Government Relations

Strategic, Proactive Leadership

CBOE® and our affiliates operate in a highly regulated environment. Laws passed by Congress and rules established by federal agencies, such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), greatly affect the market structure within which CBOE operates as well as numerous other areas of importance to CBOE and the investors we serve. As a leader in the derivatives marketplace, and an innovator in options and volatility products, we are committed to proactively addressing key issues of interest and providing transparency into our strategic agenda.

For more information about key topics, please click on the links below.

Issue: On November 24, 2015, the CFTC approved the issuance of a rulemaking proposal for public comment regarding automated trading on futures exchanges. The proposed rulemaking, referred to as Regulation AT, proposed various risk controls; transparency measures; standards for system development, testing, and monitoring; and reporting and record-keeping requirements related to automated trading on futures exchanges. The rulemaking also proposed to establish a registration requirement for certain proprietary trading firms with direct electronic access to a futures exchange.

On November 4, 2016, the CFTC approved the issuance of a revised Regulation AT rulemaking proposal for public comment. The revised rulemaking proposed certain changes to the original proposal, including: requiring risk controls at two levels instead of three; eliminating the proposed AT Person annual reporting obligations and replacing them with an annual certification; narrowing the definition of AT Person by imposing a volume threshold; and requiring Commission approval in order to obtain source code from an AT Person.

Our Position Overall, and as CFE states in its comment letters to the CFTC regarding the original and revised proposed rulemakings, CFE agrees that it is important to manage the risks associated with automated trading and believes that sufficient regulation of futures exchanges is already in place to address the concerns of the proposed rulemaking. Should the CFTC decide to proceed with final adoption of the proposal, CFE's comment letters to the CFTC also recommends changes to specific aspects of the proposal.

Additional Information: Read the CFTC Fact Sheet regarding proposed Regulation AT.

CFE's March 2016 Comment Letter

CFE's May 2017 Comment Letter

Issue: CBOE is concerned that certain provisions in the Basel III framework governing bank capital requirements have had and will continue to have, a potentially serious adverse impact on the U.S. listed options and futures markets.

Our Position: The Basel III framework was intended to reduce systemic market risk by requiring banks to increase capital and/or decrease leverage for certain risk exposures. Large U.S. bank holding companies are required to calculate their Risk-Weighted Assets ("RWA") using a standardized approach known as the Current Exposure Method ("CEM"), which creates a capital floor for the banking organizations and fails to allow offsetting risks to be netted when calculating capital charges. The Basel III capital requirements extend to subsidiaries of bank holding companies, including bank-owned firms that clear trades for market makers, the primary liquidity providers for listed options and futures. CBOE is concerned that these clearing firms will increase clearing fees and impose capital limits on market makers that will restrict their ability to provide liquidity in listed options and futures. Absent regulatory relief, remedies to address this industrywide problem will not be available until 2017 when the Basel Committee's replacement for the CEM, known as the SA-CCR, is expected to go into effect.

In addition, CBOE is concerned that the Basel III supplemental leverage ratio, currently scheduled to go into effect in 2018, also will not adequately take into consideration its effect on the U.S. options and futures markets. The leverage ratio is a separate regulator-created requirement that is defined as the capital measure (the numerator), which constitutes Tier 1 capital, divided by the exposure measure (the denominator). CBOE is concerned that the leverage ratio does not account for the fact that segregated customer initial margin for centrally cleared derivatives, which is designed to reduce the clearing firm's exposure in order to guarantee the customer's performance, cannot be used to leverage the customer's clearing member firm. Absent any capital recognition for such reduced exposure, clearing firms may incur unnecessarily high capital costs that do not accurately reflect the exposure reduction achieved from segregated customer initial margin for cleared derivatives.

Additional Information:

Read CBOE's July 2016 Joint Comment Letter on bank capital regulation, which states that the CEM grossly overstates a bank's actual economic exposure, thereby requiring banking organizations to hold capital that is disproportionate to the actual risks posed by listed options. CBOE is concerned that absent regulatory relief, remedies to address this industrywide problem will not be available until 2017 when the Basel Committee's replacement for the CEM, known as the SA-CCR, is expected to go into effect.

