's established dividend policy
that do not exceed the ``Extraordinary Dividend Threshold'' established
by the CRO (initially, ten percent (10%) of the cum-price of the
Underlying Security) (such regularly-scheduled dividends, ``Ordinary
Dividends'') shall be transferred through the Funding Rate, and no
adjustment shall be made to the Contract Specifications, Daily
Settlement Price, Contract Unit or number of outstanding Perpetual SFP
contracts to reflect an Ordinary Dividend.\58\ The rule also provides
that cash distributions by the issuer of an Underlying Security that
the issuer designates as ``special'', ``extraordinary'' or ``non-
recurring,'' that fall outside of the issuer's established ordinary
dividend policy or that exceed the Extraordinary Dividend Threshold
(such distributions, ``Extraordinary Dividends'') and all other cash or
property distributions that are not Ordinary Dividends for which the
CRO deems an adjustment to be appropriate ``shall be reflected by a
per-contract cash amount recorded against open positions and settled in
cash at the Daily Settlement Time . . . by a reduction of the Daily
Settlement Price by the value per share of the'' distribution. The CRO
may reflect such distributions by another method upon a determination
that such other method ``best preserves the economic equivalence of
open positions'' and may ``halt trading in the affected Perpetual SFP
in connection with an Extraordinary Dividend.''
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\58\ See note 52, supra.
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Rule 14.28(a) sets forth the general rule that the Exchange will
address forward stock splits, stock distributions and dividends or
bonus issues in respect of an Underlying Security by proportionately
reducing the Daily Settlement Price established immediately before the
event and proportionately increasing the number of Perpetual SFP
contracts comprising each open position. In the case of a reverse stock
split or consolidation of shares, Rule 14.28(a) sets forth the general
rule that the Daily Settlement Price of the relevant Underlying
Security established immediately before the event shall be
proportionately increased and the number of Perpetual SFP contracts
comprising each open position shall be proportionately reduced. In each
case, the Daily Settlement Price shall be multiplied by, and the number
of Perpetual SFP contracts comprising each open position divided by,
the ratio of the number of shares outstanding before the event to the
number outstanding after the event. The Contract Unit shall remain
unchanged and the notional value of each open position shall be
substantially unaffected by the adjustments contemplated in Rule 14.28.
The adjustment shall be implemented following the Daily Settlement Time
on the last-cum trading day.
Rule 14.28(b) provides the general rule that ``[t]he Exchange shall
ordinarily adjust the terms of a Perpetual SFP to reflect a rights
distribution in the manner that best preserves economic equivalence,
except that no adjustment shall ordinarily be made to reflect the
issuance of rights that are not immediately exercisable, that trade
together with the Underlying Security and that may be redeemed by the
issuer (so-called ``poison pill'' rights). If such rights later become
exercisable, begin to trade separately from the Underlying Security, or
are redeemed, the CRO shall determine whether an adjustment is
appropriate.''
Rule 14.28(c) provides that ``[a]djustments of the Daily Settlement
Price shall be rounded to the nearest minimum price increment, and
adjustments of the number of Perpetual SFP contracts comprising a
position shall be rounded to the nearest minimum trading increment
under Rule 14.9(a) and the applicable Contract Specifications in the
manner the CRO determines, consistent with the methodology of [Klear]
and any relevant reporting authority; any resulting difference between
aggregate long and aggregate short open interest shall be resolved by
the Exchange in coordination with [Klear] and shall not be allocated to
[p]articipants. Where rounding would not preserve economic equivalence
to the greatest extent practicable, the CRO may apply an alternative
convention or a compensating cash adjustment.''
Rule 14.29 sets forth general rules regarding how the Exchange will
address mergers, tender offers and reorganizations affecting the
issuers of Underlying Securities. For tender and exchange offers, Rule
14.29(a) provides that ``[n]o adjustment shall ordinarily be made to
reflect a tender offer or exchange offer to holders of the Underlying
Security . . . [but that a] Perpetual SFP shall ordinarily be adjusted
or settled to reflect a merger, consolidation, or similar event that
becomes effective following completion of such an offer.'' Rule
14.29(b) provides that, ``[w]hen the Underlying Security is converted
in a merger or similar event into the right to receive a fixed amount
of cash, the Perpetual SFP shall ordinarily be closed and subject to
final cash settlement at such fixed amount of cash.'' Pursuant to Rule
14.29(c), ``[i]n the case of a merger, consolidation, reincorporation,
or similar event in which shares of the Underlying Security are
converted into or exchanged for shares of another company, the
Perpetual SFP shall ordinarily be closed and subject to final cash
settlement in accordance with Rule 14.30 at the value of the shares of
the resulting or acquiring company receivable per share of the
Underlying Security,'' subject to the CRO's authority to instead direct
that open positions be converted into positions in Perpetual SFPs that
reference the shares of the resulting or acquiring company with
corresponding adjustments to the number of Perpetual SFP contracts
comprising each open position.
Rule 14.29(d) provides that ``[n]o adjustment shall ordinarily be
made to reflect a change in the capital structure of the issuer where
the Underlying Securities held by the public are not converted into
another security, cash, or other property,'' including the issuance of
new debt or equity, refinancing of outstanding debt, a partial stock
repurchase by the issuer or the sale of significant assets of the
issuer. Corporate Events that do not ``alter the economic rights
attached to the shares,'' such as name changes, likewise shall not give
rise to any adjustment.
Rule 14.29(e) provides that, notwithstanding the foregoing, the CRO
may, in the CRO's sole discretion, effect accelerated final cash
settlement of the
[[Page 60479]]
affected Perpetual SFP in accordance with Rule 14.30 in lieu of any
adjustments or conversion otherwise provided under Rules 14.28 or
14.29. The CRO may effect accelerated final settlement pursuant to Rule
14.29(e) upon a determination that ``continued trading following the
Corporate Action would not result in a fair and orderly market, would
give rise to material risk or pricing discontinuities, would result in
an illiquid or unrepresentative market in the affected Perpetual SFP,
or would otherwise be impracticable, inequitable or undesirable.''
Rule 14.30 sets out the Exchange's rules and procedures related to
accelerated final settlement of Perpetual SFPs in connection with
certain Corporate Actions affecting Underlying Securities or their
issuers. Rule 14.30(a) provides that ``[t]he CRO may declare a
Perpetual SFP subject to accelerated final cash settlement upon: a
determination under Rule 14.29(e) or any other event that renders
continued trading in the Perpetual SFP impracticable or inequitable.''
Pursuant to Rule 14.30(b), open positions in a Perpetual SFP
subject to accelerated final settlement shall be closed by cash
settlement at a final settlement price determined in accordance with
Rule 14.7(c).
Rule 14.30(c) specifies that accelerated final settlement pursuant
to Rule 14.30 ``shall occur as promptly as practicable, and ordinarily
within three (3) business days, following the CRO's declaration.'' Rule
14.30(c) further provides that ``[t]he Exchange shall provide not less
than two (2) business days' notice prior to accelerated final
settlement, except where emergency circumstances require more immediate
action, and shall not close the affected Perpetual SFP earlier than
necessary to give effect to the Corporate Action, in order to minimize
premature closures in the event the Corporate Action does not become
effective.''
In addition to the foregoing, Part VII of Chapter 14 includes rules
relating to the reliability of settlement prices and references prices
used by the Exchange to determine Daily Settlement Prices and any final
settlement prices in respect of Perpetual SFPs, erroneous or
unavailable prices and operational provisions relating to adjustments
and accelerated final settlement.
