Notice2026-21149
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Permit the Listing of Binary Options Overlying Key Performance Indicators Reported by Certain Issuers of Stock
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
October 16, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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[Federal Register Volume 91, Number 199 (Friday, October 16, 2026)]
[Notices]
[Pages 65854-65886]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-21149]
[[Page 65853]]
Vol. 91
Friday,
No. 199
October 16, 2026
Part II
Securities and Exchange Commission
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Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting Accelerated Approval of a Proposed
Rule Change, as Modified by Amendment No. 1, To Permit the Listing of
Binary Options Overlying Key Performance Indicators Reported by Certain
Issuers of Stock; Notice
Federal Register / Vol. 91 , No. 199 / Friday, October 16, 2026 /
Notices
[[Page 65854]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-106659; File No. SR-CBOE-2026-061]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Permit the
Listing of Binary Options Overlying Key Performance Indicators Reported
by Certain Issuers of Stock
October 13, 2026.
I. Introduction
On June 30, 2026, Cboe Exchange, Inc. (``Exchange'' or ``Cboe'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to allow the Exchange to list binary options
overlying specified key performance indicators (``KPI(s)'') reported by
certain issuers of stock (``binary KPI options''). The proposed rule
change was published for comment in the Federal Register on July 15,
2026.\3\ On August 26, 2024, pursuant to Section 19(b)(2) of the
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ The Commission received comments regarding the
proposed rule change.\6\ On October 1, 2026, the Exchange filed
Amendment No. 1 to the proposed rule change, which replaces and
supersedes the original filing in its entirety.\7\ The Commission is
publishing this notice and order to solicit comment on Amendment No. 1
in Sections II and III below, which sections are being published
verbatim as filed by the Exchange, and to approve the proposed rule
change, as modified by Amendment No. 1, on an accelerated basis.\8\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 105877 (July 10,
2026), 91 FR 43418.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 106196, 91 FR 55918
(August 31, 2026). The Commission designated October 13, 2026, as
the date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ Comments received are available at: <a href="https://www.sec.gov/rules-regulations/public-comments/sr-cboe-2026-061">https://www.sec.gov/rules-regulations/public-comments/sr-cboe-2026-061</a>.
\7\ Amendment No. 1 revises the proposal to: (1) correct errors
and add clarifying language to the rule text, including with regard
to the Exchange's determination of the at-the-money value for new
series listing and the availability only to registered market-makers
of a proposed position limit exemption; (2) correct errors and
provide additional representations and clarifications in the in the
description of the proposal, including with regard to the Options
Listing Procedures Plan (``OLPP'') and the Options Price Reporting
Authority (``OPRA'') Plan; (3) provide additional description of
alternative settlement procedures; (4) provide additional discussion
regarding the trading of binary KPI options when trading in the
stock of the underlying issuer has been halted; (5) provide
additional information regarding how investors may obtain
information regarding binary KPI options; and (6) provide a 25,000-
contract position limit for binary KPI options. Amendment No. 1 is
available at: <a href="https://www.sec.gov/comments/SR-CBOE-2026-061/srcboe2026061-1079659-3751188.pdf">https://www.sec.gov/comments/SR-CBOE-2026-061/srcboe2026061-1079659-3751188.pdf</a>.
\8\ The Commission's discussion and findings begin in Section
IV.
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II. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend its Rules to permit the listing of binary options overlying
key performance indicators (``KPIs'') reported by certain issuers of
stock (``binary KPI options''). The text of the proposed rule change is
provided in Exhibit 5.
The text of the proposed rule change is also available on the
Commission's website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>), the
Exchange's website (<a href="https://www.cboe.com/us/options/regulation/rule_filings/cone/">https://www.cboe.com/us/options/regulation/rule_filings/cone/</a>), and at the principal office of the Exchange.
III. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend its Rules to permit the listing of
binary options overlying key performance indicators (``KPIs'') reported
by certain issuers of stock (``binary KPI options'').
By way of background, binary options are based on the same
framework as traditional, standardized options traded on the Exchange,
except the payout of a binary option is a fixed amount contingent upon
the occurrence of the option being in- or at-the-money rather than an
amount based on the degree to which the option is in-the-money. As a
result, payout at expiration of a binary option is an all-or-nothing
occurrence.
Under current Exchange Rules, the Exchange may list binary options
on broad-based indexes and the Cboe Magnificent 10 Index.\9\ The
Exchange proposes to amend its Rules to permit the listing of binary
KPI options. Binary KPI options are European-style, cash-settled
options contracts listed on an underlying KPI of an issuer. The
exercise settlement value of a binary KPI option is determined not by
the market price of the issuer's stock, but by whether a specific
financial or operating metric that is reported by the issuer in an
earnings-related filing submitted to the U.S. Securities and Exchange
Commission (the ``Commission'') meets or exceeds a pre-specified strike
level.
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\9\ See Chapter 4, Section H.
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First, the Exchange proposes to adopt Chapter 4, Section I (Binary
KPI Options) to describe binary KPI options. The Rules in proposed
Chapter 4, Section I apply only to binary KPI options. All other Rules
apply to the trading of binary KPI options, except as otherwise
provided or the context otherwise requires.
The Exchange proposes to adopt Rule 4.80 (Definitions). Like other
standardized options, binary KPI options have standardized terms that
are established by the Exchange. Standardized terms for binary KPI
options include the exercise criterion that is the condition or
criterion of a binary KPI option, the exercise settlement amount (i.e.,
payout amount), the strike price, the expiration date, the settlement
type as A.M.-settlement or P.M.-settlement, the exercise style (as
European-style), and the requirements used to determine if the KPI
condition or criterion of a binary KPI option has been met (the
``payout determination'' \10\). The Exchange proposes to establish
these terms in new Rule 4.80 and additional provisions related to
binary KPI options in proposed Chapter 4, Section I, as described
below.
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\10\ This is the term used in the options disclosure document
related to binary KPI options (currently pending Commission review)
as required by Rule 9b-1 under the Securities Exchange Act of 1934
(the ``Act'').
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The Exchange proposes to define a ``binary KPI option'' in new Rule
4.80 as a cash-settled option contract listed on an underlying KPI of
an issuer with an exercise settlement amount that is
[[Page 65855]]
established at the creation of the option and with a settlement value
that is determined by whether a specific KPI disclosed by the issuer in
an earnings-related filing submitted to the Commission meets or exceeds
its exercise price. Binary KPI options are paid out if the reported
value of the applicable KPI (1) equals or is greater than (i.e., the
payout determination) the exercise price for a call binary KPI option
or (2) is less than (i.e., the payout determination) the exercise price
for a put binary KPI option.\11\ The Exchange also proposes to provide
that unless the context dictates otherwise, the terms underlying
security, equity, or index, or any variations of these terms, in the
Rules mean issuer KPI for purposes of binary KPI options.\12\
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\11\ This is substantially similar to the definition of binary
index option in Rule 4.70.
\12\ Similarly, the proposed rule change amends the definition
of ``underlying security'' in Rule 1.1 to provide that the term
``underlying security'' (or ``underlying'') means ``with respect to
binary KPI options, the applicable issuer KPI that is the subject of
the settlement.''
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The Exchange proposes to define a ``call binary KPI option'' as an
option contract that returns an exercise settlement amount if the
settlement value of the underlying KPI is at or above the exercise
price at expiration (i.e., in- or at-the-money).\13\
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\13\ This is substantially similar to the definition of call
binary index option in Rule 4.70.
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The Exchange proposes to define ``exercise price'' (also referred
to as ``strike price'') as the value \14\ to which the settlement value
of the underlying KPI is compared to determine whether the holder of a
binary KPI option is entitled to the exercise settlement amount.\15\
For binary KPI options, the exercise price is the exercise threshold of
an option contract that establishes the number that is compared against
the settlement value of the underlying KPI to determine if the cash
payout amount (i.e., the exercise settlement amount) will be paid out.
In other words, binary KPI options will have a threshold number as the
exercise price that will be used to determine if the exercise criterion
of the binary KPI option has been met, in which case the option will be
exercised and holders will receive the cash payout amount (i.e., the
exercise settlement amount). For binary KPI options, the exercise
threshold will be a number that reflects or is compared to the
underlying KPI of the binary option.
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\14\ The value of an exercise price is measured in the
applicable units of the KPI (and is scaled, as further discussed
below). For example, some KPIs are measured in U.S. dollars while
others may be measured in percentages or numbers.
\15\ This is substantially similar to the definition of exercise
price with respect to binary index options in Rule 4.70. The
Exchange proposes to define ``exercise settlement amount'' for
binary KPI options as $1 (unless otherwise adjusted pursuant to
Rules 4.6 or 4.84 or modified pursuant to the Rules of the Clearing
Corporation). While the definition of exercise settlement amount for
binary index options in Rule 4.70 provides for a range of amounts
that the Exchange determines on a class-by-class basis, an exercise
settlement amount of $1 is permissible under that Rule.
Specifically, the exercise settlement amount for binary index
options equals the exercise settlement value (which must be between
$1 and $1,000) times the multiplier (which must be at least 1).
Therefore, $1 is currently a permissible exercise settlement amount
for binary index options if the Exchange set an exercise settlement
value of $1 and a multiplier of 1.
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The Exchange proposes to define the term KPI (or ``key performance
indicator'') as a key financial or operating metric disclosed by an
issuer in its earnings-related filings submitted to the Commission
(i.e., Form 8-K, Form 10-Q, or Form 10-K, as applicable).
The Exchange proposes to define ``put binary KPI option'' as an
option contract that returns an exercise settlement amount if the
settlement value of the underlying KPI is below the exercise price at
expiration (i.e., in-the-money).\16\
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\16\ This is substantially similar to the definition of put
binary index option in Rule 4.70.
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The Exchange proposes to define ``settlement value'' as the value
of the underlying KPI that is used to determine whether a binary KPI
option is in-, at-, or out-of-the-money.\17\ The proposed definition
specifies that the ``settlement value'' is the value of the applicable
KPI as disclosed in the applicable issuer's earnings-related filing
submitted to the Commission on the applicable expiration date (for both
A.M.-settled and P.M.-settled binary KPI options).\18\ The Exchange
designates the applicable KPI and the relevant reporting period (for
example, a calendar quarter) at the time of listing a binary KPI
option.
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\17\ This is substantially similar to the definition of
settlement value with respect to binary index options in Rule 4.70.
\18\ While the timing of an issuer's official disclosure informs
whether the Exchange will establish a binary KPI option as A.M.-
settled or P.M.-settled (as further discussed below), the Exchange
will use the KPI value included in an issuer's earnings-related
filing submitted to the Commission for the applicable reporting
period (and not the press release disclosing earnings results, for
example) as the settlement value. The Exchange understands, however,
these values are generally the same.
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Proposed paragraph (b) of the settlement value definition provides
if the applicable KPI is not reported or is otherwise unavailable on
the expiration date,\19\ settlement (including any payout of the
exercise settlement amount) will occur in accordance with the Rules of
the Clearing Corporation.\20\ The alternative settlement procedures of
the Clearing Corporation (as further discussed below) provide that if
the KPI value needed to determine whether a binary KPI option is at- or
in-the-money is not available, expiring contracts will be exercised but
may result in delivery of an alternative exercise settlement amount.
The alternative exercise settlement amount may be the last closing
price of the binary KPI option (i.e., the market valuation of the KPI
event), meaning that the alternative exercise settlement amount will be
between $0.01 and $1.00, rather than the expected $0.00 or $1.00. For
example, if a KPI will not be reported by the KPI issuer, there is
expiring open interest on binary KPI options on that KPI, and the last
closing price of the binary KPI option was $0.76, the alternative
settlement procedures of the Clearing Corporation provide that expiring
binary KPI options may be exercised and settle at $0.76 rather than
$1.00. If an option closing price is not available or is deemed by CCUS
to be unreliable, the exercise criterion for binary option contracts on
that KPI event will be deemed to have not been met, and the binary
options will expire unexercised and worthless.
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\19\ For example, if an issuer does not report the applicable
KPI in its earnings-related filings submitted to the Commission,
will not be submitted such a filing for the applicable reporting
period, or delays its filing submission to the Commission.
\20\ The Exchange notes this proposed provision is similar to
Rules 4.13(a)(4) and 5.20(e) (which provide that for index options,
in various circumstances that may cause values of securities that
are components of the index to not be available for calculation of
the index at expiration, the values of those securities (and thus
the value of the index) will be calculated in accordance with the
Rules and By-Laws of the Clearing Corporation). As further discussed
below, the Exchange intends to clear binary KPI options through Cboe
Clear US, LLC (``CCUS'') and will submit a separate rule filing to
update Rules to reflect this. Therefore, references in the proposed
Rules and this rule filing to Clearing Corporation mean CCUS.
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Additionally, proposed paragraph (c) of the settlement value
definition states if an applicable KPI is restated after the expiration
date and settlement of a binary KPI option, the settlement value (and
the exercise settlement amount) of the binary KPI option does not
change (as set forth in the Rules of the Clearing Corporation). In
other words, the value of the applicable KPI as reported by the issuer
on the applicable expiration date is final, and the amount paid (or not
paid) at settlement will not change, regardless of whether the KPI is
later restated by the issuer.
The Exchange proposes to add Rule 4.81 (Designation of Binary KPI
Option Contracts) to identify the binary KPI options that may be listed
for trading on the Exchange. Pursuant to proposed Rule 4.81(a), the
Exchange may from time to time approve for listing and
[[Page 65856]]
trading on the Exchange any of the following binary KPI options
contracts for the following issuers:
------------------------------------------------------------------------
KPI (each financial metric
Company is measured in $ unless
otherwise specified)
------------------------------------------------------------------------
Apple, Inc................................ Earnings per Share: Diluted;
Total Net Sales; Net Sales
by Category: iPhone; Net
Sales by Category:
Services; Net Sales by
Reportable Segment:
Americas; Net Sales by
Reportable Segment: Greater
China.
Advanced Micro Devices, Inc............... GAAP Diluted Earnings per
Share; GAAP Revenue; Net
Revenue: Data Center
Segment; Net Revenue:
Client and Gaming Segment;
GAAP Operating Margin (%).
Alphabet Inc.............................. Diluted net Income per
Share; Revenues; YouTube
Ads Revenues; Google Cloud
Revenues.
<a href="http://Amazon.com">Amazon.com</a>, Inc........................... Diluted Earnings per Share;
Total Net Sales; AWS: Net
Sales; North America: Net
Sales; International: Net
Sales; Net Sales:
Advertising Services.
Bank of America Corporation............... Diluted Earnings per Share;
Total Revenue, Net of
Interest Expense; Net
Interest Income; Provision
for Credit Losses; Net
Income.
Citigroup Inc............................. Diluted Earnings per Share;
Total Revenue, Net of
Interest Expense; Net
Interest Income; Total
Provision for Credit
Losses; Net income.
Coinbase Global, Inc...................... Net Income per Share--
Diluted; Total Revenue;
Transaction Revenue; Total
Trading Volume;
Subscription and Services
Revenue.
Ford Motor Company........................ GAAP Earnings per Share--
Diluted; Total Revenues;
Ford Pro Segment: Revenue;
Ford Model e Segment:
Revenue; Ford Blue Segment:
Revenue.
Intel Corporation......................... GAAP Earnings per Share
Attributable to Intel--
Diluted; Net Revenue;
Revenue: Client Computing
Group (CCG); Revenue: Data
Center and AI (DCAI);
Revenue: Intel Foundry;
GAAP Operating Margin (%).
JPMorgan Chase & Co....................... Earnings per Share--Diluted;
Net Revenue--Reported; Net
Interest Income; Provision
for Credit Losses; Net
Income.
Marathon Digital Holdings, Inc............ Earnings (Net Loss) per
Share of Common Stock--
Diluted; Revenues; Number
of Blocks Won (# Bitcoin
(BTC)); Energized Hashrate
(EH) (# EH/s); Total
Bitcoin Holdings (# BTC);
BTC Produced (# BTC); BTC
Purchased (# BTC).
Meta Platforms, Inc....................... Earnings per Share: Diluted;
Revenue; Family Daily
Active People (DAP) (#);
Revenue: Advertising;
Operating Margin (%).
Microsoft Corporation..................... Diluted Earnings per Share;
Revenue; Intelligent Cloud:
Revenue; Microsoft Cloud
Revenue; More Personal
Computing: Revenue.
Netflix, Inc.............................. Earnings per Share: Diluted;
Revenues; United States and
Canada (UCAN): Revenue;
Europe, Middle East, and
Africa (EMEA): Revenue;
Operating Margin (%).
NVIDIA Corporation........................ GAAP Diluted Earnings per
Share; Revenue; Data Center
Revenue; Edge Computing
Revenue; Automotive
Revenue.
Palantir Technologies Inc................. Earnings per Share
Attributable to Common
Stockholders, Diluted;
Revenue; Net Income; Closed
Deals of at Least $1
Million (#).
Robinhood Markets, Inc.................... Net Income Attributable to
Robinhood Common
Stockholders: Diluted;
Total Net Revenues; Funded
Customers (#); Average
Revenue per User
(``ARPU''); Robinhood Gold
Subscribers (#).
SoFi Technologies, Inc.................... Earnings per Share
Attributable to Common
Stockholders--Diluted;
Total Net Revenue; Total
Net Revenue--Technology
Platform; Total Net
Revenue--Financial
Services; Total Net
Revenue--Lending.
Space Exploration Technologies Corp....... Earnings per Share: Diluted;
Total Revenues.
Super Micro Computer, Inc................. Net Income per Common Share:
Diluted; Net Sales; Gross
Margin (%); Cash Flow Used
in Operations; Net Income.
Target Corporation........................ Diluted Earnings per Share;
Net Sales; Food & Beverage
Net Sales; Apparel &
Accessories Net Sales;
Operating Income: Rate (%).
Tesla, Inc................................ Net Income per Share of
Common Stocks Attributable
to Common Stockholders:
Diluted; Total Revenues;
Total Automotive Revenue;
Model 3/Y Production (#);
Supercharger Connectors
(#); Free Cash Flow.
