On January 23, 2026, the Securities and Exchange Commission published a notice in the Federal Register regarding a proposed rule change filed by Cboe C2 Exchange, Inc. The filing, designated as SR-C2-2026-003, seeks to amend Rule 5.34(c) to enhance the Risk Monitor Mechanism. This mechanism helps Trading Permit Holders manage order and execution risks in options trading. The proposal introduces greater flexibility in how trading activities are counted toward specific risk parameters, effective immediately upon filing under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. It addresses the need for tailored risk controls in a dynamic market environment, potentially benefiting market participants by refining their exposure management. The notice invites public comments until February 18, 2026, underscoring the regulatory process for such exchange rule adjustments.
Background on the Risk Monitor Mechanism
The Risk Monitor Mechanism, outlined in current Rule 5.34(c), enables Trading Permit Holders (TPHs) to set limits on parameters like executed contract volume, notional value, execution count, percentage of outstanding contracts executed, and instances of reaching these limits. These are monitored per underlying security for an Executing Firm ID (EFID), across all underlyings for an EFID, or across an EFID Group. When limits are exceeded, the system automatically cancels or rejects orders and quotes, preventing further trading until reset. This setup protects against excessive risk accumulation over specified intervals or trading days. The mechanism draws from broader exchange efforts to maintain market integrity, similar to risk controls on other platforms like Cboe's affiliated exchanges. It aligns with statutory requirements under the Securities Exchange Act to foster fair and orderly markets.
Key Elements of the Proposed Amendments
The proposal adds two main enhancements under new subparagraphs in Rule 5.34(c)(4)(B). First, TPHs can opt to exclude volume or executions from Complex Order Auctions (COA) when calculating limits for the volume parameter (Rule 5.34(c)(4)(A)(i)) and count parameter (Rule 5.34(c)(4)(A)(iii)). This applies to underlying, EFID, or EFID Group limits on both interval and absolute bases. As noted in the filing, 'a TPH may specify whether volume or executions in Complex Order Auctions (COA) count toward the TPH's underlying, EFID, or EFID Group limit.' Such auctions involve price improvement and exposure periods, presenting distinct risk profiles compared to standard orders.
Second, TPHs gain the ability to configure volume or count parameters based on contra-party capacity. They can set a percentage (up to 100%) of volume or executions to count toward limits, depending on the contra-party's capacity code, such as 'C' for Public Customer. For instance, the filing illustrates that 'a TPH could specify that only 20% of the quantity on each trade with a Capacity "C" (i.e., Public Customer) contra-party would be counted.' This allows differentiation by counterparty type, recognizing varied risk implications in trades with customers versus other market participants.
These changes are optional, with TPHs retaining the choice to maintain existing configurations. The Exchange justifies them as means to 'more precisely tailor the volume and count parameters,' enhancing risk management without mandatory adoption.
Statutory Basis and Regulatory Context
The Exchange asserts that the proposal complies with Section 6(b)(5) of the Securities Exchange Act, which requires rules to promote just and equitable trade principles, remove market impediments, and protect investors. It emphasizes that the enhancements minimize risk exposure and reduce potential for market disruptions. The filing references no direct legal precedents but aligns with general risk control frameworks approved by the SEC for other exchanges. On competition, the Exchange states the rule 'does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate,' noting uniform availability to all TPHs and applicability only to C2 trading. This reflects ongoing SEC oversight of self-regulatory organizations, where immediate effectiveness under Rule 19b-4(f)(6) allows swift implementation while permitting Commission suspension if needed.
Perspectives and Implications
Stakeholders may view the proposal differently. Market-makers and liquidity providers could appreciate the contra-party adjustments for calibrating risks in customer-facing trades, potentially encouraging participation. Retail-focused TPHs might favor auction exclusions to avoid unintended triggers from protected mechanisms. However, critics could argue it complicates oversight, though the filing counters this by stressing optional use and investor protection benefits. Short-term, the change could lead to quicker adoption among active TPHs, refining daily operations. Longer-term, it might influence industry standards for risk tools, prompting similar updates elsewhere. The proposal fits into broader trends of technological advancements in trading infrastructure, balancing innovation with regulatory safeguards.
In summary, this proposed rule change refines an existing risk tool to offer TPHs more granular control, supported by the Exchange's rationale for improved market efficiency. Potential next steps include SEC review of public comments, possible amendments to the filing, or full approval. Ongoing debates may center on whether such flexibilities adequately address emerging risks in high-speed trading environments, with challenges arising from integration into diverse TPH systems. Monitoring adoption rates and any market impacts will be key for future refinements.
