Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Its Rules To Permit Orders Comprised of Options and Futures Legs (“Future-Option Orders”), 81592-81600 [2024-23064]
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Federal Register / Vol. 89, No. 195 / Tuesday, October 8, 2024 / Notices
comparable to those offered by other
exchanges as well as to provide a
competitive rate charged for removing
liquidity, which the Exchange believes
will help to encourage Members to send
orders to the Exchange to the benefit of
all Exchange participants. As the
proposed rates are equally applicable to
all market participants, the Exchange
does not believe there is any burden on
intramarket competition.
With respect to the proposed billing
errors policy, the proposal would
establish a clearly defined timeframe for
fees and rebates to be considered final
that would apply equally to all Members
and Non-Members. Additionally, as
noted above, this proposed change is
similar to rules of other exchanges and
therefore does not raise any new or
novel issues that have not been
previously considered by the
Commission.34
For these reasons, the Exchange does
not believe such proposed changes
would impair the ability of Members or
competing order execution venues to
maintain their competitive standing in
the financial markets, and therefore, the
Exchange does not believe the proposal
will impose any burden on intermarket
competition. Moreover, because the
proposed changes would apply equally
to all Members and Non-Members, as
applicable, the Exchange does not
believe the proposal would impose any
burden on intramarket competition.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
This proposed rule change establishes
dues, fees or other charges among its
members and, as such, may take effect
upon filing with the Commission
pursuant to Section 19(b)(3)(A)(ii) of the
Act 35 and paragraph (f)(2) of Rule 19b–
4 thereunder.36 Accordingly, the
proposed rule change would take effect
upon filing with the Commission.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend the rule change if
it appears to the Commission that the
action is necessary or appropriate in the
public interest, for the protection of
34 See
supra notes 14–19 [sic].
U.S.C. 78s(b)(3)(A)(ii).
36 17 CFR 240.19b–4(f)(2).
35 15
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investors, or would otherwise further
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
LTSE–2024–06 on the subject line.
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–LTSE–2024–06. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–LTSE–2024–06 and should be
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.37
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024–23062 Filed 10–7–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101229; File No. SR–
CBOE–2024–042]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Amend Its
Rules To Permit Orders Comprised of
Options and Futures Legs (‘‘FutureOption Orders’’)
October 1, 2024.
Paper Comments
PO 00000
submitted on or before October 29,
2024.
Sfmt 4703
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 17, 2024, Cboe Exchange,
Inc. (the ‘‘Exchange’’ or ‘‘Cboe
Options’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. 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 orders comprised of
options and futures legs (‘‘future-option
orders’’). The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegal
RegulatoryHome.aspx), at the
Exchange’s Office of the Secretary, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
17 CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
37
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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
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The Exchange proposes to amend its
Rules to permit future-option orders,
which would be comprised of both
options and futures legs. The Exchange
understands it is common for investors
to engage in hedging or other
investment strategies that involve
options and related futures products.
However, to execute those investment
strategies, investors must submit the
options order to the Exchange and
separately submit the futures order to a
designated contract market (‘‘DCM’’) on
which the futures trade. For example,
market participants may obtain
positions in Cboe Volatility Index
(‘‘VIX’’) options through transactions on
the Exchange and hedge those positions
entering into a separate transaction on
Cboe Futures Exchange, LLC’s (‘‘CFE’’)
centralized market in VIX futures (‘‘VX
futures’’). Separate executions of this
sort create additional risks, including
risk that one order will execute while
the other does not and price risk
resulting from the time it takes to
complete both transactions. The
Exchange understands that due to those
risks and the complexities of multi-part
transactions, market participants may
instead transact in the over-the-counter
(‘‘OTC’’) market or not obtain a hedge at
all. The proposed rule change adopts a
mechanism to facilitate the execution of
these cross-product transactions in a
simple, efficient manner that reduces
these execution and price risks.
The Exchange first proposes to adopt
a definition of a future-option order.
Specifically, the proposed rule change
amends Rule 1.1 to define a ‘‘futureoption order’’ 3 as an order to buy or sell
3 As proposed, a ‘‘future-option order’’ is deemed
an inter-regulatory spread order for purposes of the
Rules. Rule 1.1 defines an inter-regulatory spread
order as an order involving the simultaneous
purchase and/or sale of at least one unit in contracts
each of which is subject to different regulatory
jurisdictions at stated limits, or at a stated
differential, or at market prices on the floor of the
Exchange. The proposed rule change modernizes
this definition to apply it to the Exchange in
general, as opposed to the floor of the Exchange (the
definition of inter-regulatory spread order was
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a stated number of units of an
underlying or a related futures
contract(s) coupled with the purchase or
sale of an option contract(s) on the
Exchange.4 The Exchange would
designate in which classes future-option
orders would be available.5
The proposed definition of a futureoption order includes a risk offset
requirement. A user may only submit a
future-option order if it satisfies the
applicable risk offset requirement. The
Exchange believes a risk offset
requirement will provide market
participants with sufficient flexibility to
execute legitimate strategies comprised
of options and futures while preventing
a market participant from using the
proposed execution mechanism to
execute a futures trade outside of the
normal trading process on the
applicable designated contract market
by combining the future leg(s), for
example, with an inexpensive out-ofthe-money option leg.
Pursuant to paragraph (a) of the
proposed definition of future-option
order, the System will accept a futureoption order if the future leg(s) provides
no less than 10% and no greater than
125% risk offset to the option leg(s).6 A
adopted when all trading on the Exchange occurred
in open outcry).
4 The proposed definition of a future-option order
is similar to the definition of a stock-option order.
Rule 1.1 defines a ‘‘stock-option order’’ as an order
to buy or sell a stated number of units of an
underlying or a related security coupled with either
(a) the purchase or sale of option contract(s) on the
opposite side of the market representing either the
same number of units of the underlying or related
security or the number of units of the underlying
security necessary to create a delta neutral position
or (b) the purchase or sale of an equal number of
put and call option contracts, each having the same
exercise price and expiration date, and each
representing the same number of units of stock as,
and on the opposite side of the market from, the
underlying or related security portion of the order.
The primary difference is the stock-option order
definition requires the order to be delta neutral,
while the proposed definition of a future-option
order requires the order to have a risk offset within
a specified range (as described below).
5 Pursuant to Rule 1.5, the Exchange announces
all determinations it makes pursuant to the Rules
via specifications, Notices, or Regulatory Circulars
with appropriate advanced notice, which will be
posted on the Exchange’s website, or as otherwise
provided in the Rules; electronic message; or other
communication method as provided in the Rules.
The Exchange intends to initially permit futureoption orders overlying VIX. However, the
Exchange may expand the availability of futureoption orders to other underlying securities or
indexes in the future. If required, the Exchange and
would submit rule filings in connection with any
such expansion; for example, the Exchange may
determine that a different risk offset requirement
than what is proposed in this filing is appropriate
for another underlying based on the characteristics
of the overlying options and futures.
6 The user must include a delta value for each
option leg of the order when submitting a futureoption order. See Rule 1.1 (proposed paragraph
(b)(2) of definition of future-option order). While a
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future-option order satisfies this risk
offset requirement if the net delta value
of the order is no greater than ¥0.10
and no less than ¥1.25. The delta value
of an option leg equals the expected
change in the price of that options
contract given a $1.00 change in the
price of the underlying security or
index. The delta value of a future leg
equals the amount set forth in the rules
or contract specifications of the
designated contract market (‘‘DCM’’) on
which the future contract trades. The
delta value of each option and future leg
is multiplied by the applicable
multiplier. The sum of the future legs
delta values divided by the sum of the
option legs delta values, which equals
the net delta value for the order.
For VIX future-option orders, the
System will calculate the risk offset
described above using the net delta
value for each ‘‘group’’ of option legs
and future legs with the same expiration
date. The net delta value of each group
must be no greater than ¥0.10 and no
less than ¥1.25.7 For example, suppose
a VIX future-option order is submitted
with the following components:
• Sell 1 Dec VX future 8 with a delta of
¥1
• Buy 2 Jan VX futures with delta of 1
• Buy 16 Dec VIX option 9 calls with a
delta of 0.50
• Buy 35 Jan VIX option puts with a
delta of ¥0.60
The 1 short Dec VX future is grouped
with the 16 long Dec VIX calls, which
group has a net delta of/(¥1 × 1,000)/
(16 × .50 × 100) = ¥1,000/800 = ¥0.125.
The 2 long Jan VX futures are grouped
with the 35 short Jan VIX puts, which
group has a net delta of (2 × 1,000)/(35
× ¥0.60 × 100) = ¥2,000/2,100 =
¥0.9524. This order would satisfy the
risk offset requirement, as both groups
have a net delta between ¥0.10 and
¥1.25. If the System determines that a
complex strategy comprised of future
and option legs satisfies the risk offset
requirement, it accepts all future-option
orders for that complex strategy for the
remainder of that trading day. This will
prevent a situation in which the
Exchange accepts a future-option order
for a specific complex strategy on a
trading day but cannot execute against
user may use any methodology it chooses to
calculate the delta value of option legs, the value
must be reasonable and will be subject to
surveillance by the Exchange’s regulatory division.
The System will use the user-submitted delta values
to calculate the risk offset for the entire order.
7 If any option contract leg or future contract leg
cannot be grouped with any future leg(s) or option
leg(s), respectively, the System rejects a VIX futureoption order.
8 VX futures have a contract multiplier of 1,000.
9 VIX options have a contract multiplier of 100.
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future-option orders for the same
complex strategy submitted later that
trading day but no longer satisfies the
risk offset requirement because the delta
values have changed since the initial
order was submitted.10
The proposed rule change also
amends the definition of ‘‘complex
order’’ in Rule 1.1 to provide that unless
the context otherwise requires, the term
complex order will include futureoption orders.11
As proposed in Rule 5.33(o), when a
user submits a future-option order to the
Exchange:
• if the User is also a member of the
DCM on which the applicable future
trades and the Exchange has established
electronic communication with the
DCM, the Exchange will electronically
communicate the future component of
the future-option order to the DCM on
behalf of the User 12; or
• if the User is not also a member of
the DCM on which the applicable future
trades or opts out of the direct
communication described in the above
bulleted paragraph (or such direct
communication is unavailable), the User
must designate a specific futures
commission merchant (‘‘FCM’’) or
introducing broker (‘‘IB’’) with which it
has entered into an agreement pursuant
to proposed Rule 5.33, Interpretation
and Policy .05 (the ‘‘designated FCM/
IB’’) to which the Exchange will
communicate the futures component of
the future-option order on behalf of the
user.13 Proposed Interpretation and
Policy .05 provides that if the user is not
also a member of the DCM on which the
applicable future trades or opts out of
10 It is for this reason a user may not designate
a future-option order submitted for electronic
processing as GTC or GTD. See proposed Rule 1.1
(proposed paragraph (b)(1) of definition of futureoption order).
11 The term complex order already includes crossproduct orders such as stock-option orders and
security future-option orders.
12 Unlike stock, a future trades on one DCM,
which would make such direct communication
with the DCM possible. This would only be
available if the DCM and Exchange established
electronic communication between the two markets
to permit this direct communication of the futures
component.