The Walt Disney Company................... Diluted Earnings per Share;
Revenues; Entertainment
Subscription Video on
Demand (SVOD) Operating
Income; Revenues:
Experiences; Segment
Operating Income: Sports.
------------------------------------------------------------------------
The Exchange proposes to add Rule 4.81(b) to clarify that binary
KPI options are a separate class from other options overlying the stock
of the issuer \21\ and are a separate class from other binary KPI
options with differently underlying KPIs for the same issuer. The
Exchange believes this is reasonable given that an individual KPI is
the specific underlying of binary KPI options, and generally options
with different underlyings (e.g., different underlying security or
index) are different option classes.
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\21\ This is substantially similar to Rule 4.71(b), which
provides that binary index options are a separate class from other
options overlying the same index.
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Next, the Exchange proposes to adopt Rule 4.82 (Terms of Binary KPI
Option Contracts) to describe the permissible terms the Exchange may
establish for binary KPI option series. Proposed Rule 4.82 provides
that binary KPI options listed and traded on the Exchange are
designated as to expiration date, exercise price, settlement type,
exercise style, exercise settlement amount, contract multiplier, and
underlying KPI.\22\ After approving a particular binary KPI option
class for listing and trading on the Exchange, the Exchange from time
to time may open for trading series of options in that binary KPI
option class. Proposed Rule 4.82(a) states the Exchange may designate
the settlement type for binary KPI options as A.M.-settled or P.M.-
settled.\23\ Binary KPI options for issuers \24\ that disclose their
earnings results before the open of Regular Trading Hours (``RTH'') on
a
[[Page 65857]]
given trading day are designated as A.M.-settled binary KPI options,
and binary KPI options for issuers that disclose their earnings results
after the close of RTH on a given trading day are designated as P.M.-
settled binary KPI options. The Exchange notes that the proposed
concepts of A.M.-settlement and P.M.-settlement for binary KPI options
differ compared to traditional options (as well as binary index
options), for which ``P.M.-settled'' generally means that the
expiration of an option so designated will settle to the closing price
of the underlying security or index value and ``A.M.-settled''
generally means that the expiration of an option so designated will
settle to the opening price of the underlying. While different than how
these terms apply to standard and binary index options, the Exchange
believes the proposed description of A.M.-settlement and P.M.-
settlement appropriately reflects the earnings disclosure practices of
issuers. Additionally, while the timing of the event that will
determine whether the Exchange designates a binary KPI option as A.M.-
settled or P.M.-settled is different than that for traditional options
and binary index options, the trading hours on expiration dates for
each of A.M.-settled and P.M.-settled binary KPI options are consistent
with those of A.M.-settled and P.M.-settled index options (traditional
and binary) today.
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\22\ This is substantially similar to Rule 4.72 regarding binary
index options.
\23\ Binary index options (as well as many traditional index
options) that may be listed on the Exchange may be designated A.M.-
settled or P.M.-settled.
\24\ The Exchange determines whether an issuer discloses its
earnings results before the open or after the close of RTH on a
given trading day based on publicly available information regarding
the issuer's general disclosure practices.
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Proposed Rule 4.82(a) further states that the exercise style of
binary KPI options is European-style, which is consistent with the
rules regarding binary index options.\25\ A European-style option may
only be exercised on its expiration date.\26\
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\25\ See Rule 4.72(a).
\26\ See Rule 1.1 (definition of European-style option).
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Proposed Rule 4.82(b) describes permissible expirations for binary
KPI options. Specifically, the proposed rule change will permit the
Exchange to list binary KPI option series that expire on the date on
which an issuer discloses its earnings results (that include the
applicable KPI) for the applicable reporting period (such as calendar
quarter). The expiration date for a binary KPI option will be the date
on which an issuer discloses its earnings results (that include the
applicable KPI) for the specified reporting period (such as the date on
which an issuer will issue its earnings results press release). The
specific expiration date for a binary KPI option series will finalized
when an issuer announces the date on which it will disclose its
earnings results (that include the applicable KPI) for that reporting
period.\27\ If that date is a Tuesday, Wednesday, Thursday, or Friday
and the Exchange is not open for business on that date, the expiration
date will be the first business day immediately prior to that day. If
that date is a Monday and the Exchange is not open for business on that
date, the expiration date will be the first business day immediately
following that Monday. The disclosed KPIs relate to a specific time
period (such as a month or calendar quarter), which KPIs an issuer
publicly discloses on a date following the end of the applicable
reporting period.\28\
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\27\ For example, for a binary KPI option series, the Exchange
may designate the reporting period for a series to be the fourth
quarter of 2026. The expiration date for that series would be the
date the applicable issuer establishes as the date it will disclose
earnings results for that quarter. In accordance with Rule 1.5(a),
the Exchange intends to publish on its public website finalized
expiration dates for binary KPI options, as well as update its
reference data file for each issuer KPI on which the Exchange lists
binary KPI options (as will be described in the Exchange's technical
specifications available on its public website), with the specific
expiration date for a binary KPI option series once known. The
Exchange also plans to provide finalized expiration dates in data
files sent to data vendors.
\28\ While earnings results are often reported with respect to
the time period covered by the issuer's earnings release, such as a
calendar quarter, certain issuers may disclose results for different
time periods. For example, it is possible in an earnings release for
an issuer to announce a KPI that covers a calendar month rather than
a calendar quarter.
---------------------------------------------------------------------------
While an expiration date for a binary KPI option will be a specific
date, as is the case for traditional options and binary index options,
the Exchange's proposed designation of expiration dates for binary KPI
options will differ to reflect standard issuer disclosure practices. In
some instances, an issuer might not establish the specific date on
which it will disclose its earnings results for a reporting period
until weeks prior to the disclosure date. Consequently, unlike standard
equity and index options that have an exact expiration date when
strikes are first listed, a binary KPI option will be listed for
trading with a placeholder expiration date if the date the KPI
information will be released by the issuer is not publicly known. If a
placeholder expiration date is required, it will be set as the first
trading day following the date of the deadline for the issuer's
submission of its earnings-related filing for the reporting period
applicable to the series. Once an issuer announces the disclosure date
of the KPI information, the expiration date will be updated as the
finalized expiration date of the option contract.\29\ Ultimately, the
expiration date for a binary KPI option is the issuer's earnings
disclosure date, even if that date is unknown at the time the series is
listed.
---------------------------------------------------------------------------
\29\ Issuers have different practices as to when they disclose
their earnings results (and when they announce their earnings
disclosure dates); however, each issuer's practice is generally
consistent and predictable.
---------------------------------------------------------------------------
The Exchange may designate binary KPI option series to expire up to
12 months from the time they are listed and may list up to two
expirations at one time for a binary KPI option (per KPI per issuer).
The Exchange may open for trading a series of binary KPI options at
least one business week prior to the expiration date of a binary KPI
option. The proposed permissible expirations for binary KPI options are
similar to current Rules regarding binary index options. First, the
proposed rule change permits the Exchange to list binary KPI options to
expire up to 12 months from the time they are listed. Current rules
regarding binary index options permit these expirations, in addition to
expirations out more than 12 months up to 36 months from the time they
are listed.\30\ The proposed rule change also limits the Exchange to
list up to two expirations at one time for binary KPI options.
Therefore, the proposed scope of permissible expirations for binary KPI
options is narrower than that permitted for binary index options under
current Rules (as previously approved by the Commission).
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\30\ See Rule 4.72.
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The proposal to list expirations at least one business week prior
to the expiration date of binary KPI option (as well as the proposed
language regarding shifting an expiration date to the business day
immediately before or after an expiration date that falls on a day the
Exchange is not open for business) is substantially similar to current
Exchange Rules applicable to short-term equity options series,\31\ as
well as the rules of another options exchange applicable to binary
equity options.\32\ The Exchange believes it is appropriate to permit
listing of binary KPI options that expire up to 12 months from the time
they are listed to accommodate different issuer reporting periods, as
well as to permit the Exchange to list expirations for consecutive
calendar quarter periods or for a calendar quarter and annual reporting
period at the same time. As discussed above, issuers disclose KPIs in
their earnings-related filings submitted to the Commission.
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\31\ See Rule 4.5(d).
\32\ See NYSE American, LLC Section 17, Rule 903ByRDs.
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Proposed Rule 4.82(c) describes the permissible exercise prices (or
strike prices) the Exchange may designate for
[[Page 65858]]
binary KPI option series. Proposed Rule 4.82(c)(1) describes how the
value of exercise prices of binary KPI option series are measured.
Specifically, the exercise price of each binary KPI option series will
be a fixed amount equal to an underlying KPI value. Because the value
of certain KPIs may be very large (e.g., billions of dollars), the
Exchange proposes that the exercise price for a binary KPI option will
be the underlying KPI divided by a scaling factor based on the value of
the KPI in the issuer's most recent earnings-related filings submitted
to the Commission as of the time a binary KPI option class is listed as
follows:
<bullet> If the most recently disclosed KPI value is greater than
or equal to one trillion, the exercise price equals that value divided
by one trillion (e.g., for such KPIs, an exercise price of 27.00 is
equivalent to a KPI value of 27,000,000,000,000.00);
<bullet> If the most recently disclosed KPI value is greater than
or equal to one billion but less than one trillion, the exercise price
equals that value divided by one billion (e.g., for such KPIs, an
exercise price of 112.00 is equivalent to a KPI value of
112,000,000,000.00);
<bullet> If the most recently disclosed KPI value is greater than
or equal to one million but less than one billion, the exercise price
equals that value divided by one million (e.g., for such KPIs, an
exercise price of 900.00 is equivalent to a KPI value of
900,000,000.00);
<bullet> If the most recently disclosed KPI value is greater than
or equal to one thousand but less than one million, the exercise price
equals that value divided by one thousand (e.g., for such KPIs, an
exercise price of 42.00 is equivalent to a KPI value of 42,000.00); and
<bullet> If the most recently disclosed KPI value is less than one
thousand, the exercise price equals that value and is not divided by a
scaling factor (e.g., for such KPIs, an exercise price of 774.00 is
equivalent to a KPI value of 774.00).\33\
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\33\ When applying the scaling factor, the Exchange will not
round the scaled KPI value and instead will truncate the value to
fit the scaled strike price value within standard strike listing
format.
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The Exchange will apply a different scaling factor to newly listed
binary KPI option series for a new expiration only after the value of
the KPI in the issuer's earnings-related submitted to the Commission
has a value in a different scaling tier for four consecutive reporting
periods or if the Exchange deems it necessary in the interests of a
fair and orderly market. Application of a different scaling factor will
not affect the exercise prices of any series of the binary KPI options
previously opened. For example, if the Exchange begins listing a new
class of binary KPI options and the most recently disclosed KPI value
for the issuer at the time of that listing was for the third quarter of
2026 and was $892,000, the exercise prices for that class of binary KPI
options will be scaled by 1,000, and thus exercise prices of 895, 995,
and 1005, would represent $895,000, $995,000, and $1,005,000,
respectively. If the issuer discloses a KPI value of $1,020,000 in its
fourth quarter 2026 earnings disclosure, the Exchange will continue to
list exercise prices scaled by 1,000. If the issuer then discloses KPI
values of $1,112,000, $1,237,000, and $1,064,000 for the first, second,
and third quarters, respectively, of 2027, the Exchange will begin
scaling the exercise prices by 1,000,000 for the fourth quarter 2027
expirations (or for the first quarter 2028 expirations if the Exchange
had already listed fourth quarter 2027 expirations prior to the
disclosure of the third quarter 2027 KPI value). The Exchange believes
this will permit consistency for listing scaled KPI values while
allowing the Exchange to update strike prices to reflect long-term
changes to an issuer's KPI values.
The Exchange will announce in accordance with Rule 1.5 if the
scaling factor applied to a binary KPI options changes (for example,
the KPIs will be scaled in billions rather than in millions), including
through updates to the Exchange's technical specifications regarding
binary KPI options and reference data files that describe the terms of
binary KPI options, which will be available on the Exchange's website
(customers receive notifications of such updates). This is consistent
with how the Exchange provides information regarding product
information (including updates) for all options the Exchange lists for
trading.\34\
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\34\ The binary KPI option contract specifications available on
the Exchange's public website will set forth the scaling factor for
each binary KPI option.
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It is possible for a KPI to have a negative value, such as earnings
per share (which is equivalent to a loss per share). Proposed Rule
4.82(c)(1)(B) provides the Exchange may list binary KPI options series
with exercise prices representing negative KPI values. For these
series, the exercise price will equal the absolute value of the KPI and
will be scaled as described above. For example, if an issuer's earnings
per share in the last reporting period was -$3.52 (and thus was a loss
per share), a binary KPI option for such issuer with a strike of 3.58
will reflect an expected loss of $3.58 per share. The Exchange will
incorporate into symbology for binary KPI options whether the value of
the strike price is positive or negative, including if the Exchange
lists binary KPI option series with both positive and negative strike
prices. This is similar to current Exchange practice for index options
for which the Exchange lists both A.M.-settled and P.M.-settled
series--whether a series is A.M.- or P.M.-settled is built into the
symbol, each of which could have the same strike prices listed at the
same time. Whether a symbol reflects a positive or negative value will
be available on contract specifications as well as the reference data
file for the specific binary KPI option on the Exchange's public
website (in accordance with Rule 1.5).
Proposed Rule 4.82(c)(2) provides the minimum interval between
strike prices for binary KPI options series is:
<bullet> 0.01 where the strike price is less than 10;
<bullet> 0.10 where the strike price is 10 or greater but less than
100;
<bullet> 1.00 where the strike price is 100 or greater but less
than 1,000;
<bullet> 10.00 where the strike price is 1,000 or greater but less
than 10,000; and
<bullet> 100.00 where the strike price is 10,000 or greater.
As discussed above, while KPI values above 1,000 are generally
scaled, there may be circumstances in which the Exchange lists strikes
above 1,000 or even 10,000 given the Exchange's proposal to maintain a
lower scale level until a KPI value is consistently above a certain
level (e.g., above one billion for four consecutive quarters). This may
occur when a KPI value is near the top of a scaling range; for
continuity, the Exchange will continue listing strike prices using the
lower scaling factor and not change to a higher scaling factor until
the KPI value is regularly within that higher range (as noted above).
Suppose a KPI value is 995,000,000; in this case, strike prices will be
scaled by 1,000,000. Thus, the Exchange may list binary KPI options
above and below 995 (995,000,000 divided by 1,000,000). However, it is
realistic that the KPI may increase to above 1,000,000,000. As
proposed, the Exchange may list strike prices, for example, of 1,000
(representing 1,000,000,000) and above, for expirations until the KPI
value is above 1,000,000,000 for four consecutive reporting periods. To
reduce confusion, the Exchange would not scale strike prices using
different scaling factors within a single expiration (and would not
change the scale until the KPI value is consistently at the higher
level). Therefore, it is possible the Exchange may list strikes greater
than 1,000. Similarly, while strikes above 10,000 may be rare, given
the
[[Page 65859]]
Exchange proposes to maintain a lower scale level until a KPI value is
consistently above a certain level (e.g., above one billion for four
consecutive quarters, as proposed), depending on market factors and
demand, it is possible (although unlikely) the Exchange may determine
it is appropriate to list strikes above 10,000 if market factors or
expectations signify a significant increase of the KPI value. The
proposed strike intervals accommodate the listing of binary KPI options
in these circumstances before the Exchange shifts the strike prices for
an issuer's KPI to a different scaling level.
The proposed strike intervals are generally consistent with current
Rules for other options, which provide for larger strike intervals as
the values of strike prices increase. Given the scaling factors for
larger KPI values, it may appear the proposed rule change will permit
smaller strike intervals for larger KPI values if those intervals are
considered solely on a nominal basis. However, that is not the case if
the actual values of the strike intervals are considered. The
corresponding actual value of the strike interval for a strike price
that was subject to a larger scale value is higher than the actual
value of the strike interval for a strike price that was subject to a
smaller scale value. For example, suppose a strike price of 950
represents $950 million. The proposed rule change would permit strike
intervals of $1.00. However, that $1.00 corresponds to $1,000,000. In
other words, if the Exchange listed strikes of 950, 951, and 952, the
difference in the actual value between those strikes is $1,000,000, not
$1 (i.e., the strikes represent values of $950,000,000, $951,000,000,
and $952,000,000). Similarly, suppose a strike price of 3 represents
$3,000,000,000. The proposed rule change would permit strike intervals
of $0.01. However, in this case, that $0.01 corresponds to $10,000,000.
If the Exchange listed strikes of 3.00, 3.01, and 3.02, the difference
in the actual value between those strikes is $10,000,000, not $0.01
(i.e., the strikes represent values of $3,000,000,000, $3,010,000,000,
and $3,020,000,000, respectively). As a result, the permissible strike
intervals between strike prices representing values in the billions are
actually larger than the permissible strike intervals between strike
prices representing values in the millions. This is consistent with the
general premise underlying current strike intervals that larger strike
intervals apply to larger strike values.
Proposed Rule 4.82(d) describes the initial series of a binary KPI
option the Exchange may open for trading. Specifically, the Exchange
may open for trading one or more binary KPI option series with a fixed
KPI value as the strike price (scaled as described above), with
approximately the same number of strike prices being opened above and
below the at-the-money KPI value at the time the binary KPI option
series are opened. The ``at-the-money'' KPI value may be the value of
the KPI in the issuer's most recent earnings-related filing submitted
to the Commission, the issuer's disclosed estimate of the KPI for the
next reporting period, or analysts' consensus estimate as reported by
major market vendors, as the Exchange deems appropriate based on the
most recent market information available to the Exchange. Because KPIs
are static values, the Exchange believes it is appropriate to determine
strike prices based on all available information that would inform
expectations about the KPIs (as investors would do). The Exchange
understands that an issuer's previously disclosed KPI, as well as
issuer and analyst estimates of the KPI, are primary factors investors
may consider when determining in which direction the KPI value may move
in the next reporting period (similar to how investors consider the
then-current price of an underlying stock when considering their
options investment strategies and which direction the stock price may
move). Therefore, the Exchange believes using the most recently
available of these values is appropriate to use for determining which
strikes it should list for a specific issuer KPI. The Exchange believes
this flexibility to select the most appropriate at-the-money value is
similar to current rules that permit the Exchange to list additional
series to maintain an orderly market, to meet customer demand, or when
the market price of the underlying security moves substantially.\35\
The Exchange believes the proposed definition of at-the-money will
allow the Exchange to list series with strike prices that are
consistent with investor expectations and demands and that are based on
information available in the market.