Membership Standards
SFP Broker Member Eligibility Criteria. In order to be eligible for
membership to transact in or intermediate transactions in Perpetual
SFPs, a person must satisfy the eligibility criteria set forth in Rule
14.37. Specifically, in addition to complying with the requirements and
satisfying the conditions for membership set forth in Chapter 3 of the
Exchange's rules, a member of the Exchange must satisfy the following
criteria in order to be eligible for membership to trade Perpetual SFPs
as an SFP Broker Member: (i) the member must not be subject to
statutory disqualification under Section 3(a)(39) \59\ of the Act or
Section 8a(2) of the CEA; \60\ (ii) the person must not be subject to
any order denying, suspending or revoking registration or membership
with any securities or futures regulatory authority and (iii) in the
case of a FCM or introducing broker member of the Exchange seeking to
intermediate Perpetual SFP transactions on behalf of its customers, (a)
be registered in good standing with the CFTC and be registered with the
Commission as a broker-dealer (or operate pursuant to notice
registration under Section 15(b)(11) of the Act \61\ and (b) be a
member in good standing of the National Futures Association (``NFA'').
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\59\ 15 U.S.C. 78c(a)(39).
\60\ 7 U.S.C. 12a(2).
\61\ 15 U.S.C. 78o(b)(11).
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Intermediation of Perpetual SFP Transactions by Kalshi Prime.
Subject to the requirements and conditions contained in Part X of
Chapter 14, an affiliate of the Exchange, Kalshi Prime LLC (``Kalshi
Prime'') will intermediate Perpetual SFP transactions on the Exchange
as an FCM SFP Broker Member. Kalshi Prime will be registered in good
standing with the CFTC as a FCM and notice-registered with the
Commission as a broker-dealer under Section 15(b)(11) of the Act and a
member of NFA. The Exchange proposes to adopt Rule 14.38 to govern the
Exchange's receipt of inbound orders in Perpetual SFPs from and
provision of system access and data distribution services for the
purpose of intermediating Perpetual SFP transactions to Kalshi Prime.
Pursuant to Rule 14.38(e), Kalshi Prime's privileges as an FCM SFP
Broker Member on the Exchange would be limited to those available to
other FCM members of the Exchange under Exchange Rule 3.2(g): (i)
intermediating customer transactions on Kalshi, (ii) distributing
Kalshi data to its customers pursuant to any data distribution
agreement with Kalshi and (iii) accessing Kalshi's trading systems
electronically. Rule 14.38(e) further specifies that Kalshi Prime will
have such privileges only with respect to Perpetual SFP transactions on
the Exchange and will be subject to all of the Exchange's rules to the
same extent and on equal terms as such rules apply to other FCM SFP
Broker Members.\62\
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\62\ Kalshi Prime would also be expressly prohibited, under Rule
14.38(f), from providing or performing the functions that the
Commission and courts have previously found to result in exchange
affiliates being ``facilities'' of such exchange--namely, Rule
14.38(f) would prohibit Kalshi Prime from providing order routing
services, co-location services, market data services or any other
services or functions determined by the Exchange, in its sole
discretion, to constitute a system of communication from or to the
Exchange for the purpose of effecting transactions on the Exchange,
except to the extent such activities are encompassed by the
permitted FCM SFP Broker Member functions under Rule 14.38(e) and
provided or performed subject to the same terms and conditions as
any other SFP Broker Member. See Order Approving Proposed Rule
Change by the Pacific Exchange, Inc., as Amended, and Notice of
Filing and Order Granting Accelerated Approval to Amendment Nos. 4
and 5 Concerning the Establishment of the Archipelago Exchange as
the Equities Trading Facility of PCX Equities, Inc., Release No. 34-
44983 (Oct. 25, 2001), 66 FR 55225, 55234 (Nov. 1, 2001) (the ``PCX
Order'') (finding an exchange-affiliated broker-dealer's order
routing service for the exchange to constitute a facility of the
exchange because it was ``uniquely linked to and endorsed by [the
exchange] to provide its outbound routing functionality,'' but that
the affiliated broker-dealer's introducing broker and electronic
communications network functions did not constitute facilities of
the exchange); Self-Regulatory Organizations; Cboe Exchange, Inc.;
Order Disapproving a Proposed Rule Change To Adopt a New Rule
Regarding Order and Execution Management Systems, Release No. 34-
101491 (Oct. 31, 2024), 89 FR 88080 (Nov. 6, 2024) (finding that an
exchange-affiliated order and execution management system
constituted a facility of the exchange because its functions were
``more akin to an optional order routing function . . . than to an
introducing broker-function.''); Intercontinental Exch., Inc. v.
SEC, 23 F.4th 1013, 1022 (D.C. Cir. 2022) (holding that wireless co-
location services offered by an exchange affiliate constituted
facilities of the exchange because they were ```system[s] of
communication . . . . maintained by or with the consent of the
exchange' that [are] offered `for the purpose of effecting or
reporting transactions on the exchange.''); Market Data
Infrastructure, 86 FR 18596, 18666 (Apr. 9, 2021) (``The Commission
would expect that the activities of a competing consolidator
affiliated with a national securities exchange would be likely to
fall within the statutory definitions'').
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The Exchange recognizes ``that the potential for unfair
discrimination may be heightened if a national securities exchange or
its affiliate owns or operates a broker dealer . . . because the
financial interests of the national securities exchange may conflict
with its responsibilities as [a self-regulatory organization] regarding
the affiliated broker-dealer.'' \63\ For the reasons described below,
the Exchange does not believe that Kalshi Prime's role as an FCM SFP
Broker Member permitted to intermediate Perpetual SFP transactions will
impair the ability of the Exchange to carry out the purposes of the Act
and to comply and enforce compliance by its members and persons
associated with its members with the Act, Commission rules thereunder
and the Exchange's
[[Page 60480]]
rules consistent with Section 6(b)(1) of the Act,\64\ give rise to
unfair discrimination or conflicts of interest between customers,
issuers and broker or dealers on the Exchange inconsistent with Section
6(b)(5) of the Act,\65\ or create a burden on competition inconsistent
with Section 6(b)(8) of the Act.\66\
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\63\ PCX Order at 55233.
\64\ 15 U.S.C. 78f(b)(1).
\65\ 15 U.S.C. 78f(b)(5).
\66\ 15 U.S.C. 78f(b)(8).
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The Commission has itself acknowledged that a national securities
exchange may have subsidiaries or affiliates that are broker-
dealers,\67\ provided that such affiliated broker or dealer must be a
member of another self-regulatory organization that is primarily
responsible for examining the broker-dealer.\68\ In addition, the
Commission has approved exchange rule-changes permitting certain
activities of affiliated broker-dealers subject to appropriate
safeguards to ensure such activities are consistent with Sections
6(b)(5) and 6(b)(8) of the Act.
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\67\ Regulation of Exchanges and Alternative Trading Systems, 63
FR 70844, 70891 (Dec. 22, 1998) (``National securities exchanges
could, under the rules the Commission is adopting today, form
subsidiaries or affiliates that operate alternative trading systems
registered as broker-dealers. If a national securities exchange
chose to form such a subsidiary or affiliate, the exchange itself
could remain registered as a national securities exchange, while the
subsidiary or affiliate operated as a broker-dealer'').