13 As is the case with any order submitted to the
Exchange, only authorized Users and associated
persons of Users may establish connectivity to and
access the Exchange to submit orders. See Rule
5.5(a). A ‘‘User’’ is defined as a Trading Permit
Holder (‘‘TPH’’) or Sponsored User who is
authorized to obtain access to the System pursuant
to Rule 5.5. See Rule 1.1 (definition of User). The
Exchange currently has no Sponsored Users, so the
term ‘‘User’’ at present is synonymous with the
term ‘‘TPH.’’ The User and any individuals
associated with the User that submits a futureoption order must have any required futures
industry registrations and comply with applicable
rules of the designated contract market on which
the futures trades and the Commodity Futures
Trading Commission (‘‘CFTC’’).
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the direct communication (or such
direct communication is unavailable), to
submit a future-option order to the
Exchange for execution, a user must
enter into an agreement with one or
more FCMs or IBs that are not affiliated
with the Exchange, which FCM/IB(s) the
Exchange has identified as having
connectivity to electronically
communicate the futures components of
future-option orders to the designated
contract market on which the futures
trade.14 This will provide users with
flexibility to pick which FCM/IB will
communicate the futures components of
their orders for execution (if an FCM/IB
is necessary for communication of the
futures component to the DCM).15
The proposed rule change first
amends Rule 5.33 to describe how
future-option orders may execute
electronically on the Exchange. The
proposed rule change adds futureoption order to the list of types of
complex orders that may be accepted for
electronic trading.16 Specifically, the
proposed rule change amends Rule
5.33(b)(5) to reference the proposed
definition of future-option order in Rule
1.1 and state that only future-option
orders in the classes designated by the
Exchange 17 with no more than the
applicable number of legs are eligible
for electronic processing.18 Futureoption orders submitted for electronic
processing may execute pursuant to a
complex order auction (‘‘COA’’) if
eligible as described in Rule 5.33(d) or
in the complex order book (‘‘COB’’) as
described in Rule 5.33(e) and will
execute in the same manner as other
complex orders, except as described
below.
The proposed rule change adopts rule
5.33(f)(1)(C) to provide that users may
express bids and offers for a futureoption order in any decimal price the
14 This requirement is substantially identical to
that required for stock-option orders.
15 The Exchange intends to establish an
arrangement with one or more FCMs/IBs that are
members of the applicable designated contract
market, pursuant to which arrangement those
FCMs/IBs will have connectivity to the Exchange to
receive the futures components of future-option
orders and communicate those to the applicable
designated contract market for execution of these
futures components.
16 The proposed rule change also amends Rule
5.70(b) to provide that the Exchange may make
future-option orders available for flexible (FLEX)
options trading.
17 This flexibility with respect to classes is
necessary given the Exchange would need to
establish a relationship with appropriate DCMs on
which futures trade before it would be able to
accept future-option orders that contain futures legs
that trade on those DCMs.
18 The proposed rule change also provides that
future-option orders will execute (electronically) in
the same manner as other complex orders except as
otherwise specified in Rule 5.33.
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Exchange determines, which will permit
the Exchange to accommodate the
available pricing of futures. The
minimum increment for the option
leg(s) of a future-option order is $0.01 or
greater, which the Exchange may
determine on a class-by-class basis,
regardless of the minimum increments
otherwise applicable to the option
leg(s),19 and the future leg(s) of a futureoption order may be executed in any
decimal price permitted in the
designated contract market on which
the applicable futures trade. Smaller
minimum increments are appropriate
for future-option orders as the future
component may be able to trade at finer
decimal increments permitted by the
designated contract market on which
the futures trade. The Exchange notes
that even with the flexibility provided
in the proposed rule, the individual
options legs must trade at increments
allowed by the Commission.
The proposed electronic execution
process of future-option orders is
substantially similar to that of stockoption orders. Proposed Rule 5.33(o)(2)
provides that a future-option order may
execute against other future-option
orders (or COA Responses, if
applicable), but may not execute against
orders in the simple book.20 If a futureoption order can execute upon entry or
following a COA, or if it can execute
following evaluation while resting in
the COB pursuant to Rule 5.33(i), the
System executes the option component
(which may consist of one or more
option legs) of a future-option order
against the option component of other
future-option orders resting in the COB
or COA responses pursuant to the
allocation algorithm applicable to the
class (pursuant Rule 5.33(d)(5)(A)(ii)), as
applicable, but does not immediately
send the user a trade execution report,
and then automatically communicates
the future component(s) to the DCM or
the designated FCM/IB, as applicable,
for execution at the DCM on which the
futures trade. If the System receives an
execution report for the future
component from the DCM or the
designated FCM/IB, as applicable, the
Exchange sends the user the trade
execution report for the future-option
order, including execution information
for the future and option components. If
the System receives a report from the
DCM or the designated FCM/IB, as
applicable, that the future component(s)
19 This is consistent with the permissible pricing
of options legs of complex orders and stock-option
orders. See Rule 5.4(b) and 5.33(f)(A) and (B).
20 See also proposed Rule 5.33(g)(5) (which
provides that future-option orders, like stock-option
orders, may not leg into the simple book).
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cannot execute,21 the Exchange nullifies
the option component trade and notifies
the user of the reason for the
nullification. If a future-option order is
not marketable, it rests in the COB (if
eligible to rest) or routes to PAR for
manual handling, subject to a user’s
instructions. The Exchange believes this
proposed process is reasonable, because
the options and futures components of
a future-option order are submitted for
execution as part of the same
investment strategy. Given this, if the
future component does not execute, the
Exchange believes it is reasonable to
expect that a user that submitted a
future-option order to request
nullification of the options trade (as
permitted by Rule 6.5). If the future
component does not execute, rather
than require the user that submitted the
future-option order to contact the
Exchange to request nullification of the
option component execution pursuant
to Rule 6.5, the proposed rule eliminates
this requirement for the user to make
such request. Instead, the proposed rule
change provides that the Exchange will
automatically nullify the option
transaction if the future component does
not execute. The Exchange believes
such nullification without a request
from the user is consistent with the
purpose of future-option orders, as
contingent execution at or near the same
time (and thus reduction in price and
execution risk) is one of the primary
goals of future-option orders (as further
discussed below).
Future-option orders may also be
submitted for execution (if eligible) in
the complex automated improvement
mechanism (‘‘C–AIM’’) as described in
Rule 5.38 or complex solicitation
auction mechanism (‘‘C–SAM’’) as
described in Rule 5.40. Processing of
future-option orders through C–AIM or
C–SAM will occur in the same manner
as any other complex orders submitted
into those execution mechanisms.
Proposed Rule 5.33(o)(2) provides that
a future-option order may only execute
if the price complies with subparagraph
(f)(2)(B). The proposed rule change
amends Rule 5.33(f)(2) to describe the
permissible execution prices and
priority of future-option orders, which
is substantially similar to that of stock21 Execution of the futures components will need
to satisfy requirements of the applicable designated
contract market, including informational and
reporting time requirements, risk controls, and
price restrictions (such as needing to be within the
daily quotation range). Pursuant to Rule 5.33(k),
trading in any complex strategy (including one that
comprises a future-option order) is suspended if
any component of a complex strategy (including a
future leg) is halted. Therefore, if trading in a future
is halted, it could not execute and would result in
the future-option order not being executed.
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option orders. Specifically, proposed
Rule 5.33(f)(2)(C) states for a futureoption order with one option leg, the
option leg may not trade at a price
worse than the individual component
price on the simple book or at the same
price as a priority customer order on the
simple book. For a future-option order
with more than one option leg, the
option legs must trade at price pursuant
to Rule 5.33(f)(2)(A), which is the
permissible execution prices and
priority for complex orders comprised
of option legs. The System, therefore,
will not execute a future-option order at
a net price: (1) that would cause any
option component of the complex
strategy to be executed at a price of zero;
(2) that would cause any option
component of the complex strategy to be
executed at a price worse than the
individual component prices on the
simple book; (3) worse than the price
that would be available if the complex
order legged into the simple book; or (4)
worse than the synthetic best bid or
offer (‘‘SBBO’’) 22 or equal to the SBBO
when there is a priority customer order
on any leg comprising the SBBO and, if
a conforming complex order,23 at least
one option component of the complex
order must execute at a price that
improves the best bid or offer (‘‘BBO’’)
for that component by at least one
minimum increment or, if a
nonconforming complex order,24 the
option component(s) of the complex
order for the leg(s) with a priority
customer order at the BBO must execute
at a price that improves the price of that
priority customer order(s) on the simple
book by at least one minimum
22 The proposed rule change adds subparagraph
(3) to the definition of SBBO in Rule 5.33(a) to
provide that the SBBO is the best net bid and best
net offer on the Exchange for a complex strategy
calculated using, for future-option orders, the BBO
for each component (or the national best bid or offer
(‘‘NBBO’’) for a component if the BBO for that
component is not available) and the daily quotation
range for each future component. Similarly, the
proposed rule change adds subparagraph (3) to the
definition of synthetic national best bid or offer
(‘‘SNBBO’’) in Rule 5.33(a) to provide that the
SNBBO is the national best net bid and net offer for
a complex strategy calculated using, for futureoption orders, the NBBO for each option component
and the daily quotation range for each future
component.
23 The proposed rule change amends the
definition of ‘‘conforming complex order’’ in Rule
1.1 to provide that a future-option order is
conforming (1) if the ratio on the options legs is
greater than or equal to one-to-three (.333) or less
than or equal to three-to-one (3.00) or (2) the
options legs comprise an Index Combo order (as
defined in Rule 5.33(b)).
24 The proposed rule change amends the
definition of ‘‘nonconforming complex order’’ in
Rule 1.1 to provide that a future-option order is
nonconforming if the ratio of its options legs is less
than one-to-three (.333) or greater than three-to-one
(3.00) (unless the options legs comprise an Index
Combo order).
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increment.25 Pursuant to these proposed
changes, the option component(s) of a
future-option order will ultimately trade
in the same manner and in accordance
with the same priority principles as they
would if they had been submitted
without a future leg.
The proposed rule change also
amends Rules in Chapter 5, Section G of
the Rulebook to describe how futureoption orders may execute in open
outcry on the Exchange’s trading floor,
which is substantially similar to the
open outcry execution process of stockoption orders. Specifically, the
proposed rule change amends Rule
5.83(b) to provide that the Exchange
may make future-option orders available
for PAR routing for manual handling (as
is the case for other complex orders,
including stock-option orders). The
proposed rule change further amends
this provision to provide that the
Exchange may determine (as it can for
other nonconforming complex orders
and non-conforming stock-option
orders) to make nonconforming futureoption orders not eligible for electronic
processing, in which case such orders
would only be eligible for manual
handling and open outcry trading. The
proposed rule change amends Rule
5.85(g) to provide that a bid or offer that
is identified to the trading crowd as part
of a future-option order is made and
accepted subject to the following
conditions (which are the same
conditions applicable to stock-option
orders): (1) at the time the future-option
order is announced, the TPH initiating
the order must disclose to the crowd all
legs of the order and identify the
specific market(s) on which and the
price(s) at which the non-option leg(s)
of the order is to be filled; and (2)
concurrent with the execution of the
options leg of the order, the initiating
TPH and each TPH that agrees to be a
contra-party on the non-option leg(s) of
the order must take steps immediately
to transmit the non-option leg(s) to the
identified market(s) for execution.26
Proposed Rule 5.85(b)(3) provides,
however, that (like the stock component
of stock-option orders) a floor broker or
PAR official may, subject to a User’s
instructions, route the future component
of a future-option order represented in
open outcry to the DCM or an Exchange25 All-or-none complex orders (including futureoption orders) may only execute at prices better
than the SBBO.