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\35\ See, e.g., Rule 4.5(d)(4).
---------------------------------------------------------------------------
The Exchange will list strike prices for binary KPI option series
that are reasonably close to the at-the-money KPI value at the time of
listing. A strike is ``reasonably close'' to the at-the-money KPI value
if (1) for KPIs less than or equal to 1, it is no more than 2; \36\ (2)
for KPIs greater than 1 and less than or equal to 10, it is no more
than 100% above or below the at-the-money KPI value; and (3) for KPIs
greater than 10, it is no more than 30% above or below the at-the-money
KPI value. The Exchange may also open binary KPI option series that are
more than 30% above or below the at-the-money KPI value (if the KPI is
greater than 10) if demonstrated customer interest exists for such
series, as expressed by institutional, corporate or individual
customers or their brokers.\37\
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\36\ The Exchange believes this is appropriate given the
potentially small values of certain KPIs. For example, suppose the
second quarter earnings per share of a company was $0.04. In such a
case, if strikes were limited to 100% above this value, the Exchange
could only list strikes up to $0.08, which would provide investors
with minimal investment options. Therefore, the Exchange believes
this provision is appropriate to provide the Exchange with authority
to list meaningful strikes for smaller-valued KPIs.
\37\ See, e.g., Rule 4.5(d)(3) and (4) (permissible series for
short term equity option series). It is currently uncommon for the
Exchange to list series more than 50% away from the at-the-money
value of an underlying security for strikes above 20, as permitted
by Rule 4.5(d)(3).
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The Exchange may add new binary KPI option series when the Exchange
deems it necessary to maintain a fair and orderly market or to meet
customer demand, and the opening of a new series of binary KPI options
on the Exchange will not affect any other series of options of the same
binary KPI option class previously opened.\38\ The Exchange may list
additional series using updated at-the-money KPI values, such as if the
Exchange lists binary KPI options series for an expiration before the
applicable issuer has disclosed the KPI value in a filing submitted to
the Commission for the immediately preceding reporting period and that
value is then disclosed in a filing submitted to the Commission or if
the issuer or major market data vendors publish estimates of the KPI
value. For example, before expiration of a binary KPI option series set
to expire on the date of an issuer's disclosure of its third quarter
earnings results, the Exchange lists series of that binary KPI option
to expire on the date of an issuer's disclosure of its fourth quarter
earnings results (using the KPI from the issuer's second quarter
earnings results as the at-the-money KPI value). After the issuer
discloses its third quarter earnings results in a filing submitted to
the Commission, including the applicable KPI, the Exchange may list
additional series for the fourth quarter binary KPI options using the
third quarter KPI
[[Page 65860]]
result as the at-the-money KPI value. Suppose, further, that after the
issuer discloses its third quarter earnings results, the issuer
publishes an estimate of the fourth quarter KPI value. As investors may
see this estimate (and possibly factor it into their investment
decisions), the Exchange may determine it is appropriate to consider
this estimate the ``at-the-money'' value and list additional strikes
above and below this value. Any additional strike prices the Exchange
lists will be reasonably close (as defined above) to the at-the-money
KPI value at the time of listing.
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\38\ Rule 4.72(c) also provides that additional series of a
binary index option may be opened for trading on the Exchange when
the Exchange deems it necessary to maintain an orderly market or to
meet customer demand, and that the opening of a new series of binary
index option on the Exchange will not affect any other series of
options of the same class previously opened.
---------------------------------------------------------------------------
Continuing the above example, suppose the Exchange lists binary KPI
options for the fourth quarter before the binary KPI options for the
third quarter have expired. As proposed, the Exchange would list
strikes above and below the at-the-money strike, which at the time of
listing may be the settlement value KPI from the issuer's second
quarter earnings results disclosure (the most recently available KPI).
If the KPI for the option was net sales, and the second quarter value
was $45.093 billion, the at-the-money strike would be 45.10, and the
Exchange could list strikes within 30% of that value, and additional
series based on customer demand or market changes. After the Exchange
lists those series, the issuer discloses its third quarter earnings
results, including net sales of $57.241 billion. As proposed, after
that disclosure, the Exchange may list additional strikes within 30% of
$57.24 to reflect the change in value of the underlying (as well as
additional series based on customer demand or market changes).
This proposed framework for listing and adding series is similar to
the framework in current Rules for listing and adding series of equity
options.\39\ While the proposed strike intervals are narrower than
these rules, the permissible ranges are also narrower. The Exchange
acknowledges the proposed framework would permit the Exchange to list
many strikes per KPI per expiration. However, the Exchange intends to
apply its standard strike listing practices to binary KPI options.
Specifically, the Exchange generally lists strikes at wider intervals
as they move farther away from the at-the-money value, while listing
more granular intervals for strikes closer to the at-the-money value.
The Exchange also generally delists granular strikes that are deep out-
of-the-money if the Exchange determines they are sufficiently covered
by wider strike intervals that are close in value.
---------------------------------------------------------------------------
\39\ See, e.g., Rule 4.5(d)(3) and (4).
---------------------------------------------------------------------------
These proposed provisions regarding the listing of binary KPI
option series are similar to provisions regarding permissible series of
other options. The Exchange believes it is reasonable to list binary
KPI options for a new reporting period prior to the expiration of then-
listed binary KPI options for the immediately preceding reporting
period (e.g., listing binary KPI options for the fourth quarter before
expiration of binary KPI options for the third quarter), and thus
before the settlement value of the applicable KPI is known for the
immediately preceding reporting period for these options, to permit
investors to roll positions from one expiration to the next. As
proposed, once the settlement value for the immediately preceding
reporting period is known (the third quarter in this example), the
Exchange may list additional series of the binary KPI options that
reflect that KPI value. This is consistent with current practice if
there is a change (including a substantial change) in the price of an
underlying security or value of an underlying index. For example, Rule
4.5(d)(4) permits the Exchange to open additional series of a short-
term option series overlying a security when the market price of the
underlying security moves away from the exercise price or prices of the
series already opened, subject to the ``reasonably close'' parameters
set forth in that Rule. Disclosure of, as an example, the third quarter
KPI value after the fourth quarter binary KPI options series were
listed based on the second quarter KPI value (if the third quarter KPI
value differs from the second quarter KPI value) is similar to a move
in the price of an underlying security, which may result in the
Exchange listing additional series based on the updated price of the
underlying security. Similarly consistent with current practice for
other options (as set forth in Rule 4.5(d)(4), for example), opening of
binary KPI options based on this later-disclosed KPI value will not
affect any other series of options of the same binary KPI options class
previously opened.
Proposed Rule 4.82(g) provides that the contract multiplier for
each class of binary KPI options is one.\40\
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\40\ While the definition of contract multiplier for binary
index options in Rule 4.70 permits the Exchange to designate a
multiplier (which must be at least one), the proposed fixed
multiplier of one for binary KPI options is currently permissible
for binary index options under that Rule.
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The Exchange proposes to add new Rule 4.83 (Determination of
Settlement Value) to establish that binary KPI options that are ``at-
the-money,'' ``in-the-money,'' or ``out-of-the-money'' are a function
of the settlement value of the underlying issuer KPI in relation to the
type of binary KPI option (i.e., put or call) and the exercise
price.\41\ As described above, the settlement value for a binary KPI
option is the value of the KPI for the applicable reporting period as
disclosed in the applicable issuer's earnings-related filing submitted
to the Commission. While the Exchange factors the timing of an issuer's
disclosure of a KPI value into the determination of whether the
Exchange lists a binary KPI option as A.M-settled or P.M.-settled, the
Exchange will source the settlement value from the earnings-related
filing for the applicable reporting period that the issuer submits to
the Commission. Generally, companies issue press releases that contain
earnings results and near contemporaneously submit a Form 8-K to the
Commission with the press release as an exhibit. Therefore, it is
unlikely the value of the KPI in the Commission filing will differ from
the value in the initial disclosure; however, the value in the
Commission filing will be the ultimate settlement value.
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\41\ This is substantially similar to Rule 4.73 regarding binary
index options.
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Proposed Rule 4.84 (Adjustment) provides that binary KPI option
contracts are subject to adjustment only in accordance with and to the
extent specified in the Rules of the Clearing Corporation. When any
adjustment has been made pursuant to proposed Rule 4.84 (and the Rules
of the Clearing Corporation), the Exchange will announce this
adjustment, which will become effective as of the time specified in
that announcement.\42\
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\42\ This is substantially similar to Rule 4.74 regarding binary
index options. This is also consistent with how adjustments are
handled for traditional equity and index options.
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Next, the Exchange proposes to add new Rule 5.1(b)(3)(F), which
says RTH for binary KPI options are from 9:30 a.m. to 4:00 p.m.\43\
Further, the last day of trading for P.M.-settled binary KPI options is
the day of expiration, and the last day of trading for A.M.-settled
binary KPI options is the trading day prior to expiration.
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\43\ As set forth in Rule 1.6, unless otherwise specified, all
times in the Rules (including the proposed Rules) are Eastern Time.
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The Exchange recognizes it is possible, although unusual and
unlikely, that an issuer's KPI information may become available at
unexpected times. Proposed Rules 5.1(b)(3)(F)(iii) and (iv) address the
impact on trading and expiration that such disclosure may have. First,
the
[[Page 65861]]
proposed rule change provides if the Exchange confirms an issuer
discloses the KPI prior to the expiration date (i.e., the date on which
the issuer had announced it would disclose its earnings results for the
applicable reporting period), trading in the applicable binary KPI
options series will cease, and the expiration date for the option
accelerates to a date on or shortly after the date of that disclosure
in accordance with the Rules of the Clearing Corporation.\44\ This may
occur if, for example, the applicable issuer releases the KPI
information in advance of the expiration date of the option. If the
issuer releases KPI information after the expiration date, which may be
the case if, for example, the issuer's disclosure of its earnings is
delayed, trading in the option will not be impacted and will cease as
of the expiration date. While the expiration date will not change,
expiration and settlement processing of such options will be delayed
until the KPI information becomes available, in accordance with the
Rules of the Clearing Corporation. Additionally, the proposed rule
change provides if there is an unofficial disclosure \45\ of the KPI
prior to the expiration date, the Exchange may determine to halt (and
resume) trading in the applicable binary KPI options series in
accordance with Rule 5.20. In certain circumstances, the expiration
date for the option may accelerate in accordance with the Rules of the
Clearing Corporation; if this occurs, trading in the binary KPI will
cease.\46\ This proposed provision addresses the unlikely event that
KPI information becomes available through sources other than the issuer
in advance of the expiration date. If the Exchange determines the KPI
information reported from the unofficial source is unreliable, trading
in the binary KPI option may resume until it expires.
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\44\ The proposed acceleration of binary KPI options is similar
to the existing acceleration process for equity options when the
underlying security of such options has been converted entirely to
cash. See OCC Rule 807.
\45\ Unofficial disclosure of a KPI may include, for example, an
unsanctioned leak of the KPI or disclosure of the KPI by a source
other than the issuer.
\46\ Rule 5.20(a) provides that any two Floor Officials, in
consultation with a designated senior executive officer of the
Exchange, may halt trading in any security in the interests of a
fair and orderly market and to protect investors considering
relevant factors.
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The Exchange proposes to add new Rule 5.3(c), which states that,
notwithstanding Rule 5.3(a), bids and offers for a binary option with a
multiplier other than 100 must be expressed in terms of dollars per 1/
multiplier of the total value of the contract.\47\ For example, if a
binary option has a multiplier of 1, an offer of ``0.50'' represents an
offer of $0.50.
---------------------------------------------------------------------------
\47\ The Exchange notes this would apply to all binary options,
not just binary KPI options, as Rule 4.70 permits binary options to
have multipliers of at least one.
---------------------------------------------------------------------------
Pursuant to Rule 5.4(c)(1), the Exchange establishes the minimum
increment for bids and offers on orders for binary options on a class-
by-class basis, which may not be less than $0.01. The Exchange proposes
to clarify that this Rule applies to binary index options (which the
Exchange may list pursuant to current Rules) and would apply to binary
KPI options as proposed in this rule filing.
The Exchange proposes to add Rule 5.31(d)(1)(D), which provides
that for binary KPI options, the System initiates the opening rotation
at 9:30 a.m. This is analogous to the opening process currently in
place for VIX options, for which the opening rotation is similarly
triggered at a specified time.\48\
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\48\ See Rule 5.31(d)(1)(C).
---------------------------------------------------------------------------
The Exchange proposes to adopt a maximum execution price protection
mechanism for binary options.\49\ Specifically, proposed Rule 5.34(d)
permits the Exchange to apply a maximum execution price protection for
binary options on a class basis, pursuant to which the System adjusts
any execution price for a binary option above the Exchange-designated
maximum execution price for that class down to that maximum execution
price. For example, suppose the Exchange designates $1.03 as the
maximum execution price for a binary KPI option class. If the System
observes a binary KPI option execution in that class at $1.10, the
System adjusts the execution price to $1.03. Binary options have a
maximum value equivalent to the exercise settlement amount (i.e., the
cash payout amount). Therefore, the Exchange believes it is reasonable
to prevent executions from occurring at prices significantly above that
maximum value, as it protects investors from execution prices that are
potentially erroneous.
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\49\ The Exchange notes this would apply to all binary options,
including both binary index options and binary KPI options.
---------------------------------------------------------------------------
While binary options have a maximum intrinsic value (e.g., binary
KPI options have a maximum intrinsic value of $1, which is the exercise
settlement amount), there are costs involved with options trading that
may cause investors to execute these options at prices higher than that
value. Suppose a customer wants to buy a binary option that is close to
expiration and is deep in-the-money. While the intrinsic value of this
binary option is $1, and likely to pay out $1, a Market-Maker would
need to receive more than $1 to accommodate the sale of this binary
option to cover additional trading expenses, such as transaction and
clearing fees. Therefore, the Exchange believes allowing execution
prices above the intrinsic value is appropriate.
The Exchange proposes to add Rule 6.5, Interpretation and Policy
.10, which provides that Rule 6.5 does not apply to binary KPI options.
While the obvious error provisions set forth in Rule 6.5 will not be
applicable to binary KPI options, the Exchange believes the proposed
maximum execution price protection in Rule 5.34(d) may prevent
executions at potentially erroneous prices, obviating the need for an
obvious error process for binary KPI options.\50\
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\50\ The proposed rule change also deletes an extra space from
Rule 6.5, Interpretation and Policy .04.
---------------------------------------------------------------------------
The Exchange proposes to amend Rule 6.20(g) (Exercise of Options
Contracts) to describe the automatic exercise feature of binary KPI
options. Current Rule 6.20(g) describes the automatic exercise of
binary index options. The proposed rule change moves the current
provision to proposed subparagraph (g)(1) (and clarifies it applies to
binary index options). The proposed rule change then adds a similar
provision for binary KPI options as Rule 6.20(g)(2), which states that
binary KPI options will be automatically exercised at expiration if the
settlement value of the underlying KPI is equal to or greater than the
exercise price of a call binary KPI option or less than the exercise
price of a put binary KPI option.\51\
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\51\ The proposed rule change also makes a nonsubstantive change
to Rule 6.20(g)(1) to conform language with proposed subparagraph
(g)(2).
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The Exchange proposes to amend Rule 8.36 (Position Limits for
Binary Options) to set forth position limit requirements for binary KPI
options.\52\ The Exchange proposes to adopt Rule 8.36(a)(iii) to
provide that in determining compliance with Rule 8.30 (Position
Limits), the position limit for binary KPI options is 25,000 standard
option contracts per expiration and 100
[[Page 65862]]
binary KPI option contracts equal one standard option contract.\53\
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\52\ As part of the proposed change, the Exchange proposes to
clarify that current fixed position limit provisions in proposed
Rule 8.36(a)(1) (current Rule 8.36(a)) and the formulaic position
limit provisions in proposed Rule 8.36(a)(2) (current Rule 8.36(b))
apply to binary index options. The proposed rule change also updates
the paragraph lettering for current Rules 8.36(c) through (f) to
reflect revised paragraph lettering.
\53\ This is similar to other Rules regarding how positions in
contracts with multipliers other than 100 are counted for purposes
of determining compliance with Rule 8.30. See, e.g., Rule 8.30,
Interpretation and Policy .08 (regarding mini-option contracts,
which have a multiplier of 10).
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The Exchange also proposes to amend current Rule 8.36(c) (proposed
Rule 8.36(b)), which currently states that positions in binary index
options on the same index that have different exercise settlement
amounts are aggregated. The Exchange proposes to amend the rule to
clarify that this provision applies to binary index options (as
proposed Rule 8.36(b)(1)). Further, the Exchange proposes to adopt Rule
8.36(b)(2) to provide that positions in binary KPI options on the same
KPI that have different expiration dates are not aggregated (as
proposed position limits are calculated per expiration), and positions
in binary KPI options for the same issuer with different underlying
KPIs are not aggregated (as binary KPI options overlying different
KPIs, even for the same issuer, are different classes, as discussed
above).
The Exchange proposes to amend current Rule 8.36(d) (proposed Rule
8.36(c)) relating to the aggregation of binary options positions with
non-binary option contracts for purposes of position limits. The
Exchange proposes to clarify that the current provision (as proposed
Rule 8.36(c)(1)) applies to binary index options. The Exchange proposes
to adopt Rule 8.36(c)(2) to provide that binary KPI options are not
aggregated with non-binary options contracts overlying the stock of the
issuer. Finally, the Exchange proposes to amend the hedge exemption
provision in current Rule 8.36(f) (proposed Rule 8.36(e)).\54\ As
proposed, with respect to binary KPI options, a binary KPI option short
put position coupled with a binary KPI option short call position held
by a Market Maker, regardless of the binary KPI option strike, will be
exempt from the established position limits as prescribed in Rule 8.36.
