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[Federal Register Volume 90, Number 7 (Monday, January 13, 2025)]
[Notices]
[Pages 2759-2766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00412]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102126; File No. SR-CBOE-2024-042]

Self-Regulatory Organizations; Cboe Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Permit Orders Comprised of Options and Futures 
Legs (``Future-Option Orders'')

January 6, 2025.

I. Introduction

    On September 17, 2024, Cboe Exchange, Inc. (the ``Exchange'' or

[[Page 2760]]

``Cboe Options'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to permit future-option 
orders.\3\ The proposed rule change was published for comment in the 
Federal Register on October 8, 2024.\4\ The Commission has received no 
comments regarding the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposal states that a future-option order ``which is 
deemed an inter-regulatory spread order for purposes of the Rules, 
is 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. The Exchange designates in 
which classes future-option orders are available.'' See proposed 
Exchange Rule 1.1.
    \4\ See Securities Exchange Act Release No. 101229 (Oct. 1, 
2024), 89 FR 81592 (``Notice'').
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    On November 18, 2024, pursuant to Section 19(b)(2) of the Exchange 
Act,\5\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\6\ This order institutes proceedings under 
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change.
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 101646 (Nov. 18, 
2024), 89 FR 83723 (Nov. 22, 2024) (designating January 6, 2025, as 
the date by which the Commission shall either approve, disapprove, 
or institute proceedings to determine whether to disapprove the 
proposed rule change).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    As described more fully in the Notice,\8\ the Exchange proposes to 
amend its rules to permit future-option orders, which would be 
comprised of both options and futures legs.\9\ The Exchange states that 
it is common for investors to engage in hedging or other investment 
strategies that involve options and related futures products, and that, 
to execute these 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.\10\ The Exchange 
states, for example, that 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'').\11\ The Exchange states that separate 
executions of this sort create additional risks, including the risk 
that one order will execute while the other does not and price risk 
resulting from the time it takes to complete both transactions.\12\ The 
Exchange states that due to these 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.\13\ The 
Exchange states that the proposal would adopt a mechanism to facilitate 
the execution of these cross-product transactions in a simple, 
efficient manner that reduces these execution and price risks.\14\
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    \8\ See supra note 4.
    \9\ See Notice, 89 FR 81593.
    \10\ See id.
    \11\ See id.
    \12\ See id.
    \13\ See id.
    \14\ See id.
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    The proposal amends Exchange Rule 1.1 to define to define a 
``future-option order'' 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.\15\ The 
Exchange would designate in which classes future-option orders would be 
available.\16\ The Exchange states that it intends to initially permit 
future-option orders overlying VIX and that it may expand the 
availability of future-option orders to other underlying securities or 
indexes in the future. \17\ The Exchange further states that, if 
required, the Exchange would submit rule filings in connection with any 
such expansion; the Exchange states, for example, that it may determine 
that a different risk offset requirement (as discussed below) is 
appropriate for another underlying based on the characteristics of the 
overlying options and futures.\18\
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    \15\ The Exchange states that a ``future-option order'' is 
deemed an inter-regulatory spread order for purposes of the 
Exchange's rules. The Exchange states that Exchange 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 Exchange states that the proposed 
rule change modernizes this definition to apply it to the Exchange 
in general, as opposed to the floor of the Exchange (the Exchange 
states that the definition of inter-regulatory spread order was 
adopted when all trading on the Exchange occurred in open outcry). 
See id. at footnote 3.
    \16\ See Notice, 89 FR 81593. The Exchange states that the 
proposed definition of a future-option order is similar to the 
definition of a stock-option order, and that Exchange 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 Exchange 
states that 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). 
See id. at footnote 4.
    \17\ See Notice, 89 FR at footnote 5.
    \18\ See id.
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    The proposed definition of a future-option order includes a risk 
offset requirement and a User may submit a future-option order only if 
it satisfies the applicable risk offset requirement.\19\ The Exchange 
states that 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 DCM by combining the 
future leg(s), for example, with an inexpensive out-of-the-money option 
leg.\20\ 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).\21\ 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.\22\ 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, and the delta value of a future leg equals the amount set 
forth in the rules or contract specifications of the DCM on which the 
future contract trades.\23\ The delta value of each option and future 
leg is multiplied by the applicable multiplier.\24\ The sum of the 
future legs delta values divided by the sum of the