\68\ Id.; see also PCX Order at note 111.
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For example, in its order regarding rule changes of the Pacific
Exchange, Inc. (``PCX'') to create a new electronic communications and
trading facility, the Archipelago Exchange (``ArcaEx''), after
consideration of the ``potentially unfair advantages'' associated with
exchange-broker affiliation, the Commission approved PCX rules
permitting ArcaEx's broker-dealer affiliate, Wave Securities LLC
(``Wave''), to intermediate transactions as an introducing broker on
PCX, under circumstances similar to those at issue here.\69\ In so
doing, the Commission emphasized that: ``[i]n its introducing broker
role, Wave would be acting as a user/member of the ArcaEx on precisely
the same terms as any other member. Wave would not be the sole source
of sponsored access to the ArcaEx; all other [Equity Trading Permit]
Holders could readily provide similar services on behalf of their
customers.'' \70\ The Commission further emphasized that PCX had
implemented additional protections to ``limit the risk that Wave would
receive an unfair advantage over other [Equity Trading Permit] Holders
in operating as an introducing broker,'' including through rules
provisions requiring strong information barriers between PCX and its
facilities and the introducing-broker functions of Wave.\71\
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\69\ See PCX Order at 55233-55234. In the PCX Order, the
Commission also concluded that the introducing broker and electronic
communications network functions of Wave did not constitute
``facilities'' of PCX as defined in Section 3(a)(2) of the Act. PCX
Order at 55234. Because Kalshi Prime will not engage in any
activities that the Commission has previously determined constitute
``facilities'' of an exchange and given the safeguards discussed
herein to limit operational integration between Kalshi Prime and the
Exchange, the Exchange shall not treat Kalshi Prime's operations as
an FCM SFP Broker Member intermediating Perpetual SFP transactions
as a facility of the Exchange. See note 62, supra.
\70\ Id. at 55234.
\71\ Id.
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Also, in the securities options context, the Commission has
previously approved rule changes of Cboe C2 Exchange, Inc. (``Cboe
C2''), a national securities exchange, to permit its affiliated broker-
dealer, Cboe Trading, Inc. (``Cboe Trading''), to provide inbound
options routing services where Cboe C2 implemented controls to ensure
that an unaffiliated self-regulatory organization was primarily
responsible for performing regulatory responsibilities for Cboe Trading
and that Cboe Trading ``does not develop or implement changes to its
systems on the basis of nonpublic information obtained as a result of
its affiliation with the [e]xchange until such information is available
generally to similarly situated Trading Permit Holders of the
[e]xchange.'' \72\
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\72\ Self-Regulatory Organizations; Cboe C2 Exchange, Inc.;
Notice of Filing and Order Granting Accelerated Approval of a
Proposed Rule Change Concerning an Affiliation between the Exchange
and Cboe Trading and to Adopt Rules to Permit Inbound Routing by
Cboe Trading, Release No. 34-82952 (March 27, 2018); 83 FR 14096
(Apr. 2, 2018).
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The Exchange does not believe that Kalshi Prime's role as an FCM
SFP Broker Member on the Exchange will be inconsistent with Sections
6(b)(1), 6(b)(5) or 6(b)(8) of the Act because the Exchange has
implemented robust protections and safeguards to ensure that Kalshi
Prime will not be operationally integrated with or have privileged
access to the systems or information of the Exchange, similar in nature
to those implemented by PCX in respect of Wave's introducing-broker
function and Cboe C2 in respect of Cboe Trading's inbound options
routing services.
Pursuant to Rule 14.38(g), the Exchange will be prohibited from
permitting the entry of orders through Kalshi Prime that result in
Kalshi Prime's customers receiving privileged treatment on the Exchange
in any respect or being placed at a competitive advantage vis a vis
participants of the Exchange who enter orders otherwise than through
Kalshi Prime. Rule 14.38(g) also prohibits the Exchange from
establishing or administering its platform or any rule, policy, fee,
order routing, communication or other system, margin requirement or
other functionality in a manner designed or reasonably likely to
privilege Kalshi Prime relative to any other FCM SFP Broker Member.
Consistent with the Exchange's regulatory obligation to ``provide its
members, persons with trading privileges and independent software
vendors with impartial access to its markets and services,'' \73\ these
rules are designed to ensure that Kalshi Prime does not receive any
unfair advantage over other SFP Broker Members intermediating Perpetual
SFP transactions, such that other SFP Broker Members can readily
provide similar services on behalf of their customers.
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\73\ 17 CFR 38.151(b).
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Further, Rule 14.38(b) would prohibit the Exchange from permitting
Kalshi Prime to intermediate Perpetual SFP transactions on the Exchange
unless a third-party self-regulatory organization unaffiliated with the
Exchange (a ``Third-Party DSRO'') conducts surveillance and examination
of Kalshi Prime as would otherwise be required of the Exchange under
CFTC Regulation 1.52(c). Kalshi Prime's Third-Party DSRO will be NFA.
And Rule 14.38(i) requires, consistent with Exchange Rules 2.9 and 12.3
and CFTC Regulation 1.69,\74\ that ``only Public Director members of
the [Exchange's Board of Directors], Regulatory Oversight Committee,
Disciplinary Panel, Outcome Review Committee or Appeals Committee may
take part in matters for which [Kalshi Prime] is a named party in
interest'' and that the Exchange's ``Chief Compliance Officer shall
report any such matter to the Regulatory Oversight Committee.''
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\74\ 17 CFR 1.69.
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Accordingly, all supervision, oversight and enforcement of Kalshi
Prime's compliance with applicable law and Exchange rules would occur
on an independent basis: (i) NFA, as Kalshi Prime's Third-Party DSRO,
would perform surveillance and examination of Kalshi Prime's compliance
with CFTC regulatory requirements relating to minimum net capital and
related financial matters, customer funds segregation, risk management
and financial reporting (which would otherwise be performed by the
Exchange itself under Regulation 1.52(c)); (ii) NFA would also surveil
and examine Kalshi Prime, in its capacity as a member of NFA, for
compliance with CFTC
[[Page 60481]]
regulations and NFA rules relating to, among other things, supervision,
anti-money laundering, recordkeeping, business continuity and disaster
recovery, information security, fraud and related matters,
frontrunning, suitability, risk disclosures, sales practices and
marketing; \75\ and (iii) only independent decisionmakers (i.e., Public
Directors that, pursuant to Rule 2.2(g), must be found by Kalshi's
Board of Directors to have no ``Material Relationship,'' as defined in
Rule 2.2(g), with the Exchange) of applicable Exchange committees may
participate in matters involving Kalshi Prime's compliance with
Exchange rules and all such matters must be reported to the Exchange's
Regulatory Oversight Committee.
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\75\ See NFA, Compliance Rules, <a href="https://www.nfa.futures.org/rulebooksql/rules.aspx?Section=4">https://www.nfa.futures.org/rulebooksql/rules.aspx?Section=4</a>. NFA's examination program includes
ongoing financial surveillance, identification of high-risk firms,
and on-site examinations at intervals of no less than eighteen
months. See 17 CFR 1.52(c)(1)(iv), (d)(2)(ii)(C)(4).