26 The proposed rule change also updates Rule
5.85(g)(2) to provide that a trade representing
execution of the options leg of a future-option order
may be cancelled at the request of any TPH that is
a party to that trade only if market conditions in
any of the non-Exchange market(s) prevent the
execution of the non-option leg(s) at the price(s)
agreed upon.
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designated FCM/IB not affiliated with
the Exchange for execution at a
designated contract market on which
the futures trade in accordance with
proposed Rule 5.33, Interpretation and
Policy .05.27 The Exchange also
proposes to add subparagraph (5) to
Rule 5.85(g) (which is substantially
similar to Rule 5.85(g)(4) for stockoption orders) to provide that a TPH or
PAR official may route the future
component of an eligible future-option
order represented in open outcry from
PAR directly to a designated FCM/IB (as
defined in Rule 5.33(o)) not affiliated
with the Exchange for electronic
execution at the designated contract
market on which the futures trade (1) in
accordance with the order’s terms, and
(2) as a single order or as a paired
matching order (including with orders
transmitted from separate PAR
workstations). TPHs seeking to route the
future component of a future-option
order represented in open outcry
through PAR to an Exchange-designated
FCM/IB not affiliated with the Exchange
for electronic execution at the
designated contract market on which
the futures trade must comply with
proposed Rule 5.33(o).28 The Exchange
proposes to amend Rule 5.91(g) to
provide that as they currently can for
complex orders (including stock-option
orders), floor brokers may leg futureoption orders where one of the legs is
executed on the Exchange.
The proposed rule change amends
Rule 5.85(b)(3) to describe the priority
that will apply to future-option orders
executed on the Exchange’s trading
floor. Specifically, the proposed rule
change provides that future-option
orders have priority over bids (offers) of
in-crowd market participants but not
over priority customer bids (offers) in
the book. Specifically, future-option
orders, like stock-option orders, will
have priority over bids and offers of incrowd market participants on the
trading floor. Further, the options legs of
conforming and nonconforming futureoption orders may be executed at the
same net debit and credit prices as the
options legs of stock-option orders.
27 The proposed rule change also makes a
nonsubstantive amendment to Rule 5.85(b)(3) to
correct the current cross-reference to Rule 5.11 to
Rule 5.33, Interpretation and Policy .04, which is
the applicable rule to be referenced.
28 If any TPH that is a party to a trade
representing the execution of the options leg of a
future-option order requests, if market conditions in
any of the non-Exchange market(s) prevent the
execution of the non-option leg(s) at the price(s)
agreed upon, the execution of the option leg may
be cancelled. See proposed Rule 5.87, Interpretation
and Policy .03. This is consistent with what is
permissible for stock-option orders, as well as the
proposed electronic processing of future-option
orders set forth in proposed Rule 5.33(o).
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Pursuant to proposed Rule 5.85(b)(4), a
conforming future-option order may be
executed at a net debit or credit price
without giving priority to equivalent
bids (offers) in the individual series legs
that are represented in the trading
crowd or in the book if the price of at
least one option leg of the order
improves the corresponding bid (offer)
of a priority customer order(s) in the
book by at least one minimum trading
increment as set forth in Rule 5.4(b).29
Additionally, pursuant to proposed Rule
5.85(b)(5), a nonconforming futureoption order may be executed at a net
debit or credit price without giving
priority to equivalent bids (offers) in the
individual series legs that are
represented in the trading crowd or in
the book if each option leg of the order
betters the corresponding bid (offer) of
a priority customer order(s) in the book
on each leg by at least one minimum
trading increment as set forth in Rule
5.4(b).30
The Exchange proposes to amend
Rule 6.5, Interpretation and Policy .07 to
describe how a future-option order may
qualify as an obvious error. As
proposed, future-option orders will be
handled in a similar manner as stockoption orders for purposes of Rule 6.5.
Specifically, if the option leg of a futureoption order qualifies as an obvious
error under Rule 6.5(c)(1) or
catastrophic error under Rule 6.5(d)(1),
then the option leg that is an obvious or
catastrophic error will be adjusted in
accordance with Rule 6.5(c)(4)(A) or
(d)(3), respectively, regardless of
whether one of the parties is a customer.
However, the option leg of any customer
future-option order will be nullified if
the adjustment would result in an
execution price higher (lower) for buy
(sell) transactions than the customer’s
limit price on the future-option order,
29 In other words, if there is a priority customer
order on every leg comprising the SBBO, at least
one option leg of the future-option order must
execute at a price that improves the price of the
priority customer order on the simple book for that
leg by at least one minimum increment. This is the
same priority that applies to a conforming complex
order (comprised of all option legs) as set forth in
Rule 5.85(b)(1), and thus the options legs of a
conforming future-option order will execute subject
to the same priority as they would if they had been
submitted without a future leg.
30 In other words, if there is a priority customer
order on any leg(s) comprising the SBBO, the
component(s) of the future-option order for the
option leg(s) with a priority customer order at the
BBO must execute at a price that improves the price
of that priority customer order(s) on the simple
book by at least one minimum increment. This is
the same priority that applies to a nonconforming
complex order (comprised of all option legs) as set
forth in Rule 5.85(b)(2), and thus the options legs
of a nonconforming future-option order will execute
subject to the same priority as they would if they
had been submitted without a future leg.
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and the Exchange will attempt to nullify
the future leg. Whenever a DCM
nullifies the futures leg(s) of a futureoption order or whenever the future
leg(s) cannot be executed, the Exchange
will nullify the option leg upon request
of one of the parties to the transaction
or in accordance with Rule 6.5(c)(3).
Finally, the proposed rule change
adds Interpretation and Policy .02 to
Rule 6.6 to clarify that TPHs may update
only the option component of a futureoption order trade using Clearing Editor
(and as permitted by Rule 6.6). Any
updates to the future component would
need to be done in accordance with the
Rules of the applicable DCM (if
permissible).
Execution of the options components
of future-option orders will be subject to
Commission jurisdiction, and execution
of the futures components of futureoption orders will be subject to
Commodity Futures Trading
Commission (‘‘CFTC’’) jurisdiction.
Further, each of the Exchange and the
designated contract market on which
the futures component of a futureoption order trades will regulate
conduct relating to future-option orders
and trades with respect to compliance
with its rules, including bringing
disciplinary actions for violations of its
rules. Before authorizing a class of
future-option orders to trade on the
Exchange, the Exchange would enter
into an information sharing agreement
with the designated contract market on
which the applicable future trades that
encompasses information relating to
future-option orders and trades.31 This
would allow for the sharing of
information between the Exchange and
the DCM to permit the Exchange (and
the DCM) to have access to all order,
trade, regulatory, and other data relating
to these orders and trades.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.32 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 33 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
31 The Exchange already has one in place with
CFE for purposes of VIX future-option orders.
32 15 U.S.C. 78f(b).
33 15 U.S.C. 78f(b)(5).
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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) 34 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
In particular, 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, to protect investors and the
public interest because it will provide
investors with greater opportunities to
manage risk. The proposed rule change
would provide investors with a more
efficient mechanism to execute options
and related future products, which
investors regularly trade as part of
hedging and other investment strategies.
The proposed execution mechanism for
future-option orders will make the
trading and hedging process for
investment strategies comprised of
option and future components more
efficient, which will reduce execution,
legging, and price drift risk that
otherwise accompanies the current
execution process for these strategies.
For example, today, investors looking to
execute an investment strategy
comprised of option and future
components must do so through
separate trades—one for the options and
one for the futures. This creates risk that
one trade occurs but the other does not,
which may leave an investor with an
unhedged position. Additionally,
separate transactions create risk because
market conditions may change between
the time it takes to execute both
transactions, which may make the full
package execute in an unfavorable
manner for the investor. Investors may
continue to execute these strategies as
separate transactions if they so choose.
However, the addition of the proposed
execution process (both electronic and
open outcry) would provide investors
with an optional, alternative means to
execute strategies comprised of future
and options components that would
reduce these risks, as it would permit
the entire package to be priced together
and will result in an execution only if
both the options and futures
components are able to trade. The
proposed single execution mechanism,
therefore, expands the ability of market
34 Id.
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participants to engage in cross-product
investment and hedging transactions,
which the Exchange believes will
contribute to reduced overall market
risk and increased liquidity.
The Exchange believes the proposed
rule change is designed to prevent
fraudulent and manipulative acts and
practices and to promote just and
equitable principles of trade. The
proposed risk offset requirement is
designed to provide market participants
with sufficient flexibility to execute
legitimate options strategies comprised
of options and futures while preventing
misuse of this mechanism, such as a
market participant from using the
proposed execution mechanism to
execute a futures trade outside of the
normal trading process on the
applicable designated contract market
by combining the future leg(s), for
example, with an inexpensive out-ofthe-money option leg.
As discussed above, the Commission
and the CFTC will maintain jurisdiction
over execution of the options and
futures components, respectively, of
future-option orders. Further, each of
the Exchange and the DCM on which
the futures component of a futureoption order trades will regulate
conduct relating to future-option orders
and trades with respect to compliance
with its rules, including bringing
disciplinary actions for violations of its
rules.35 The Exchange is a member of
the Intermarket Surveillance Group
(‘‘ISG’’). The ISG members work
together to coordinate surveillance and
investigative information sharing in the
futures and options markets, and the
Exchange would therefore have access
to information regarding relevant
trading activity from other ISG
members, including applicable DCMs
(as CFE is) that are also members. Before
authorizing a class of future-option
orders to trade on the Exchange, if the
applicable DCM was not a member of
ISG, or if the applicable DCM was a
member of ISG but the Exchange still
deemed appropriate, the Exchange
would enter into an information sharing
agreement with the designated contract
market on which the applicable future
trades that encompasses information
relating to future-option orders and
trades. This would allow for the sharing
of information between the Exchange
and the designated contract market to
permit the Exchange (and the
designated contract market) to have
access to all order, trade, regulatory, and
other data relating to these orders and
35 This would include any rules the designated
contract market related to the execution of the
future component of a future-option order.
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81597
trades, and thus facilitate the
intermarket surveillance of futureoption orders. As a self-regulatory
organization, the Exchange recognizes
the importance of surveillance, among
other things, to detect and deter
fraudulent and manipulative trading
activity as well as other violations of
Exchange rules and the federal
securities laws. The Exchange’s current
rules prohibiting market manipulation
and fraudulent, noncompetitive, and
disruptive trading practices will apply
to future-option orders. The Cboe
Regulatory Division will incorporate
information it receives from the
designated contract market into its
surveillance procedures to monitor
trading of future-option orders,
including to detect any manipulative
trading activity. The Exchange believes
its surveillance, along with the
proposed risk offset requirement, are
reasonably designed to detect
manipulative trading and enforce
compliance with the proposed rules and
other Exchange Rules. The Exchange
performs ongoing evaluations of its
surveillance program to ensure its
continued effectiveness and will
continue to review its surveillance
procedures on an ongoing basis and
make any necessary enhancements and/
or modifications that may be needed for
future-option orders.
