[Federal Register Volume 91, Number 11 (Friday, January 16, 2026)]
[Notices]
[Pages 2209-2216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-00801]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104588; File No. SR-CBOE-2026-004]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Adopt Future-Option Orders
January 13, 2026.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on January 6, 2026, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(the ``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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange 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 also available on the Commission's website
(https://www.sec.gov/rules/sro.shtml), the Exchange's website (https://www.cboe.com/us/options/regulation/rule_filings/bzx/) [sic], and at the
principal office of the Exchange.
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 amend its Rules to permit future-option
orders comprised of Cboe Volatility Index (``VIX'') options (``VIX
options'') (which trade on the Exchange) and VIX futures (``VX
futures'') (which trade on Cboe Futures Exchange, LLC's (``CFE'')). The
Exchange understands it is common for investors to engage in hedging or
other investment strategies that involve VIX options and VX futures,
given they both overlie the same index. However, to execute those
strategies, investors must submit a VIX options order to the Exchange
and separately submit a VX futures order to CFE, which is the
designated contract market (``DCM'') on which the VX futures trade. For
example, market participants may obtain positions in VIX options
through a transaction on the Exchange and hedge those positions by
entering into a separate transaction on CFE for 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.
First, the Exchange 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. Future-option orders will be available for VIX options
and VX futures (the DCM for which is CFE), which may be referred to as
``VIX future-option orders.''
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\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 amends the
definition of inter-regulatory spread order to provide that, with
respect to future-option orders, market prices are those on the
Exchange, not just the floor of the Exchange, given that trading on
the Exchange currently occurs both on the trading floor and
electronically.
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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, a VIX future-option order must be comprised of ``groups''
of offsetting future and options legs. The future and option components
of each group must have the same expiration, and the VX future leg(s)
in a group must provide a risk offset to the VIX option leg(s) in that
group of no less than 10% and no greater than 125%. A future-option
order satisfies this risk offset requirement if the delta value of each
group is no greater than -0.10 and no less than -1.25.\4\ The delta
value \5\ of
[[Page 2210]]
VIX option leg equals the expected change in the price of that option
contract given a $1.00 change in the value of VIX. The delta value of a
VX future leg equals the amount set forth in the CFE rules or contract
specifications. The delta value of each VIX option leg is multiplied by
its multiplier of 100, and the delta value of each VX future leg is
multiplied by its multiplier of 1,000. The sum of the future legs delta
values divided by the sum of the option legs delta values, which equals
the delta value for the order.
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\4\ The System rejects a future-option order if any option
contract leg or future contract leg cannot be grouped with any
future leg(s) or option leg(s), respectively.
\5\ A User must include a reasonable delta value for each option
leg when submitting a future-option order (excluding auction
responses) to the Exchange. See paragraph (b) of proposed definition
of future-option order in Rule 1.1. This will permit the System to
calculate whether the delta value of a group satisfies the risk
offset requirement. Auction responses need not include the
reasonable delta value because the risk offset requirement would
have already been deemed to be satisfied upon acceptance of the
auctioned order.
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For example, suppose a VIX future-option order is submitted with
the following components:
Sell 1 Dec VX future with a delta of -1
Buy 2 Jan VX futures with delta of 1
Buy 16 Dec VIX option 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 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 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 delta between -0.10 and -
1.25.
If the System determines that a complex strategy comprised of VX
future (at a specified price) \6\ and VIX option legs satisfies the
risk offset requirement, it accepts all VIX future-option orders for
that complex strategy for the remainder of the 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 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.\7\
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\6\ A User must include a net price for the option leg(s) and a
price for each futures leg of a future-option order. See proposed
subparagraph (b)(3) of the deifnition [sic] of future-option order
in Rule 1.1.
\7\ It is for this reason a User may only designate a future-
option order submitted for electronic processing as Day (an order
that, if not executed, expires at the applicable market close) or
IOC (an order that must execute in whole or in part as soon as the
System receives it) and not GTC (good-til-cancelled) or GTD (good-
til-date)). See proposed Rule 1.1 (proposed paragraph (b)(1) of
definition of future-option order).