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The Exchange is also instituting additional safeguards in Rule
14.38 similar to those approved for PCX to ensure that Kalshi Prime
does not receive any informational or other competitive advantages from
its affiliation with the Exchange. Specifically, Rule 14.38(h) provides
that ``[t]he officers and directors of the Exchange shall establish and
maintain procedures and internal controls reasonably designed to
adequately restrict the flow of confidential and proprietary
information between the Exchange and the functions of any [a]ffiliated
SFP Broker Member.'' Pursuant to Rule 14.38(h), the Exchange may only
furnish to Kalshi Prime the same information on the same terms that the
Exchange makes available in the normal course of business to any other
SFP Broker Member and, as necessary to administer its rules or comply
with applicable law, communicate non-public information to Kalshi Prime
that relates solely to Kalshi Prime or one or more of its customers.
Finally, Rule 14.38(d) provides the Exchange with broad authority
to deny or condition Kalshi Prime's application to intermediate
Perpetual SFP transactions as an FCM SFP Broker Member ``so long as
such action is impartial, transparent, fair and non-discriminatory.''
Accordingly, the Exchange could, at any time, upon a determination that
Kalshi Prime has obtained privileged or exclusive access to the
Exchange with respect to Perpetual SFPs, the information barriers
contemplated in Rule 14.38(h) prove ineffective, or otherwise, suspend,
condition or terminate Kalshi Prime's ability to intermediate Perpetual
SFP transactions as an FCM SFP Broker Member.
The Exchange therefore believes that its addition of Rule 14.38 and
admission of Kalshi Prime as an FCM SFP Broker Member on the Exchange
will not grant Kalshi Prime any unfair advantage over other FCM SFP
Broker Members intermediating Perpetual SFP transactions for their
customers and will ensure appropriate operational segregation of Kalshi
Prime's FCM SFP Broker Member functions from the operation of the
Exchange and its facilities.
Trading Safeguards, Sales Practices and Market Surveillance
Kalshi proposes adopting Rulebook Chapter 14, Parts IV (Trading
Safeguards), VIII (Sales Practices) and IX (Market Surveillance) and
related new definitions in Rule 14.2.
Part IV of Chapter 14 governs the trading safeguards applicable to
Perpetual SFPs, the parameters, procedures and methodologies of which
shall be established and published by the Exchange by Exchange Notice
or technical specification and may be modified by the Exchange at any
time. The Exchange shall communicate material changes to trading
safeguards to its members, except that the Exchange shall not be
obligated to provide prior notice of any such changes upon a
declaration that ``Stressed Market Conditions'' exist for one or more
Perpetual SFPs. Pursuant to Rule 14.14(d), the Exchange shall provide
self-match prevention functionality for Perpetual SFPs. Rule 14.14(e)
sets forth the categories of persons prohibited from trading in
Perpetual SFPs, which include: (i) any person who is an officer,
director, or 10% or greater shareholder subject to Section 16 of the
Act of an issuer of any Underlying Security of a Perpetual SFP, (ii)
any person who is in possession of material non-public information
regarding an issuer of an Underlying Security of a Perpetual SFP, and
(iii) any family member or household member of a person in the
aforementioned categories. Rule 14.15 provides that, notwithstanding
any other provision of Chapter 14, ``the Exchange shall have the
authority to halt, suspend, or restrict trading in any Perpetual SFP,
or to modify the parameters of any trading safeguard, at any time and
for any duration, if the Exchange determines, in its sole discretion,
that such action is necessary or appropriate to: (i) maintain fair and
orderly markets; (ii) protect market participants; (iii) address an
emergency, (iv) respond to extraordinary market conditions; or (v)
comply with applicable law or regulation.'' Rule 14.15(c) provides that
the Exchange shall promptly report to the CFTC any trading halt,
trading suspension or declaration of Stressed Market Conditions in
accordance with Part 38 of CFTC Regulations.\76\ The Exchange is
adopting Part IV of Chapter 14 in order to more effectively protect
against manipulative practices and insider trading, and to promote fair
and orderly trading in Perpetual SFPs on the Exchange.
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\76\ 17 CFR Part 38.
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Part VIII of Chapter 14 requires that each SFP Broker Member
effecting transactions in Perpetual SFPs for its customers must comply
with the sales practice requirements of the NFA and, to the extent
applicable, the rules of any national securities association of which
such SFP Broker Member is a member, including suitability obligations
and customer account approval procedures. Part VIII further provides
that, before opening an account for a customer to trade Perpetual SFPs,
an SFP Broker Member must deliver to the customer the Risk Disclosure
Statement for Security Futures Contracts prescribed jointly by NFA and
the Financial Industry Regulatory Authority (``FINRA''),\77\ and must
obtain written acknowledgment of receipt. Part IX of Chapter 14 governs
the Exchange's market surveillance program for Perpetual SFPs,
including its rules and procedures for real-time market monitoring,
coordinated market surveillance and its audit trail.
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\77\ See FINRA and NFA, Security Futures Risk Disclosure
Statement (updated 2020), available at <a href="https://www.finra.org/sites/default/files/2020-08/Security_Futures_Risk_Disclosure_Statement_2020.pdf">https://www.finra.org/sites/default/files/2020-08/Security_Futures_Risk_Disclosure_Statement_2020.pdf</a>.
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Rule 14.34 provides that ``[t]he Exchange shall conduct real-time
market surveillance of all trading activity in Perpetual SFPs to detect
potential violations of Exchange rules, the CEA, the [Act], and other
applicable laws and regulations.'' The rule further provides that
``[m]arket surveillance shall include monitoring for: manipulation of
Perpetual SFP prices or the prices of Underlying Securities; insider
trading; front-running; violations of position limits and reporting
requirements; wash trades; self-referencing or self-matching trades;
and other fraudulent or manipulative practices.'' Pursuant to Rule
14.35, ``[t]he Exchange shall maintain membership in the Intermarket
Surveillance Group (``ISG'') and shall comply with all ISG requirements
for
[[Page 60482]]
the sharing of surveillance information.'' Rule 14.35 further provides
that ``[t]he Exchange shall share information with other markets on
which the Underlying Securities and related securities trade, including
transaction information, customer identity information, position
information, and any other information necessary for coordinated
surveillance'' and that ``[t]he Exchange shall coordinate with other
markets in investigating potential violations involving Perpetual SFPs,
and the Underlying Securities.''
Rule 14.36 provides that ``[t]he Exchange shall maintain an audit
trail sufficient to facilitate coordinated surveillance among the
Exchange, any market on which an Underlying Security is traded, and any
market on which any related security is traded.'' Pursuant to Rule
14.36, the Exchange's audit trail shall capture, at a minimum: ``the
time of order receipt and execution (to the millisecond); the identity
of the [p]articipant entering the order; the identity of the customers,
if applicable; the terms of the order; any modifications or
cancellations; and the execution price and counterparty.'' The Exchange
maintains its audit trail in accordance with DCM Core Principle 10 in
Section 5(d)(10) \78\ and CFTC Regulations 38.550, 38.551 and
38.552.\79\ Pursuant to Rule 14.36(c), and consistent with CFTC
Regulation 1.31(b),\80\ the Exchange shall maintain records of all
transactions in Perpetual SFPs for a period of not less than five
years.
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\78\ 7 U.S.C. 7(d)(10).
\79\ 17 CFR 38.550, 38.551, 38.552.
\80\ 17 CFR 1.31(b).