[[Page 2761]]

option legs delta values equals the net delta value for the order.\25\
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    \19\ See Notice, 89 FR at 81593.
    \20\ See id.
    \21\ See id. The Exchange states that the user must include a 
delta value for each option leg of the order when submitting a 
future-option order. See Exchange Rule 1.1 (proposed paragraph 
(b)(2) of definition of future-option order). The Exchange states 
that although 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 Exchange states that the System will use the user-
submitted delta values to calculate the risk offset for the entire 
order. See id. at footnote 6.
    \22\ See Notice, 89 FR 81593 and paragraph (a)(1) of the 
proposed definition of future-option order.
    \23\ See paragraphs (a)(1)(A) and (B) of the proposed definition 
of future-option order.
    \24\ See paragraph (a)(1)(C) of the proposed definition of 
future-option order.
    \25\ See paragraph (a)(1)(D) of the proposed definition of 
future-option order.
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    For future-option orders overlying the Cboe Volatility Index (VIX), 
the System calculates the risk offset set forth in paragraph (a) using 
the net delta value for each ``group'' of option legs and future legs 
with the same expiration date.\26\ The net delta value of each group 
must be no greater than -0.10 and no less than -1.25.\27\ 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.\28\
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    \26\ See paragraph (a)(2) of the proposed definition of future-
option order.
    \27\ See id.
    \28\ See id. An example of this calculation appears in the 
Notice at 89 FR 81593.
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    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.\29\ The Exchange states that 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 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.\30\
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    \29\ See paragraph (c) [sic] of the proposed definition of 
future-option order.
    \30\ See Notice, 89 FR 81593-4. The Exchange states that it is 
for this reason a user may not designate a future-option order 
submitted for electronic processing as GTC or GTD, as provided in 
proposed Exchange Rule 1.1 (proposed paragraph (b)(1) of definition 
of future-option order). See id. at 81594, footnote 10.
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    The Exchange states that the proposal also amends the definition of 
``complex order'' in Exchange Rule 1.1 to provide that unless the 
context otherwise requires, the term complex order will include future-
option orders.\31\
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    \31\ See id. at 81594.
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    The Exchange states that, under proposed Exchange 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; \32\ or
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    \32\ The Exchange states that, unlike stock, a future trades on 
one DCM, which would make such direct communication with the DCM 
possible. The Exchange states that this would only be available if 
the DCM and the Exchange established electronic communication 
between the two markets to permit this direct communication of the 
futures component. See id. at footnote 12.
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     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 above (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 Exchange 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.\33\ 
The Exchange states that 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 DCM on which the futures trade.\34\ The 
Exchange states that 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).\35\
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    \33\ The Exchange states that only authorized Users and 
associated persons of Users may establish connectivity to and access 
the Exchange to submit orders. See Exchange Rule 5.5(a). The 
Exchange states that a ``User'' is defined as a Trading Permit 
Holder (``TPH'') or Sponsored User who is authorized to obtain 
access to the System pursuant to Exchange Rule 5.5. See Exchange 
Rule 1.1 (definition of User). The Exchange states that it currently 
has no Sponsored Users, so the term ``User'' at present is 
synonymous with the term ``TPH.'' The Exchange states that a 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 DCM on which the futures 
trades and the Commodity Futures Trading Commission (``CFTC''). See 
Notice, 89 FR at footnote 13.
    \34\ The Exchange states that this requirement is substantially 
identical to that required for stock-option orders. See Notice, 89 
FR at footnote 14.
    \35\ The Exchange states that it intends to establish an 
arrangement with one or more FCMs/IBs that are members of the 
applicable DCM, 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 DCM 
for execution of these futures components. See Notice, 89 FR at 
footnote 15.
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    The Exchange states that the proposal adds future-option orders to 
the list of types of complex orders that may be accepted for electronic 
trading.\36\ The Exchange states that future-option orders submitted 
for electronic processing may execute pursuant to a complex order 
auction (``COA'') if eligible, as described in Exchange Rule 5.33(d), 
or in the complex order book (``COB'') as described in Exchange Rule 
5.33(e) and will execute in the same manner as other complex orders, 
except as described herein.\37\ The Exchange states that future-option 
orders may also be submitted for execution (if eligible) in the complex 
automated improvement mechanism (``C-AIM''), as described in Exchange 
Rule 5.38, or the complex solicitation auction mechanism (``C-SAM'') as 
described in Exchange Rule 5.40.\38\ The Exchange further states that 
the proposal amends Exchange Rule 5.70(b) to provide that the Exchange 
may make future-option orders available for flexible (FLEX) options 
trading.\39\
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    \36\ See Notice, 89 FR 81594.
    \37\ See id.
    \38\ See id. at 81595.
    \39\ See id. at footnote 16.
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    The Exchange states that it proposes to adopt Exchange 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 allow the Exchange to accommodate the available pricing of 
futures.\40\ 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), and the future leg(s) of a future-
option order may be executed in any decimal price permitted in the DCM 
on which the applicable futures trade.\41\ The Exchange states that 
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 DCM on which the futures trade.\42\ The Exchange 
states that even with the flexibility provided in the proposed rule, 
the individual options legs must trade at increments allowed by the 
Commission.\43\
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    \40\ See Notice, 89 FR 81594.
    \41\ See proposed Exchange Rule 5.33(f)(1)(C).
    \42\ See Notice, 89 FR 81594.
    \43\ See id.
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    As described more fully in the Notice, the Exchange states that the 
proposed electronic execution process of future-option orders is 
substantially similar to that of stock-option orders.\44\ If a future-
option order can execute upon entry or following a COA, or if it can 
execute following evaluation while resting in