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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.\8\
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\8\ The term complex order already includes cross-product orders
such as stock-option orders and security future-option orders.
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The proposed rule change adds future-option order to the list of
types of complex orders that may be accepted for electronic trading.\9\
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 VIX future-option orders with no more than the
applicable number of legs are eligible for electronic processing.\10\
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. 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.
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\9\ 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.
\10\ The definition of stock-option order in Rule 5.33(b)(5)
similarly permits stock-option orders with no more than the
applicable number of legs permitted by the Exchange for electronic
processing. 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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The Exchange proposes to amend Rule 5.33 to describe how future-
option orders may execute electronically on the Exchange, which process
is substantially similar to that for stock-option orders. As proposed
in Rule 5.33(o), when a User submits to the System a future-option
order:
if the User is also a member of CFE (to which the Exchange
has established electronic communication),\11\ the Exchange will
electronically communicate the future component of the future-option
order to CFE on behalf of the User; \12\ or
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\11\ The rule text is drafted generically and refers to the DCM
on which the applicable futures trade to accommodate the potential
addition of additional classes of future-option orders in the
future. However, as discussed above, the Exchange initially will
only permit VIX future-option orders; therefore, the descriptions in
this filing reference CFE rather than DCM in certain instances.
\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, as is the case with CFE.
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if the User is not also a CFE member, 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 to submit a
future-option order to the Exchange for execution, if the User is not
also a CFE member, 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 CFE.\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 VX futures component to
CFE).\15\
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\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 User
and any individuals associated with the User that submits a future-
option order to the Exchange 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''). In addition, as is the case
with respect to any order submitted to the Exchange, the User and
any individuals associated with the User that submits a future-
option order to the Exchange must have any required securities
industry registrations.
\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.
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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
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Book.\16\ 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(s) 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(s) 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) cannot execute,\17\ the
Exchange nullifies the option component(s) 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), subject to a
User's instructions.
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\16\ 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).
\17\ 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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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),\18\ 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.\19\ 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 as set forth in the Rules.
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\18\ 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).
\19\ The current minimum increment for VX futures on CFE is 0.05
index points, and the individual legs and net prices of spread
trades in the VX futures contract may be in increments of 0.01 index
points.
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Proposed Rule 5.33(o)(2) provides that a future-option order may
only execute if the price complies with proposed subparagraph
(f)(2)(C), which describes the permissible execution prices and
priority of future-option orders (which are 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.\20\ 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'') \21\ or equal to
the SBBO when there is a priority customer order on any leg comprising
the SBBO and, if a conforming complex order,\22\ 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, 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.\23\ 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.
Additionally, each component of a future-option order will clear in the
same manner as they would if they executed in separate trades.
Specifically, each executed VIX option leg of a VIX future-option order
will clear at The Options Clearing Corporation (``OCC'') in the same
manner as it would if the VIX option executed in a simple transaction
on Cboe. Similarly, each VX future leg of a VIX future-option order
will clear at OCC in the same manner as it would if the VX future
executed in a simple transaction on CFE.
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\20\ The DCM will check the prices of the futures legs to ensure
the prices are consistent with its execution requirements (including
those related to price and risk).
\21\ Because the price(s) of the future leg(s) is specified at
the time of order entry, the proposed rule change amends the
definition of SBBO in Rule 5.33(a) to provide that, for a future-
option order, the SBBO is the best net bid and best net offer on the
Exchange for a complex strategy calculated using the BBO for each
option component (or the national best bid or offer (``NBBO'') for a
component if the BBO for that component is not available).
Similarly, the proposed rule change amends the definition of
synthetic national best bid or offer (``SNBBO'') in Rule 5.33(a) to
provide that, for a future-option order, the SNBBO is the national
best net bid and net offer for a complex strategy calculated using
the NBBO for each option component.
\22\ The proposed rule change amends the definition of
``conforming complex order'' in Rule 1.1 to include a future-option
order. As discussed above, a future-option order must satisfy a risk
offset to be entered into the System, which is intended to prevent
misuse of this mechanism and permit entry of legitimate strategies
comprised of options and futures. The Exchange believes this
satisfies means it is appropriate to define all future-option orders
as conforming. Pursuant to the proposed changes to Rule 5.33, if the
ratio of the options components of a future-option order is
nonconforming, then they must still satisfy the heightened execution
pricing requirements in that rule, which will protect customer
orders on the Simple Book.