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2. Statutory Basis
The Exchange believes that proposed Chapter 14 is consistent with
Section 6 of the Act and, in particular, furthers the objectives of
Sections 6(b)(1) \81\ and 6(b)(5) \82\ of the Act insofar as it is
designed to ensure the compliance of the Exchange and its members with
applicable provisions of the Act and Commission and Exchange rules, to
prevent fraudulent and manipulative acts and to promote just and
equitable principles of trade. The Exchange further believes that the
proposed rule change is consistent with Section 6(h)(3) \83\ of the Act
which contains detailed requirements for listing standards and
conditions for trading security futures products.
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\81\ 15 U.S.C. 78f(b)(1).
\82\ 15 U.S.C. 78f(b)(5).
\83\ 15 U.S.C. 78f(h)(3).
---------------------------------------------------------------------------
The Exchange believes that its adoption of Chapter 14 is 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, because:
<bullet> The Exchange has established and shall monitor and enforce
compliance with the rules of the Perpetual SFPs, including the initial
and maintenance listing standards for Perpetual SFPs;
<bullet> The listing standards for Perpetual SFPs described above
require a liquid underlying market for any Perpetual SFP the Exchange
will list for trading, and therefore the proposed Perpetual SFPs will
not be readily susceptible to manipulation. In particular, the
Exchange's proposed initial listing standards for Perpetual SFPs
require that the Underlying Security for each Perpetual SFP must exceed
20 million shares in estimated deliverable supply (Rule 14.3(f)), have
a minimum market capitalization of at least $100 billion (Rule 14.3(b))
and have had a minimum ADTV of at least $450 million over the prior six
months (with a higher ADTV requirement for securities with less than
six months trading history) (Rule 14.3(c)). Pursuant to Rule 14.4, the
Exchange shall not list any Perpetual SFPs, notwithstanding
satisfaction of the initial listing criteria in Rule 14.3, on
securities within one of the categories enumerated in Rule 14.4,
including securities subject to a trading halt, suspension or
revocation of listing by its principal listing exchange or by the
Commission pursuant to Section 12(k) of the Act.\84\ Further, pursuant
to Rule 14.6, the Exchange shall delist Perpetual SFPs that fail to
satisfy the maintenance listing standard requirements established under
the rule following the ninety (90) day cure period specified therein or
that are subject to any Immediate Delisting Event. Under the
maintenance standards in Rule 14.6(a), the minimum ADTV is at least
$200 million for the prior calendar quarter (with a higher ADTV
requirement for securities with less than one quarter trading history,
the estimated deliverable supply maintenance standard is the same as in
Rule 14.3(f) and the maintenance market capitalization standard is $50
billion. The proposed listing standards assure a robust market for the
Underlying Security to protect against manipulation. In this regard,
Kalshi has carefully structured the initial listing standards to assure
that the contracts it will list at a minimum meet the more stringent
requirements for Kalshi to have the flexibility permitted under CFTC
Regulation 41.25(b)(3)(i)(A) \85\ to set position limits as a
percentage of the Underlying Security's estimated deliverable supply.
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\84\ 15 U.S.C. 78l(k).
\85\ 17 CFR 41.25(b)(3)(i)(A).
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<bullet> Trading in the Perpetual SFPs will be subject to the
Exchange rules, which include prohibitions on manipulative or
disruptive trading practices prohibited by the CEA or by the CFTC,
fraudulent or abusive trading, trading with access to material non-
public information that is the subject of an underlying of a contract,
and several other harmful or potentially manipulative trading
practices. Further, pursuant to Rule 14.8, the NPC shall specifically
consider whether a proposed underlying security for a proposed
Perpetual SFP has been the subject of, or is reasonably susceptible to,
manipulation and, where the NPC identifies elevated manipulation risk,
it may impose enhanced position limits, margin requirements or other
risk controls as a condition of listing, or may decline to list, the
Perpetual SFP. Further, as with any new product listed for trading on
the Exchange, trading activity in the Perpetual SFPs will be subject to
monitoring and surveillance by the Exchange (see Rule 14.34).
<bullet> Pursuant to Part VI of Chapter 14, the Exchange will
establish speculative position limits and/or accountability levels for
any Perpetual SFP it lists as required by and consistent with CFTC
Regulation 41.25(b)(3) and Appendix A to Subpart C of Part 41 of CFTC
Regulations (Guidance on and Acceptable Practices for Position Limits
and Position Accountability for Security Futures Products).
<bullet> Transactions in Perpetual SFPs will be cleared by Klear in
Klear's capacity as a CFTC-registered DCO and are subject to all CFTC
regulations related to the clearing of futures.
<bullet> The Perpetual SFPs will be listed for trading on the
Exchange's electronic trade execution system (the ``Platform''), which
provides for competitive and open execution of transactions.\86\
Eligible participants may also execute and submit block trades in
Perpetual SFPs, subject to and in accordance with Rule 5.3(e).
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\86\ Exchange participants may also use the Exchange's Request
for Quote (``RFQ'') pre-execution communications system to solicit
interest in a market, subject to placement of resulting orders in
the order book on a price-time priority basis as though they were
placed manually (at a lower time priority than existing resting
orders) and in accordance with Rule 5.3(b).
---------------------------------------------------------------------------
[[Page 60483]]
<bullet> The Platform and related Kalshi systems will capture
requisite trade information for Perpetual SFPs, which will ensure that
the audit trail and the audit trail data for trading of Perpetual SFPs
will be sufficient for the Exchange to monitor for potential market
abuse.
<bullet> The Exchange's existing rules contain prohibitions
precluding intermediaries from disadvantaging their customers,
including but not limited to prohibitions on front running and entering
orders for their own proprietary accounts when the intermediary has in
hand an order to buy or sell the same contract for a customer at the
same price or at the market price. These rules apply to transactions in
Perpetual SFPs on the Exchange.
<bullet> Chapter 9 of the Exchange rules 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 Perpetual SFPs will be subject to Chapter 9, and the Exchange's
Disciplinary Panel or any Oversight Panel established by Kalshi with
requisite authority may exercise its enforcement power in the event
rule violations in Perpetual SFPs are identified.
<bullet> Market participants may use the arbitration provisions set
forth in Chapter 10 of the Exchange rules to settle disputes with
respect to trading of Perpetual SFPs.
<bullet> The Exchange will publish information regarding trading
volume, open interest and price information daily on its website for
Perpetual SFPs.
<bullet> The Exchange will amend the Exchange rules accordingly on
the effective date, which will be publicly available on the Kalshi
website, to reflect the addition of Chapter 14 regarding Perpetual
SFPs.
<bullet> The requirements and conditions applicable to Kalshi
Prime's intermediation of Perpetual SFP transactions in Rule 14.38 are
designed to eliminate any unfair discrimination between customers,
issuers, brokers or dealers arising from Kalshi Prime's affiliation
with the Exchange and ensure that the Exchange retains the ability to
carry out the purposes of the Act and to comply and impartially enforce
compliance by its members and persons associated with its members with
the Act, Commission rules and the rules of the Exchange.
Below is a summary of each requirement or condition under Section
6(h)(3) of the Act, followed by a brief explanation of how Kalshi will
comply with it, whether by particular provisions in Chapter 14 or
otherwise.
Clause (A) of Section 6(h)(3) of the Act \87\ requires that any
security underlying a security futures product be registered pursuant
to Section 12 of the Act.\88\ This requirement is addressed by Exchange
Rules 14.3(a), 14.4(b) and 14.6(c).
---------------------------------------------------------------------------
\87\ 15 U.S.C. 78f(h)(3)(A).