Read CBOE's January 2016 Comment Letter on the Federal Reserve Board's Total Loss-Absorbing Capacity (T-LAC) Proposal

Read CBOE's October 2015 Joint Comment Letter on bank capital regulation.

Issue: The National Market System ("NMS") Plan Governing the Consolidated Audit Trail ("CAT NMS Plan") was approved by the SEC in order to create, implement, and maintain a consolidated audit trail ("CAT") that captures customer and order event information for orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution in a single, consolidated data source. The CAT NMS Plan applies to stock, stock options and index options, but it does not apply to, and thus will not capture order and transaction data for, stock index futures or options on index futures.

Our Position: CBOE believes incorporating futures data into CAT would create a more comprehensive audit trail, which would further enhance the surveillance programs of the self-regulatory organizations, the SEC, and the CFTC.

Additional Information:
Read CBOE's July 2016 Comment Letter on the CAT Plan.
Read the CAT NMS Plan

Issue: Certain market participants are steering institutional customers into opaque and non-exchange traded bilateral option "contracts." These so-called "copycat" OTC derivatives have terms that are similar to contracts currently listed and traded on registered exchanges, including CBOE.

Our Position: CBOE believes this practice neither benefits nor fully protects users of such products and subjects the financial system to unnecessary risk. This practice also deprives the exchange marketplace of valuable liquidity which impacts all market participants. CBOE believes (1) OTC option trading should be transparent as is listed option trading; (2) firms utilizing OTC options should be monitored for best execution compliance; and (3) OTC options that substantially mirror the terms of listed options should not be allowed.

Additional Information: Read CBOE's Comment Letter to the SEC which was submitted on October 2, 2014. The letter asserts our concern regarding the use of OTC options by market participants where substantially similar listed options are available.

Issue: On September 8, 2016, the CFTC approved a rulemaking for systems safeguards testing requirements. The regulations approved by the CFTC include enhancements and clarifications to existing requirements relating to cybersecurity testing and system safeguards risk analysis for registered entities, including U.S. futures exchanges. Some parts of the regulations became effective on September 19, 2016, while other parts become effective within six months or a year.

Our Position: Overall, CFE agrees that is important to have robust cybersecurity and system safeguards programs. During the comment period, CFE advocated for principles-based, flexible standards that are not enforced in a strict liability manner. CFE's comments were taken into consideration by the CFTC in promulgating the final regulations.

Additional Information: Read the CFTC Fact Sheet regarding the regulations.

CFE's February 2016 Comment Letter

Issue: The Department of Labor (DOL) proposed on April 14, 2015 sweeping new regulations governing retirement accounts and IRAs which would exclude listed options and futures as permissible investments. On April 6, 2016, the DOL released its final Conflict of Interest Rule and related exemptions, which are available at http://www.dol.gov/ebsa/regs/conflictsofinterest.html. The final rule and related exemptions permit all asset types, including exchange-traded options and futures, to be used in ERISA plans (401(k)) and IRAs. Compliance with the new requirements of the rule will not begin until April 2017, one year after the final rule is published in the Federal Register. The DOL has also adopted a "phased" implementation approach for the Best Interest Contract Exemption, with full compliance required as of January 1, 2018.

Our Position: The DOL conflict of interest proposal raised significant issues for the U.S. options industry. CBOE's foremost concern was that the proposal would eliminate the ability of investors to use exchange-traded options and futures in ERISA plans (401(k)) and IRAs. We are pleased that in response to comments from various parties, including CBOE, our customers and the U.S. Securities Markets Coalition, the proposal was modified to cover all asset types, including exchange-traded options and futures. CBOE is grateful to members of Congress, from both sides of the aisle, who took the time to study this complex issue and to sign letters to the DOL in support of our position. We are also grateful to the DOL for understanding and ultimately addressing the importance of allowing investors to continue to use exchange-traded options and futures in their retirement accounts and IRAs. CBOE will continue to evaluate the new rule and related exemptions and advocate for the use of exchange-traded options and futures in retirement accounts and IRAs.