\23\ All-or-none complex orders (including future-option orders)
may only execute at prices better than the SBBO.
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Unlike the stock component of stock-option orders, a future-option
order may only execute if the future leg(s) is executable at the
specified price(s). Therefore, while the options legs may execute at
prices that satisfy the net price, the price(s) of the future leg(s)
are set upon order entry, as noted above. Price competition for a
future-option order exposed on the Exchange will, therefore, occur with
respect to the option leg(s), and the package execution price will
reflect the net price of the option leg(s) and the specified price(s)
of the future leg(s).
The Exchange believes the proposed execution process for future-
option orders is reasonable, because the
[[Page 2212]]
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(s) 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(s) 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(s) 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(s) 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).\24\
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\24\ This proposed process to nullify (without request) the
option leg(s) of a future-option order if the DCM nullifies the
future leg(s) of the order is consistent with the process used for
stock-option orders. See Rule 6.5, Interpretation and Policy .07(c).
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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). While this has the
same effective as nullification of the option leg(s) transactions set
forth in proposed 5.33(o)(2), the proposed nullification in Rule 6.5,
Interpretation and Policy .07 occurs at a different time, in a
different manner, and for different reasons. Rule 5.33(o)(2) is nearly
instantaneous nullification of the execution of the option leg(s) if it
is communicated to the Exchange that the futures leg(s) was unable to
execute. In that situation, the customer receives no fill report as the
future-option order was not fully executed. However, with respect to
Rule 6.5, Interpretation and Policy .07, nullification pursuant to this
provision permits nullification of the option leg(s) if an execution of
future-option order occurred, but the future leg(s) execution was
nullified at a later time by the DCM pursuant to the DCM's rules.
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).\25\ As the future component of a future-option order
ultimately executes in accordance with the Rules of the DCM, and the
Clearing Editor is an Exchange tool to correct information specific to
option executions.\26\ Updates to any future components of a future-
option order may only be made in accordance with the Rules of the DCM.
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\25\ The proposed rule change also adds that the same would be
true for security-future orders, which are not currently listed for
trading on the Exchange.
\26\ The Exchange notes Rule 6.6 permits TPHs to update the MPID
of a stock component of a stock-option order, but that is a
securities concept and thus Clearing Editor does not contain the
functionality to update any corresponding futures field. However,
unlike options components, TPHs cannot use Clearing Editor to update
order-specific fields for stock components as they can for option
components. Therefore, the proposed rule change is effectively
consistent with the Clearing Editor use for stock components. Any
post-execution changes to futures components would need to occur
pursuant to the DCM's rules.
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Activity related to the execution of the options components of VIX
future-option orders will be subject to Commission jurisdiction, and
activity related to the execution of the futures components of VIX
future-option orders will be subject to Commodity Futures Trading
Commission (``CFTC'') jurisdiction.\27\ 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. The Exchange and CFE
have an existing information sharing agreement that encompasses
information relating to future-option orders and trades. This would
allow for the sharing of information between the Exchange and CFE to
permit the Exchange CFE to have access to all order, trade, regulatory,
and other data relating to these orders and trades.
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\27\ On September 9, 2025, CFE submitted to the CFTC a rule
certification filing to adopt rules regarding VIX future-option
orders (which filing became effective ten business days following
such filing date, however CFE stated in that filing it would not
implement the functionality until the Exchange amended its rules to
permit VIX future-option orders). See Cboe Futures Exchange, LLC
Rule Certification Submission Number CFE-2025-021 (September 9,
2025), available at https://www.cftc.gov/sites/default/files/filings/orgrules/25/09/rules09092530095.pdf.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\28\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \29\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \30\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\28\ 15 U.S.C. 78f(b).
\29\ 15 U.S.C. 78f(b)(5).
\30\ Id.