\88\ 15 U.S.C. 78l.
---------------------------------------------------------------------------
Clause (B) of Section 6(h)(3) of the Act \89\ is applicable only to
physically delivered security futures products and is therefore not
germane to the proposed products.
---------------------------------------------------------------------------
\89\ 15 U.S.C. 78f(h)(3)(B).
---------------------------------------------------------------------------
Clause (C) of Section 6(h)(3) of the Act \90\ 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.\91\ For the reasons discussed above, Kalshi believes that
the listing standards proposed by Kalshi for Perpetual SFPs are no less
restrictive than comparable listing standards for exchange-traded
options. The Exchange expects that all Underlying Securities to be
eligible to underlie exchange-traded options.
---------------------------------------------------------------------------
\90\ 15 U.S.C. 78f(h)(3)(copyright).
\91\ 15 U.S.C. 78o-3(a).
---------------------------------------------------------------------------
Clause (D) of Section 6(h)(3) of the Act \92\ requires that each
security futures product be based on common stock or such other equity
securities as the Commission and CFTC jointly determine are
appropriate. This requirement is addressed by Rule 14.3(h).
---------------------------------------------------------------------------
\92\ 15 U.S.C. 78f(h)(3)(D).
---------------------------------------------------------------------------
Clause (E) of Section 6(h)(3) of the Act \93\ imposes requirements
with respect to linkages and coordinated clearing across clearing
agencies that clear security futures products. This provision is
inapplicable. Pursuant to Section 6(h)(7) of the Act,\94\ this
requirement is deferred until the ``compliance date'' (as defined
therein) and is currently inapplicable to Klear's clearing of the
Perpetual SFPs. Further, no other clearing house currently clears the
Perpetual SFPs that Kalshi proposes to list.
---------------------------------------------------------------------------
\93\ 15 U.S.C. 78f(h)(3)(E).
\94\ 15 U.S.C. 78f(h)(7).
---------------------------------------------------------------------------
Clause (F) of Section 6(h)(3) of the Act \95\ 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 effect transactions in a security futures product. This
requirement is addressed by Part VIII of Chapter 14 (Sales Practices),
which requires an SFP Broker Member effecting Perpetual SFP
transactions of its customers to comply with the sales practices
requirements, including suitability obligations and customer account
approval procedures, of the NFA and, to the extent applicable, the
rules of any national securities association of which such SFP Broker
Member is a member. Pursuant to Section 15A(k) of the Act,\96\ NFA is a
national securities association for the limited purpose of regulating
the activities of NFA members who are registered as brokers or dealers
in security futures products under Section 15(b)(11) of the Act.\97\
---------------------------------------------------------------------------
\95\ 15 U.S.C. 78f(h)(3)(F).
\96\ 15 U.S.C. 78o-3(k).
\97\ 15 U.S.C. 78o(b)(11).
---------------------------------------------------------------------------
Clause (G) of Section 6(h)(3) of the Act \98\ requires that each
SFP be subject to the prohibition against dual trading in Section 4j of
CEA.\99\ The Exchange does not have a rule prohibiting dual trading as
this provision is inapplicable to our circumstances. ``Dual trading''
is defined in Section 4j of the CEA as ``the execution of customer
orders by a floor broker during the same trading session in which the
floor broker executes any trade in the same contract market or
registered derivatives transaction execution facility'' for the account
of such floor broker, an account for which such floor broker has
trading discretion or an account controlled by a person with whom such
floor broker has a relationship through membership in a broker
association.\100\
---------------------------------------------------------------------------
\98\ 15 U.S.C. 78f(h)(3)(G).
\99\ 7 U.S.C. 6j.
\100\ 7 U.S.C. 6j(b).
---------------------------------------------------------------------------
Trading of Perpetual SFPs will occur on the Platform, an electronic
trading system, and not on a trading floor. Accordingly, Kalshi does
not have floor brokers. Further, CFTC Regulation 41.27, adopted
pursuant to Section 4j(a) of the CEA,\101\ only requires a DCM
operating an electronic trading system to include in its rules a dual
trading prohibition for security futures products only if their
electronic trading system ``provides market participants with a time or
place advantage or the ability to override a predetermined algorithm.''
\102\ These features are not present on the Platform. Accordingly, the
Exchange is not required to and does not intend to include a specific
dual trading provision in its Rules. However, the Exchange's current
rules include, in Rule 5.17, a similar prohibition on any FCM or
introducing broker member from entering into an order to buy or sell a
contract for their own account or any account in which they have a
[[Page 60484]]
proprietary interest when the intermediary has in hand an order to buy
or sell the same contract for a customer at the same price or at the
market price.
---------------------------------------------------------------------------
\101\ 7 U.S.C. 6j(a).
\102\ 17 CFR 41.27(b)(2).
---------------------------------------------------------------------------
Clause (H) of Section 6(h)(3) of the Act \103\ provides that
trading in a security futures product must not be readily susceptible
to manipulation of the price of such security futures product, 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.
---------------------------------------------------------------------------
\103\ 15 U.S.C. 78f(h)(3)(H).
---------------------------------------------------------------------------
As discussed above, the Exchange believes that its listing
standards are designed to ensure that Perpetual SFPs and their
Underlying Securities will not be readily susceptible to price
manipulation. In particular, Part II of Chapter 14 includes several
initial and maintenance listing criteria that are significantly more
stringent than the listing standards in SLB 15. Specifically, the
Exchange's initial listing standards require that the Underlying
Security for a Perpetual SFP have an estimated deliverable supply in
excess of 20 million shares (Rule 14.3(f)), a minimum market
capitalization of $100 billion (Rule 14.3(b)) and an ADTV of at least
$450 million over the prior six months or higher for securities with
less than six months trading history (Rule 14.3(c)).
Pursuant to Rule 14.6, the Exchange will delist a Perpetual SFP on
an Underlying Security that fails to meet its maintenance standards
following the expiration of a ninety (90) day cure period or that is
subject to an Immediate Delisting Event. Several of the Rule 14.6
maintenance standards proposed by the Exchange are more stringent than
the corresponding standards in SLB 15, requiring the Underlying
Security to maintain an estimated deliverable supply in excess of 20
million shares, a market capitalization of at least $50 billion and a
minimum ADTV of at least $200 million for the prior calendar quarter or
higher for securities that have been listed for trading for less than a
quarter. In addition, Rule 14.4 categorically excludes, among other
securities, any security that is subject to a trading halt, suspension
or revocation of listing by its principal listing exchange, ensuring
that securities with cash markets experiencing significant disruption,
including due to potential manipulation, may not become Underlying
Securities of Perpetual SFPs. And, in addition to these minimum
criteria, the NPC shall, pursuant to Rule 14.8 specifically consider
the susceptibility to manipulation of a security when determining
whether to permit the listing of a Perpetual SFP on such security, and
retains discretion to decline to list a Perpetual SFP on any security
regardless of whether the security satisfies the aforementioned
criteria.
Further, the Funding Rate calculation methodology for Perpetual
SFPs is carefully designed to ensure that periodic funding obligations
of holders of Perpetual SFPs are resilient to disruptive or anomalous
trading behavior affecting both Perpetual SFPs and their Underlying
Securities. First, each of the inputs to the Funding Rate calculation
is independently resistant to manipulation: the Reference Price
reflects real-time consolidated equity cash market data, thereby
incorporating the depth, liquidity and competitive price discovery of
U.S. cash equity markets, while the Mark Price (which equals the
Settlement Price as of the Periodic Transfer Time) is calculated
through an objective, tiered methodology designed to prevent isolated
or anomalous activity from materially affecting the calculation.
