CBOE, §1A diff (2017 → 2018)

Item 1A. Risk Factors. The risks and uncertainties described below are those that we believe are material at this time relating to our business and relating to the Merger. These risks and uncertainties, however, are not the only risks and uncertainties that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also significantly impact us. Any of these risks and uncertainties may materially and adversely affect our business, financial condition or results of operations, liquidity, cash flows and the Merger. Risks Relating to Our Business Loss of our right to exclusively list and trade certain index options and futures could have a material adverse effect on our financial performance. We hold exclusive licenses to list securities index options on the S&P 500 Index, the Russell 2000 Index, as well as others, granted to us by the owners of such indexes and based on which we have developed our proprietary VIX methodology. In 2017, approximately 69.8% of our net transaction fees (defined below) were generated by futures and index options, the overwhelming majority of which were generated by our exclusively-licensed products and products based on the VIX methodology. The bulk of this revenue is attributable to our S&P 500 Index options and VIX Index options and futures. As a result, our operating revenues are dependent in large part on the exclusive licenses we hold for these products and our ability to maintain our exclusive VIX methodology. There is a risk, with respect to each of our current exclusive licenses, that the owner of the index may not renew the license with us on an exclusive basis or at all. In the first event, we would be subject to multiple listing in the trading of what is now an exclusive index product, which could result in a loss of market share and negatively impact our profitability. In the second event, we could lose the right to list the index product entirely. The loss or limited use of any of our exclusive index licenses, especially for the S&P 500 Index, for any reason could have a material adverse effect on our business and profitability. In addition to the risks related to our exclusive licenses, if we are unable to retain exclusive proprietary rights in the VIX methodology, our volatility products could be subject to multiple listing, which could have a material adverse effect on us. The E.U. has adopted legislation commonly referred to as MiFIR that will require the person with proprietary rights to a benchmark to provide non-discriminatory access to that benchmark to trading venues and central counterparty clearing houses for the purposes of trading and clearing. Licenses to the benchmark must be provided on fair, reasonable and non-discriminatory terms. In addition, the E.U. implemented at the beginning of 2018 legislation known as the Benchmark Regulation that may impact the ability of European investors to trade our U.S. benchmark products if they are not recognized, authorized, endorsed or deemed equivalent in the E.U. While similar legislation to MiFIR has not been proposed in the U.S., if it were passed, it could cause us to lose exclusivity in our internally developed and licensed index products. The new European legislation may impact our expansion activities of our U.S. benchmark products in Europe, and may reduce the volume on our US options and futures exchanges from international customers. Furthermore, our competitors may succeed in providing a market for the trading of index-based or volatility products that are economically similar to those that we offer. It is also possible that a third party may offer trading in index-based products that are the same as those that are the subject of one of our exclusive licenses, but in a jurisdiction in which the index owner cannot require a license or in a manner otherwise not covered by our exclusive license. The value of our exclusive licenses to list securities index options and futures also depends on the continued ability of index owners to require licenses for the trading of options and futures based on their indexes. Although we and the index owners have prevailed in legal actions challenging our rights to exclusively license indexes, we may be subject to changes in the law or other actions taken in the future that might impede our ability to exclusively offer trading in certain index options and futures. General economic conditions and other factors beyond our control could significantly reduce demand for our products and services and harm our business. The volume of exchange transactions and the demand for our products and services are directly affected by economic, political and market conditions in the U.S., Europe and elsewhere in the world that are beyond our control, including: · economic, political and geopolitical market conditions; · broad trends in business and finance; · concerns over inflation and wavering institutional or retail confidence levels; · government or central bank actions, such as changes in government fiscal and monetary policy and foreign currency exchange rates; · other legislative and regulatory changes; · the availability of short-term and long-term funding and capital; · the perceived attractiveness of the U.S. or European capital markets; · the availability of alternative investment opportunities; · changes in the level of trading activity in underlying instruments; · changes and volatility in the prices of securities; · changes in the volume of foreign currency transactions; · changes in supply and demand for currencies; · movements in currency exchange rates; · the level and volatility of interest rates; · changes in the financial