The Exchange believes the proposed
execution process will also promote just
and equitable principles of trade. As
described above, future-option orders
will execute in a substantially similar
way as complex orders, including stockoption orders. The proposed priority for
future-option orders will protect
customer orders in the simple book. As
proposed, the option component(s) of a
future-option order will ultimately trade
in the same manner and in accordance
with the same priority principles as they
would if they had been submitted
without a future leg. Further, the
proposed process to nullify the option
component execution if the futureoption order does not execute is
consistent with the purpose of the
future-option order. Given the option
and future components of a futureoption order are submitted as part of the
same investment strategy, if the future
component does not execute, the
Exchange believes it is reasonable to
expect that a user that submitted a
future-option to request nullification of
the options trade in accordance with
current Exchange Rules. If the future
component does not execute, rather
than require the user that submitted the
future-option order to contact the
Exchange to request nullification of the
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option component execution, the
proposed rule eliminates this
requirement for the user to make such
request. Instead, the proposed rule
change provides that the Exchange will
automatically nullify the option
transaction if the future component does
not execute. The Exchange believes
such nullification without a request
from the user is consistent with the
purpose of future-option orders, as
contingent execution at or near the same
time (and thus reduction in price and
execution risk) is one of the primary
goals of future-option orders (as further
discussed below).
Additionally, the Exchange believes
the availability of future-option orders
will 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 because it will
provide investors with an alternative to
the OTC market for investment
strategies comprised of future and
option components. The proposed rule
change will provide investors with the
ability to execute these investment
strategies in a listed market
environment as opposed to in the
unregulated OTC market. The proposed
rule change may shift liquidity from the
OTC market onto the Exchange (as well
as shift swaps and OTC combos from
the OTC market onto designated
contract markets in the form of futures),
which the Exchange believes would
increase market transparency as well as
enhance the process of price discovery
conducted on the Exchange through
increased order flow to the benefit of all
investors. The Exchange believes it may
be a more attractive alternative to the
OTC market, because trading these
strategies in an exchange environment
may benefit market participants in
several ways, including but not limited
to the following: (1) enhanced efficiency
in initiating and closing out positions;
(2) increased market transparency; and
(3) heightened contra-party
creditworthiness due to clearing
requirements for listed options and
futures.
The Commission previously
determined that permitting investors to
submit an order for execution to Cboe
that included components subject to
different regulatory jurisdictions was
consistent with the Act.36 Specifically,
in 1988, the Commission approved a
Cboe proposed rule change to allow
36 Securities Exchange Act Release No. 26271
(November 10, 1988), 53 FR 46727 (November 18,
1988) (SR–CBOE–88–17) (‘‘CBOE–CBOT JV
Approval Order’’); see also Securities Exchange Act
Release No. 24235 (March 19, 1987), 52 FR 9750
(March 26, 1987) (SR–Phlx–86–43).
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inter-regulatory spread orders (which
were defined as the simultaneous
purchase and/or sale of at least one unit
in contracts each of which is subject to
different regulatory jurisdictions at
stated limits, or at a stated differential,
or at market prices on the floor of the
Exchange) to trade on Cboe’s trading
floor.37 The only substantive differences
between that proposal and the proposed
rule change regarding future-option
orders are as follows:
• The proposed rule change would
permit future-option orders in classes
authorized by the Exchange, dependent
upon agreements the Exchange may
make with applicable DCMs, compared
to the prior filing that was limited to
orders comprised of two options and
two related futures.38 The Exchange
believes this is reasonable because the
proposed rule change will provide the
Exchange with the ability to expand the
availability of future-option order
functionality in the future to
accommodate additional investment
strategies of investors, and the proposed
rules regarding future-option orders
would apply in the same manner
regardless of the underlying
components.39
• The proposed rule change would
permit electronic execution in addition
to open outcry execution of futureoption orders. This merely reflects the
advancement in the availability of
electronic trading since 1988 and
provides an additional manner of
execution for future-option orders.
• The proposed rule change does not
create a separate pit on the Exchange’s
trading floor for the related futures as
the prior proposal did. Given the
advances in electronic trading (and the
fact that many futures exchanges no
longer have open outcry trading), the
Exchange believes this is no longer
necessary to permit future-option
orders.40
37 See
CBOE–CBOT JV Approval Order.
spreads subject to that proposal
were limited to those comprised of S&P 500 Index
options and CBOE 50 futures, and S&P 100 Index
options and S&P 250 futures.
39 As noted above, if the Exchange determines a
different risk offset requirement would be
appropriate for a different class of future-option
orders, it will submit a rule filing as necessary to
implement that requirement.
40 As an example, VX futures trade electronically
only on CFE. For similar reasons, the Exchange
believes structuring future-option orders as a joint
venture is unnecessary, as the individual
components will continue to trade on the
applicable market as proposed. As noted above, the
Exchange will be able to share information with the
applicable DCM (through ISG or information
sharing agreements) for regulatory purposes. It is
possible the Exchange and the designated contract
market may enter into other agreements as
appropriate to permit future-option orders (e.g., to
establish electronic connections for purposes of
38 Inter-regulatory
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These differences have no impact on
the fundamental attributes of the
underlying product that the
Commission approved in 1988 and that
the Exchange proposes in this filing,
which is a multi-part order comprised of
an option and a related future submitted
to the Exchange for pricing as a package,
with execution of each component
contingent on the other. When
approving the prior proposal, the
Commission stated that permitting
execution of inter-regulatory spreads
(including for hedging purposes) on the
Exchange would ‘‘contribute to the
mechanism of a free and open market by
enhancing . . . market makers’ ability to
hedge their positions with futures [and]
enable market makers to better
accommodate customer orders and to
provide deeper and tighter markets.’’ 41
The Commission further stated that the
proposed rule change was designed to
minimize regulatory concerns, and
clarifying the regulatory responsibility
for each leg of an inter-regulatory spread
(as the current filing does) would
‘‘expedite the enforcement of each
jurisdiction’s regulations and foster
coordination and cooperation between
the jurisdictions involved.’’ 42
Ultimately, the Commission found that
the proposal to execute inter-regulatory
spreads on Cboe to be consistent with
the requirements of the Act.43 While
some time has passed since approving
inter-regulatory spreads (the Exchange
notes the rules permitted execution of
inter-regulatory spreads remained in
Cboe’s Rulebook until 2005,44 and the
definition of an inter-regulatory spreads
remains in Cboe’s Rulebook 45), the
Exchange is unaware of any changes to
Section 6(b)(5) of the Act since the
Commission approved that the trading
of inter-regulatory spreads that would
prevent the Commission from approving
future-option orders at this time.
Further, as discussed above, the
proposed rules regarding the handling
and execution of future-option orders
are also substantially similar to that of
stock-option orders,46 and rules
previously filed with the Commission
routing the futures component), but such
agreements would have no impact on the proposed
rules.
41 See CBOE–CBOT JV Approval Order at 46729.
42 Id. at 46730.
43 Id.
44 See Securities Exchange Act Release No. 52824
(November 22, 2005), 70 FR 72318 (December 2,
2005) (SR–CBOE–2005–69).
45 See Rule 1.1 (definition of inter-regulatory
spread).
46 See Rules 5.33 (including subparagraphs
(f)(1)(B) and (2)(B), paragraph (l), and Interpretation
and Policy .04), 5.70(b), 5.83(b), and 5.85 (including
subparagraphs (b)(3) through (5) and paragraph (g)).
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for security-future option orders.47 The
only substantive difference between
stock-option orders (and security-future
option orders) is that one component of
a future-option order (the future leg(s))
is not subject to Commission
jurisdiction. The Exchange believes
market participants who trade want to
trade these strategies because they have
determined these strategies are the most
appropriate to achieve their investment
goals should be able to avail themselves
of a more efficient and lower risk
execution mechanism for these
strategies, even though those strategies
happen to include a component subject
to jurisdiction of another regulator.
Ultimately, 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, to protect investors and the
public interest because it will provide
investors with a competitive and
efficient market mechanism for
executing investment strategies
comprised of future-option orders on
the Exchange, which will provide a
venue for order exposure and price
discovery. These are bona fide
investment strategies that reduce market
participants’ risk and facilitate hedging.
A robust and competitive market
requires that exchanges respond to
investors’ evolving needs by constantly
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
removed.48 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.49 This
47 See Securities Exchange Act Release No. 49367
(March 5, 2004), 69 FR 11678 (March 11, 2004) (SR–
CBOE–2004–14); see also Securities Exchange Act
Release Nos. 46390 (August 21, 2002), 67 FR 55290
(August 28, 2002) (SR–ISE–2002–18); and 48894
(December 8, 2003), 68 FR 70328 (December 17,
2003) (SR–PCX–2003–42).
48 See H.R. Rep. No. 94–229, at 92 (1975) (Conf.
Rep.).
49 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
VerDate Sep<11>2014
17:23 Oct 07, 2024
Jkt 265001
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 life-blood of a vibrant
competitive market—and that is
particularly so given the continued
internalization of the securities markets,
as exchanges 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 in
order to attract order flow and liquidity
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 that the
proposed rule change will help further
competition by providing market
participants with yet another
investment option for the listed options
market.
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 future-option orders will be
available to all TPHs and will execute
in the same manner. Future-option
orders will be available to all users on
a voluntary basis, and users will not be
required to use future-option orders to
execute investment strategies comprised
of option and future components. Users
may continue to execute these strategies
as they do today by entering an option
order on the Exchange and separately
executing the future component on a
designated contract market. For users
that elect to use the proposed
functionality, the proposed rule change
would reduce price and execution risk
that currently exists when executing
these strategies.
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’’).
PO 00000
Frm 00183
Fmt 4703
Sfmt 4703
81599
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 functionality (and
previously have, as noted above). The
Exchange understands investors
currently execute investment strategies
comprised of option and future
components today. Investors may
continue to do so; however, the
proposed rule change merely provides
them a simple, efficient, transparent,
and competitive execution mechanism
for hedging and other investment
strategies that contain options and
related futures components.
The Exchange believes the proposed
rule change may relieve any burden on,
or otherwise promote, competition. The
proposed rule change is designed to
provide investors with a more efficient
and lower risk mechanism to execute
investment strategies comprised of
futures and options components. The
Exchange believes this is an
enhancement to executing these
investment strategies in a riskier and
more complex manner through separate
transactions or in the unregulated and
opaque OTC market. The proposed rule
change would make a more attractive
alternative to either of these options by
providing investors with the ability to
execute these strategies in a single
transaction in an exchange
environment. This would result in
increased market transparency,
enhanced efficiency in initiating and
closing out positions, and heightened
contra-party creditworthiness.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
E:\FR\FM\08OCN1.SGM
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81600
Federal Register / Vol. 89, No. 195 / Tuesday, October 8, 2024 / Notices
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
CBOE–2024–042 on the subject line.
Paper Comments
ddrumheller on DSK120RN23PROD with NOTICES1
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–CBOE–2024–042. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CBOE–2024–042 and should be
submitted on or before October 29,
2024.
17:23 Oct 07, 2024
[FR Doc. 2024–23064 Filed 10–7–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
VerDate Sep<11>2014
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.50
Vanessa A. Countryman,
Secretary.