[[Page 2762]]

the COB pursuant to Exchange Rule 5.33(i), the System will execute 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, but will not immediately send the 
User a trade execution report, and then will 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.\45\ If 
the System receives an execution report for the future component from 
the DCM or the designated FCM/IB, as applicable, the Exchange will send 
the User the trade execution report for the future-option order, 
including execution information for the future and option 
components.\46\ If the System receives a report from the DCM or the 
designated FCM/IB, as applicable, that the future component(s) cannot 
execute, the Exchange will nullify the option component trade and 
notify the User of the reason for the nullification.\47\ The Exchange 
states that 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.\48\ A future-option order that is not marketable will rest in 
the COB (if eligible to rest) or route to PAR for manual handling, 
subject to a User's instructions.\49\
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    \44\ See id.
    \45\ See proposed Exchange Rule 5.33(o)(2)(A).
    \46\ See proposed Exchange Rule 5.33(o)(2)(B).
    \47\ See proposed Exchange Rule 5.33(o)(2)(B). The Exchange 
states that the execution of the futures component must satisfy 
requirements of the applicable DCM, including informational and 
reporting time requirements, risk controls, and price restrictions 
(such as needing to be within the daily quotation range). The 
Exchange states that, pursuant to Exchange 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. See Notice, 89 FR at 
footnote 21.
    \48\ See Notice, 89 FR 81595.
    \49\ See proposed Exchange Rule 5.33(o)(2).
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    Proposed Exchange Rule 5.33(f)(2)(C) states that 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. The 
Exchange states that, for a future-option order with more than one 
option leg, the option legs must trade at price pursuant to Exchange 
Rule 5.33(f)(2)(A), which is the permissible execution prices and 
priority for complex orders comprised of option legs.\50\ Therefore, 
the Exchange states that the System 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'') \51\ or equal to the SBBO when there is a priority 
customer order on any leg comprising the SBBO and, if a conforming 
complex order,\52\ 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,\53\ 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.\54\ The 
Exchange states that, pursuant to the 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.\55\
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    \50\ See Notice, 89 FR 81595 and proposed Exchange Rule 
5.33(f)(2)(C)(ii).
    \51\ See Notice, 89 FR 81595. The Exchange states that the 
proposal revises the definition of SBBO in Exchange 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. The Exchange states that the proposal revises the 
definition of synthetic national best bid or offer (``SNBBO'') in 
Exchange 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. See Notice, 89 FR 
at footnote 22.
    \52\ The Exchange states that the proposal amends the definition 
of ``conforming complex order'' in Exchange 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 Exchange Rule 5.33(b)). See Notice, 
89 FR at footnote 23.
    \53\ The Exchange states that the proposal amends the definition 
of ``nonconforming complex order'' in Exchange 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). See Notice, 89 FR at footnote 24.
    \54\ The Exchange states that all-or-none complex orders 
(including future-option orders) may only execute at prices better 
than the SBBO. See Notice, 89 FR at footnote 25.
    \55\ See Notice, 89 FR 81595.
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    The Exchange states that the proposal also amends rules in Chapter 
5, Section G of the Exchange's rulebook to describe the execution of 
future-option orders in open outcry on the Exchange's trading floor, 
which the Exchange states is substantially similar to the open outcry 
process for stock-option orders.\56\ The Exchange states that the 
proposal amends Exchange Rule 5.83(b) to provide that the Exchange may 
make future-option orders available for PAR routing for manual 
handling, and further amends this provision to provide that the 
Exchange may determine 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.\57\ The 
Exchange states that the proposal amends Exchange 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 Trading Permit Holder (``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.\58\ The Exchange states that 
proposed Exchange Rule 5.85(b)(3) provides 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-designated FCM/IB not affiliated with the Exchange for 
execution at a DCM on