Additional Information: Read the material below that supports our position.

CBOE's Comment Letter

Testimony on Proposed Conflict of Interest Rule

July 29, 2015 DOL Letter from Members of Congress

September 24, 2015 DOL Letter from Members of Congress

OCC's April 6, 2016 Press Release on the Final DOL Rule

Issue: Under EU regulations, certain EU entities such as EU banks must take a punitive capital charge if they transact business through a non-qualifying clearinghouse. A non-EU clearinghouse is qualified if it has been recognized by the EU as subject to equivalent regulation. The European Commission adopted the EU-US equivalence decision on March 15, 2016, which ensures that central counterparties registered with the CFTC will be able to obtain recognition in the EU. However, the EU still does not currently recognize the US as having equivalent regulation over US-based clearinghouses for SEC regulated securities options. The implementation date for these punitive capital charges has been extended to December 15, 2017.

Our Position: CBOE, C2, and CFE use OCC as their clearinghouse. OCC is a clearinghouse for both securities options and futures. The adverse consequences to non-recognition of SEC regulated clearinghouses would be very significant. CBOE supports the efforts of the SEC to address this issue and obtain equivalency for US clearinghouses for securities options.

Additional Information: Read WFE's Letter about the Impact of EU Clearinghouse Recognition Delays.

Issue: There are fundamental differences between equity markets and options markets. Unlike equity markets, where a sizeable percentage of order executions occur off-exchange pursuant to opaque trading processes on dark pools, all listed options transactions must occur on an exchange pursuant to auction exposure requirements. Additionally, maker-taker pricing is not the norm in the options market.

Our Position: CBOE believes that regulatory market structure reviews and changes should be addressed in a holistic manner that contemplates impact on the options market.

Additional Information:
CBOE's May 2015 Comment Letter to the SEC Equity Market Structure Advisory Committee

CBOE's January 2016 Comment Letter to the SEC Equity Market Structure Advisory Committee

CBOE's Joint Comment Letter to members of the House Financial Services Committee regarding NMS Plan governance

Issue: Portfolio Margin is a margin methodology that sets margin requirements for an account based on the entirety of the account and results in a more efficient use of capital. In general, positions in index option class groups that are highly correlated may be netted against each other based on allowed percentage amounts to determine the overall profit/loss of an account. For example, in a securities portfolio margin account, cash-index options and exchange-traded funds within the same class groups may be netted to determine the overall profit/loss of the account as a whole at various assumed up and down market moves in the underlying. The greatest loss from among the assumed market moves, if any, is the margin requirement, subject to a per contract minimum. Also, some security-based swaps may be held in a futures account for portfolio margin purposes. Customers benefit from PM because margin requirements calculated on net risk are generally lower than alternative position or strategy based methodologies for determining margin requirements.

Currently, futures and securities options, including VIX® futures and VIX options cannot be held in either the same securities or futures account. However, the Dodd-Frank Act (DFA) amended various SEC and CFTC statutes to enable securities to be held in a futures account or futures to be held in a securities account. To give effect to these amendments, SEC and CFTC action is needed either in the form of an exemptive order or rule or regulation, and the SEC and CFTC together need to promulgate rules to ensure transactions and accounts are subject to comparable requirements to the extent practicable for similar products.

Our Position: CBOE advocates strongly for portfolio margining of index futures in a securities account. CBOE believes that the ability to hold index futures and securities in a single account, and for margin to be calculated based on the entirety of the account and not assessed separately by instrument would result in a more efficient use of customers' capital and help avoid liquidating transactions in times of market stress.

Additional Information: Read CBOE's Press Release on position margining rules. The DFA provides for portfolio margining. CBOE, in conjunction with The Options Clearing Corporation (OCC), plans to undertake an initiative to petition the CFTC to issue an exemptive order that would permit portfolio margining of VIX futures in a securities account.

