SEC OKs Cboe Rule Change to Adopt VIX Future-Option Orders

The SEC approved a Cboe Exchange, Inc., rule change that permits investors to execute cross-product strategies using a single order type comprising options and futures on the Cboe Volatility Index.

In the approval order, the SEC authorized the exchange to adopt VIX future-option orders, which combine VIX options traded on Cboe and VIX futures traded on the Cboe Futures Exchange ("CFE"). Previously, investors seeking to hedge or execute strategies involving both products had to enter separate transactions on each exchange, creating execution and price risks if only one order filled or market conditions changed between trades. The new mechanism allows the entire package to be priced together, with the options trade standing only if the futures component executes.

Under the rule, Cboe transmits the futures component to the CFE after the options leg executes. Users that are not CFE members must first designate a futures commission merchant or introducing broker, on whose behalf Cboe routes the futures leg. If the futures component cannot execute, the exchange nullifies the options trade. The SEC noted that the options components remain subject to its jurisdiction, while the futures components are subject to CFTC oversight.

The SEC approved the rule change as modified by Amendment Nos. 1 and 2, granting accelerated approval with respect to Amendment No. 1.