[[Page 2763]]

which the futures trade in accordance with proposed Exchange Rule 5.33, 
Interpretation and Policy .05.\59\ The Exchange also proposes to add 
subparagraph (5) to Exchange Rule 5.85(g) (which the Exchange states is 
substantially similar to Exchange 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 Exchange Rule 
5.33(o)) not affiliated with the Exchange for electronic execution at 
the DCM 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).\60\ 
The Exchange states that 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 DCM on which the futures trade must comply 
with proposed Exchange Rule 5.33(o).\61\ The Exchange proposes to amend 
Exchange 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.\62\
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    \56\ See id.
    \57\ See id.
    \58\ See id. The Exchange states that the proposal also updates 
Exchange 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. See id. at footnote 26.
    \59\ See Notice, 89 FR 81595-6.
    \60\ See id. at 81596.
    \61\ See id.
    \62\ See id.
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    The Exchange states that the proposal amends Exchange Rule 
5.85(b)(3) to describe the priority that will apply to future-option 
orders executed on the Exchange's trading floor.\63\ The Exchange 
states that, under the proposal, future-option orders, like stock-
option orders, will have priority over bids (offers) of in-crowd market 
participants on the trading floor but not over priority customer bids 
(offers) in the book.\64\ Further, the Exchange states that 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.\65\ Pursuant to proposed Exchange 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 Exchange 
Rule 5.4(b).\66\ The Exchange states that, pursuant to proposed 
Exchange 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 Exchange Rule 5.4(b).\67\
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    \63\ See id.
    \64\ See id.
    \65\ See id.
    \66\ The Exchange states that 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. The Exchange states that this is 
the same priority that applies to a conforming complex order 
(comprised of all option legs) as set forth in Exchange 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. See Notice, 89 at 
footnote 29.
    \67\ See Notice, 89 FR 81596. The Exchange states that 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. The Exchange states that 
this is the same priority that applies to a nonconforming complex 
order (comprised of all option legs) as set forth in Exchange 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. See id. at footnote 
30.
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    The Exchange states that the proposal amends Exchange Rule 6.5, 
Interpretation and Policy .07 to describe how a future-option order may 
qualify as an obvious error, that future-option orders will be handled 
in a similar manner to stock-option orders for purposes of Exchange 
Rule 6.5.\68\ The Exchange states that if the option leg of a future-
option order qualifies as an obvious error under Exchange Rule 
6.5(c)(1) or catastrophic error under Exchange Rule 6.5(d)(1), then the 
option leg that is an obvious or catastrophic error will be adjusted in 
accordance with Exchange Rule 6.5(c)(4)(A) or (d)(3), respectively, 
regardless of whether one of the parties is a customer.\69\ The 
Exchange states that 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.\70\ The Exchange states that when a DCM 
nullifies the futures leg(s) of a future-option order or when 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 Exchange Rule 6.5(c)(3).\71\ The Exchange states that 
the proposal adds Interpretation and Policy .02 to Exchange 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 Exchange 
Rule 6.6), and that any updates to the future component would need to 
be done in accordance with the Rules of the applicable DCM (if 
permissible).\72\
---------------------------------------------------------------------------

    \68\ See Notice, 89 FR 81596.
    \69\ See id.
    \70\ See id.
    \71\ See id.
    \72\ See id.
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    The Exchange states that 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.\73\ The Exchange further states that 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.\74\ The Exchange 
states that before authorizing a class of future-option orders to trade 
on the Exchange, the Exchange would enter into an information sharing 
agreement with the DCM on which the applicable future trades that 
encompasses information relating to future-option orders and trades, 
which 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.\75\
---------------------------------------------------------------------------