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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
strategies involving VIX options and VX futures, which investors
regularly trade as part of hedging, management of risk exposure, and
other investment strategies. The proposed execution
[[Page 2213]]
mechanism for VIX future-option orders will make the trading and
hedging process for investment strategies comprised of VIX option and
VX 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 VIX option and
VX future components must do so through separate trades--one for the
options on the Exchange and one for the futures on CFE. 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 as they
do today if they so choose. However, the addition of the proposed
electronic execution process would provide investors with an optional,
alternative means to execute strategies comprised of VX future and VIX
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 in the listed
markets for products overlying the VIX.
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 noted
above, the Exchange determined the proposed risk offset range based on
experience with and feedback from market participants, as well as a
review of the risk offsets of transactions involving VX futures and VIX
options. As a result, we feel this range would accommodate their
investment strategies. Additionally, the Exchange manually reviewed the
risk offsets of executed Exchange of Contract for Related Positions
(``ECRPs'') that occurred in accordance with CFE rules (which market
participants engage in to exchange future positions for options
positions) over a six-month period. None of those ECRP transactions had
a risk offset outside of the 10% to 125% range. The Exchange believes
review of the risk offsets in ECRPs is informative, as it is a common
investment strategy comprised of options and futures positions.
As discussed above, the Commission and the CFTC will maintain
jurisdiction over execution of the options and futures components,
respectively, of future-option orders. The Exchange would not list
future-option orders until the CFTC separately approves any necessary
CFE rule filings, grants any necessary exemptive relief, or takes any
other required action with respect to the execution of the VX futures
components of these orders. Further, each of the Exchange and CFE 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.\31\ 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 CFE. 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 CFE
into its surveillance procedures to monitor trading of VIX future-
option orders, including to detect any manipulative trading activity.
The Exchange believes its surveillance, along with the proposed risk
offset requirement and application of current surveillances to evaluate
the reasonability of User-designated delta values, 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.
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\31\ 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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The Exchange believes the proposed execution process will also
promote just and equitable principles of trade. As described above, VIX
future-option orders will execute in a substantially similar way as
complex orders, including stock-option orders. The proposed priority
for VIX future-option orders will protect customer VIX option orders in
the simple Book. As proposed, the VIX option component(s) of a VIX
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 VX future leg(s). 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 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
[[Page 2214]]
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 VIX 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 VX future and VIX 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.\32\
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.\33\ The only
substantive differences between that proposal and the proposed rule
change regarding future-option orders are as follows:
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\32\ 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).
\33\ See CBOE-CBOT JV Approval Order.
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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.\34\ 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.\35\
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\34\ 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.
\35\ 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.
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The proposed rule change would permit electronic
execution.\36\ This merely reflects the advancement in the availability
of electronic trading since 1988 and provides an additional manner of
execution for future-option orders.
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\36\ The proposed rule change does not adopt future-option
orders for open outcry trading. The Exchange intends to add future-
option orders for open outcry trading at a later date and will
submit a separate rule filing for that functionality.
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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.\37\
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\37\ 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.
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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.'' \38\ 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.'' \39\ Ultimately, the Commission
found that the proposal to execute inter-regulatory spreads on Cboe to
be consistent with the requirements of the Act.\40\ 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,\41\ and the definition of an inter-
regulatory spreads remains in Cboe's Rulebook \42\), 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.
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\38\ See CBOE-CBOT JV Approval Order at 46729.
\39\ Id. at 46730.
\40\ Id.
\41\ See Securities Exchange Act Release No. 52824 (November 22,
2005), 70 FR 72318 (December 2, 2005) (SR-CBOE-2005-69).
\42\ See Rule 1.1 (definition of inter-regulatory spread).
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Further, as discussed above, the proposed rules regarding the
handling and execution of VIX future-option orders are also
substantially similar to that of stock-option orders,\43\ and rules
previously filed with the Commission for security-future option
orders.\44\ The only substantive difference between stock-option orders
(and security-future option orders) is that one component of
[[Page 2215]]
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.
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\43\ See Rules 5.33 (including subparagraphs (f)(1)(B) and
(2)(B), paragraph (l), and Interpretation and Policy .04), and
5.70(b).