Given the retail nature of binary KPI options, the Exchange expects
investors to primarily buy binary KPI options. Liquidity providers, as
a result, may amass short positions to facilitate investors' purchases
of binary KPI positions. The proposed hedge exemption is intended to
exclude offsetting pairs of these short positions from counting towards
position limits so that such position limits do not restrict liquidity
providers' ability to provide liquidity in the market. Traditional
hedge exemptions set forth in Rule 8.30, Interpretation and Policy .04
(Equity Hedge Exemptions), upon which Market-Makers may rely for equity
options, are inapplicable to the proposed binary KPI options. For
example, under Rule 8.30, Interpretation and Policy .04(a)(2), a long
call position accompanied by a short put position, where the long call
expires with the short put, and the strike price of the long call and
short put is equal, and where each long call and short put position is
hedged with 100 shares are exempt from position limits. The Exchange
proposes a hedge exemption specific to binary KPI options. The Exchange
believes that exempting offsetting short binary KPI option will provide
liquidity providers with an opportunity to exempt their hedge positions
from position limits in a similar manner as they can for equity options
pursuant to current Rules.
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\54\ As per current Rule 8.36(f), binary options are not subject
to the hedge exemption to the standard position limits found in Rule
8.30. As part of the proposed rule change, the Exchange proposes to
clarify current hedge exemption provisions specific to binary index
options and to move provisions specific to binary index options to
Rule 8.36(e)(1). The Exchange proposes to renumber current Rule
8.36(f)(1), (2), and (3) as Rule 8.36(f)(1)(A), (B), and (C),
respectively.
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The Exchange lastly proposes to amend Rule 8.43 (Reports Related to
Position Limits). Current Rule 8.43(a) states that in a manner and form
prescribed by the Exchange, each Trading Permit Holder (``TPH'') shall
report to the Exchange, the name, address, and social security or tax
identification number of any customer who, acting alone, or in concert
with others, on the previous business day maintained aggregate long or
short positions on the same side of the market of 200 or more contracts
of any single class of option contracts dealt in on the Exchange. The
Exchange proposes to amend Rule 8.43(f) to provide that for purposes of
this report, 100 binary KPI option contracts equal one standard option
contract.\55\ The Exchange believes this is reasonable given that
binary KPI options have a multiplier of 1 while standard equity option
contracts have a multiplier of 100.\56\
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\55\ The Exchange also proposes to amend the paragraph heading
so that it applies to all binary options rather than just binary
index options, as well as to amend one of the provisions to apply to
all binary options rather than just index options (the other
provisions are specific to binary index options and remain
unchanged).
\56\ This is consistent with the proposed rule change discussed
above that 100 binary KPI option contracts equal one standard option
contract for purposes of determining compliance with Rule 8.30.
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Except as otherwise described above, all binary KPI options will be
listed and traded on the Exchange in a substantially similar manner to
standard equity and index options and binary index options may be
listed and traded under current Rules. The Rules that apply to the
listing and trading of non-binary options on the Exchange, including
those related to customer accounts, margin requirements (pursuant to
current margin rules, binary KPI options will be fully funded),\57\ and
trading halt procedures,\58\ which are designed to prevent fraudulent
and manipulative acts and practices, will apply to the listing and
trading of binary KPI options. The Exchange has analyzed its capacity
and represents that it believes it has the necessary systems capacity
to handle any potential additional message traffic associated with the
listing of binary KPI options.
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\57\ See Rule 10.3(m).
\58\ Binary KPI options will not be automatically tied to the
trading state of the underlying issuer stock, and, thus, trading in
binary KPI options may not be affected by halts in the underlying
issuer stock. The binary KPI options will halt in accordance with
current Rules, including Rules 5.20 and 5.22.
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At launch, binary KPI options will be supported for electronic
trading only and for complex orders; \59\ FLEX and floor trading will
not be available. The Exchange will support Automated Improvement
Mechanism (``AIM'') and Complex-AIM (``C-AIM'') auctions as well as
Complex Order Auctions (``COA'') for binary KPI options at launch.\60\
The Exchange will not apply Preferred Market-Maker (``PMM''),
Designated Primary Market-Maker (``DPM''), or small-size order
entitlement overlays at launch.\61\
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\59\ Complex order functionality will apply to binary KPI
options in the same manner as all other options that trade on the
Exchange, as described in Rule 5.33 (this will include the ability
to leg into the simple book).
\60\ As per current Rules, the Exchange may designate binary KPI
options eligible for additional auction types in the future. See,
e.g., Rule 5.39 (Solicitation Auction Mechanism (``SAM'' or ``SAM
Auction'')), Rule 5.40 (Complex Solicitation Auction Mechanism (``C-
SAM'' or ``C-SAM Auction'')), and Rule 5.35 (Step Up Mechanism
(``SUM'')). The Exchange may also determine in the future to
deactivate any auction functionality for binary KPI options in
accordance with Rules regarding the auctions.
\61\ See Rule 5.32(a)(2). Pursuant to that Rule, the Exchange
may determine in the future to apply any of these priority overlays
to binary KPI options. Market-Makers for binary KPI options will be
subject to obligations set forth in Rules 5.51 and 5.52, including
electronic continuous quoting obligations in Rule 5.52(d)(2).
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With respect to order types and times-in-force, at launch, the
Exchange will support limit orders \62\ with Time-in-Force of Day or
Immediate-or-Cancel (``IOC''). With respect to order instructions,\63\
the Exchange will
[[Page 65863]]
support the following at launch: Attributable and Non-Attributable;
Book Only; Cancel Back; orders marked with Match Trade Prevention
identifiers (``MTPs'') Cancel Newest (``MCN''), MTP Cancel Oldest
(``MCO''), MTP Decrement and Cancel (``MDC''), MTP Cancel Both
(``MCB''), MTP Cancel Smallest (``MCS''); Minimum Quantity; Post Only;
\64\ Price Adjust; Reserve; and Stop-Limit. All other order types,
order instructions, or times-in-force will not be supported at launch;
however, according to current Rule 5.6, the Exchange may determine to
support additional order types, order instructions, or times-in-force
on a class-by-class basis for binary KPI options. Consistent with
current practice, if the Exchange modifies the applicability of any
functionality or order instructions for binary KPI options, it will
notify TPHs in accordance with Rule 1.5(a) (such as by Exchange
notice).
---------------------------------------------------------------------------
\62\ See Rule 5.6(b) for definition of ``limit order.''
\63\ See Rule 5.6(c) for definitions of order instructions.
\64\ The Exchange intends to make the Post Only instruction
available as it understands Market-Makers use this instruction on
their quotes to prevent those quotes from trading against resting
interest (Rule 5.5(c)(3)(A) requires quotes (i.e., bulk messages) to
be designated as Post Only or Book Only). Market-Makers generally
send quote updates regularly and frequently, as their quoting
systems update quotes to reflect market factors. The Post Only
instruction eliminates the risk that one Market-Maker's quote update
would execute against, for example, another Market-Maker's quote
update that another Market-Maker may have sent but has not yet
reached the Book. The Post Only instruction ultimately supports
Market-Maker's primary function, which is to add liquidity to the
Book.
---------------------------------------------------------------------------
The Exchange will send quotation and transaction price information
for binary KPI options to The Options Price Reporting Authority
(``OPRA'') in the same manner it sends this information to OPRA for all
other options the Exchange lists. Additionally, the Exchange
understands from OPRA that it will disseminate information regarding
binary KPI options in the same manner it does for all other options the
Exchange lists. The Exchange intends to follow OPRA's standard capacity
monitoring process for binary KPI options (in accordance with OPRA
instructions), which includes submission of quarterly capacity
projections (the Exchange will include its projected binary KPI option
volume in the applicable submission). Further, the Exchange understands
from OPRA that no technical changes are required to accommodate the
reporting to OPRA of quotation and transaction information regarding
binary KPI options (the Exchange represents, if later required by OPRA,
it will adhere to any new technical requirements OPRA deems necessary
to accommodate binary KPI options).\65\ The Exchange does not believe
TPHs will experience any capacity issues as a result of this proposal
and represents that it will monitor the trading volume associated with
binary KPI options and the effect (if any) of binary options on market
fragmentation and the capacity of the Exchange's automated system.
---------------------------------------------------------------------------
\65\ The Exchange understands OPRA may need to update how it
disseminates open interest information for binary KPI options, as
its current process incorporates information from OCC. The Exchange
and CCUS are working with OPRA to implement a process to provide
OPRA with binary KPI option open interest so OPRA may incorporate it
into its dissemination process.
---------------------------------------------------------------------------
Certain provisions of the OPRA Plan regarding voting if there is a
tie in a Management Committee vote, as well as the allocation of costs
and resources, relate specifically to volume cleared at The Options
Clearing Corporation (the ``OCC''). The Exchange will take steps
necessary and within its authority to propose amendments to these
provisions of the OPRA Plan to reflect all listed options volume
cleared by any registered clearing agency, including volume that will
be cleared by CCUS (as discussed below). If an amendment to the OPRA
Plan to revise these provisions is not effective before the Exchange
begins listing binary KPI options, the Exchange will be responsible for
additional costs associated with any additional OPRA capacity the
Exchange may need as a result of the listing and trading of binary KPI
options but will receive no additional OPRA revenue for binary KPI
options trades.\66\
---------------------------------------------------------------------------
\66\ See Limited Liability Company Agreement of Options Price
Reporting Authority, LLC, Section 7.1(a) (which provides that OPRA
costs accrued in a single calendar year above a ceiling are
allocated in accordance with guidelines regarding capacity planning,
which guidelines allocate OPRA costs above the annual ceiling on the
basis of a party's share of message capacity (which would include
binary KPI options without an OPRA Plan amendment) and thus is
unrelated to number of trades reported by OCC); and Sections
7.1(a)(iv) and (b)(ii) (which provides that OPRA revenues are
allocated based on compared trades as reported by OCC, which would
exclude binary KPI option trades without an OPRA Plan amendment).
---------------------------------------------------------------------------
Today, the Exchange has an adequate surveillance program in place
for options. The Exchange intends to apply the same program procedures
to binary KPI options the Exchange applies to its other options
products. Additionally, the Exchange is a member of the Intermarket
Surveillance Group (``ISG'') under the Intermarket Surveillance Group
Agreement. ISG members work together to coordinate surveillance and
investigative information sharing in the stock, options, and futures
markets. In addition, the Exchange has a Regulatory Services Agreement
with the Financial Industry Regulatory Authority, Inc. (``FINRA'') for
certain market surveillance, investigation and examinations functions.
Pursuant to a multi-party 17d-2 joint plan, all options exchanges
allocate amongst themselves and FINRA responsibilities to conduct
certain options-related market surveillance that are common to rules of
all options exchanges.\67\ All options exchanges are also parties to
the Options Regulatory Surveillance Authority plan under Regulation NMS
Rule 608, pursuant to which FINRA conducts options-related insider
trading surveillance, investigations, and enforcement for the U.S.
options markets. The Exchange believes its existing surveillance
procedures are designed to deter and detect possible manipulative
behavior which might potentially arise from listing and trading the
proposed binary options. Further, the Exchange will implement any new
surveillance procedures it deems necessary to effectively monitor the
trading of binary KPI options, including cooperation with FINRA to
update insider trading surveillances to incorporate the unique
characteristics of binary KPI options.
---------------------------------------------------------------------------
\67\ Section 19(g)(1) of the Act, among other things, requires
every self-regulatory organization (``SRO'') registered as a
national securities exchange or national securities association to
comply with the Act, the rules and regulations thereunder, and the
SRO's own rules, and, absent reasonable justification or excuse,
enforce compliance by its members and persons associated with its
members. See 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section
17(d)(1) of the Act allows the Commission to relieve an SRO of
certain responsibilities with respect to members of the SRO who are
also members of another SRO (``common members''). Specifically,
Section 17(d)(1) allows the Commission to relieve an SRO of its
responsibilities to: (i) receive regulatory reports from such
members; (ii) examine such members for compliance with the Act and
the rules and regulations thereunder, and the rules of the SRO; or
(iii) carry out other specified regulatory responsibilities with
respect to such members.
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The Exchange will report any information regarding binary KPI
options required to be reported to the Consolidated Audit Trail
(``CAT'') in the same manner it reports this information to CAT for all
other options the Exchange lists.\68\ The Exchange understands from
FINRA CAT--the administrator of the CAT--that no technical changes are
required to accommodate the reporting to CAT of information regarding
binary KPI options (the Exchange represents, if
[[Page 65864]]
later required by FINRA CAT, it will adhere to any new technical
requirements FINRA CAT deems necessary to accommodate binary KPI
options).
---------------------------------------------------------------------------
\68\ CAT reporting requirements will apply to broker-dealers
with respect to binary KPI options in the same manner as they apply
to any other options the Exchange lists. The Exchange understands
from FINRA CAT there will be no changes to the reporting
specifications for broker-dealers to accommodate the reporting of
information regarding binary KPI options to CAT.
---------------------------------------------------------------------------
Pursuant to the Options Order Protection and Locked/Crossed Market
Plan (``Linkage Plan''),\69\ participant exchanges to the Linkage Plan
established a framework to provide order protection. The Linkage Plan
(and Exchange Rules 5.65 through 5.67 regarding intermarket linkage)
applies to the trading of multiply listed options. Rule 5.36 addresses
order routing away from the Exchange to promote compliance with the
Linkage Plan. If the proposed binary KPI options become multiply listed
options, Users may designate a binary KPI option order for routing (or
not available for routing) in the same manner they do for other
multiply listed options, and the Exchange System is designed to prevent
trade-throughs and avoid displaying locked/crossed markets in
accordance with the Linkage Plan for all multiply listed options (and
Exchange Rules 5.65 through 5.67 regarding intermarket linkage).
---------------------------------------------------------------------------
\69\ The Linkage Plan requires U.S. options exchanges to
establish a framework for providing order protection and addressing
locked and crossed markets in eligible options classes. The Linkage
Plan is a national market system plan approved by the Commission
pursuant to Section 11A of the Act and Rule 608 thereunder. The full
text of the Linkage Plan is available at <a href="https://www.theocc.com/getcontentasset/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/dfc3d011-8f63-43f6-9ed8-4b444333a1d0/options_order_protection_plan.pdf">https://www.theocc.com/getcontentasset/7fc629d9-4e54-4b99-9f11-c0e4db1a2266/dfc3d011-8f63-43f6-9ed8-4b444333a1d0/options_order_protection_plan.pdf</a>.
---------------------------------------------------------------------------
Upon launch, binary KPI options will clear through CCUS, subject to
CCUS receiving approval of its application for temporary registration
as a registered clearing agency under Section 17A of the Act and of the
proposed updates to its rules to accommodate the clearing of binary KPI
options. Additionally, the Exchange has submitted to the Commission an
options disclosure document describing the characteristics and risks
associated with the trading of binary KPI options in accordance with
Rule 9b-1 under the Act.\70\ In connection with the clearing of binary
KPI options through CCUS, if CCUS receives approval of its temporary
registration status, the Exchange will then submit to the Commission a
separate rule filing to reflect that these options will be cleared
initially by CCUS (as the Rules currently contemplate clearing of
options traded on the Exchange through OCC). The Exchange represents it
will not list for trading binary KPI options until all applicable
filings and documents of CCUS related to binary KPI options being
cleared through CCUS are approved by the Commission or effective after
review by the Commission, as applicable.
---------------------------------------------------------------------------
\70\ 17 CFR 240.9b-1.
---------------------------------------------------------------------------
Further, the Exchange understands FINRA may submit a separate rule
filing in due course for various clarifying changes to its rules to
similarly reflect the trading of binary KPI options and the clearance
of options through CCUS. The Exchange is unaware of the effectiveness
of any such FINRA rule filing being a prerequisite for the listing and
trading of binary KPI options on the Exchange. However, the Exchange
will provide FINRA with any information it requests in connection with
any rule filing it determines to submit in connection with the trading
of binary KPI options and their clearance through CCUS.
The Options Listings Procedure Plan (the ``OLPP'') sets forth
procedures to facilitate the listing and trading of standardized
options. The OLPP currently describes procedures with respect to
options issued by and cleared at OCC. The Exchange will take steps
necessary and within its authority to propose amendments to the OLPP to
reflect listing procedures applicable to options that will be cleared
by CCUS, including binary KPI options. If an amendment to the OLPP to
apply those procedures to CCUS is not effective before the Exchange
begins listing binary KPI options, that will have no impact on the
listing or trading of binary KPI options, as the Exchange will certify
and list binary KPI options following the same procedures at CCUS as it
does for other options at OCC.
If, after Commission approval of both this rule filing and CCUS'
clearing agency registration application, OCC submits a proposal to the
Commission to amend its rules to clear binary KPI options, the Exchange
acknowledges that the OLPP will require amendment. Certain provisions
of the current OLPP (including, but not limited to, the ability for
additional registered clearing agencies to become OLPP Sponsors, the
process for requesting a new series of binary KPI options, and the
application of the indemnification clause to CCUS as it relates to
those options exchanges that clear binary options through CCUS)
reference only OCC as a clearing agency for listed options. The purpose
of such an amendment would be to update these OLPP provisions to
account for the fact that both CCUS and OCC could clear binary KPI
options. Accordingly, the Exchange agrees that it will file with the
Commission a proposed amendment to the OLPP (pursuant to Rule 608 of
Regulation NMS) no more than 10 business days following Commission
publication of a notice of filing of a proposed rule change by OCC to
amend its rules to clear binary KPI options, and will operate in good
faith in cooperating with the Commission, the OCC, and CCUS to ensure
such proposed amendment reflects the changes referenced above as well
as any additional changes the Commission may deem necessary or
appropriate in light of the foregoing in the interest of maintaining
fair and orderly markets and the protection of investors.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\71\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \72\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \73\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\71\ 15 U.S.C. 78f(b).