Further, the Funding Rate calculation is the product of hundreds (390
during a regular 9:30 a.m.--4:00 p.m. trading day) of sequential
Premium calculations, each equally-weighted and incorporating the
Reference Price and Mark Price observed during the applicable
respective Computation Interval. Averaging observations across the full
trading day substantially dilutes the effect of any isolated distortion
and would require a person seeking to manipulate the Funding Rate to
sustain a material market influence across numerous Computation
Intervals. Such conduct would require repeated exposure to execution
risk and transaction costs and would generate an observable pattern of
order and trading activity detectable by the Exchange's real-time
monitoring and trade surveillance controls.
The Exchange will also maintain several controls external to the
Funding Rate calculation methodology to ensure the integrity of daily
funding settlements and their resistance to manipulation. As provided
in Rule 14.10(i), the Exchange will monitor the performance of the
funding mechanism in maintaining economic correspondence between the
price of each Perpetual SFP and its corresponding Underlying Price
Index, including through surveillance of Premium behavior around the
Daily Settlement Time to identify any unusual, potentially manipulative
or disruptive trading behavior occurring near a daily settlement
period. The Exchange may amend the Funding Rate methodology and related
parameters (e.g., the Deadband Threshold and Maximum Funding Magnitude)
in accordance with applicable Exchange Rules and applicable law.
Funding Rates and associated periodic funding payment transfers will
also be subject to the Exchange's Market Outcome Review Process, set
forth in Exchange Rule 7.1, whereby the Exchange's Outcome Review
Committee may determine the final settlement outcome of the Perpetual
SFP for the applicable daily settlement period. The Exchange may
initiate the Market Outcome Review Process at its sole discretion and
by taking into account circumstances that may have a material impact on
the reliability or transparency of the underlying related to a contract
(i.e., the Underlying Price Index of a Perpetual SFP). Additionally,
pursuant to Rule 14.10(g), the Exchange may initiate the Market Outcome
Review Process for any daily settlement for which the Daily Settlement
Price cannot be determined under Rule 14.12(a), a Perpetual SFP's terms
and conditions or the Underlying Price Index (because it is unavailable
or unreliable). Finally, Rule 14.10(j) provides that the Exchange may
take such actions as it deems necessary and appropriate in accordance
with the procedures set forth in Exchange Rule 2.8--including, but not
limited to, temporarily adjusting the Maximum Funding Magnitude,
modifying margin requirements or imposing additional risk controls--in
the event of an ``Emergency'' as defined in Exchange Rule 2.8.
Collectively, these controls supplement the already manipulation-
resistant funding calculation methodology by ensuring the availability
of controls within the discretion of the Exchange to detect, remedy and
deter manipulation.
The Exchange's proposed position limits for Perpetual SFPs are also
designed to most effectively protect against manipulation. Not only are
the speculative position limits and position accountability provisions
described in Part VI of Chapter 14 consistent with CFTC Regulation
41.25(b)(3)(i), but the position limits proposed by the Exchange in
many respects exceed regulatory requirements in their stringency
because they apply regulatory position limits across the life of a
Perpetual SFP, rather than only during the last three trading days of a
contract.
In addition, the Exchange is adopting, pursuant to Part IV of
Chapter 14, rules regarding trading safeguards applicable
[[Page 60485]]
to Perpetual SFPs, including pre-trade and intra-trade safeguards, and
will have the authority to establish and amend the parameters,
procedures and methodologies for such safeguards at its discretion. The
Exchange shall also provide self-match prevention functionality for
Perpetual SFPs and prohibit insiders and persons in possession of
material non-public information in respect of issuers of Underlying
Securities from trading Perpetual SFPs.
More generally, Exchange Rule 5.17 imposes prohibitions on any
person ``engag[ing] in conduct or practices inconsistent with just and
equitable principles of trade'' or ``engag[ing] in any activity that is
intended to, or has the effect of, manipulating the market in violation
of Sections 6(c) and 9(a)(2) of the CEA,'' in addition to prohibitions
on various other manipulative or deceptive trade practices. These
provisions will apply to transactions in Perpetual SFPs on the
Exchange. Chapter 9 of the Exchange rules spells out the disciplinary
capabilities and processes of the Exchange and Rule 9.5 describes the
various penalties that the Exchange may impose on persons violating its
rules, which include: fines or penalty fees, disgorgement of profits
resulting from the violation plus the cost of damages to
counterparties, suspension of trading or member status or privileges
and revocation of trading or member status or privileges.
Clause (I) of Section 6(h)(3) of the Act \104\ requires that
procedures be in place for coordinated surveillance among the market on
which a security futures product is traded, any market on which any
security underlying the security futures product is traded, and other
markets on which any related security is traded to detect manipulation
and insider trading. The Exchange has procedures in place for
coordinated surveillance consistent with these requirements. In
particular, pursuant to Rule 14.35, the Exchange shall maintain
membership in the Intermarket Surveillance Group (``ISG'') and shall
comply with all ISG requirements for the sharing of surveillance
information. Rule 14.35 also provides that the Exchange shall
coordinate with other markets in investigating potential violations
involving Perpetual SFPs and their Underlying Securities, and Exchange
Rule 2.15 permits the Exchange to enter into information-sharing
agreements with any person or body, including with domestic or foreign
regulatory or self-regulatory organizations, associations and boards of
trade.
---------------------------------------------------------------------------
\104\ 15 U.S.C. 78f(h)(3)(I).
---------------------------------------------------------------------------
Clause (J) of Section 6(h)(3) of the Act \105\ requires that the
market on which a 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.
---------------------------------------------------------------------------
\105\ 15 U.S.C. 78f(h)(3)(J).
---------------------------------------------------------------------------
The Exchange relies on its Surveillance Department to perform
surveillance of listed contracts. The Surveillance Department maintains
a comprehensive suite of proprietary and vendor surveillance systems
that leverage high-performance, multi-availability zone, cloud-hosted
datastores to process, store, and analyze the audit trail records
described below, together with cleared trades and allocations,
positions, and referential data including instrument metadata. The
Exchange's logging system will capture audit trail data for trading of
Perpetual SFPs. The Exchange's audit trail is maintained in accordance
with Core Principle 10 in CEA Section 5(d)(10) and CFTC Regulations
Sec. 38.550, Sec. 38.551 and Sec. 38.552. The Exchange retains the
audit trail for a minimum of 5 years, as required by CFTC Regulation
Sec. 1.31(b).
The Surveillance Department makes use of the proprietary
Investigative Dashboard in order to reconstruct historical trading
conditions. The Investigative Dashboard allows analysts to view the
historical state of an order book at any moment in time together with
the order, participant, and execution details recorded in the audit
trail described below. Coupled together, this empowers officers to
replay the exact sequence of events that preceded and succeeded the
investigated activity. Anomalous and potentially fraudulent or
disruptive activity is automatically flagged for review by the
surveillance team: flags are introduced by both proprietary
surveillance systems and by Solidus Labs' trade surveillance
technology, which ingests a real time data feed from the Exchange.