strength of market participants; · consolidation among market participants and market data subscribers; · unforeseen market closures or other disruptions in trading; and · disruptions due to terrorism, war, extreme weather events or other catastrophes Any of these factors, individually or collectively, could have a material adverse effect on our business, financial condition and operating results by causing a substantial decline in the financial services markets and reducing trading volumes and demand for market data. We operate in a highly regulated industry and may be subject to censures, fines and other legal proceedings if we fail to comply with legal and regulatory obligations. Cboe Options, C2, BZX, BYX, EDGX and EDGA are registered national securities exchanges and self-regulatory organizations (“SROs”), and, as such, are subject to comprehensive regulation by the SEC. CFE is a designated contract market (“DCM”), and Cboe SEF is a swap execution facility (“SEF”), each registered with the CFTC and subject to comprehensive regulation by the CFTC. In addition to its other SRO responsibilities, BZX, as a listing market, also is responsible for evaluating applications submitted by issuers interested in listing their securities on BZX and monitoring each issuer’s compliance with BZX’s continued listing standards. Failure to comply with these SRO responsibilities could result in potential sanctions or fines and a negative impact on Cboe’s reputation or branding. Our European business is subject to regulatory oversight in the U.K. by the U.K. Financial Conduct Authority (“FCA”), which through the “passporting” regime provides authorization to carry on business in other Member States of the E.U. and the European Economic Area in accordance with the applicable E.U. legislation and regulation to which our European business is subject. If a regulatory authority makes a finding of non-compliance, conditional fines could be imposed, and our licenses could be revoked. Any such fine or revocation of a license could have a material adverse effect on our business, financial condition and operating results. In addition to the requirements related to operating our U.S. markets imposed by the SEC and the CFTC, we also have certain responsibilities for regulating the TPHs and members that trade on our exchanges. While we have entered into agreements under which FINRA with respect to our options and equities exchanges, and NFA with respect to our futures exchange, provide certain regulatory services, we retain ultimate responsibility for the regulation of our TPHs and members. Our ability to comply with applicable laws and rules is largely dependent on the establishment and maintenance of appropriate systems and procedures, our ability to attract and retain qualified personnel, the ability of FINRA and NFA to perform under the regulatory services agreements and our oversight of the work done by FINRA and NFA. The SEC and CFTC have broad powers to audit, investigate and enforce compliance and to punish noncompliance by, as applicable, SROs, DCMs and SEFs pursuant to applicable laws, rules and regulations. If a regulatory authority were to find one of our programs of enforcement or compliance to be deficient, our SROs, DCM, or SEF could be the subject of investigations and enforcement proceedings that may result in substantial sanctions, including revocation of registration as a national securities exchange, DCM, or SEF. Any such investigations or proceedings, whether successful or unsuccessful, could result in substantial costs, the diversion of resources, including management time, and potential harm to our reputation, which could have a material adverse effect on our business, financial condition and operating results. In addition, our SROs, DCM, or SEF may be required to modify or restructure their regulatory functions in response to any changes in the regulatory environment, or they may be required to rely on third parties to perform regulatory and oversight functions, each of which may require us to incur substantial expenses and may harm our reputation if our regulatory services are deemed inadequate. For example, if we are unable to fulfill our obligations under the consent orders with the SEC with respect to Cboe Options and C2 or with respect to BZX, BYX, EDGX and EDGA, it may have a significant adverse impact on our business, financial condition and operating results. In addition, SROs are required by federal law to perform a variety of regulatory functions. In light of those responsibilities, courts have held that SROs are immune from damages for some civil claims related to actions that are incident to their regulatory responsibilities. There is a risk that a court might not adopt the immunity doctrine, and whether a court that recognizes the doctrine would apply it to a claim depends on the nature of the claim. In addition, we could be exposed to liability to regulators or other governmental authorities even in situations where immunity would bar a civil claim. Our business may be adversely affected by price competition. The securities industry is characterized by intense price competition, especially with respect to transaction fees. We may be required to adjust pricing to respond to actions by new or existing competitors, which could adversely impact our business, financial condition and operating results. We also compete with respect to the pricing of market data and value-added market data, such as historical market data. In our options segment, the pricing model for trade execution has changed in response to competitive market conditions, and our competitors have adjusted transaction