\72\ 15 U.S.C. 78f(b)(5).
\73\ Id.
---------------------------------------------------------------------------
Binary KPI Options Are Securities
As an initial matter, the Exchange believes that the binary KPI
options proposed herein are ``securities'' under the Act.\74\ The Act
defines the term ``security'' to include ``any put, call, straddle,
option, or privilege on any security, certificate of deposit, or group
or index of securities (including any interest therein or based on the
value thereof).'' \75\ As discussed above, the Commission has already
approved Rules addressing binary options overlying
[[Page 65865]]
securities indexes, and the binary KPI options will operate in
substantially the same manner as these binary options but with a
different underlying (specifically, an issuer KPI). Moreover, the
reasons the Commission previously articulated when it determined that
credit default options (``CD options'') were securities and approved CD
options to be listed on the Exchange apply to the binary KPI options as
well.\76\
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\74\ For the same reasons discussed herein, the Exchange
believes the binary KPI options contracts are also ``securities''
under the Securities Act of 1933, as amended. See 15 U.S.C.
77b(a)(1).
\75\ 15 U.S.C. 78c(a)(10). See also Caiola v. Citibank, N.A.,
New York, 295 F.3d 312, 325 (2d Cir. 2002), quoting United Housing
Foundation v. Foreman, 421 U.S. 837, 848 (1975) (``In searching for
the meaning and scope of the word `security' . . . the emphasis
should be on economic reality'').
\76\ See Securities Exchange Act Release No. 55871 (June 6,
2007), 72 FR 32372 (June 12, 2007) (SR-CBOE-2006-84) (order
approving the Exchange's proposal to adopt CD options) (``CD Options
Approval'').
---------------------------------------------------------------------------
Like the previously approved binary options and CD options, the
binary KPI options contracts proposed herein satisfy the definition of
``security'' in the Act because they are options that are ``based on
the value [of a security or securities] or ``any interest therein.''
\77\ The proposed KPIs, including net income, net sales, net interest
income, provision for credit losses, and specified expense metrics, are
recognized by investment professionals and analysts as among the most
significant inputs into the valuation of an issuer's stock; therefore,
a binary option with such an underlying KPI is based on the value of
the security to which the KPI relates. As the CFA Institute has
observed, fundamental financial metrics (including revenue, earnings,
and net income) serve as the primary inputs to equity valuation models
used by investment professionals to determine the intrinsic value of a
company's shares.\78\
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\77\ The Commission has confirmed on numerous occasions that the
term ``security'' includes options that are based on the value of
securities or that are interests in securities. See, e.g., CD
Options Approval, at 32376-77 (concluding that CD options ``are
options `based on the value [of a security or securities]' and,
therefore, securities'' and that credit default options ``are
options on an `interest in,'' or based on the value of an interest
in, a security or securities within the meaning of Section 3(a)(10)
of the Act'') (brackets in original); In the Matter of EZTD,
Securities Exchange Act Rel. No. 79292 (Nov. 10, 2016) (finding that
``[a]ll of the binary options that EZTD offered and sold to U.S.
customers, however, are options based on the value of a security or
index of securities, and thus are securities under the [definitions
in the Securities Act and the Exchange Act]'').
\78\ See, e.g., discussion in CFA Institute Member Survey
Report, 2018 (``CFA Institute Report''), available at <a href="https://www.cfainstitute.org/sites/default/files/-/media/documents/survey/key-performance-indicators-survey.pdf">https://www.cfainstitute.org/sites/default/files/-/media/documents/survey/key-performance-indicators-survey.pdf</a> and May 1, 2025 Comment letter
on FASB Invitation to Comment--Financial Key Performance Indicators
for Business Entities (file reference no: 2024-ITC100): <a href="https://rpc.cfainstitute.org/sites/default/files/docs/comment-letters/fasb-financial-kpis-itc-response.pdf">https://rpc.cfainstitute.org/sites/default/files/docs/comment-letters/fasb-financial-kpis-itc-response.pdf</a> (``Alternative performance measures
(APMs), which include Financial KPIs and non-financial KPIs (e.g.,
same-store sales, average revenue per user) are of such importance
that investor organizations have proposed a dedicated standard
setting board for them.'' p. 2.)
---------------------------------------------------------------------------
The proposed rule change would apply to certain KPIs--primarily
financial metrics such as revenue, earnings and income--of specified
issuers that are disclosed in required Commission reports (i.e., those
reports that provide investors with information about the issuer that
the issuer considers to be material to making an investment decision
with respect to that issuer's securities). Issuers disclose these KPIs
in earnings-related filings submitted to the Commission because these
KPIs are material to investors in evaluating the value of the
underlying stock. Indeed, the Commission noted in its recent proposal
to permit issuers to submit semiannual reports rather than quarterly
reports that ``[i]n addition to protecting investors, greater
availability of material information allows securities prices to better
reflect their issuers' fundamental value and ultimately promotes
capital formation as issuers have access to lower cost of capital and
investors in those issuers' securities have access to higher
liquidity.'' \79\ Therefore, the Commission recognized that the value
of securities is based, in part, on material information--such as KPIs
disclosed in earnings-related filings submitted to the Commission. A
binary option whose payoff is contingent on whether an issuer achieves
one of the KPI thresholds identified in the proposed rule change is,
therefore, an instrument whose payoff depends on information that
directly influences the intrinsic value of the issuer's security and
that the market uses as a basis for pricing the security itself. An
option that is based on one or more of the proposed KPIs is, therefore,
``based on the value of'' that issuer's security within the meaning of
the Act.
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\79\ See Semiannual Reporting, Securities Exchange Act Release
No. 105368, at 66 (May 5, 2026).
---------------------------------------------------------------------------
The underlyings the Exchange is proposing for binary KPI options
are KPIs for certain public company issuers that are (1) included in
those issuers' financial filings submitted to the Commission and (2)
important to determinations of the values of the issuers' stocks. An
issuer frequently includes KPIs and metrics material to the financial
condition and results of operations of the company as part of the
disclosure requirement in Management's Discussion and Analysis of
Financial Condition and Results of Operations (``MD&A'') in reports and
registration statements the issuer files with the Commission under both
the Act and the Securities Act.\80\ The relevant obligation ``requires
disclosure of information not specifically referenced in the item that
the company believes is necessary to an understanding of its financial
condition, changes in financial condition and results of operations,''
which can include KPIs.\81\ In providing guidance to issuers on the use
of KPIs in their MD&A disclosure, the Commission observed that ``[w]hen
proposing the current MD&A framework, the Commission noted that `[f]or
each business, there is a limited set of critical variables which
presents the pulse of the business.''' \82\ Due to their importance,
certain KPIs directly inform an investor's assessment of the valuation
of an issuer's stock.\83\
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\80\ See, e.g., Item 303 of Regulation S-K. 17 CFR 229.303.
``The objective of the discussion and analysis is to provide
material information relevant to an assessment of the financial
condition and results of operations of the registrant including an
evaluation of the amounts and certainty of cash flows from
operations and from outside sources,'' and the MD&A discussion and
analysis ``must be of the financial statements and other statistical
data that the registrant believes will enhance a reader's
understanding of the registrant's financial condition, cash flows
and other changes in financial condition and results of
operations.'' Id.
\81\ See Commission Guidance on Management's Discussion and
Analysis of Financial Condition and Results of Operation, Securities
Exchange Act Release No. 88094 (Jan. 30, 2020).
\82\ Id.
\83\ For example, in responding to a November 2024 request for
comment by the Financial Accounting Standards Board regarding
financial KPIs for business entities, the CFA Institute submitted a
comment letter on behalf of its members, answering the question
``How often do you use Financial KPIs in your analysis?'' with an
answer of ``All the time.'' CFA Institute Report at n.46.
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To qualify as a ``security'' under the Act, an option need not be
restricted only to referencing the specific dollar value of a security.
When approving the Exchange's listing of CD options, the Commission
concluded that the CD options were ``securities'' even though the CD
options ``do not share every feature of a classic option.'' \84\ In
determining that CD options are ``based on the value [of a security or
securities]'' and, therefore, that they are securities, the Commission
stated that CD options ``expressly reference in their payout conditions
a term of an underlying security that is material to the value of that
security.'' \85\ This is also the case with the binary KPI options
identified in the proposal: the KPIs selected are ``material to the
value'' of a particular
[[Page 65866]]
security, and payouts of binary KPI options are conditioned on those
terms. Indeed, the nexus between the proposed KPIs and the value of the
underlying security is, if anything, more direct than in the case of CD
options. Whereas CD options reference a credit event (a contingency
that may or may not affect the market value of the reference security
depending on recovery rates and market conditions), binary KPI options
reference the issuer's actual reported financial or operating
performance, and the underlying KPIs are the metrics investors consider
when determining the value of a stock. Unlike an exogenous event that
merely holds the potential to trigger potential financial consequence
for a security, each of the proposed KPIs (whether measured at the
consolidated or segment level) ultimately constitutes a material
component of the issuer's financial results that itself forms the basis
for investors' measurements of a company's (and its stock's) intrinsic
value.
---------------------------------------------------------------------------
\84\ CD Options Approval at 32375 n.34. The Commission
specifically noted that ``the fact that the payout of a cash-settled
option will not increase or decrease based on the price movement of
the underlying security of that option is not dispositive.'' Id. at
32375.
\85\ Id. at 32376.
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Certain KPIs in the proposal (including, for example, those based
on earnings per share) also result in binary KPI options overlying
those KPIs being options based on an ``interest in,'' or based on the
value of an interest in, a security or securities within the meaning of
Section 3(a)(10) of the Act. In the CD Options Approval, the Commission
observed that ``[a] security is a collection of rights (and
obligations) running between the issuer and the holder of the
security'' and that ``[t]he concept of an `interest in' a security
plainly includes rights generating a pecuniary interest in a security,
such as the right to a dividend payment or bond (coupon) payment.''
\86\ The Commission stated that, for CD options, it was ``important to
note that merely because the option does not transfer ownership of the
interest or right in a security--but instead becomes in-the-money and
provides a cash payment if certain security rights are triggered--does
not mean the option is not on an interest in a security.'' \87\
Similarly, each binary KPI option proposed herein provides a cash
payout based on the value of the disclosed KPI. Some of such KPIs are
directly tied to a pecuniary interest in a security, such as earnings
per share (which represents a stockholder's pro rata claim on the
issuer's profits and is the basis for both dividend distributions and
earnings-driven appreciation in the value of the security), and others
are indirectly tied to the pecuniary interest of a security, such as
the issuer's net revenue and income, which determine the issuer's
capacity to generate returns for stockholders. A stockholder's
pecuniary interest in a security is not limited to contractual payment
rights (such as declared dividends) but encompasses the right to
benefit from the issuer's earnings capacity, as reflected in the market
price of the security. Binary KPI options based on earnings metrics
therefore reference a core component of the stockholder's pecuniary
interest.
---------------------------------------------------------------------------
\86\ Id.
\87\ Id. at n.46.
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Although the Act does not separately define the term ``option,''
the CEA's definition of ``option'' lends further support to the
classification of binary KPI options as securities. The CEA defines
``option'' as ``an agreement, contract, or transaction that is of the
character of, or is commonly known to the trade as, an `option',
`privilege', `indemnity', `bid', `offer', `put', `call', `advance
guaranty', or `decline guaranty'.'' \88\ This functional definition
focuses on the character of the instrument and common usage rather than
formal labels, and the binary KPI options proposed herein exhibit the
defining characteristics of the previously Commission-approved binary
options through standardized terms established by the Exchange: the
nature of the underlying interest, the settlement method, the
multiplier, the exercise style of the option, whether the option has
automatic exercise provisions, the expiration date, and the exercise
price. Specifically, binary KPI options are associated with an
underlying KPI as designated by the Exchange. The Exchange establishes
these options as cash-settled (the settlement method) that are
European-style (the exercise style of the option) and will be
automatically exercised if the requirements for exercising the option
have been met. Binary KPI options have a multiplier of one. As is the
case for all other options listed on the Exchange, each binary KPI
option will include an expiration date and a strike price in accordance
with the proposed Rules. As such, the binary KPI options contracts are
appropriately categorized as standardized options. Notably, as further
discussed below, the binary payout structure does not transform these
instruments into event contracts or swaps even though binary KPI
options would likely meet the definition of ``security-based swap''
\89\ (but would, therefore, still be ``securities'' subject to the
Commission's jurisdiction \90\) if they were not excluded from the
definition of ``swap.'' \91\ The Commission has previously approved
binary options with all-or-nothing payouts, including binary index
options, for listing on the Exchange, as securities options. The
distinguishing feature is not the shape of the payout curve but rather
the nature of the underlying interest: where the underlying is a
security, an interest therein, or based on the value thereof, the
instrument is a securities option regardless of whether its payout is
variable or binary.
---------------------------------------------------------------------------
\88\ 7 U.S.C. 1a(36).
\89\ The term ``security-based swap'' is defined in the Act, and
that definition is incorporated by reference into the CEA. See 15
U.S.C. 78c(a)(68) (defining the term); and 7 U.S.C. 1a(42).
\90\ Security-based swaps are ``securities'' under the Act. See
15 U.S.C. 78c(a)(10).
\91\ See 7 U.S.C. 1a(47)(B)(iii).
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The OCC's Options Disclosure Document (``ODD'') includes the
characteristics above in the list of standardized terms of options
generally.\92\ More specifically, the ODD attributes these same
characteristics to binary options. Although the ODD defines an option
generally as ``the right to buy or sell a specified amount or value of
a particular underlying interest at a fixed exercise price by
exercising the option before its specified expiration date,'' it notes
that cash settlement does not preclude an instrument from being an
option: ``Certain special kinds of options may give a right to receive
a cash payment if certain criteria are met.'' \93\ More specifically,
the ODD describes binary options as follows: ``A binary option is a
cash-settled option having only two possible payoff outcomes: either a
fixed amount or nothing at all . . . The binary options approved for
trading are all subject to automatic exercise. The holder of a binary
option . . . has the right to receive (and the writer of a binary
option has the obligation to pay) the exercise settlement amount for
the option if the value of the underlying interest as of the time
specified by the applicable listing options market (i.e., the exercise
settlement value) meets the criteria for automatic exercise of the
option, as specified in the rules of the listing options market. If
those criteria are not met, the option will expire worthless. . . .
binary options are European-style options.'' \94\ Accordingly, the
binary KPI options proposed herein have the character of binary options
(and thus standardized
[[Page 65867]]
options) and are commonly understood to function as such.
---------------------------------------------------------------------------
\92\ See Characteristics and Risks of Standardized Options,
Options Clearing Corporation at 3 (June 2024) (``ODD''). The ODD was
amended to add disclosure on binary options in June 2008. See
Securities Exchange Act Release No. 57744, 73 FR 25072 (May 6,
2008).
\93\ ODD at 3.
\94\ Id. at 8.
---------------------------------------------------------------------------
Moreover, the Exchange emphasizes that the ``based on the value
of'' analysis does not depend on a generalized statistical relationship
between KPIs and stock prices in the aggregate, but rather on the
demonstrated materiality of each specific KPI to the specific issuer's
stock for which binary KPI options are proposed. Under the proposal,
the Exchange will designate the applicable KPI and the relevant
reporting period at the time of listing. This issuer-specific
designation ensures that the Exchange has determined, prior to listing,
that the particular KPI is material to the valuation of the respective
issuer. Critically, the Exchange's materiality determination is not
made in isolation; it is corroborated by reporting requirements or the
issuer's own judgment. An issuer's inclusion of a KPI in its earnings-
related filings submitted to the Commission--if the metric is not
otherwise required by regulation to be included--reflects the issuer's
independent determination, made subject to the officer certifications
required under the Sarbanes-Oxley Act of 2002, that such metric is
necessary for investors to understand the issuer's financial condition
and results of operations, and is therefore material to an investor's
valuation of the issuer's securities. The issuer's disclosure decision
thus constitutes a determination by the issuer itself that the KPI is
material to the value of its stock.
Additionally, treating the binary KPI options proposed herein as
securities is consistent with the position taken by the Commission and
the U.S. Commodity Futures Trading Commission (``CFTC'' and, together
with the Commission, the ``Commissions'') in the 2012 joint rulemaking
\95\ further defining ``swap'' and ``security-based swap,'' in which
the Commissions stated that the ``swap'' and ``security-based swap''
definitions were not intended to capture existing options products and
that securities options, including exchange-traded equity options and
listed index options, remain subject to the existing Commission options
regulatory regime and are not reclassified as swaps or security-based
swaps.\96\ Importantly, the Commissions further cautioned against an
overly broad application of the swap definitions where an instrument
does not functionally operate as a swap.\97\
---------------------------------------------------------------------------
\95\ See, e.g., Further Definition of ``Swap,'' ``Security-Based
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping, Securities Exchange Act
Release No. 67453, 77 FR 48208 (August 13, 2012).
\96\ See id. at 48211 (noting that the definitions of ``swap''
and ``security-based swap'' ``could be read to include certain types
of agreements, contracts, and transactions that previously have not
been considered swaps or security-based swaps, and nothing in the
legislative history of the Dodd-Frank Act appears to suggest that
Congress intended such agreements, contracts, or transactions to be
regulated as swaps or security-based swaps under Title VII''). The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
``Dodd-Frank Act'') was signed into law in July 2010 and added
definitions of ``swap'' and ``security-based swap'' into the CEA and
the Act. See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010). The Exchange notes
that binary options (on SPX from April 21, 2010 to January 16, 2015;
and on VIX from April 21, 2010 to August 16, 2017) and credit
default options (from June 19, 2007 to October 2008 and April 26,
2011 to December 26, 2014) were traded as standardized options on
the Exchange after the Dodd-Frank Act was adopted.