CBOE believes that options users who utilize VIX futures would benefit from its initiative with the OCC.

Issue: In 2015, the SEC proposed amendments to SEC Rule 15b9-1, which, together with Section 15(b)(9) of the Securities Exchange Act of 1934 ("Act"), provides an exemption from the requirement that broker-dealers must be members of a registered national securities association (i.e., FINRA).

Our Position: CBOE is concerned that the proposed amendments may inadvertently require FINRA membership of broker-dealers that are members of an exchange, or multiple exchanges, and whose primary business involves executing transactions on the exchange(s) of which the broker-dealers are members, which would needlessly impact numerous exchange members without furthering the aims of Section 15(b)(9) of the Act or Rule 15b9-1.

Additional Information:

CBOE's Joint September 2016 Comment Letter

CBOE's June 2015 Comment Letter

Issue: On December 11, 2015, the SEC proposed Rule 18f-4 under the Investment Company Act of 1940, which is intended to create a comprehensive approach to the use of derivatives trading by mutual funds, closed-end funds, exchange-traded funds and companies that elect to be treated as business development companies. The proposed rule would implement portfolio limitations on derivatives trading, impose an asset coverage and segregation requirement, and, in some cases, require a formal derivatives trading risk management program.

Our Position: CBOE questions the need to include listed options in the rulemaking. CBOE suggests the Commission reexamine the asset segregation and portfolio limitation requirements of the proposed rule to ensure they will not impede proven and prudent investment strategies.

Additional Information:

CBOE's March 2016 Comment Letter

U.S. Securities Markets Coalition's March 2016 Comment Letter

Issue: A financial transaction tax (FTT) is a levy on a particular financial transaction. FTTs differ based on the type of financial transaction that is taxed and the way in which the tax revenue is spent. FTTs on the purchase or sale of exchange-traded-products such as stocks, futures, and options have been proposed for a myriad of reasons, including: to reduce volatility in the market; reduce speculation; prevent the next financial crisis; or simply to raise tax revenue. For example, a member of the Illinois House of Representatives proposed the Financial Transaction Tax Act (FTTA) in order to raise revenue for the State of Illinois by taxing transactions occurring on exchanges located in Chicago at a rate of $1 to $2 per contract. On the national level, presidential candidates have also proposed versions of a financial transaction tax including a 0.5% tax on the sale of stocks and smaller levies on bonds and derivatives as well as a tax on excessive levels of order cancellations.

Our Position: CBOE believes FTTs have the potential to seriously harm the options market. The securities and futures markets provide valuable and powerful financial hedging products for investors large and small. CBOE is concerned that an FTT, however well-meaning, will have serious unintended consequences, potentially leading to significant job and tax revenue losses. Also, a tax on excessive order cancellations could unintentionally harm market quality if it were levied against registered market-makers for quoting interest that is continuously re-pricing. This, in turn, would hurt retail investors who rely on and trade against market-maker provided liquidity.

Additional Information:
Testimony of Edward Provost on Illinois Financial Transaction Tax (6/7/16)

Issue: The President's budget for fiscal year 2017 was released on February 9, 2016. In the proposed budget, the Administration calls for changes to the tax code that would effectively eliminate important gain/loss treatment afforded to traders of certain derivative contracts including non-equity options (e.g., index options such as SPX). This treatment, known as 60/40 treatment under Section 1256, provides that 60% of a capital gain or loss may be treated as a long-term capital gain and 40% may be treated as a short- term capital gain, even if the position was held for less than one year. This 60/40 rule was enacted over 30 years ago in an effort to alleviate the effects of a mark-to-market tax regime on market makers providing critical liquidity.

Our Position: CBOE believes that eliminating 60/40 treatment is a perilous misstep at a time when use of responsible investing tools should be encouraged instead of discouraged. Further, this change would increase costs for professional liquidity providers, who are vital to making markets in these derivatives, which in turn would likely increase costs to investors as well. We are eager to work with the Administration and legislators on both sides of the aisle to ensure that investors are not adversely affected by this proposed nuanced change to the tax code.