fees and fee structures accordingly, including by opening new exchanges, which allow them to offer multiple pricing models that can appeal to different segments of market participants. These changes have resulted in significant pricing pressures on us, especially on transaction fees and incentives for multiply-listed products. As a result of these pricing pressures, our average rate per multiply-listed options contract may decrease. It is likely that this pressure will continue and even intensify as our competitors continue to seek to increase their share of trading by further reducing their transaction fees or by offering other financial incentives to order providers and liquidity providers to induce them to direct orders to their markets. In addition, one or more competitors may engage in aggressive pricing strategies and significantly decrease or completely eliminate their profit margin for a period of time in order to capture a greater share of trading volume. Some order-providing firms on our exchanges have taken ownership positions in options exchanges that compete with us and such exchanges have given those firms added economic incentives to direct orders to them. With respect to our proprietary products, we compete with futures exchanges and swap execution facilities that offer similar products and other financial market participants that offer over-the-counter derivatives. We also compete on price against certain multiply-listed options products, including SPY, which offer some of the features of our proprietary products. To attract market share, we may offer “inverted” pricing specials or no-transaction fee trading from time to time. For example, our electronic trading platform for institutional spot FX has at times offered trading of spot gold and silver pairs without any transaction fee or waived fees for certain transactions. BZX also offers a “cross-asset add volume tier” that gives a bigger rebate for additional volume on both the BZX equities and options platforms. These forms of promotions may adversely affect our profitability. If we are unable to compete successfully with respect to the pricing of our services and products, our business, financial condition and operating results may be adversely affected. We could lose a substantial percentage of our share of trading if we are unable to price transactions in a competitive manner. Also, our profits could decline if competitive pressures or regulatory changes force us to reduce fees. A significant portion of our operating revenues is generated by our transaction-based business. If the amount of trading volume on our exchanges decreases, or the product mix shifts to lower revenue products, our revenues from transaction fees will decrease. In 2017, approximately 70.2% of our operating revenues were generated by our transaction-based business. This business is dependent on our ability to attract and maintain order flow, both in absolute terms and relative to other market centers. If the amount of trading volume on our exchanges, CFE or notional value traded on Cboe FX and Cboe Europe Equities exchanges decreases, we will lose transaction fees. Revenue from our spot FX business is influenced by the general level of trading activity in the spot FX market. Trading volume on our exchanges and markets can be influenced by a number of factors, including market volatility. Our total trading volumes could decline if our market participants reduce their trading activity for any reason, such as: · heightened capital requirements; · transaction tax; · regulatory or legislative actions; · reduced need to trade due to low volatility and/or passive investment trends; · reduced access to capital required to fund trading activities; · consolidation among market participants; or · significant market disruptions. Over the past few years, a number of legislative actions have been taken, both domestically and internationally, that may cause market participants to be subject to increased capital requirements and additional compliance burdens. These actions, including Basel III, Dodd-Frank, the Collins Amendment to Dodd-Frank, MiFID II and MiFIR, may cause market participants to reduce trading activity on our exchanges. In addition, the transaction fees generated are different based on type of product and other factors, including the type of customer and certain volume discounts. If the amount of our trading volume decreases, or the mix traded shifts to our lower revenue per contract products, our revenues from transaction fees will decrease. We can offer no assurance that we would be able to reduce our costs to match the amount of any such decrease. Our market data fees and revenues may be reduced due to declines in our market share, trading volumes or regulatory changes. The occurrence of any event that reduces the amount of market data fees that we receive, whether as a result of fee reductions, fewer members subscribing to the U.S. tape plans, declines in market share or trading volumes (or notional volume in the case of Cboe Europe Equities) or regulatory changes, will have a direct negative impact on our business, financial condition and operating results. For example, if our market share of U.S. listed cash equities and options, or Cboe’s European cash equities trading, were to decline, our share of market data fees could also decline. Moreover, market data fees could decline as a result of a reduction in the numbers of market data users, for example because of consolidation among market data subscribers or due to a decline in professional subscriptions as a result of staff reductions in the financial services industry or