\97\ See id.; see also 77 FR 48208, at 48211 (``Title VII also
calls on the agencies to treat functionally or economically similar
products or entities in a similar manner, but does not require
identical rules.''). Section 712(d)(1) of the Dodd-Frank Act
provides that the CFTC and the SEC, in consultation with the Board
of Governors of the Federal Reserve System, shall jointly further
define the terms ``swap,'' ``security-based swap,'' and ``security-
based swap agreement.'' Section 712(a)(7)(A) of the Dodd-Frank Act
further provides that ``[i]n adopting rules and orders under this
subsection, the [CFTC] and the [SEC] shall treat functionally or
economically similar products or entities described in paragraphs
(1) and (2) in a similar manner.''
---------------------------------------------------------------------------
The definition of ``security-based swap'' in the Act is broad
enough to include binary KPI options if they are ``swaps''; however,
because the binary KPI options are options, they are not ``swaps'' or
``security based swaps.'' \98\ This is because the CEA expressly
excludes from the definition of ``swap'' ``any put, call, straddle,
option, or privilege on any security, certificate of deposit, or group
or index of securities, including any interest therein or based on the
value thereof, that is subject to [the Securities Act and the Act].''
\99\ Pursuant to this exclusion, if an instrument qualifies as a
securities option under the Act and the Securities Act (as the Exchange
believes the proposed binary KPI options do), it is categorically
removed from the swap and security-based swap definitions as a matter
of statutory construction. Put another way, because security-based
swaps are, by definition, a subset of swaps, an option that falls
within the definition of ``security'' in the Act and the Securities Act
is excluded from the definition of ``swap'' and, thus, cannot, as a
matter of statutory construction, be a security-based swap.\100\
---------------------------------------------------------------------------
\98\ The definition of ``security-based swap'' generally
includes ``any agreement, contract or transaction that is [a swap
and is] based on . . . the occurrence, nonoccurrence, or extent of
the occurrence of an event relating to a single issuer of a security
or the issuers of securities in a narrow-based security index,
provided that such event directly affects the financial statements,
financial condition, or financial obligations of the issuer.'' 15
U.S.C. 78c(a)(68)(A)(ii)(III).
\99\ 7 U.S.C. 1a(47)(B)(iii).
\100\ In the recent ``Statement on Tokenized Securities''
published jointly by the Division of Corporation Finance, the
Division of Trading and Markets, and the Division of Investment
Management, the interplay of the statutory definitions of
``security,'' ``swap'' and ``security-based swap'' was laid out
plainly as follows (footnotes omitted, emphasis added):
The assessment of whether a financial instrument is a security-
based swap or a linked security depends, in part, on the exclusions
from the definition of ``swap.'' There are several exclusions from
the definition of ``swap'' relating to securities. To the extent a
financial instrument falls into one of these exclusions, it is not a
swap and, therefore, is not a security-based swap. For example, any
note, bond, or evidence of indebtedness that is a security, as
defined in Section 2(a)(1) of the Securities Act, is excluded from
the definition of swap. Similarly, any put, call, straddle, option,
or privilege on any security, certificate of deposit, or group or
index of securities, including any interest therein or based on the
value thereof, that is subject to the Securities Act and the
Exchange Act, is excluded from the definition of swap.
SEC Division of Corporation Finance, Division of Investment
Management, Division of Trading and Markets, Statement on Tokenized
Securities (Jan. 28, 2026).
---------------------------------------------------------------------------
Classifying binary KPI options as securities options under the Act
is consistent with the Commission's established regulatory framework
for binary options, including investor protection objectives, and
preserves the integrity of antimanipulation restrictions, insider
trading prohibitions, and material nonpublic information (``MNPI'')
controls. More specifically, because these contracts are tied to
Commission disclosure rules and regulations and MNPI risks that are
substantially identical to those present in traditional securities
trading, aligning binary KPI options with the securities regulatory
framework preserves the integrity of insider trading prohibitions and
the Commission's disclosure regime. Listing binary KPI options on a
registered national securities exchange subjects trading activity to
SRO and Commission surveillance for, among other things, manipulative
trading and insider trading, affording investors the full protection of
the federal securities laws. Further, classifying binary KPI options as
security options under the Act allows these contracts to be traded by
the same liquidity providers that trade listed options today, all of
whom are Commission-registered and regulated broker-dealers who are
also subject to FINRA and exchange SRO oversight, and allows such
contracts to be traded by the same retail customer base that trade
binary options (and KPI-related contracts) today.
[[Page 65868]]
Proposal
The Exchange believes the proposal is consistent with Section 6(b)
of the Act, in general, and furthers the objectives of Section 6(b)(5)
of the Act,\101\ in particular, in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\101\ 15 U.S.C. 78f(b).
---------------------------------------------------------------------------
Specifically, the Exchange believes the proposed rule change will
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, protect investors
and the public interest because it establishes a clear and transparent
framework for a new category of listed options (binary KPI options)
that are tied to financial and operating metrics of issuers that are
publicly disclosed in earnings-related filings issuers submit to the
Commission. Currently, investors wishing to position their investment
strategies around earnings disclosures must rely primarily on equity
options, whose pricing is affected by a wide range of variables beyond
the reported financial or operating measure of interest (e.g., implied
volatility, delta, time value, and general market movement). Binary KPI
options allow investors to take a targeted, defined-risk position
directly on a specific financial or operating measure (i.e., an issuer
KPI) for a particular reporting period. The Exchange believes this
additional investment tool will protect investors and the public
interest because it will promote market efficiency, enable more precise
price discovery around earnings events, allow investors to hedge
against potential idiosyncratic risks, and close a gap in current
national securities exchange-listed products available to market
participants.
The Exchange believes the proposed list of issuers and KPIs on
which the Exchange may list binary KPI options will prevent fraudulent
and manipulative acts and practices, remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, protect investors and the public interest. First, as
noted above, the Exchange is proposing to list binary KPI contracts
based on specific financial and operating metrics reported by the
following issuers in their earnings-related filings submitted to the
Commission: Apple, Inc.; Advanced Micro Devices, Inc.; Alphabet Inc.;
<a href="http://Amazon.com">Amazon.com</a>, Inc.; Bank of America Corporation; Citigroup Inc.; Coinbase
Global, Inc.; Ford Motor Company; Intel Corporation; JPMorgan Chase &
Co.; Marathon Digital Holdings, Inc.; Meta Platforms, Inc.; Microsoft
Corporation; Netflix, Inc.; NVIDIA Corporation; Palantir Technologies
Inc.; Robinhood Markets, Inc.; SoFi Technologies, Inc.; Space
Exploration Technologies Corp.; Super Micro Computer, Inc.; Target
Corporation; Tesla, Inc.; and The Walt Disney Company. The Exchange
believes offering investors an additional investment tool on a national
securities exchange related to some of the most actively traded stocks
and options will perfect the mechanism of a free and open market and
benefit investors by allowing them to further refine their investment
strategies, including using binary KPI options to hedge idiosyncratic,
event-specific risk embedded in the specific KPIs (as further discussed
below), for these actively traded companies.
The Exchange believes the proposed universe of issuers will prevent
fraudulent and manipulative acts and practices, because the proposed
issuers are large, well-capitalized, and widely followed issuers with
highly liquid underlying securities and options markets. During May
2026, each of the issuers exceeded $3 billion in market capitalization
and ranked among the top 200 U.S. companies by average daily options or
stock volume, with the exception of Space Exploration Technologies Corp
(commonly referred to as SpaceX), which did not begin trading until
June 2026 but which the Exchange believes will satisfy these measures
with its first month of trading results based on its volumes since it
began trading.\102\ Securities with high market capitalizations and
liquid markets are generally less susceptible to manipulation because
of the substantial capital required to artificially influence prices of
those securities. The depth and breadth of trading activity for
securities with significant market capitalizations, such as the stocks
of the proposed issuers, make it unlikely that a single market
participant would be able to exert undue influence on the price of such
a stock, as large volumes of buyers and sellers are what ultimately
continuously reflect the true market value of the stock. The Exchange
believes the KPIs of issuers with high market capitalizations proposed
to underlie binary KPI options are similarly less susceptible to
manipulation because any attempt to distort a financial metric of such
an issuer would require an enormous and economically impractical
deployment of capital, which would likely exceed the fixed payout of a
binary KPI option. Therefore, like stocks of large-cap issuers, KPIs of
large-cap issuers are less susceptible to manipulation due to the
structural barriers that would make manipulating KPI values
operationally difficult and financially irrational (in addition to the
rigorous financial oversight to which these issuers are subject, as
further discussed below).
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\102\ The ADV of SpaceX stock between June 12 and June 22, 2026
was approximately 290,009,963 shares. The market capitalization of
SpaceX as of June 22, 2026 was $2.145 trillion.
---------------------------------------------------------------------------
In addition to the proposed issuers being highly capitalized and
having actively traded stocks and options on such stocks, the Exchange
also believes the proposed limited universe of issuers for binary KPI
options to those proposed will prevent fraudulent and manipulative acts
and practices because each issuer is subject to current and periodic
reporting requirements under the Act. Therefore, each of the proposed
issuers must file annual reports on Form 10-K, quarterly reports on
Form 10-Q, and current reports on Form 8-K with the Commission, which
as discussed above disclose information the issuer believes is
necessary for an investor to understand its financial condition,
changes in financial condition, and results of operations, which can
include KPIs. Further, each issuer maintains audited financial
statements prepared in accordance with U.S. Generally Accepted
Accounting Principles (``GAAP'') and is subject to executive
certification requirements under the Sarbanes-Oxley Act. As a result,
the settlement-determining KPI values for each eligible issuer are
produced within the Commission's supervisory jurisdiction, are publicly
verifiable from a Commission-regulated source, and are subject to
relevant anti-fraud provisions under the Act, which the Exchange
believes will reduce the potential for manipulation of the underlying
KPIs as well as the applicable issuer's stock.
Further, the Exchange believes the proposed limited universe of
issuers will introduce binary KPI options in a well-developed, well-
understood, and transparent Commission-regulated market environment.
Each issuer is among the most widely followed, actively traded, and
extensively analyzed issuers in its respective sector, with deep and
liquid equity and derivatives markets and a broad
[[Page 65869]]
institutional and retail investor base. The depth of existing market
activity surrounding these issuers supports fair and orderly pricing by
ensuring that binary KPI options are listed in markets where price
discovery is well-established, liquidity is readily available, and
participants have broad access to the information necessary to form and
express informed views on KPI outcomes. The Exchange believes the
continuous public scrutiny to which these issuers are subject
substantially reduces the likelihood that any market participant could
obtain or maintain an informational advantage sufficient to manipulate
the settlement value of the binary KPI options.
The Exchange believes the proposed KPI metrics will similarly
prevent fraudulent and manipulative acts and practices, remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors and the
public interest. The Exchange's proposal limits eligible KPIs to GAAP
and non-GAAP measures and other statistics related to an issuer's
financial condition and operational results, all of which the proposed
issuers disclose in their earnings-related filings (i.e., Forms 8-K,
10-Q, and 10-K) submitted to the Commission. As such, the settlement
values of the proposed binary KPI options are derived exclusively from
information that issuers deem as material information required to be
disclosed in filings submitted to the Commission. These metrics are
routinely referenced and tracked in the investment community, which the
market recognizes as meaningful and central indicators of issuer
performance. The Exchange believes the inclusion of well-established
metrics as eligible KPIs expands the value of binary KPI options for
investors without compromising the integrity of trading processes,
including the settlement process.
The Exchange proposes new Rule 4.81 to list the specific binary KPI
contracts with the KPI criteria for each option contract. Such KPI
criteria are established as the set KPI events that will be used to
determine whether an option contract should be exercised by comparing
the strike price of the binary KPI option to the KPI settlement value.
The proposed KPI metrics are among the most widely followed and
extensively analyzed measures for the proposed issuers. Specifically,
the Exchange proposes to be able to list a binary KPI option on
earnings per share (prepared in accordance with GAAP) for each proposed
issuer. This metric is among the most widely followed and extensively
analyzed figures in public company financial disclosures and is
disclosed in each issuer's current or periodic Commission filings.
Similarly, the Exchange proposes to list binary KPI options on revenue,
prepared in accordance with the applicable GAAP, for each issuer. As is
the case for earnings per share, revenue is a widely followed financial
metric for public reporting companies and is the subject of extensive
analyst coverage.
The Exchange proposes KPIs representing revenues broken out by
appliable reportable segment, business unit, or product category,
including cloud and artificial intelligence infrastructure revenues,
streaming and geographic subscription revenues, automotive segment
revenues, financial services segment revenues, consumer product
category revenues, and digital asset exchange transaction and
subscription revenues, among others, for several of the proposed
issuers. Each such metric is a GAAP-defined figure required to be
disclosed in the issuer's current or periodic Commission filings. The
Exchange understands these metrics enable market participants to
express views on specific high-profile business lines that are
extensively covered by analysts and subject to a high volume of
publicly available forecasts.
The Exchange proposes KPIs for the proposed financial institution
issuers that are specific to financial institution income statement
presentation, including net interest income, provision for credit
losses, and net income. Each such metric reflects the distinct GAAP
reporting framework applicable to banking institutions and is subject
to the same current and periodic disclosures as other proposed KPIs.
The proposed rule change also includes operating margin, gross
margin, or cash flow from operations KPIs for several issuers, each of
which is computed directly from GAAP financial statement line items
disclosed in the issuer's current and periodic Commission filings.
These metrics provide market participants with insight into issuer
profitability and capital generation and complement other revenue and
earnings figures when market participants are evaluating the value of
an issuer and its stock.
The Exchange also proposes several non-financial operational KPIs
that issuers disclosed in their current and periodic Commission
filings, including relevant production volumes, network and
infrastructure counts, user engagement metrics, deal counts, digital
asset trading volume, and digital asset mining and holdings metrics.
Each designated non-financial operational metric is closely tied to the
core economic activity of the respective issuer's business and is a
figure the issuer has affirmatively chosen to disclose to the public as
a key indicator of business performance. Issuers typically designate
and disclose such metrics because they are understood by the market to
be among the most meaningful measures of issuers' business activities.
As discussed above, this is consistent with Commission guidance that an
issuer should include KPIs in its earnings-related filings submitted to
the Commission that the issuer believes an investor needs to gain
understanding of its financial condition, changes in financial
condition, and results of operations, as such KPIs present the
``pulse'' of the issuer's business. The market significance of these
metrics is further reflected in the extensive analyst coverage and
investor attention, particularly near each earnings disclosure date.
Each metric is subject to executive certification as part of the filing
in which it appears and is widely tracked by financial data services
and equity research analysts.
Overall, the Exchange believes that the proposed well-established,
publicly reported metrics as eligible KPIs will expand the value of
binary KPI options for investors without compromising the integrity of
trading processes, including the settlement process. As a result, the
Exchange believes the proposed KPIs will protect investors and the
public interest, as the ability to list binary KPI options overlying
these issuer KPIs will permit the Exchange to offer investors
additional investment and hedging tools on the Exchange that investors
can incorporate into their investment strategies regarding the proposed
issuers.
The Exchange believes the proposed contract terms for binary KPI
options will promote just and equitable principles of trade, remove
impediments to and perfect a free and open market and national market
system, and protect investors. As discussed above, the proposed
contract terms for binary KPI options are standardized option terms.
Like traditional option contracts and binary index option contracts
currently listed for trading on the Exchange, each proposed binary KPI
option will be a call or a put, will have an underlying, exercise
price, an expiration date, a settlement type, an exercise style, and a
multiplier. As is the case for binary index options, each proposed
binary KPI option will have an exercise settlement amount paid
depending on how the settlement value of the
[[Page 65870]]
underlying KPI compares to the exercise price.
The proposed binary KPI options will function in a substantially
similar manner as, and have substantially similar contract terms to,
binary index options the Exchange may already list pursuant to its
Rules. The proposed definitions of binary KPI option, call binary KPI
option, exercise price, and put binary KPI option are the same as those
terms for binary index options (as previously approved by the
Commission), differing only in reference to the underlying (issuer KPI
v. index).
The proposed definition of settlement value for binary KPI options
is generally similar to the definition for binary index options (as
previously approved by the Commission), with certain differences
necessary to be addressed due to the different nature of a KPI as the
underlying. While the definition of exercise settlement value in Rule
4.70 allows the Exchange to determine the exercise settlement amount
for binary index options, $1 is a permissible exercise settlement
amount for those options; therefore, the proposed $1 exercise
settlement amount for binary KPI options is not novel and is consistent
with current Rules. The Exchange believes the proposed $1 exercise
settlement amount is reasonable given the retail nature of the proposed
binary KPI options and merely adds specificity to the Rules for binary
KPI options. The Exchange notes binary KPI options differ from
standardized index options (which are also cash-settled) in that the
exercise settlement amount is $1.00 rather than a cash amount equal to
the difference between the settlement value of the index and the strike
price of an option. Since the $1.00 exercise settlement amount will be
paid out to the option holder if the criterion of the binary KPI option
has been met, a binary KPI option has a fixed exercise settlement
amount.
The Exchange believes the alternative settlement procedures of the
Clearing Corporation described above in the Purpose section are
appropriate in that they establish a process to address an unexpected
condition, taking into consideration fairness to both option writers
and holders. Pursuant to these alternative settlement procedures, the
payout amount of a binary KPI option may be based on the market's last
valuation of the binary KPI option. If a KPI value is unavailable at
settlement, the Clearing Corporation may delay expiration processing in
accordance with its Rules. In certain circumstances, if the Clearing
Corporation determines that the KPI value is unavailable (and will not
become available, such as if an issuer announces it will no longer
disclose the KPI value or will not be submitted its earnings-related
filing to the Commission for the relevant reporting period), the
Clearing Corporation may apply its alternative settlement procedures.