Jkt 265001
[Release No. 34–101233; File No. SR–
CboeBZX–2024–091]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To List and
Trade Shares of the Franklin Crypto
Index ETF, a Series of the Franklin
Crypto Trust, Under BZX Rule
14.11(e)(4), Commodity-Based Trust
Shares
October 2, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 19, 2024, Cboe BZX
Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. (‘‘BZX’’ or
the ‘‘Exchange’’) is filing with the
Securities and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) a proposed
rule change to list and trade shares of
the Franklin Crypto Index ETF (the
‘‘Fund’’), a series of the Franklin Crypto
Trust (the ‘‘Trust’’),3 under BZX Rule
14.11(e)(4), Commodity-Based Trust
Shares.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
50 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The Trust was formed as a Delaware statutory
trust on August 13, 2024. The Fund is operated as
a partnership for U.S. federal tax purposes. The
Trust and the Fund have no fixed termination date.
1 15
PO 00000
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Fmt 4703
Sfmt 4703
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to list and
trade the Shares under BZX Rule
14.11(e)(4),4 which governs the listing
and trading of Commodity-Based Trust
Shares on the Exchange.5 Franklin
Holdings, LLC is the sponsor of the
Fund (‘‘Sponsor’’). The Shares will be
registered with the Commission by
means of the Trust’s registration
statement on Form S–1 (the
‘‘Registration Statement’’).6
Section 6(b)(5) and the Applicable
Standards
The Commission has approved
numerous series of Trust Issued
Receipts,7 including Commodity-Based
Trust Shares,8 to be listed on U.S.
national securities exchanges. In order
for any proposed rule change from an
exchange to be approved, the
4 The Commission approved BZX Rule 14.11(e)(4)
in Securities Exchange Act Release No. 65225
(August 30, 2011), 76 FR 55148 (September 6, 2011)
(SR–BATS–2011–018).
5 Any of the statements or representations
regarding the index composition, the description of
the portfolio or reference assets, limitations on
portfolio holdings or reference assets, dissemination
and availability of index, reference asset, and
intraday indicative values, or the applicability of
Exchange listing rules specified in this filing to list
a series of Other Securities (collectively,
‘‘Continued Listing Representations’’) shall
constitute continued listing requirements for the
Shares listed on the Exchange.
6 On August 16, 2024, the Trust filed with the
Commission the Registration Statement on Form S–
1, submitted to the Commission by the Sponsor on
behalf of the Trust (333–281615). The descriptions
of the Trust, the Shares, and the Index (as defined
below) contained herein are based, in part, on
information in the Registration Statement. The
Registration Statement is not yet effective and the
Shares will not trade on the Exchange until such
time that the Registration Statement is effective.
7 See Exchange Rule 14.11(f).
8 Commodity-Based Trust Shares, as described in
Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
E:\FR\FM\08OCN1.SGM
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]]>Agencies
[Federal Register Volume 89, Number 195 (Tuesday, October 8, 2024)]
[Notices]
[Pages 81592-81600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-23064]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101229; File No. SR-CBOE-2024-042]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Its Rules To Permit Orders
Comprised of Options and Futures Legs (``Future-Option Orders'')
October 1, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 17, 2024, Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe
Options'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. 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 orders comprised of options and futures
legs (``future-option orders''). The text of the proposed rule change
is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for
[[Page 81593]]
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 future-option
orders, which would be comprised of both options and futures legs. The
Exchange understands it is common for investors to engage in hedging or
other investment strategies that involve options and related futures
products. However, to execute those investment strategies, investors
must submit the options order to the Exchange and separately submit the
futures order to a designated contract market (``DCM'') on which the
futures trade. For example, market participants may obtain positions in
Cboe Volatility Index (``VIX'') options through transactions on the
Exchange and hedge those positions entering into a separate transaction
on Cboe Futures Exchange, LLC's (``CFE'') centralized market in VIX
futures (``VX futures''). Separate executions of this sort create
additional risks, including risk that one order will execute while the
other does not and price risk resulting from the time it takes to
complete both transactions. The Exchange understands that due to those
risks and the complexities of multi-part transactions, market
participants may instead transact in the over-the-counter (``OTC'')
market or not obtain a hedge at all. The proposed rule change adopts a
mechanism to facilitate the execution of these cross-product
transactions in a simple, efficient manner that reduces these execution
and price risks.
The Exchange first proposes to adopt a definition of a future-
option order. Specifically, the proposed rule change amends Rule 1.1 to
define a ``future-option order'' \3\ as an order to buy or sell a
stated number of units of an underlying or a related futures
contract(s) coupled with the purchase or sale of an option contract(s)
on the Exchange.\4\ The Exchange would designate in which classes
future-option orders would be available.\5\
---------------------------------------------------------------------------
\3\ As proposed, a ``future-option order'' is deemed an inter-
regulatory spread order for purposes of the Rules. Rule 1.1 defines
an inter-regulatory spread order as an order involving the
simultaneous purchase and/or sale of at least one unit in contracts
each of which is subject to different regulatory jurisdictions at
stated limits, or at a stated differential, or at market prices on
the floor of the Exchange. The proposed rule change modernizes this
definition to apply it to the Exchange in general, as opposed to the
floor of the Exchange (the definition of inter-regulatory spread
order was adopted when all trading on the Exchange occurred in open
outcry).
\4\ The proposed definition of a future-option order is similar
to the definition of a stock-option order. Rule 1.1 defines a
``stock-option order'' as an order to buy or sell a stated number of
units of an underlying or a related security coupled with either (a)
the purchase or sale of option contract(s) on the opposite side of
the market representing either the same number of units of the
underlying or related security or the number of units of the
underlying security necessary to create a delta neutral position or
(b) the purchase or sale of an equal number of put and call option
contracts, each having the same exercise price and expiration date,
and each representing the same number of units of stock as, and on
the opposite side of the market from, the underlying or related
security portion of the order. The primary difference is the stock-
option order definition requires the order to be delta neutral,
while the proposed definition of a future-option order requires the
order to have a risk offset within a specified range (as described
below).
\5\ Pursuant to Rule 1.5, the Exchange announces all
determinations it makes pursuant to the Rules via specifications,
Notices, or Regulatory Circulars with appropriate advanced notice,
which will be posted on the Exchange's website, or as otherwise
provided in the Rules; electronic message; or other communication
method as provided in the Rules. The Exchange intends to initially
permit future-option orders overlying VIX. However, the Exchange may
expand the availability of future-option orders to other underlying
securities or indexes in the future. If required, the Exchange and
would submit rule filings in connection with any such expansion; for
example, the Exchange may determine that a different risk offset
requirement than what is proposed in this filing is appropriate for
another underlying based on the characteristics of the overlying
options and futures.
---------------------------------------------------------------------------
The proposed definition of a future-option order includes a risk
offset requirement. A user may only submit a future-option order if it
satisfies the applicable risk offset requirement. The Exchange believes
a risk offset requirement will provide market participants with
sufficient flexibility to execute legitimate strategies comprised of
options and futures while preventing a market participant from using
the proposed execution mechanism to execute a futures trade outside of
the normal trading process on the applicable designated contract market
by combining the future leg(s), for example, with an inexpensive out-
of-the-money option leg.
Pursuant to paragraph (a) of the proposed definition of future-
option order, the System will accept a future-option order if the
future leg(s) provides no less than 10% and no greater than 125% risk
offset to the option leg(s).\6\ A future-option order satisfies this
risk offset requirement if the net delta value of the order is no
greater than -0.10 and no less than -1.25. The delta value of an option
leg equals the expected change in the price of that options contract
given a $1.00 change in the price of the underlying security or index.
The delta value of a future leg equals the amount set forth in the
rules or contract specifications of the designated contract market
(``DCM'') on which the future contract trades. The delta value of each
option and future leg is multiplied by the applicable multiplier. The
sum of the future legs delta values divided by the sum of the option
legs delta values, which equals the net delta value for the order.
---------------------------------------------------------------------------
\6\ The user must include a delta value for each option leg of
the order when submitting a future-option order. See Rule 1.1
(proposed paragraph (b)(2) of definition of future-option order).
While a user may use any methodology it chooses to calculate the
delta value of option legs, the value must be reasonable and will be
subject to surveillance by the Exchange's regulatory division. The
System will use the user-submitted delta values to calculate the
risk offset for the entire order.
---------------------------------------------------------------------------
For VIX future-option orders, the System will calculate the risk
offset described above using the net delta value for each ``group'' of
option legs and future legs with the same expiration date. The net
delta value of each group must be no greater than -0.10 and no less
than -1.25.\7\ For example, suppose a VIX future-option order is
submitted with the following components:
---------------------------------------------------------------------------
\7\ If any option contract leg or future contract leg cannot be
grouped with any future leg(s) or option leg(s), respectively, the
System rejects a VIX future-option order.
Sell 1 Dec VX future \8\ with a delta of -1
---------------------------------------------------------------------------
\8\ VX futures have a contract multiplier of 1,000.
---------------------------------------------------------------------------
Buy 2 Jan VX futures with delta of 1
Buy 16 Dec VIX option \9\ calls with a delta of 0.50
---------------------------------------------------------------------------
\9\ VIX options have a contract multiplier of 100.
---------------------------------------------------------------------------
Buy 35 Jan VIX option puts with a delta of -0.60
The 1 short Dec VX future is grouped with the 16 long Dec VIX
calls, which group has a net delta of/(-1 x 1,000)/(16 x .50 x 100) = -
1,000/800 = -0.125. The 2 long Jan VX futures are grouped with the 35
short Jan VIX puts, which group has a net delta of (2 x 1,000)/(35 x -
0.60 x 100) = -2,000/2,100 = -0.9524. This order would satisfy the risk
offset requirement, as both groups have a net delta between -0.10 and -
1.25. If the System determines that a complex strategy comprised of
future and option legs satisfies the risk offset requirement, it
accepts all future-option orders for that complex strategy for the
remainder of that trading day. This will prevent a situation in which
the Exchange accepts a future-option order for a specific complex
strategy on a trading day but cannot execute against
[[Page 81594]]
future-option orders for the same complex strategy submitted later that
trading day but no longer satisfies the risk offset requirement because
the delta values have changed since the initial order was
submitted.\10\
---------------------------------------------------------------------------
\10\ It is for this reason a user may not designate a future-
option order submitted for electronic processing as GTC or GTD. See
proposed Rule 1.1 (proposed paragraph (b)(1) of definition of
future-option order).
---------------------------------------------------------------------------
The proposed rule change also amends the definition of ``complex
order'' in Rule 1.1 to provide that unless the context otherwise
requires, the term complex order will include future-option orders.\11\
---------------------------------------------------------------------------
\11\ The term complex order already includes cross-product
orders such as stock-option orders and security future-option
orders.
---------------------------------------------------------------------------
As proposed in Rule 5.33(o), when a user submits a future-option
order to the Exchange:
if the User is also a member of the DCM on which the
applicable future trades and the Exchange has established electronic
communication with the DCM, the Exchange will electronically
communicate the future component of the future-option order to the DCM
on behalf of the User \12\; or
---------------------------------------------------------------------------
\12\ Unlike stock, a future trades on one DCM, which would make
such direct communication with the DCM possible. This would only be
available if the DCM and Exchange established electronic
communication between the two markets to permit this direct
communication of the futures component.