    \73\ See id.
    \74\ See id.
    \75\ See id.
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    The Exchange states that the proposal will provide investors with 
greater opportunities to manage risk and will 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.\76\ The Exchange states that the proposed 
execution mechanism for future-option orders will make the trading and 
hedging process for investment

[[Page 2764]]

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.\77\ The Exchange states that today, investors seeking 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, which creates risk that one trade occurs but the 
other does not, and which may leave an investor with an unhedged 
position.\78\ In addition, the Exchange states that 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.\79\ The 
Exchange states that although investors may continue to execute these 
strategies as separate transactions, the proposed execution process 
(both electronic and open outcry) will provide investors with an 
optional, alternative means to execute strategies comprised of future 
and options components that will reduce these risks, as it will 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.\80\ The Exchange states that 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.\81\
---------------------------------------------------------------------------

    \76\ See id. at 81597.
    \77\ See id.
    \78\ See id.
    \79\ See id.
    \80\ See id.
    \81\ See id.
---------------------------------------------------------------------------

    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.\82\ The Exchange states that 
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 using the proposed 
execution mechanism to execute a futures trade outside of the normal 
trading process on the applicable DCM by combining the future leg(s), 
for example, with an inexpensive out-of-the-money option leg.\83\
---------------------------------------------------------------------------

    \82\ See id.
    \83\ See id.
---------------------------------------------------------------------------

    The Exchange states that the Commission and the CFTC will maintain 
jurisdiction over execution of the options and futures components, 
respectively, of future-option orders.\84\ The Exchange states that 
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.\85\ The Exchange states that it is a member of the Intermarket 
Surveillance Group (``ISG''). The Exchange states that ISG members work 
together to coordinate surveillance and investigative information 
sharing in the futures and options markets, and that 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.\86\ The Exchange states that 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 DCM on which 
the applicable future trades that encompasses information relating to 
future-option orders and trades.\87\ The Exchange states that 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, 
and thus facilitate the intermarket surveillance of future-option 
orders.\88\ The Exchange states that, as a self-regulatory 
organization, it 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.\89\ The Exchange states that its current rules 
prohibiting market manipulation and fraudulent, noncompetitive, and 
disruptive trading practices will apply to future-option orders, and 
that the Cboe Regulatory Division will incorporate information it 
receives from the DCM into its surveillance procedures to monitor 
trading of future-option orders, including to detect any manipulative 
trading activity.\90\ The Exchange states that 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.\91\ The Exchange states that it 
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.\92\
---------------------------------------------------------------------------

    \84\ See id.
    \85\ See id.
    \86\ See id.
    \87\ See id.
    \88\ See id.
    \89\ See id.
    \90\ See id.
    \91\ See id.
    \92\ See id.
---------------------------------------------------------------------------

    The Exchange states that the proposal will provide investors with 
the ability to execute their investment strategies in a listed market 
environment as opposed to in the unregulated OTC market and 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.\93\ The Exchange states that it may be a more 
attractive alternative to the OTC market, because of, among other 
things: (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.\94\ The Exchange states that the Commission 
previously approved an Exchange proposal that permitted the trading of 
inter-regulatory spreads comprised of S&P 500 Index options and CBOE 50 
futures, and S&P 100 Index options and S&P 250 futures.\95\
---------------------------------------------------------------------------

    \93\ See id. at 81598.
    \94\ See id.
    \95\ See Notice, 89 FR at footnote 38.
---------------------------------------------------------------------------

III. Proceedings To Determine Whether To Approve or Disapprove SR-CBOE-
2024-042 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \96\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is

[[Page 2765]]

appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\97\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act,\98\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and protect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \97\ See id.
    \98\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
self-regulatory organization that proposed the rule change.'' \99\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
requirements must all be sufficiently detailed and specific to support 
an affirmative Commission finding,\100\ and any failure of a self-
regulatory organization to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Act and the 
applicable rules and regulations.\101\ As discussed above, the Exchange 
states that it initially proposes to make future-option orders 
available for VIX, and that it may expand the availability of future-
option orders to other underlying securities or indexes in the 
future.\102\ However, the proposed rules do not specifically limit the 
availability of future-option orders to VIX, nor do they identify the 
permissible underliers for future-option orders.\103\ In addition, 
although all future-option orders would be subject to a risk offset 
requirement, the proposed rules establish a methodology for calculating 
the risk offset only for VIX.\104\ The Exchange states that it may 
determine that a different risk offset requirement is appropriate for 
another underlying based on the characteristics of the overlying 
options and futures.\105\ Instituting proceedings will allow for 
additional consideration and clarification of the intended scope of the 
proposal, including whether the proposal should be limited to future-
option orders on underliers for which the Exchange has established a 
methodology for calculating the risk offset requirement.
---------------------------------------------------------------------------