Ultimately, the Determinations Committee determines whether the
alternative settlement procedures of the Clearing Corporation are
appropriate.\103\ Certain events may trigger the alternative settlement
procedures, including but not limited to company announcements that a
KPI event will no longer be available; a delay in company earnings
announcements for an indefinite period; illiquid markets where there
are is no bid/offer or other data for price discovery. The timing of
the triggering of alternative settlement procedures depends on when the
Clearing Corporation makes any such determination of the lack of
availability of the KPI, which will often be the expiration date (but
may be at other times as set forth in the Rules of the Clearing
Corporation and further described in the options disclosure document
for binary KPI options). If, when applying the alternative settlement
procedures, the Clearing Corporation, in coordination with
representatives of the exchange(s) on the Determination Committee,
determines that the last closing price is unreliable or inappropriate
to use because the binary KPI option has not recently traded or traded
with sufficient liquidity, the KPI will be deemed as not met and the
binary KPI options will expire unexercised. The Exchange notes that
alternative settlement procedures are not novel for options, and
alternative settlement procedures vary based on option type.\104\
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\103\ The Determinations Committee is convened by CCUS for the
purpose of making settlement and contract-adjustment determinations
for binary options issued and cleared by CCUS. The Determinations
Committee will be comprised of representatives from CCUS and the
exchange(s) on which the option that is subject to review (for a
settlement issue or contract-adjustment determination) trades.
\104\ For example, for binary index options on indexes issued by
OCC, OCC Rules provide for a determination process used when the
underlying security price or index value is unreported, inaccurate,
unavailable or inappropriate. The OCC determination process utilizes
a panel to fix the value of the underlying interest to be used for
expiration processing. This process differs from the proposed
alternative settlement procedures for binary KPI options because the
binary options issued by OCC depend solely on trading price or index
value (unlike binary KPI options), and OCC Rules allow specific
methods by which an underlying value may be determined for
expiration processing if a trading price or value is not available.
See OCC By-Laws, Article XIV, Section 5.
---------------------------------------------------------------------------
The Exchange believes the proposed expirations for binary KPI
options will remove impediments to and perfect the mechanism of a free
and open market and a national market system because they will align
with the reporting periods for which the proposed issuers disclose
earnings results and submit corresponding filings to the Commission.
These expirations will, therefore, permit investors to incorporate
binary KPI options into their investment strategies that correspond to
issuers' earnings results. Further, as discussed above, the Exchange
believes aligning expirations with Commission-filed and -regulated
sources will reduce the potential for manipulation of the underlying
KPIs, which will ultimately protect investors and the public interest.
The proposed rule change establishes a strike regime for binary KPI
options similar to that for traditional options and binary index
options. As is the case for traditional options and binary index
options, the proposed rule change establishes permissible strike
intervals, the amounts of which increase as the value of the strike
increases. Additionally, the Exchange proposes to list initial and
additional series pursuant to a similar framework as traditional equity
options. The differences between the proposed strike regime and that of
standard equity and index options are necessary and appropriate to
reflect the static nature of KPIs (unlike underlying equities and
indexes, the values of which change throughout the trading day) and the
timing of their disclosure. As noted above, the Exchange intends to
list binary KPI options aligned with the cadence of the KPI disclosures
as their expiration cycle (generally quarterly). The Exchange intends
to list for trading binary KPI options with expirations for the then-
current reporting period (e.g., third quarter) as well as the following
period (e.g., fourth quarter) prior to the expiration of the binary KPI
options for the then-current reporting period (e.g., third quarter).
As the Exchange does for standard options, as well as binary index
options, the Exchange lists strikes (subject to its Rules) based on
relevant market information--including the then-current value of the
underlying--and customer demand. As described above, the Exchange
intends to do the same for binary KPI options by listing strikes
relative to the then-current value of the underlying KPI or publicly
available estimates from the issuer or major market data vendors. The
Exchange believes it is consistent with just and equitable principles
of trade to permit the Exchange to list strikes based on all available
information that would inform
[[Page 65871]]
expectations about the KPIs (as investors would do), and then add
strikes based on new or updated information, as it will allow the
Exchange to list series with strikes consistent with investor
expectations and demands. This will enable the Exchange to respond to
changes in market conditions for binary KPI options in the same manner
it is able to do today for equity and index options (including binary
index options), factoring in the static value of KPIs. Specifically,
the Exchange believes this flexibility is appropriate for binary KPI
options because the value of a KPI changes only when an issuer
discloses that KPI, which generally happens every three months, unlike
other underlyings, the value of which changes every trading day. While
this proposed strike listing regime for binary KPI options differs from
that of other options, the concept is the same, which is to permit the
Exchange to list strikes reflective of the then-current value of the
underlying and in response to customer demand. It is possible the
changed value of an underlying KPI in a more recent earnings disclosure
or new or updated estimates may be more sudden and pronounced than
changes in the value of an underlying equity or index (which are
susceptible to sudden value changes); however, like the listing rules
for equity and index options, the proposed rules permit the Exchange to
list strikes to reflect changes in the value of the underlying,
including substantial changes.
The Exchange believes the proposed scaling of strike prices is
reasonable and will protect investors, as it will permit the Exchange
to list strike values in amounts similar to current strike values for
other options. As noted above, values of certain KPIs may be large
(e.g., in the billions). The proposed scaling will permit the Exchange,
for example, to list a strike of 27 rather than 27,000,000,000, which
the Exchange believes will be simpler for investors to understand (as
it will be made clear that 27 will reflect billions in this example
\105\) and consistent with current strike levels. The proposed scaling
also permits the strike prices for binary KPI options to fit within
current system capabilities regarding strike price values. The Exchange
believes scaling rather than modifying its systems (and potentially
causing investors to modify their systems) will benefit investors by
allowing them to trade binary KPI options in the same manner as they
trade other options today.
---------------------------------------------------------------------------
\105\ The binary KPI option contract specifications available on
the Exchange's public website will set forth the scaling factor for
each binary KPI option.
---------------------------------------------------------------------------
The Exchange believes the proposed strike intervals promote just
and equitable principles of trade because it will permit the Exchange
to list commercially meaningful strikes that will permit investors to
tailor their trading strategies with precision. The Exchange
acknowledges the proposed strike intervals are smaller than those in
current Rules for other types of options. However, the Exchange
believes the precision is appropriate and necessary given the nature of
KPIs and the proposed binary options. The purpose of binary KPI options
is to permit investors to take discrete and precise positions on KPIs.
Therefore, the Exchange needs the ability to list strikes with the
precision necessary to permit investors to take these positions. For
example, an issuer's earnings (or loss) per share is generally a
relatively small number (under $10). While strike intervals for other
options are limited to $0.50 intervals, that would not be meaningful in
the context of binary KPI options when investors are looking to take
positions for a specific KPI value, which will be measured in penny
intervals. Therefore, the Exchange believes smaller strike intervals
will benefit investors because they will allow the Exchange to list
binary KPI options that will enable investors to use these options in
the precise nature for which they are intended and provide sufficient
flexibility for the Exchange to list series to respond to changes in
market conditions and customer demand, while other proposed rules will
place bounds around the strikes the Exchange may list.\106\
---------------------------------------------------------------------------
\106\ See proposed Rule 4.82(d) and (e).
---------------------------------------------------------------------------
Further, as discussed above, the proposed strike interval framework
is consistent with that of other options, which provides for larger
strike intervals as the value of strike prices increases (as described
above). Given the scaling factor for larger KPI values, while it may
appear the proposed rule change will permit smaller strike intervals
for larger KPI values, this is not the case if the actual value (rather
than the nominal value) of the strike intervals is considered. The
corresponding actual value of the strike interval for a strike price
that was subject to a larger scale value is higher than the actual
value of the strike interval for a strike price that was subject to a
smaller scale value. As a result, the permissible strike intervals for
strike prices representing higher KPI values are larger than the
permissible strike intervals for strike prices representing lower KPI
values. This is consistent with general premise underlying current
strike intervals that larger strike intervals apply to larger strike
values and, therefore, the Exchange believes the proposed rule change
will promote just and equitable principles of trade.
The Exchange believes the proposed rule change clearly describes
the proposed terms of binary KPI options, such as with respect to
expirations (including the Exchange's announcement of the specific
expiration date after binary KPI options series for that expiration are
listed with a placeholder expiration date) and exercise prices
(including the scaling factor, negative values, and potential changes
to that scaling factor for a binary KPI option class) for all
investors. As discussed above, the Exchange will describe the terms of
binary KPI options and changes to such terms in Exchange notices,
technical specifications (including binary KPI option reference data
files), and contract specifications in accordance with Rule 1.5. As
this documentation will be posted on the Exchange's public website, it
will be available to all investors. Further, Exchange TPHs and retail
brokerage firms are highly sophisticated investors and currently intake
information regarding other Exchange-listed options (including changes)
in the same manner that the Exchange plans to release this information
for binary KPI options. As binary KPI options are intended as a retail-
focused product, the Exchange understands from retail brokerage firms
that binary KPI options will be displayed on the firms' user interfaces
in ways that similarly make the terms of the options clear to their
retail customers.\107\ Therefore, through information available on the
Exchange's websites and made available by retail brokerage firms to
their customers, the Exchange expects retail customers to have access
to all relevant information regarding the terms of binary KPI options
they choose to trade, including specification of the actual expiration
dates and applicable scale values for each KPI.
---------------------------------------------------------------------------
\107\ For example, the Exchange understands from retail
brokerage firms they intend to display a binary KPI option of an
issuer's earnings per share of -$2.47 to expire on the date on which
the issuer discloses its third quarter 2026 earnings results as a
phrase, such as ``will the issuer's loss per share for the third
quarter of 2026 be more than (or less than) $2.47?''.
---------------------------------------------------------------------------
The proposed rule change specifies a multiplier of one for binary
KPI options rather than require the Exchange to designate a multiplier
of at least one as
[[Page 65872]]
the rules for binary index options do. This proposed multiplier is
currently permissible as a multiplier for binary index options and is
thus consistent with the definition of contract multiplier for binary
index options (as that requires a multiplier of at least one) and
merely adds specificity to the Rules for binary KPI options.
The Exchange believes proposed Rule 5.1(b)(3)(f), which establishes
RTH for binary KPI options, is consistent with the Act, protects
investors, and prevents fraudulent and manipulative practices. The
Exchange believes the proposed structure ensures that trading in binary
KPI options will cease before the earnings disclosure that determines
settlement. The distinction between A.M.- and P.M.-settled contracts
mirrors the settlement terms already applicable to binary index
options, as well as other Exchange products.
The Exchange believes halting trading in binary KPI options in
accordance with current Rules (including Rules 5.20 and 5.22) and not
automatically if trading in the underlying issuer stock halts will
promote just and equitable principles of trade, remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, protect investors and the public
interest. The Exchange generally halts trading in a security to protect
investors by allowing time for the market to absorb information or
volatility that may impact the value of the security and promote
orderly price discovery, thereby reducing the risk that investors trade
at stale or distorted prices. The Exchange believes halting trading in
binary KPI options in lockstep with trading halts in the issuer's stock
and options overlying that stock given the discrete, disclosure-driven
nature of binary KPI options' value would not serve these investor-
protection purposes. Therefore, the Exchange believes it will benefit
investors to permit them to continue to manage and adjust their
positions in binary KPI options. If the Exchange believes halting
trading in a binary KPI option would be necessary to maintain a fair
and orderly market and protect investors based on then-current factors,
which may include whether the issuer's stock halts and the reasons that
caused the halt, the Exchange will have the authority to do so pursuant
to Rule 5.20.
The Exchange believes proposed Rule 5.3(c)(3), which addresses bid
and offer conventions for binary options with multipliers other than
100, will provide clarity and consistency in market quotations relative
to the notional size of the option and promote investor understanding
of the cost and value of binary KPI option contracts. Therefore, the
Exchange believes the proposed rule change is consistent with just and
equitable principles of trade because it creates a pricing structure
that reflects the notional value of an option based on its
multiplier.\108\
---------------------------------------------------------------------------
\108\ The Exchange notes that this proposal is consistent with
the existing framework for adjusting bids and offers for mini- and
micro-options under Rule 5.3(c)(1) and (2), respectively.
---------------------------------------------------------------------------
Proposed Rule 5.31(d)(1)(D), which provides for binary KPI options,
the System initiates the opening rotation at 9:30 a.m., is consistent
with the opening rotation trigger for VIX options and will allow binary
KPI options to open for trading in an orderly and transparent manner.
The Exchange believes this provision removes impediments to a free and
open market by applying the same proven opening process to binary KPI
options that governs other listed options classes on the Exchange.
Additionally, unlike equity options, for which the underlying opens for
trading and can trigger the opening rotation, KPIs do not trade, so
triggering the opening rotation based on a set time is reasonable for
binary KPI options.
The Exchange believes excluding binary KPI options from the obvious
error provisions in Rule 6.5 is consistent with the Act and promotes
just and equitable principles of trade because the standard obvious
error framework, which evaluates whether an execution price deviates
from a ``theoretical value'' by a prescribed amount, is incompatible
with the structure of binary KPI options. Binary KPI options have no
continuously observable theoretical value (unlike equity and index
options) prior to the date of the earnings-related disclosure. Rather,
their exercise settlement amount is fixed at either a pre-specified
dollar amount or zero, depending entirely on whether the reported KPI
satisfies the exercise condition, which itself is based on a single,
publicly verifiable metric, disclosed in issuers' earnings-related
filings submitted to the Commission. An obvious error framework
premised on theoretical value calculations is unsuitable for a product
with a binary, fixed payout, and application of such a framework to a
binary product could produce unjust or arbitrary results for investors.
Moreover, because settlement of binary KPI options is determined by
metrics an issuer discloses in its earnings-related filings submitted
to the Commission (i.e., figures produced pursuant to established
accounting standards, subject to independent audit, and certified under
the Sarbanes-Oxley Act), the settlement process is itself governed by a
comprehensive external regulatory framework. The Exchange believes that
establishing any alternative dispute mechanism in this context would be
not only unnecessary, but potentially disruptive to market integrity,
as it may introduce an element of post-hoc discretion into a settlement
process that is expressly designed to be objective, verifiable, and
rule bound. Finally, the Exchange notes that pursuant to proposed Rule
5.34(d), the Exchange may apply a maximum execution price protection
for binary KPI options on a class basis, pursuant to which any
execution price for a binary KPI option above the Exchange-designated
maximum execution price for that class is adjusted down to that maximum
execution price. This protection provides investors with an additional
safeguard against executions at potential erroneous prices, further
limiting the need for a separate obvious error provision applicable to
binary KPI options, which the Exchange believes protects investors and
the public interest. The Exchange accordingly believes that not
applying Rule 6.5 to binary KPI options is a reasonable and justified
product-specific accommodation that promotes orderly trading and clear,
consistent treatment of transactions in these contracts.
The Exchange believes the proposed amendments related to position
limits for binary KPI options are consistent with the Act because they
establish a rational position limit framework for binary KPI options
that will protect against manipulation while facilitating legitimate
trading activity in a novel product. The Exchange believes that setting
the position limit for binary KPI options at a fixed level of 25,000
standard options contracts, with 100 binary KPI option contracts
equaling one standard option contract, is appropriate. The Exchange
believes the proposed position limit, which is the smallest possible
position limit that can apply to equity options, is appropriate and
consistent with the Act.\109\ Specifically, the proposed position limit
of 25,000 standard contracts is equivalent to the position limit in
Rule 8.30, Interpretation and Policy .02 that applies to an equity
option for which the underlying security does not meet the requirements
for a higher option contract limit (including newly listed equity
options). The position limit for options on the stocks of the issuers
of the proposed KPIs is ten times higher (i.e., 250,000 contracts)
pursuant to Rule
[[Page 65873]]
8.30, Interpretation and Policy .02. Given the large market
capitalization and liquidity of these stocks, the Exchange believes the
proposed position limit for binary KPI options for the issuers of those
stocks is conservative and reasonable for the binary KPI options.
Further, the proposed position limit for binary KPI options is
equivalent to a position limit the Commission previously approved for
binary options on stocks.\110\ Therefore, the Exchange believes the
proposed position limit will promote just and equitable principles of
trade, as it is sufficient to mitigate potential manipulation and
prevent disruption in the markets for the issuers' stocks and options
on the stocks while accommodating investors trading activity for
legitimate economic purposes.
---------------------------------------------------------------------------
\109\ See, e.g., Rule 8.30, Interpretation and Policy .02(a).
\110\ See NYSE American, LLC Section 17, Rule 904ByRDs.
---------------------------------------------------------------------------
As proposed, binary KPI options with a multiplier of one will count
toward applicable limits on a proportional basis relative to standard
equity options on the issuer's stock, which carry a multiplier of 100.
This treatment is consistent with the position limits applied to other
reduced-value options, such as micro-options (which also have a
contract multiplier of one).\111\ Because the proposed binary KPI
options have a multiplier of one, while standard option contracts have
a multiplier of 100, the notional value of a binary KPI option is
significantly less than the notional value of standard option
contracts. For example, 25,000 contracts with a value of $1.00 with a
multiplier of 100 would equate to $2,500,000 notional value, while
25,000 binary KPI option contracts with a value of $1.00 (which is the
fixed maximum value of a binary KPI option contract) with a multiplier
of one would equate to $25,000 notional value. Counting 100 binary KPI
contracts as one standard option contract for purposes of calculating
compliance with position limits effectively calibrates these limits so
that investors may hold positions in binary KPI options for an
economically equivalent number of contracts as they may hold in
standard equity options. Therefore, the Exchange believes this proposed
treatment is consistent with just and equitable principles of trade, as
it counts option positions in a manner equivalent with their value.
---------------------------------------------------------------------------
\111\ See Rule 8.31(f) (which provides for purposes of
determining compliance with the position limits under Rule 8.31, 100
micro-option contracts with an index multiplier of one equal one
standard option contract with an index multiplier of 100).
---------------------------------------------------------------------------
The Exchange further believes the proposal regarding position
limits is reasonable because it reflects the distinct structure of
binary KPI options and their relationship to the underlying issuer.
Binary KPI options have a fixed maximum notional value and settle on an
all-or-nothing basis based on a KPI of the issuer rather than the price
of the issuer's stock as is the case for a standard equity option. The
economic risk of a position is binary, in that the contract either
settles in-the-money at $1.00 or out-of-the-money at $0.00.