---------------------------------------------------------------------------
if the User is not also a member of the DCM on which the
applicable future trades or opts out of the direct communication
described in the above bulleted paragraph (or such direct communication
is unavailable), the User must designate a specific futures commission
merchant (``FCM'') or introducing broker (``IB'') with which it has
entered into an agreement pursuant to proposed Rule 5.33,
Interpretation and Policy .05 (the ``designated FCM/IB'') to which the
Exchange will communicate the futures component of the future-option
order on behalf of the user.\13\ Proposed Interpretation and Policy .05
provides that if the user is not also a member of the DCM on which the
applicable future trades or opts out of the direct communication (or
such direct communication is unavailable), to submit a future-option
order to the Exchange for execution, a user must enter into an
agreement with one or more FCMs or IBs that are not affiliated with the
Exchange, which FCM/IB(s) the Exchange has identified as having
connectivity to electronically communicate the futures components of
future-option orders to the designated contract market on which the
futures trade.\14\ This will provide users with flexibility to pick
which FCM/IB will communicate the futures components of their orders
for execution (if an FCM/IB is necessary for communication of the
futures component to the DCM).\15\
---------------------------------------------------------------------------
\13\ As is the case with any order submitted to the Exchange,
only authorized Users and associated persons of Users may establish
connectivity to and access the Exchange to submit orders. See Rule
5.5(a). A ``User'' is defined as a Trading Permit Holder (``TPH'')
or Sponsored User who is authorized to obtain access to the System
pursuant to Rule 5.5. See Rule 1.1 (definition of User). The
Exchange currently has no Sponsored Users, so the term ``User'' at
present is synonymous with the term ``TPH.'' The User and any
individuals associated with the User that submits a future-option
order must have any required futures industry registrations and
comply with applicable rules of the designated contract market on
which the futures trades and the Commodity Futures Trading
Commission (``CFTC'').
\14\ This requirement is substantially identical to that
required for stock-option orders.
\15\ The Exchange intends to establish an arrangement with one
or more FCMs/IBs that are members of the applicable designated
contract market, pursuant to which arrangement those FCMs/IBs will
have connectivity to the Exchange to receive the futures components
of future-option orders and communicate those to the applicable
designated contract market for execution of these futures
components.
---------------------------------------------------------------------------
The proposed rule change first amends Rule 5.33 to describe how
future-option orders may execute electronically on the Exchange. The
proposed rule change adds future-option order to the list of types of
complex orders that may be accepted for electronic trading.\16\
Specifically, the proposed rule change amends Rule 5.33(b)(5) to
reference the proposed definition of future-option order in Rule 1.1
and state that only future-option orders in the classes designated by
the Exchange \17\ with no more than the applicable number of legs are
eligible for electronic processing.\18\ Future-option orders submitted
for electronic processing may execute pursuant to a complex order
auction (``COA'') if eligible as described in Rule 5.33(d) or in the
complex order book (``COB'') as described in Rule 5.33(e) and will
execute in the same manner as other complex orders, except as described
below.
---------------------------------------------------------------------------
\16\ The proposed rule change also amends Rule 5.70(b) to
provide that the Exchange may make future-option orders available
for flexible (FLEX) options trading.
\17\ This flexibility with respect to classes is necessary given
the Exchange would need to establish a relationship with appropriate
DCMs on which futures trade before it would be able to accept
future-option orders that contain futures legs that trade on those
DCMs.
\18\ The proposed rule change also provides that future-option
orders will execute (electronically) in the same manner as other
complex orders except as otherwise specified in Rule 5.33.
---------------------------------------------------------------------------
The proposed rule change adopts rule 5.33(f)(1)(C) to provide that
users may express bids and offers for a future-option order in any
decimal price the Exchange determines, which will permit the Exchange
to accommodate the available pricing of futures. The minimum increment
for the option leg(s) of a future-option order is $0.01 or greater,
which the Exchange may determine on a class-by-class basis, regardless
of the minimum increments otherwise applicable to the option
leg(s),\19\ and the future leg(s) of a future-option order may be
executed in any decimal price permitted in the designated contract
market on which the applicable futures trade. Smaller minimum
increments are appropriate for future-option orders as the future
component may be able to trade at finer decimal increments permitted by
the designated contract market on which the futures trade. The Exchange
notes that even with the flexibility provided in the proposed rule, the
individual options legs must trade at increments allowed by the
Commission.
---------------------------------------------------------------------------
\19\ This is consistent with the permissible pricing of options
legs of complex orders and stock-option orders. See Rule 5.4(b) and
5.33(f)(A) and (B).
---------------------------------------------------------------------------
The proposed electronic execution process of future-option orders
is substantially similar to that of stock-option orders. Proposed Rule
5.33(o)(2) provides that a future-option order may execute against
other future-option orders (or COA Responses, if applicable), but may
not execute against orders in the simple book.\20\ If a future-option
order can execute upon entry or following a COA, or if it can execute
following evaluation while resting in the COB pursuant to Rule 5.33(i),
the System executes the option component (which may consist of one or
more option legs) of a future-option order against the option component
of other future-option orders resting in the COB or COA responses
pursuant to the allocation algorithm applicable to the class (pursuant
Rule 5.33(d)(5)(A)(ii)), as applicable, but does not immediately send
the user a trade execution report, and then automatically communicates
the future component(s) to the DCM or the designated FCM/IB, as
applicable, for execution at the DCM on which the futures trade. If the
System receives an execution report for the future component from the
DCM or the designated FCM/IB, as applicable, the Exchange sends the
user the trade execution report for the future-option order, including
execution information for the future and option components. If the
System receives a report from the DCM or the designated FCM/IB, as
applicable, that the future component(s)
[[Page 81595]]
cannot execute,\21\ the Exchange nullifies the option component trade
and notifies the user of the reason for the nullification. If a future-
option order is not marketable, it rests in the COB (if eligible to
rest) or routes to PAR for manual handling, subject to a user's
instructions. The Exchange believes this proposed process is
reasonable, because the options and futures components of a future-
option order are submitted for execution as part of the same investment
strategy. Given this, if the future component does not execute, the
Exchange believes it is reasonable to expect that a user that submitted
a future-option order to request nullification of the options trade (as
permitted by Rule 6.5). If the future component does not execute,
rather than require the user that submitted the future-option order to
contact the Exchange to request nullification of the option component
execution pursuant to Rule 6.5, the proposed rule eliminates this
requirement for the user to make such request. Instead, the proposed
rule change provides that the Exchange will automatically nullify the
option transaction if the future component does not execute. The
Exchange believes such nullification without a request from the user is
consistent with the purpose of future-option orders, as contingent
execution at or near the same time (and thus reduction in price and
execution risk) is one of the primary goals of future-option orders (as
further discussed below).
---------------------------------------------------------------------------
\20\ See also proposed Rule 5.33(g)(5) (which provides that
future-option orders, like stock-option orders, may not leg into the
simple book).
\21\ Execution of the futures components will need to satisfy
requirements of the applicable designated contract market, including
informational and reporting time requirements, risk controls, and
price restrictions (such as needing to be within the daily quotation
range). Pursuant to Rule 5.33(k), trading in any complex strategy
(including one that comprises a future-option order) is suspended if
any component of a complex strategy (including a future leg) is
halted. Therefore, if trading in a future is halted, it could not
execute and would result in the future-option order not being
executed.
---------------------------------------------------------------------------
Future-option orders may also be submitted for execution (if
eligible) in the complex automated improvement mechanism (``C-AIM'') as
described in Rule 5.38 or complex solicitation auction mechanism (``C-
SAM'') as described in Rule 5.40. Processing of future-option orders
through C-AIM or C-SAM will occur in the same manner as any other
complex orders submitted into those execution mechanisms.
Proposed Rule 5.33(o)(2) provides that a future-option order may
only execute if the price complies with subparagraph (f)(2)(B). The
proposed rule change amends Rule 5.33(f)(2) to describe the permissible
execution prices and priority of future-option orders, which is
substantially similar to that of stock-option orders. Specifically,
proposed Rule 5.33(f)(2)(C) states for a future-option order with one
option leg, the option leg may not trade at a price worse than the
individual component price on the simple book or at the same price as a
priority customer order on the simple book. For a future-option order
with more than one option leg, the option legs must trade at price
pursuant to Rule 5.33(f)(2)(A), which is the permissible execution
prices and priority for complex orders comprised of option legs. The
System, therefore, will not execute a future-option order at a net
price: (1) that would cause any option component of the complex
strategy to be executed at a price of zero; (2) that would cause any
option component of the complex strategy to be executed at a price
worse than the individual component prices on the simple book; (3)
worse than the price that would be available if the complex order
legged into the simple book; or (4) worse than the synthetic best bid
or offer (``SBBO'') \22\ or equal to the SBBO when there is a priority
customer order on any leg comprising the SBBO and, if a conforming
complex order,\23\ at least one option component of the complex order
must execute at a price that improves the best bid or offer (``BBO'')
for that component by at least one minimum increment or, if a
nonconforming complex order,\24\ the option component(s) of the complex
order for the leg(s) with a priority customer order at the BBO must
execute at a price that improves the price of that priority customer
order(s) on the simple book by at least one minimum increment.\25\
Pursuant to these proposed changes, the option component(s) of a
future-option order will ultimately trade in the same manner and in
accordance with the same priority principles as they would if they had
been submitted without a future leg.
---------------------------------------------------------------------------
\22\ The proposed rule change adds subparagraph (3) to the
definition of SBBO in Rule 5.33(a) to provide that the SBBO is the
best net bid and best net offer on the Exchange for a complex
strategy calculated using, for future-option orders, the BBO for
each component (or the national best bid or offer (``NBBO'') for a
component if the BBO for that component is not available) and the
daily quotation range for each future component. Similarly, the
proposed rule change adds subparagraph (3) to the definition of
synthetic national best bid or offer (``SNBBO'') in Rule 5.33(a) to
provide that the SNBBO is the national best net bid and net offer
for a complex strategy calculated using, for future-option orders,
the NBBO for each option component and the daily quotation range for
each future component.
\23\ The proposed rule change amends the definition of
``conforming complex order'' in Rule 1.1 to provide that a future-
option order is conforming (1) if the ratio on the options legs is
greater than or equal to one-to-three (.333) or less than or equal
to three-to-one (3.00) or (2) the options legs comprise an Index
Combo order (as defined in Rule 5.33(b)).
\24\ The proposed rule change amends the definition of
``nonconforming complex order'' in Rule 1.1 to provide that a
future-option order is nonconforming if the ratio of its options
legs is less than one-to-three (.333) or greater than three-to-one
(3.00) (unless the options legs comprise an Index Combo order).
\25\ All-or-none complex orders (including future-option orders)
may only execute at prices better than the SBBO.
---------------------------------------------------------------------------
The proposed rule change also amends Rules in Chapter 5, Section G
of the Rulebook to describe how future-option orders may execute in
open outcry on the Exchange's trading floor, which is substantially
similar to the open outcry execution process of stock-option orders.