otherwise. Regulatory and legal developments could also impact the fees we receive from market data, or our cost in providing such services. In the U.S., we are generally required to file with the SEC any changes to the fees that we charge for our securities market data products. In recent years, certain industry groups have objected to the ability of exchanges to charge for certain market data products. Specifically, the Securities Industry and Financial Markets Association (“SIFMA”) has filed a number of denial of access applications with the SEC to set aside proposed rule changes to establish or modify fees for our market data products and related services. An adverse ruling in these matters could cause the SEC to more closely examine exchange market data fees, which in turn could result in our having to reduce the fees we charge for market data and there could be a negative impact on our revenues. See Note 23 (“Commitments, Contingencies, and Guarantees-Legal Proceedings”) for more information. We believe Cboe Europe Equities currently offers market data to customers on a non-discriminatory basis at a reasonable cost. As regulators determine how market data should be disaggregated and what is a reasonable commercial basis for providing market data, it could affect our ability to offer market data products in the same manner that we do today thereby causing an adverse effect on our European market data revenues. While MiFID II and MiFIR aim to encourage a commercial solution to a consolidated tape in Europe, should this fail to materialize, policy makers might be encouraged to implement a mandatory solution that could impact our ability to develop our own commercial offering. Legislative or regulatory changes affecting our markets could have a material adverse effect on our business, financial condition and operating results. Changes in regulation by the SEC, CFTC, FCA, foreign regulators or other government action, including SEC approval of rule filings by other SROs or entities, including OCC, could materially affect our markets. In recent years, the securities and futures industries have been subject to regulatory changes as a result of increasing government and public scrutiny of the securities and futures industries. We have also experienced an increase in rulemaking and legislation that could affect our business. In 2010, Congress passed the Dodd-Frank Act and other legislation that impact our markets or require additional action by the SEC or the CFTC. Depending on how the SEC and CFTC interpret, implement or alter these laws, exchanges like ours could be subject to additional costs. We could also see reduced trading by our customers due to margin or other requirements placed on them. Under the Collins Amendment to the Dodd-Frank Act, starting in 2015, large U.S. banks were required to use a new approach to compute their risk weighted assets, which include exchange-traded options and futures. This, and other rulemaking, has led to further increases in capital requirements for U.S. bank holding companies, and bank subsidiaries involved in the trading and clearing of derivatives. These increased capital requirements, which in many cases overstate the true economic exposure associated with listed options, may reduce trading in options and futures due to bank-affiliated clearing members and broker-dealers reducing their own trading, charging their customers more to trade, reducing the type or number of customers or withdrawing from the business of market-maker clearing. Further, Congress, regulators and some media have been increasingly scrutinizing electronic trading, the structure of equity markets and high frequency trading in recent years. The SEC continues to consider various potential market structure changes, which could result in reduced trading volumes, or which could negatively affect our business. To the extent the SEC adopts regulatory changes, our business, financial condition and operating results could be negatively impacted. In addition, the continued growth of high frequency trading has been the subject of private litigation and regulatory enforcement actions alleging that high frequency trading firms have received unfair advantages at the expense of other traders. High frequency trading accounts for a meaningful percentage of the daily volume in the U.S. and European equity markets, and these actions and other efforts to slow trading could lead to a reduction in trading volumes, negatively impacting all trading markets, including our business. In addition, the SEC approved a two-year “tick pilot” program to impose wider minimum quoting and/or trading increments, or tick sizes, in certain securities in an effort to incentivize liquidity provision in those securities. The tick pilot began on October 3, 2016 and consists of a control group of approximately 1,400 securities. The equity exchanges, including BZX, BYX, EDGX and EDGA, and FINRA are required to submit their initial assessments on the tick pilot’s impact 18 months after the pilot begins based on data generated during the first 12 months of its operation. The tick pilot has added complexity to the exchange system, increasing our software development costs. In addition, for tick pilot test group securities where execution at price increments narrower than the permitted quote is permitted, the implementation of the tick pilot could incentivize additional trading away from the exchanges, reducing the volume of orders executed on BZX, BYX, EDGX and EDGA. Under E.U. regulations, European banks and other European financial institutions become subject to punitive capital charges if they transact options or futures through