Additionally, with respect to binary KPI options, the maximum notional
exposure per contract is fixed in advance; it cannot exceed $1.00.
Moreover, the exercise of binary KPI option positions would not
influence the outcome of the underlying KPI. As a result, the potential
for any single market participant to exert undue influence over binary
KPI option settlement is limited.
Further, the Exchange's proposal to not aggregate positions in
binary KPI options on the same KPI with different expiration dates and
positions in binary KPI options for the same issuer with different
underlying KPIs similarly reflects the distinct structure of binary KPI
options. Each binary KPI option expiration corresponds to a separate
event tied to a specific issuer reporting period. Thus, the Exchange
believes aggregating positions across different expiration dates would
not accurately reflect the risk profile of these positions and would
impose an unnecessary burden on market participants seeking exposure to
company KPI events across different reporting periods. In determining
that position limits should not be aggregated across all binary KPI
options referencing a single issuer, the Exchange analyzed the degree
to which KPIs of a given issuer are correlated with one another.
Specifically, the Exchange performed a correlation analysis for each
company set forth in proposed Rule 4.81(a), measuring the historical
co-movement of each company's KPIs across the 16 most recent earnings
releases (Q3 2022 through Q2 2026). Of the 223 KPI correlation pairs
examined, 30 (approximately 13%) exhibit correlations above 0.90. The
Exchange notes that many of these highly correlated pairs involve
closely related measures, such as aggregate and segment revenue, where
strong co-movement is expected and does not reflect an independent
source of concentrated risk. Across the full sample, correlations
indicate that the large majority of KPI pairs move substantially
independently of one another across earnings periods. Thus, the
Exchange believes issuer-level aggregate position limits are not
warranted.
Similarly, the Exchange believes it is reasonable to not aggregate
binary KPI options with non-binary options contracts overlying the
stock of the issuer. Because binary KPI options and equity options
overlying the same issuer have different risk profiles (i.e., binary
KPI options settle based on the value of a KPI of the issuer rather
than its stock price, on which equity options settle), the Exchange
believes it would be inappropriate and misleading to require
aggregation of these positions for purposes of position limits. As
noted above, binary KPI options are based solely on whether a single,
specified-issuer KPI meets a discrete threshold at a defined future
date, and their value reflects the market's probability assessment of
that singular outcome. Standard equity options, on the other hand,
reflect a broad array of factors bearing on the price of the underlying
security, including macroeconomic conditions and sector dynamics, of
which any individual KPI is only one component. Because the two
products are not priced off a common reference and do not represent
economically equivalent or fungible exposures, aggregating positions
across them would not meaningfully advance the prevention of
manipulative practices with respect to the underlying security.
There is further precedent for the proposed nonaggregation
framework. Specifically, Rule 4.8(g) provides that positions in Single
Stock Dividend Options (``SSDOs'') will not be aggregated with
positions in ordinary options overlying the stock of the issuer
underlying the SSDOs. The rationale underlying that rule is directly
analogous to the rationale supporting nonaggregation of binary KPI
options with standard listed equity options on the same issuer. In its
SSDO filing,\112\ the Exchange noted that SSDOs are based solely on
expected dividends for an issuer and will reflect the forward value of
that expectation. Because the pricing of ordinary options and SSDOs
differs dramatically due to fundamentally different inputs, the
Exchange concluded there was no need to aggregate positions across the
two product types to prevent manipulative practices involving the
underlying. The Commission found this approach
[[Page 65874]]
appropriate and consistent with the Act in its approval of the
proposal.\113\
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\112\ See Securities Exchange Act Release No. 64654 (June 13,
2011), 76 FR 35503 (June 17, 2011) (SR-CBOE-2011-039).
\113\ See Securities Exchange Act Release No. 64991 (July 29,
2011), 76 FR 47280 (August 4, 2011) (SR-CBOE-2011-039).
---------------------------------------------------------------------------
The same logic applies to the proposed binary KPI options. Like
SSDOs, binary KPI options derive their value from a single, specified
variable (whether a particular issuer KPI meets a discrete contractual
threshold at a defined date), and their pricing reflects the market's
probability assessment of that singular outcome. In contrast, as noted
above, standard equity options on the same issuer reflect a full
spectrum of factors which may affect the underlying security's price.
The pricing of binary KPI options and standard equity options on the
same issuer will therefore differ substantially, for the same
structural reasons that the Commission found dispositive in the SSDO
context. The Exchange accordingly believes that nonaggregation of
binary KPI options with standard equity options is appropriate and
consistent with the Act.
The Exchange notes that binary option contracts (Binary Return
Derivatives (``ByRDs'')) approved for trading at NYSE American and NYSE
Arca, Inc. are similarly not aggregated with positions in other options
on the same underlying security for purposes of determining compliance
with the position limits.\114\ This is true despite those binary
options directly overlying the same stock as non-binary options. When
approving such rule (including a position limit of 25,000 contracts for
ByRDs), the Commission stated ``that the proposed position limits . . .
for [ByRDs] are reasonable and consistent with the Act. The proposed
position limit of 25,000 contracts in any [ByRD] class appears to
reasonably balance the promotion of a free and open market for these
securities with minimization of incentives for market manipulation. The
proposed margin rules appear reasonably designed to deter a member or
its customer from assuming an imprudent position in [ByRDs].'' \115\
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\114\ See NYSE American Rule 904ByRDs (b) and NYSE Arca Rule
5.86-O(b).
\115\ See Securities Exchange Act Release No. 56251 (August 14,
2007), 72 FR 46523, 46525 (SR-Amex-2004-27).
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Finally, the Exchange believes the proposed amendment to the hedge
exemption provision is consistent with the Act because it facilitates
legitimate hedging activity in binary KPI options. Because a liquidity
provider simultaneously holding a short put and short call position in
binary KPI options has taken opposing sides of the potential binary
outcome (i.e., the short call is at risk if the KPI is met, and the
short put is at risk if the KPI is not met), the Exchange believes such
a position represents a defined, bounded risk profile that does not
present the same potential for manipulation or market disruption that
position limits are designed to prevent. The Exchange believes it is
reasonable to make the proposed hedge exemption available only to
binary KPI positions held by Market-Makers. As described above, the
current equity hedge exemption in Rule 8.30 is unavailable to Market-
Makers for binary KPI options. The Exchange believes that offsetting
binary KPI option creates a similar hedge to one to which the equity
exemption is available. The Exchange believes the proposed hedge
exemption (in addition to any other exemptions available under Rule
8.30) will allow Market-Makers to provide depth and liquidity in the
marketplace for binary KPI options. The Exchange therefore believes the
hedge exemption as proposed will encourage market-making activity and
liquidity provision in binary KPI options while protecting investors
and the public.
The Exchange also believes the proposed changes to Rule 8.43(f) are
consistent with the Act. By establishing tailored reporting
requirements for binary KPI options, the Exchange will be able to
monitor TPH positions effectively and detect any accumulation of
positions that may approach or exceed applicable limits to the benefit
of investors. The Exchange believes it is consistent with just and
equitable principles of trade for 100 binary KPI option contracts to
equal one standard option contract for purposes of determining whether
the report in Rule 8.43(a) is required given the relatively small size
of binary KPI contracts compared to standard option contracts. As
discussed above, proposed binary KPI options have a multiplier of one,
while standard option contracts have a multiplier of 100. Therefore,
the notional value of a binary KPI option is significantly less than
the notional value of standard option contracts. For example, 200
contracts with a value of $1.00 with a multiplier of 100 would equate
to $20,000 notional value, while 200 binary KPI option contracts with a
value of $1.00 (which is the fixed maximum value of a binary KPI option
contract) with a multiplier of one would equate to $200 notional value.
Counting 100 binary KPI contracts as one standard option contract for
purposes of this report effectively calibrates the reporting
requirement so that investors are required to submit the report for an
economically equivalent number of contracts, which promotes just and
equitable principles of trade. The Exchange believes the proposal will
provide the Exchange and regulators with visibility into large position
concentrations in binary KPI options, preserving the ability to
identify unusual activity and respond to any unforeseen concerns, while
calibrating the threshold to a metric that is meaningful for this
contract given its smaller multiplier relative to that of standard
equity options. The Exchange believes this reporting framework, coupled
with the proposed position limits amendments, provides a fully adequate
regulatory framework for these instruments.
Further, as noted above, the Exchange believes it has an adequate
surveillance program in place to surveil for any potentially heightened
insider trading or manipulation risks that may be presented by the
proposed binary KPI options. The Exchange notes that the settlement
value of a binary KPI option is sourced from the issuer's earnings-
related filing submitted to the Commission. The values of these KPIs
are produced through the accounting and reporting processes of the
issuer, subject to independent audit prior to submission to the
Commission. Because settlement is decoupled from the market price of
the underlying security, no amount of trading activity in that security
could alter the revenue, earnings, or other metric that determines
whether the exercise criterion of a binary KPI option is satisfied. Any
manipulation of the reported KPI would constitute securities fraud and
expose the issuer to liability under federal securities law, separate
and apart from any exchange-related violation.
Moreover, the specifically proposed binary KPI options present a
more defined surveillance profile than other event contracts available
in the market today. Because settlement is tied to a well-defined set
of issuer-KPI metrics contained in earnings-related filings submitted
to the Commission, the relevant surveillance framework operates as a
focused subset of the insider trading surveillances the Exchange
already applies to standard equity options. The legal prohibition on
trading in the issuer's securities, including options, while in
possession of MNPI about an unreported KPI is not novel, but rather the
same prohibition the Exchange enforces today for standard equity
options overlying the issuer's stock.
The Exchange believes the proposed binary KPI options will serve as
a vehicle to hedge idiosyncratic, event-
[[Page 65875]]
specific risk embedded in the specific issuer KPIs. Standard equity
options are calibrated to the price of the underlying security and
capture a full spectrum of factors or risks which may affect the
issuer's value, such as macroeconomic conditions or sector dynamics.
Because equity option pricing incorporates this full spectrum, a
participant seeking to hedge exposure to a single, discrete KPI outcome
cannot do so using standard equity options as precisely as the
participant could with binary KPI options. Settlement of a binary KPI
option is determined solely by whether a specified-issuer KPI meets a
defined threshold, so the contract effectively isolates certain
individual risks an investor may seek to manage. For example, consider
an investor holding a long-term position in a particular issuer stock,
who believes the issuer's quarterly revenue will fall short of
expectations (for reasons unrelated to the issuer's long-term
prospects). The investor may utilize the binary KPI option to hedge
more precisely against the near-term risk without disruption to the
underlying equity position. This targeted hedging utility represents a
distinct and additive function relative to existing listed products,
which the Exchange believes will serve the interests of investors and
provide an efficient mechanism for managing event-specific, KPI-driven
risk.
The Exchange believes the proposed rule change will facilitate
transactions in securities, remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, protect investors and the public interest, because it will
provide investors with a securities exchange-listed investment choice
for these instruments, offering price transparency and the regulatory
protections of a national securities exchange. The Exchange believes
the proposed rule change will permit investors to manage their risk
exposures and carry out their investment objectives on a securities
exchange with more flexibility and broader applicability. The Exchange
also believes the proposed rule change will promote competition, as it
will meet demands of investors that currently may trade products
structured in substantively the same manner as the proposed binary KPI
options in other markets (as further discussed below). Binary KPI
options would provide investors with a straightforward means of
expressing a directional view on key financial and operating metrics.
The Exchange further believes the proposed rule change is consistent
with the protection of investors and the public interest, as binary KPI
options would be subject to the Exchange's existing rules governing the
listing and trading of options. The Exchange believes expanding the
universe of binary options will benefit investors, particularly retail
investors and other investors who prefer simplicity, as a complementary
offering to current exchange-traded options.
The proposed rule change will permit the Exchange to list binary
KPI options on a national securities exchange as alternatives to
products that are structured in substantially the same manner as binary
options currently available in the OTC market and on other platforms.
The Exchange understands investors have traded binary options similar
to the proposed binary options in OTC markets for many years but may
prefer to trade such options in a listed environment to receive the
benefits of trading listing options. These benefits include: (1)
enhanced efficiency in initiating and closing out positions; (2)
increased market transparency; and (3) heightened contra-party
creditworthiness. The Exchange believes the proposed rule change may
encourage liquidity to shift from the OTC market onto the Exchange,
which the Exchange believes would increase market transparency as well
as enhance the process of price discovery conducted on the Exchange
through increased order flow. The proposed rule change is intended to
provide a market for binary KPI options as a standardized product
without the credit risk of an individual issuer. By providing a listed
and standardized market for more classes of binary options, the
Exchange seeks to attract investors who desire the simplicity of a
binary option with the certainty and safeguards of a regulated and
standardized marketplace. Additionally, unlike an OTC binary option,
contra-party credit risk for Exchange-listed binary KPI options is
significantly reduced through the issuance and guarantee of the
contracts by a registered clearing agency. Further, as an exchange-
traded option, binary options will have the advantage of liquidity
provided by Market-Makers, which the Exchange believes may lead to
tighter spreads than those in the OTC market. The Exchange also
believes that standardization will enable more interested parties to
become market participants.
In addition to the OTC market, various market platforms that are
not registered as national securities exchanges currently offer
products structured in substantively the same manner as binary options
that the Exchange may list pursuant to current Rules and as proposed.
These platforms offer binary option products overlying issuer KPIs,
which may be settled at varying points of the day (not just at the open
and close of the trading day). However, as these venues are not
national securities exchanges, they do not offer investors the benefits
of centralized liquidity, market transparency, or securities
regulations intended to protect investors. The Exchange believes
listing competitive products on a national securities exchange would
create a centralized and standardized marketplace for these products,
which promotes price discovery and transparency, within an established
and appropriate regulatory framework designed to afford investors in
securities with important protections. In other words, the Exchange
believes its proposal offers a more transparent platform than the OTC
market or other market platforms offer. It would contribute to leveling
the playing field with these alternative markets and provide investors
with safeguards associated with Commission and SRO oversight of the
trading activity in the proposed exchange-listed binary KPI options.
Ultimately, the Exchange believes the proposed rule change will
provide investors with greater trading tools and opportunities and
flexibility, resulting in investors having additional means to carry
out their investment objectives and manage their risk exposures through
products listed and traded on a national securities exchange. The
Exchange believes the proposed rule change will offer market
participants a simplified, transparent, and limited risk investment
choice that may be more aligned with their specific timing needs,
investment and hedging strategies, and risk tolerances. The Exchange
believes it benefits the investing public to continue to enhance its
listed product offerings to respond to continuously changing needs of
investors and to a continuously changing competitive environment.
A robust and competitive market requires exchanges to respond to
investors' evolving needs by regularly improving their offerings. When
Congress charged the Commission with supervising the development of a
``national market system'' for securities, Congress stated its intent
that the ``national market system evolve through the interplay of
competitive forces as unnecessary regulatory restrictions are
[[Page 65876]]
removed.'' \116\ Consistent with this purpose, Congress and the
Commission have repeatedly stated their preference for competition,
rather than regulatory intervention to determine products and services
in the securities markets.\117\ This consistent and considered judgment
of Congress and the Commission is correct, particularly in light of
evidence of robust competition in the options trading industry. The
fact that an exchange proposed something new is a reason to be
receptive, not skeptical--innovation is the lifeblood of a vibrant
competitive market--and that is particularly so given the continued
internationalization of the securities markets, as exchanges and other
platforms continue to implement new products and services to compete
not only in the United States but throughout the world. Options
exchanges continuously adopt new and different products and trading
services in response to industry demands to attract order flow and to
increase their trading volume. This competition has led to a growth in
investment choices, which ultimately benefits the marketplace and the
public. The Exchange believes the proposed rule change will help
further competition by providing market participants with yet another
investment option for options listed on a national securities exchange.
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\116\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.).
\117\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975)
(``The objective [in enacting the 1975 amendments to the Exchange
Act] would be to enhance competition and to allow economic forces,
interacting within a fair regulatory field, to arrive at appropriate
variations in practices and services.''); Order Approving Proposed
Rule Change Relating to NYSE Arca Data, Securities Exchange Act
Release No. 59039 (December 2, 2008), 73 FR 74770 (December 9, 2008)
(``The Exchange Act and its legislative history strongly support the
Commission's reliance on competition, whenever possible, in meeting
its regulatory responsibilities for overseeing the [self-regulatory
organizations] and the national market system. Indeed, competition
among multiple markets and market participants trading the same
products is the hallmark of the national market system.''); and
Regulation NMS, 70 FR at 37499 (observing that NMS regulation ``has
been remarkably successful in promoting market competition in [the]
forms that are most important to investors and listed companies'').
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act, because binary KPI options will
be available to all market participants who wish to trade such options
on the same terms and in the same manner (including with respect to the
payout terms and amount). All market participants will be subject to
the same rules applicable to binary KPI options, as described in this
proposed rule change. Except as set forth in the proposed rule change,
binary KPI options will trade in the same manner as other options,
including binary index options, on the Exchange.
The Exchange does not believe the proposed rule change will impose
any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act, because other
options exchanges may propose similar products. Additionally, as noted
above, substantively similar products to the proposed binary KPI
options are available in the OTC market and various other markets.
The Exchange notes that it operates in a highly competitive market
in which market participants can readily direct order flow to competing
venues who offer similar products. The Exchange believes the proposed
rule change will provide investors with a comparable alternative to the
OTC market and other venues. The Exchange believes it may be a more
attractive alternative to the OTC market and these other venues, as
market participants will benefit from being able to trade these options
in a securities exchange environment, which provides, among other
things: (1) enhanced efficiency in initiating and closing out
positions; (2) increased market transparency; (3) heightened contra-
party creditworthiness; and (4) investor protections of the securities
regulatory framework. As a result, the Exchange believes that the
proposed rule change may relieve any burden on, or otherwise promote,
competition, as it will allow the Exchange to offer a securities
exchange-listed alternative to the products currently available in
these other markets.
C. Self-Regulatory Organization's Statement on Comments on the
[…truncated; see source link]Indexed from Federal Register on October 16, 2026.
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.