\44\ 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 VX futures and VIX options 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.\45\ 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.\46\ 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 internationalization 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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\45\ See H.R. Rep. No. 94-229, at 92 (1975) (Conf. Rep.).
\46\ 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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While a VIX future-option order contains a component that is not a
security, the Exchange believes the proposed rule change may be
approved as consistent with the Exchange Act. The Commission's primary
purposes are to protect investors and maintain fair, orderly, and
efficient markets.\47\ As discussed in this rule filing, the primary
purpose of this proposal is to create a more efficient mechanism for
investors to execute their investment strategies that include VIX
options and VX futures components. VX futures are highly correlated and
strongly related to VIX options, given they both overlie the same index
and thus have similar characteristics.\48\ As a result, the Exchange
believes that VIX futures-option orders are related to the purposes of
the Act, which would make it appropriate for the Commission to approve
this proposal.\49\ Consistent with Congress's finding in connection
with the establishment of a national market system, the proposed rule
change strengthens the securities market by providing investors with a
more efficient and transparent mechanisms to execute VIX options that
are part of investment strategies that include VX futures.\50\ As
discussed above, the proposed rule change promotes a more economically
efficient manner to execute VIX options transactions that are tied to
VX futures.\51\ The proposed rule change may also reduce the execution
and price risks that accompany the current method of executing VIX
options and VX futures as separate transactions, as well as increase
transparency by providing a listed environment to execute these
transactions. While the price discovery for the entire package (that
includes VX futures) will occur on the Exchange, the execution of the
VX futures must still occur in accordance with CFE rules and will be
regulated by CFE and the CFTC. Therefore, the proposed rule change
increases the information available with respect to these transactions
and improves the practicability of executing these orders in the best
market, which ultimately enables market participants to receive better
executions of their orders.\52\
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\47\ See SEC.gov [verbar] Mission.
\48\ See Cboe VIX Index Futures & Options Fact Sheet, available
at VIX fact sheet.pdf.
\49\ See 15 U.S.C. 78f(b)(5); see also Alliance for Fair Board
Recruitment & National Center for Public Policy Research v.
Securities and Exchange Commission, No. 21-60626 (5th Circuit
December 11, 2024), at 4 (``AFBR v. SEC''). The Act provides that
exchanges may not regulate matters not related to the Act's
purposes. It is common practice for market participants to engage in
investment strategies that involve securities and non-securities. As
part of its need to regulate securities transactions, the Exchange
may request information from other exchanges (including about non-
securities) that relate to those securities transactions. Therefore,
it is possible for the execution of a non-security, such as a
future, to be related to the purposes of the Act and thus permit the
Exchange to adopt rules related to such non-securities transactions
when they are tied to securities transactions occurring on the
Exchange.
\50\ See 15 U.S.C. 78k-1(a)(1).
\51\ See 15 U.S.C. 78k-1(a)(1)(C)(i).
\52\ See 15 U.S.C. 78k-1(a)(1)(C)(iii)-(v). Further, reduction
in price risk that currently results from separate transaction may
ultimately reduce overall transactions costs associated with
execution of VIX options and the related VX future as it may lower
the overall cost of the transaction. This plausible reduction in
transactions associated with executing this securities trade
``presumably relate[s] to the purpose of'' the national market
system. See AFBR v. SEC, at 27.
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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 VIX future-option
orders will be available to all TPHs and will execute in the same
manner. VIX future-option orders will be available to all Users on a
voluntary basis, and Users will not be required to use VIX future-
option orders to execute investment strategies comprised of option and
future components. Users may continue to
[[Page 2216]]
execute these strategies as they do today by entering a VIX option
order on the Exchange and separately executing the VX future component
on CFE. 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 VIX option and VX future
components today. Investors may continue to do so; however, the
proposed rule change merely provides them with a simpler, more
efficient, more transparent, and competitive execution mechanism for
hedging and other investment strategies that contain VIX options and VX
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.
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-2026-004 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-2026-004. 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 filing will be available for inspection and
copying at the principal office of the Exchange. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-CBOE-2026-004 and should be submitted on
or before February 6, 2026.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2026-00801 Filed 1-15-26; 8:45 am]
BILLING CODE 8011-01-P