Specifically, the proposed rule change amends Rule 5.83(b) to provide
that the Exchange may make future-option orders available for PAR
routing for manual handling (as is the case for other complex orders,
including stock-option orders). The proposed rule change further amends
this provision to provide that the Exchange may determine (as it can
for other nonconforming complex orders and non-conforming stock-option
orders) to make nonconforming future-option orders not eligible for
electronic processing, in which case such orders would only be eligible
for manual handling and open outcry trading. The proposed rule change
amends Rule 5.85(g) to provide that a bid or offer that is identified
to the trading crowd as part of a future-option order is made and
accepted subject to the following conditions (which are the same
conditions applicable to stock-option orders): (1) at the time the
future-option order is announced, the TPH initiating the order must
disclose to the crowd all legs of the order and identify the specific
market(s) on which and the price(s) at which the non-option leg(s) of
the order is to be filled; and (2) concurrent with the execution of the
options leg of the order, the initiating TPH and each TPH that agrees
to be a contra-party on the non-option leg(s) of the order must take
steps immediately to transmit the non-option leg(s) to the identified
market(s) for execution.\26\ Proposed Rule 5.85(b)(3) provides,
however, that (like the stock component of stock-option orders) a floor
broker or PAR official may, subject to a User's instructions, route the
future component of a future-option order represented in open outcry to
the DCM or an Exchange-
[[Page 81596]]
designated FCM/IB not affiliated with the Exchange for execution at a
designated contract market on which the futures trade in accordance
with proposed Rule 5.33, Interpretation and Policy .05.\27\ The
Exchange also proposes to add subparagraph (5) to Rule 5.85(g) (which
is substantially similar to Rule 5.85(g)(4) for stock-option orders) to
provide that a TPH or PAR official may route the future component of an
eligible future-option order represented in open outcry from PAR
directly to a designated FCM/IB (as defined in Rule 5.33(o)) not
affiliated with the Exchange for electronic execution at the designated
contract market on which the futures trade (1) in accordance with the
order's terms, and (2) as a single order or as a paired matching order
(including with orders transmitted from separate PAR workstations).
TPHs seeking to route the future component of a future-option order
represented in open outcry through PAR to an Exchange-designated FCM/IB
not affiliated with the Exchange for electronic execution at the
designated contract market on which the futures trade must comply with
proposed Rule 5.33(o).\28\ The Exchange proposes to amend Rule 5.91(g)
to provide that as they currently can for complex orders (including
stock-option orders), floor brokers may leg future-option orders where
one of the legs is executed on the Exchange.
---------------------------------------------------------------------------
\26\ The proposed rule change also updates Rule 5.85(g)(2) to
provide that a trade representing execution of the options leg of a
future-option order may be cancelled at the request of any TPH that
is a party to that trade only if market conditions in any of the
non-Exchange market(s) prevent the execution of the non-option
leg(s) at the price(s) agreed upon.
\27\ The proposed rule change also makes a nonsubstantive
amendment to Rule 5.85(b)(3) to correct the current cross-reference
to Rule 5.11 to Rule 5.33, Interpretation and Policy .04, which is
the applicable rule to be referenced.
\28\ If any TPH that is a party to a trade representing the
execution of the options leg of a future-option order requests, if
market conditions in any of the non-Exchange market(s) prevent the
execution of the non-option leg(s) at the price(s) agreed upon, the
execution of the option leg may be cancelled. See proposed Rule
5.87, Interpretation and Policy .03. This is consistent with what is
permissible for stock-option orders, as well as the proposed
electronic processing of future-option orders set forth in proposed
Rule 5.33(o).
---------------------------------------------------------------------------
The proposed rule change amends Rule 5.85(b)(3) to describe the
priority that will apply to future-option orders executed on the
Exchange's trading floor. Specifically, the proposed rule change
provides that future-option orders have priority over bids (offers) of
in-crowd market participants but not over priority customer bids
(offers) in the book. Specifically, future-option orders, like stock-
option orders, will have priority over bids and offers of in-crowd
market participants on the trading floor. Further, the options legs of
conforming and nonconforming future-option orders may be executed at
the same net debit and credit prices as the options legs of stock-
option orders. Pursuant to proposed Rule 5.85(b)(4), a conforming
future-option order may be executed at a net debit or credit price
without giving priority to equivalent bids (offers) in the individual
series legs that are represented in the trading crowd or in the book if
the price of at least one option leg of the order improves the
corresponding bid (offer) of a priority customer order(s) in the book
by at least one minimum trading increment as set forth in Rule
5.4(b).\29\ Additionally, pursuant to proposed Rule 5.85(b)(5), a
nonconforming future-option order may be executed at a net debit or
credit price without giving priority to equivalent bids (offers) in the
individual series legs that are represented in the trading crowd or in
the book if each option leg of the order betters the corresponding bid
(offer) of a priority customer order(s) in the book on each leg by at
least one minimum trading increment as set forth in Rule 5.4(b).\30\
---------------------------------------------------------------------------
\29\ In other words, if there is a priority customer order on
every leg comprising the SBBO, at least one option leg of the
future-option order must execute at a price that improves the price
of the priority customer order on the simple book for that leg by at
least one minimum increment. This is the same priority that applies
to a conforming complex order (comprised of all option legs) as set
forth in Rule 5.85(b)(1), and thus the options legs of a conforming
future-option order will execute subject to the same priority as
they would if they had been submitted without a future leg.
\30\ In other words, if there is a priority customer order on
any leg(s) comprising the SBBO, the component(s) of the future-
option order for the option leg(s) with a priority customer order at
the BBO must execute at a price that improves the price of that
priority customer order(s) on the simple book by at least one
minimum increment. This is the same priority that applies to a
nonconforming complex order (comprised of all option legs) as set
forth in Rule 5.85(b)(2), and thus the options legs of a
nonconforming future-option order will execute subject to the same
priority as they would if they had been submitted without a future
leg.
---------------------------------------------------------------------------
The Exchange proposes to amend Rule 6.5, Interpretation and Policy
.07 to describe how a future-option order may qualify as an obvious
error. As proposed, future-option orders will be handled in a similar
manner as stock-option orders for purposes of Rule 6.5. Specifically,
if the option leg of a future-option order qualifies as an obvious
error under Rule 6.5(c)(1) or catastrophic error under Rule 6.5(d)(1),
then the option leg that is an obvious or catastrophic error will be
adjusted in accordance with Rule 6.5(c)(4)(A) or (d)(3), respectively,
regardless of whether one of the parties is a customer. However, the
option leg of any customer future-option order will be nullified if the
adjustment would result in an execution price higher (lower) for buy
(sell) transactions than the customer's limit price on the future-
option order, and the Exchange will attempt to nullify the future leg.
Whenever a DCM nullifies the futures leg(s) of a future-option order or
whenever the future leg(s) cannot be executed, the Exchange will
nullify the option leg upon request of one of the parties to the
transaction or in accordance with Rule 6.5(c)(3).
Finally, the proposed rule change adds Interpretation and Policy
.02 to Rule 6.6 to clarify that TPHs may update only the option
component of a future-option order trade using Clearing Editor (and as
permitted by Rule 6.6). Any updates to the future component would need
to be done in accordance with the Rules of the applicable DCM (if
permissible).
Execution of the options components of future-option orders will be
subject to Commission jurisdiction, and execution of the futures
components of future-option orders will be subject to Commodity Futures
Trading Commission (``CFTC'') jurisdiction. Further, each of the
Exchange and the designated contract market on which the futures
component of a future-option order trades will regulate conduct
relating to future-option orders and trades with respect to compliance
with its rules, including bringing disciplinary actions for violations
of its rules. Before authorizing a class of future-option orders to
trade on the Exchange, the Exchange would enter into an information
sharing agreement with the designated contract market on which the
applicable future trades that encompasses information relating to
future-option orders and trades.\31\ This would allow for the sharing
of information between the Exchange and the DCM to permit the Exchange
(and the DCM) to have access to all order, trade, regulatory, and other
data relating to these orders and trades.
---------------------------------------------------------------------------
\31\ The Exchange already has one in place with CFE for purposes
of VIX future-option orders.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\32\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \33\ 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
[[Page 81597]]
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) \34\ requirement that the rules
of an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78f(b).
\33\ 15 U.S.C. 78f(b)(5).
\34\ Id.
---------------------------------------------------------------------------
In particular, 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, to protect
investors and the public interest because it will provide investors
with greater opportunities to manage risk. The proposed rule change
would provide investors with a more efficient mechanism to execute
options and related future products, which investors regularly trade as
part of hedging and other investment strategies. The proposed execution
mechanism for future-option orders will make the trading and hedging
process for investment strategies comprised of option and future
components more efficient, which will reduce execution, legging, and
price drift risk that otherwise accompanies the current execution
process for these strategies. For example, today, investors looking to
execute an investment strategy comprised of option and future
components must do so through separate trades--one for the options and
one for the futures. This creates risk that one trade occurs but the
other does not, which may leave an investor with an unhedged position.
Additionally, separate transactions create risk because market
conditions may change between the time it takes to execute both
transactions, which may make the full package execute in an unfavorable
manner for the investor. Investors may continue to execute these
strategies as separate transactions if they so choose. However, the
addition of the proposed execution process (both electronic and open
outcry) would provide investors with an optional, alternative means to
execute strategies comprised of future and options components that
would reduce these risks, as it would permit the entire package to be
priced together and will result in an execution only if both the
options and futures components are able to trade. The proposed single
execution mechanism, therefore, expands the ability of market
participants to engage in cross-product investment and hedging
transactions, which the Exchange believes will contribute to reduced
overall market risk and increased liquidity.
The Exchange believes the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices and to promote
just and equitable principles of trade. The proposed risk offset
requirement is designed to provide market participants with sufficient
flexibility to execute legitimate options strategies comprised of
options and futures while preventing misuse of this mechanism, such as
a market participant from using the proposed execution mechanism to
execute a futures trade outside of the normal trading process on the
applicable designated contract market by combining the future leg(s),
for example, with an inexpensive out-of-the-money option leg.
As discussed above, the Commission and the CFTC will maintain
jurisdiction over execution of the options and futures components,
respectively, of future-option orders. Further, each of the Exchange
and the DCM on which the futures component of a future-option order
trades will regulate conduct relating to future-option orders and
trades with respect to compliance with its rules, including bringing
disciplinary actions for violations of its rules.\35\ The Exchange is a
member of the Intermarket Surveillance Group (``ISG''). The ISG members
work together to coordinate surveillance and investigative information
sharing in the futures and options markets, and the Exchange would
therefore have access to information regarding relevant trading
activity from other ISG members, including applicable DCMs (as CFE is)
that are also members. Before authorizing a class of future-option
orders to trade on the Exchange, if the applicable DCM was not a member
of ISG, or if the applicable DCM was a member of ISG but the Exchange
still deemed appropriate, the Exchange would enter into an information
sharing agreement with the designated contract market on which the
applicable future trades that encompasses information relating to
future-option orders and trades. This would allow for the sharing of
information between the Exchange and the designated contract market to
permit the Exchange (and the designated contract market) to have access
to all order, trade, regulatory, and other data relating to these
orders and trades, and thus facilitate the intermarket surveillance of
future-option orders. As a self-regulatory organization, the Exchange
recognizes the importance of surveillance, among other things, to
detect and deter fraudulent and manipulative trading activity as well
as other violations of Exchange rules and the federal securities laws.
The Exchange's current rules prohibiting market manipulation and
fraudulent, noncompetitive, and disruptive trading practices will apply
to future-option orders. The Cboe Regulatory Division will incorporate
information it receives from the designated contract market into its
surveillance procedures to monitor trading of future-option orders,
including to detect any manipulative trading activity. The Exchange
believes its surveillance, along with the proposed risk offset
requirement, are reasonably designed to detect manipulative trading and
enforce compliance with the proposed rules and other Exchange Rules.