    \99\ 17 CFR 201.700(b)(3).
    \100\ See id.
    \101\ See id.
    \102\ See Notice, 89 FR at footnote 5.
    \103\ The proposed definition of future-option order in Exchange 
Rule 1.1 states: ``A future-option order, which is deemed an inter-
regulatory spread order for purposes of the Rules, is 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. The Exchange designates in which 
classes future-option orders are available.''
    \104\ Paragraph (a)(1) of the proposed definition of future-
option order states: ``The System accepts 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). 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.'' Paragraph (a)(2) of 
the proposed definition of future-option order states: ``For future-
option orders overlying the Cboe Volatility Index (VIX), the System 
calculates the risk offset set forth in paragraph (a) [sic] 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. 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.''
    \105\ See Notice, 89 FR at footnote 5.
---------------------------------------------------------------------------

    The Exchange states that the proposed 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 DCM by combining the future leg(s), for example, with an 
inexpensive out-of-the-money option leg.\106\ The proposal provides no 
discussion or analysis describing how the Exchange developed the 
proposed risk offset requirement, including the permitted range of the 
risk offset, or why the Exchange believes that the proposed risk offset 
requirement--as opposed to another risk offset requirement or other 
metric--would be an effective means for permitting the execution of 
legitimate trading strategies while preventing misuse of the mechanism. 
Instituting proceedings will allow for additional analysis and 
consideration of issues related to the proposed risk offset 
requirement, including whether the Exchange has adequately described 
the operation of the proposed risk offset requirement, how the Exchange 
developed and selected the proposed risk offset requirement, how the 
proposed risk offset requirement will accomplish its stated purpose, 
and how the Exchange will determine when a different risk offset 
requirement would be appropriate.
---------------------------------------------------------------------------

    \106\ See Notice, 89 FR 81593.
---------------------------------------------------------------------------

    The proposal requires a User to include a reasonable delta value 
for each option leg and the risk offset percentage of the order.\107\ 
The Exchange states that ``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.'' \108\ The proposal provides no discussion of how 
the Exchange will determine that User-assigned delta values are 
reasonable or how the Exchange will surveil for compliance with this 
requirement. Instituting proceedings will allow further discussion and 
consideration of how the Exchange will monitor compliance with the 
requirement that Users assign a reasonable delta value to each option 
leg of the order.
---------------------------------------------------------------------------

    \107\ See paragraph (b)(2) of the proposed definition of future-
option order.
    \108\ See Notice, 89 FR at footnote 6.
---------------------------------------------------------------------------

    In addition, as noted above, the Exchange states that 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 CFTC jurisdiction.\109\ 
Instituting proceedings will allow for additional analysis and 
consideration of issues related to any jurisdictional issues.
---------------------------------------------------------------------------

    \109\ See Notice, 89 FR 81596.
---------------------------------------------------------------------------

    The Commission is instituting proceedings to allow for additional 
consideration and comment on the issues discussed above. In particular, 
the Commission asks commenters to address whether the proposal includes 
sufficient analysis with respect to the issues discussed above to 
support a conclusion that the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act.

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other

[[Page 2766]]

concerns they may have with the proposal. In particular, the Commission 
invites the written views of interested persons concerning whether the 
proposal is consistent with Section 6(b)(5) or any other provision of 
the Act, and the rules and regulations thereunder. Although there do 
not appear to be any issues relevant to approval or disapproval that 
would be facilitated by an oral presentation of views, data, and 
arguments, the Commission will consider, pursuant to Rule 19b-4, any 
request for an opportunity to make an oral presentation.\110\
---------------------------------------------------------------------------

    \110\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by February 3, 2025. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
February 18, 2025.
    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 February 3, 2025. Rebuttal comments should be 
submitted by February 18, 2025.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\111\
---------------------------------------------------------------------------

    \111\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-00412 Filed 1-10-25; 8:45 am]
BILLING CODE 8011-01-P
```