a non-qualifying clearinghouse. OCC, our clearinghouse for options and futures, is not currently recognized as a qualified clearinghouse by the E.U.; however, the OCC is working with the E.U. to qualify as a foreign clearinghouse equivalent. As a prerequisite to becoming qualified, OCC could be required by the E.U. to contribute significant capital to its default waterfall applicable in the event of clearing member default. This capital could be required to be drawn before the default fund contributions of non-defaulting clearing members in the event that a defaulting clearing member’s margin and other contributions were to be exhausted. OCC’s stockholders, including Cboe Options, could be required to fund this capital. If the E.U. does not recognize OCC as a qualified clearinghouse by June 15, 2018 (or by a subsequent date in the event that the current deadline is extended), then European market participants that clear through OCC would become subject to punitive capital charges. As a result, we could experience the loss of a significant number of European market participants and a significant reduction in trading activity on our options and futures markets, which could have a material adverse effect on our business, financial condition and operating results. MiFID came into effect in 2007 regulating the market for execution services within European listed cash equity securities. MiFID has been superseded and enhanced by MiFID II and MiFIR, which were implemented at the beginning of 2018. The implementation of MiFID II and MiFIR in Europe will result in an alteration of the existing MiFID structure that has encouraged competition among market centers in Europe. MiFID II and MiFIR introduce a number of new rules, including enhanced internal organizational and compliance monitoring requirements, which apply directly to European trading venues such as our MTF and RM. The impact of MiFID II and MiFIR is likely to be significant, and could reduce trading volumes and trading fees, while increasing our costs of operating in Europe. The legislative and regulatory environment in which the spot FX market operates is evolving and has undergone significant changes in the recent past, and there may be future regulatory changes in the spot FX industry. Spot FX market participants have seen an increasing number of law enforcement actions and regulatory inquiries into their business practices. The governmental bodies and regulatory organizations that regulate parts of the spot FX market have enacted, proposed and may consider additional legislative and regulatory initiatives and may adopt new or revised laws and regulations. Changes in the interpretation or enforcement of existing laws and regulations by these entities, or the adoption of new legal or regulatory requirements, may also adversely affect our spot FX business. Further, our FX swaps business may also be adversely affected by proposed regulatory changes to the rules governing swap execution facilities. In addition, although the Global Code does not impose legislative or regulatory obligations on market participants, following its publication in May 2017 our spot FX business has conducted a review of its business practices in order to formally affirm its adherence to its principles, and may be subject to commercial pressures to accommodate its clients’ demands in terms of developments resulting from the Global Code’s publication. It is also possible that there will be additional legislative and regulatory changes or efforts in the environment in which we operate our businesses that we cannot predict the nature of these changes or their impact on our business at this time, such as the impact of the E.U. General Data Protection Regulation (“GDPR”) that replaces the Data Protection Directive 95/46/EC. Actions on any of the specific regulatory issues currently under review in the U.S. or Europe and other proposals could have a material impact on our business. In addition, U.S. and foreign legislatures and regulators and other regulatory authorities could impose legislative or regulatory changes that could adversely impact the ability of our market participants to use our markets, or participate in the securities industry at all. Any such changes could result in the loss of a significant number of market participants or a reduction in trading activity on our markets, either of which could have a material adverse effect on our business, financial condition and operating results. Changes or proposed changes in regulation may also result in additional costs of compliance and modification of market participants’ trading activity on our exchanges and markets. The Brexit Vote could have a negative impact on the U.K. and E.U. economies and lead to considerable uncertainty while new treaties are negotiated. On June 23, 2016, the U.K. voted to leave the E.U. in a referendum (the “Brexit Vote”). On March 29, 2017, the U.K. invoked Article 50 with its notice to leave the E.U. The terms and the exact timing of the U.K.’s exit from the E.U. (“Brexit”) remain unclear, although it is unlikely to be completed before the end of March 2019. In addition to the economic uncertainty the Brexit Vote brings, there are a number of potential risks that investors should consider: · Political uncertainty. Following the Brexit Vote, the U.K. has entered into a period of acute political uncertainty both as to the nature and timing of the negotiations with the E.U. Such uncertainty could lead to a high degree of economic and market disruption and legal uncertainty. It is not possible to ascertain how long this period will last and the impact it will have on the U.K. in