The Exchange maintains a complete audit trail of participant and
Exchange activity. Records are generated in real time, at the moment
the Exchange acts, and are created whenever a participant performs an
operation that changes the state of the Exchange, including the entry,
modification, and cancellation of orders, the execution of trades,
requests for quotes and responses to them, participant access to the
platform, and the movement of funds. For each order-related operation,
the Exchange records at least the following:
<bullet> A unique order identifier.
<bullet> The identity of the participant, and where the activity is
conducted for a customer account, house account, or sub-account, the
identity of that account and its relationship to the member.
<bullet> The date and time the instruction was received, recorded
to microsecond precision in Coordinated Universal Time.
<bullet> The market to which the order relates, identified by
market ticker or internal market identifier, and the related event and
series.
<bullet> The price and size of the order, and the price and size at
which it was filled.
<bullet> The order's duration or expiration instruction, including
any specific expiration time.
<bullet> The outcome of the order--whether it rested on the book,
was filled in whole or in part, was cancelled, or expired--and, for
cancellations and modifications, the reason recorded for the change.
<bullet> The risk controls applied to the order, including any
maximum execution cost, post-only, and reduce-only, as submitted by the
participant.
<bullet> The means by which the order was submitted, whether by
application programming interface, FIX connection, web platform, or
mobile application.
<bullet> The originating network address of the participant's
session and the outcome of the authentication for that session,
including whether multi-factor authentication was used.
<bullet> The Exchange's processing time for the instruction,
measured from receipt to response.
<bullet> The fees assessed to each side of the resulting trade.
Each record also identifies the Exchange system and software
version that processed the instruction, so that any entry in the audit
trail can be attributed to a specific operation of a specific version
of the Exchange.
The Exchange's logging system is operated on the Datadog platform.
For ease of retrieval and long-term retention, the details of these
operations are also stored in relational databases operated on Amazon
Web Services (``AWS''). The Exchange maintains the following databases:
<bullet> Query Exchange (Historical)--the record of orders and
executed trades, including each trade's identifier, market, price,
size, time, the identifiers of the orders on both sides, the
participants and sub-accounts on both sides, fees, and the Exchange
clock value at execution. The Query Exchange database is held on the
Exchange's query-exchange historical cluster.
<bullet> Users--the record of members and accounts, including
account type,
[[Page 60486]]
verification status, account creation and update history. The Users
database is held on the Exchange's users cluster.
In addition, Klear maintains its own record of each cleared trade
in its Trades and Users databases. These records carry identifiers in
common with the Exchange's own records, so that any trade can be traced
between the Exchange's internal record and the clearinghouse record.
AWS supports a managed relational database service that separates
computing from storage and replicates each write across multiple
independent data-center facilities. The stored record therefore does
not depend on any individual server or storage device. Daily snapshots
of each database are produced and retained as backups of historical
database state.
Records are retrievable by order identifier, trade identifier,
participant, account, market, and time period. Because the Exchange's
trade record carries the identifiers used by both Klear and the
Exchange's own operational logs, a single trade or order can be
reconstructed across all three records--the operational log of the
instruction as received and processed, the Exchange's database record
of the resulting order and trade, and Klear's record of the cleared
trade.
The Exchange shall cooperate and share information with the
Commission required by the Act, including to facilitate the
Commission's assessment of market data relating to the trading of
Perpetual SFPs.
Clause (K) of Section 6(h)(3) of the Act \106\ requires that a
market on which a security futures product is traded have in place
procedures to coordinate trading halts between such market and any
market on which any security underlying the security futures product is
traded and other markets on which any related security is traded. This
requirement is addressed by Rule 14.13.
---------------------------------------------------------------------------
\106\ 15 U.S.C. 78f(h)(3)(K).
---------------------------------------------------------------------------
Clause (L) of Section 6(h)(3) of the Act \107\ requires that the
margin requirements for a security futures product comply with the
regulations prescribed pursuant to Section 7(c)(2)(B) of the Act.\108\
To implement Section 7(c)(2)(B) of the Act, the Commission and the CFTC
have adopted parallel rules establishing a fifteen (15) percent minimum
initial and maintenance customer margin requirement for long or short
security future positions and permitting exchanges to prescribe lower
margin requirements for permitted offsetting positions involving
security futures and related positions.\109\ The Perpetual SFP Margin
Rules in Part V of Chapter 14 impose a minimum customer margin
requirement of 15.50% of the Current Market Value of a Perpetual SFP
position and do not allow for the lower margin requirements for
permitted offsetting strategies or exemptions for exempted persons and
market makers permitted under the Customer Margin Rules. The Exchange
has chosen to adopt customer margin rules for Perpetual SFPs more
stringent than those required by the Customer Margin Rules in order to
protect investors and the public interest by reducing the risk of
participants incurring margin obligations that they do not have the
financial resources to satisfy. Thus, the Exchange believes that its
Perpetual SFP Margin Rules are consistent with the requirements of the
Act.
---------------------------------------------------------------------------
\107\ 15 U.S.C. 78f(h)(3)(L).
\108\ 15 U.S.C. 78g(c)(2)(B).
\109\ 17 CFR 242.403(b); 41.45(b).
---------------------------------------------------------------------------
For the reasons described above, the Exchange believes that the
listing standards, margin levels and trading rules submitted herewith
satisfy the requirements set forth in Section 6(h)(3) of the Act.
Kalshi also believes that its proposed rule changes are consistent with
Section 6(b) of the Act, in general, and further the objectives of
Section 6(b)(5) of the Act, 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
B. Self-Regulatory Organization's Statement on Burden on Competition
Kalshi does not believe that the proposed rule changes will impose
any burden on competition not necessary or appropriate in furtherance
of the purposes of the Act. Currently, no other exchange lists security
futures products with no predefined final settlement date for trading.
Nothing in the filing restricts or impedes another exchange from
offering such security futures products for trading subject to its
compliance with applicable regulatory requirements under the Act, CEA
and respective rules of the Commission and CFTC governing security
futures products.
Further, for the reasons described above, the Exchange does not
believe that admission of Kalshi Prime as an FCM SFP Broker Member will
impose any burden on intramarket or intermarket competition that is not
necessary or appropriate in furtherance of the Act as the requirements
of Rule 14.38--the requirement of an unaffiliated Third-Party DSRO, the
prohibition on privileged or competitively advantageous treatment of
Kalshi Prime, the establishment of information barriers between the
Exchange and Kalshi Prime and the requirement that only Public
Directors on relevant committees and panels of the Exchange governing
matters involving Kalshi Prime--help to prevent an unfair burden on
competition and unfair discrimination between customers, issuers,
brokers, or dealers.
C. Self-Regulatory Organization'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 will become effective on November 2, 2026,
or such later date as it may be approved pursuant to CFTC Regulations.
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.\110\
---------------------------------------------------------------------------
\110\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
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="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#aedcdbc2cb83cdc1c3c3cbc0daddeeddcbcd80c9c1d8"><span class="__cf_email__" data-cfemail="becccbd2db93ddd1d3d3dbd0cacdfecddbdd90d9d1c8">[email protected]</span></a>. Please include
File Number SR-KALSHIEX-2026-02 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-KALSHIEX-2026-02. This
file number should be included on the
[[Page 60487]]
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-KALSHIEX-
2026-02 and should be submitted on or before October 14, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\111\
---------------------------------------------------------------------------
\111\ 17 CFR 200.30-3(a)(73).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-19409 Filed 9-22-26; 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.