The Exchange performs ongoing evaluations of its surveillance program
to ensure its continued effectiveness and will continue to review its
surveillance procedures on an ongoing basis and make any necessary
enhancements and/or modifications that may be needed for future-option
orders.
---------------------------------------------------------------------------
\35\ This would include any rules the designated contract market
related to the execution of the future component of a future-option
order.
---------------------------------------------------------------------------
The Exchange believes the proposed execution process will also
promote just and equitable principles of trade. As described above,
future-option orders will execute in a substantially similar way as
complex orders, including stock-option orders. The proposed priority
for future-option orders will protect customer orders in the simple
book. As proposed, the option component(s) of a future-option order
will ultimately trade in the same manner and in accordance with the
same priority principles as they would if they had been submitted
without a future leg. Further, the proposed process to nullify the
option component execution if the future-option order does not execute
is consistent with the purpose of the future-option order. Given the
option and future components of a future-option order are submitted as
part of the same investment strategy, if the future component does not
execute, the Exchange believes it is reasonable to expect that a user
that submitted a future-option to request nullification of the options
trade in accordance with current Exchange Rules. If the future
component does not execute, rather than require the user that submitted
the future-option order to contact the Exchange to request
nullification of the
[[Page 81598]]
option component execution, the proposed rule eliminates this
requirement for the user to make such request. Instead, the proposed
rule change provides that the Exchange will automatically nullify the
option transaction if the future component does not execute. The
Exchange believes such nullification without a request from the user is
consistent with the purpose of future-option orders, as contingent
execution at or near the same time (and thus reduction in price and
execution risk) is one of the primary goals of future-option orders (as
further discussed below).
Additionally, the Exchange believes the availability of future-
option orders will 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 because it will provide
investors with an alternative to the OTC market for investment
strategies comprised of future and option components. The proposed rule
change will provide investors with the ability to execute these
investment strategies in a listed market environment as opposed to in
the unregulated OTC market. The proposed rule change may shift
liquidity from the OTC market onto the Exchange (as well as shift swaps
and OTC combos from the OTC market onto designated contract markets in
the form of futures), which the Exchange believes would increase market
transparency as well as enhance the process of price discovery
conducted on the Exchange through increased order flow to the benefit
of all investors. The Exchange believes it may be a more attractive
alternative to the OTC market, because trading these strategies in an
exchange environment may benefit market participants in several ways,
including but not limited to the following: (1) enhanced efficiency in
initiating and closing out positions; (2) increased market
transparency; and (3) heightened contra-party creditworthiness due to
clearing requirements for listed options and futures.
The Commission previously determined that permitting investors to
submit an order for execution to Cboe that included components subject
to different regulatory jurisdictions was consistent with the Act.\36\
Specifically, in 1988, the Commission approved a Cboe proposed rule
change to allow inter-regulatory spread orders (which were defined as
the simultaneous purchase and/or sale of at least one unit in contracts
each of which is subject to different regulatory jurisdictions at
stated limits, or at a stated differential, or at market prices on the
floor of the Exchange) to trade on Cboe's trading floor.\37\ The only
substantive differences between that proposal and the proposed rule
change regarding future-option orders are as follows:
---------------------------------------------------------------------------
\36\ Securities Exchange Act Release No. 26271 (November 10,
1988), 53 FR 46727 (November 18, 1988) (SR-CBOE-88-17) (``CBOE-CBOT
JV Approval Order''); see also Securities Exchange Act Release No.
24235 (March 19, 1987), 52 FR 9750 (March 26, 1987) (SR-Phlx-86-43).
\37\ See CBOE-CBOT JV Approval Order.
---------------------------------------------------------------------------
The proposed rule change would permit future-option orders
in classes authorized by the Exchange, dependent upon agreements the
Exchange may make with applicable DCMs, compared to the prior filing
that was limited to orders comprised of two options and two related
futures.\38\ The Exchange believes this is reasonable because the
proposed rule change will provide the Exchange with the ability to
expand the availability of future-option order functionality in the
future to accommodate additional investment strategies of investors,
and the proposed rules regarding future-option orders would apply in
the same manner regardless of the underlying components.\39\
---------------------------------------------------------------------------
\38\ Inter-regulatory spreads subject to that proposal were
limited to those comprised of S&P 500 Index options and CBOE 50
futures, and S&P 100 Index options and S&P 250 futures.
\39\ As noted above, if the Exchange determines a different risk
offset requirement would be appropriate for a different class of
future-option orders, it will submit a rule filing as necessary to
implement that requirement.
---------------------------------------------------------------------------
The proposed rule change would permit electronic execution
in addition to open outcry execution of future-option orders. This
merely reflects the advancement in the availability of electronic
trading since 1988 and provides an additional manner of execution for
future-option orders.
The proposed rule change does not create a separate pit on
the Exchange's trading floor for the related futures as the prior
proposal did. Given the advances in electronic trading (and the fact
that many futures exchanges no longer have open outcry trading), the
Exchange believes this is no longer necessary to permit future-option
orders.\40\
---------------------------------------------------------------------------
\40\ As an example, VX futures trade electronically only on CFE.
For similar reasons, the Exchange believes structuring future-option
orders as a joint venture is unnecessary, as the individual
components will continue to trade on the applicable market as
proposed. As noted above, the Exchange will be able to share
information with the applicable DCM (through ISG or information
sharing agreements) for regulatory purposes. It is possible the
Exchange and the designated contract market may enter into other
agreements as appropriate to permit future-option orders (e.g., to
establish electronic connections for purposes of routing the futures
component), but such agreements would have no impact on the proposed
rules.
---------------------------------------------------------------------------
These differences have no impact on the fundamental attributes of
the underlying product that the Commission approved in 1988 and that
the Exchange proposes in this filing, which is a multi-part order
comprised of an option and a related future submitted to the Exchange
for pricing as a package, with execution of each component contingent
on the other. When approving the prior proposal, the Commission stated
that permitting execution of inter-regulatory spreads (including for
hedging purposes) on the Exchange would ``contribute to the mechanism
of a free and open market by enhancing . . . market makers' ability to
hedge their positions with futures [and] enable market makers to better
accommodate customer orders and to provide deeper and tighter
markets.'' \41\ The Commission further stated that the proposed rule
change was designed to minimize regulatory concerns, and clarifying the
regulatory responsibility for each leg of an inter-regulatory spread
(as the current filing does) would ``expedite the enforcement of each
jurisdiction's regulations and foster coordination and cooperation
between the jurisdictions involved.'' \42\ Ultimately, the Commission
found that the proposal to execute inter-regulatory spreads on Cboe to
be consistent with the requirements of the Act.\43\ While some time has
passed since approving inter-regulatory spreads (the Exchange notes the
rules permitted execution of inter-regulatory spreads remained in
Cboe's Rulebook until 2005,\44\ and the definition of an inter-
regulatory spreads remains in Cboe's Rulebook \45\), the Exchange is
unaware of any changes to Section 6(b)(5) of the Act since the
Commission approved that the trading of inter-regulatory spreads that
would prevent the Commission from approving future-option orders at
this time.
---------------------------------------------------------------------------
\41\ See CBOE-CBOT JV Approval Order at 46729.
\42\ Id. at 46730.
\43\ Id.
\44\ See Securities Exchange Act Release No. 52824 (November 22,
2005), 70 FR 72318 (December 2, 2005) (SR-CBOE-2005-69).
\45\ See Rule 1.1 (definition of inter-regulatory spread).
---------------------------------------------------------------------------
Further, as discussed above, the proposed rules regarding the
handling and execution of future-option orders are also substantially
similar to that of stock-option orders,\46\ and rules previously filed
with the Commission
[[Page 81599]]
for security-future option orders.\47\ The only substantive difference
between stock-option orders (and security-future option orders) is that
one component of a future-option order (the future leg(s)) is not
subject to Commission jurisdiction. The Exchange believes market
participants who trade want to trade these strategies because they have
determined these strategies are the most appropriate to achieve their
investment goals should be able to avail themselves of a more efficient
and lower risk execution mechanism for these strategies, even though
those strategies happen to include a component subject to jurisdiction
of another regulator.
---------------------------------------------------------------------------
\46\ See Rules 5.33 (including subparagraphs (f)(1)(B) and
(2)(B), paragraph (l), and Interpretation and Policy .04), 5.70(b),
5.83(b), and 5.85 (including subparagraphs (b)(3) through (5) and
paragraph (g)).
\47\ See Securities Exchange Act Release No. 49367 (March 5,
2004), 69 FR 11678 (March 11, 2004) (SR-CBOE-2004-14); see also
Securities Exchange Act Release Nos. 46390 (August 21, 2002), 67 FR
55290 (August 28, 2002) (SR-ISE-2002-18); and 48894 (December 8,
2003), 68 FR 70328 (December 17, 2003) (SR-PCX-2003-42).
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Ultimately, 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, to protect
investors and the public interest because it will provide investors
with a competitive and efficient market mechanism for executing
investment strategies comprised of future-option orders on the
Exchange, which will provide a venue for order exposure and price
discovery. These are bona fide investment strategies that reduce market
participants' risk and facilitate hedging. A robust and competitive
market requires that exchanges respond to investors' evolving needs by
constantly 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 removed.\48\ 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.\49\ 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 life-
blood of a vibrant competitive market--and that is particularly so
given the continued internalization of the securities markets, as
exchanges 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 in order to attract order flow
and liquidity 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 that the proposed
rule change will help further competition by providing market
participants with yet another investment option for the listed options
market.
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\48\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.).
\49\ 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 future-option orders
will be available to all TPHs and will execute in the same manner.
Future-option orders will be available to all users on a voluntary
basis, and users will not be required to use future-option orders to
execute investment strategies comprised of option and future
components. Users may continue to execute these strategies as they do
today by entering an option order on the Exchange and separately
executing the future component on a designated contract market. For
users that elect to use the proposed functionality, the proposed rule
change would reduce price and execution risk that currently exists when
executing these strategies.
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 functionality (and previously
have, as noted above). The Exchange understands investors currently
execute investment strategies comprised of option and future components
today. Investors may continue to do so; however, the proposed rule
change merely provides them a simple, efficient, transparent, and
competitive execution mechanism for hedging and other investment
strategies that contain options and related futures components.
The Exchange believes the proposed rule change may relieve any
burden on, or otherwise promote, competition. The proposed rule change
is designed to provide investors with a more efficient and lower risk
mechanism to execute investment strategies comprised of futures and
options components. The Exchange believes this is an enhancement to
executing these investment strategies in a riskier and more complex
manner through separate transactions or in the unregulated and opaque
OTC market. The proposed rule change would make a more attractive
alternative to either of these options by providing investors with the
ability to execute these strategies in a single transaction in an
exchange environment. This would result in increased market
transparency, enhanced efficiency in initiating and closing out
positions, and heightened contra-party creditworthiness.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
[[Page 81600]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CBOE-2024-042 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-CBOE-2024-042. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CBOE-2024-042 and should be
submitted on or before October 29, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-23064 Filed 10-7-24; 8:45 am]
BILLING CODE 8011-01-P