general and markets more broadly. · Legal uncertainty. A significant proportion of English law currently derives from or is designed to operate in concert with E.U. law. This is especially true of English law relating to financial markets, financial services, prudential and conduct regulation of financial institutions, bank recovery and resolution, payment services and systems, settlement finality, and market infrastructure. Depending on the timing and terms of the U.K.’s exit from the E.U., significant changes to English law are likely, and we cannot predict what these changes will be and how they may affect our business. · Regulatory uncertainty. There is significant uncertainty about how the remaining E.U. (“EU27”) financial institutions with assets (including branches) in the U.K. and U.K. financial institutions with assets in the EU27 will be regulated. At present, E.U. single market regulation allows regulated financial institutions (including credit institutions, investment firms, alternative investment fund managers, insurance and reinsurance undertakings) to benefit from a passporting system for regulatory authorizations required to conduct their businesses, as well as facilitating mutual rights of access to important elements of market infrastructure such as payment and settlement systems. E.U. law is also the framework for mutual recognition of bank recovery and resolution regimes. · Once the U.K. ceases to be a member state of the E.U., the current passporting arrangements are expected to cease to be effective, as will the current mutual rights of access to market infrastructure and current arrangements for mutual recognition of bank recovery and resolution regimes. The ability of regulated financial institutions to continue to do business between the U.K. and the EU27 after the U.K. ceases to be a member state of the E.U. would therefore be subject to separate arrangements between the U.K. and the EU27. There can be no assurance that there will be any such arrangements concluded and, if they are concluded, on what terms. · Market uncertainty. Since the Brexit Vote, there has been volatility and disruption of the capital, currency and credit markets. If this disruption continues, it may adversely impact our business, financial condition and operating results. In 2017, we derived 5.7% of our total revenues from our U.K. operations. Depending on the outcome of the Brexit negotiations, companies with operations in the U.K. may face unfavorable business conditions to access the single market. In such a case, Cboe Europe Equities may choose to move some or all of its operations to the E.U. and the related costs and expenses could have a material adverse effect on our business, financial condition and operating results. Intense competition could materially adversely affect our market share and financial performance. The market for trade execution services and products is intensely competitive in the asset classes and geographies in which we operate. Increased competition may result in a decline in our share of trading activity and a decline in our revenues from transaction fees and market data fees, thereby adversely affecting our operating results. We compete with a number of entities on several different fronts, including the cost, quality and speed of our trade execution, functionality and ease of use of our trading platform, range of our products and services, our technological innovation and adaptation and our reputation. See “Business - Competition.” Some of our competitors and potential competitors have greater financial, marketing, technological, personnel and other resources than we do. These factors may enable them to develop similar or more innovative products, to offer lower transaction fees or better execution to their customers or to execute their business strategies more quickly or efficiently than we can. In addition, our business, financial condition and operating results may be adversely affected if we cannot successfully develop, introduce and/or market new services and products or if we need to adopt costly and customized technology for our services and products. Furthermore, new or existing competitors may: · respond more quickly to competitive pressures; · develop products that compete with our products or are preferred by our customers; · offer products and services at prices below ours to gain market share and to promote other businesses; · develop and expand their technology and service offerings more efficiently; · provide better, more user-friendly and more reliable technology; · take greater advantage of acquisitions, alliances and other opportunities; · market, promote, bundle and sell their products and services more effectively; · leverage existing relationships with customers and alliance partners more effectively or exploit brand names to market and sell their services; and · exploit regulatory disparities between traditional, regulated exchanges and alternative markets, including over-the-counter markets, that benefit from a reduced regulatory burden and lower-cost business model. If our products, markets, services and technology are not competitive or we fail to anticipate or respond adequately to changes in technology, customer preferences and regulatory requirements or any significant delays in product development efforts our business, financial condition and operating results could be materially harmed. Further consolidation and alliances among our competitors could impair our competitive position. In recent years, the securities trading industry has witnessed increased consolidation among market participants, such as Bats’ acquisition of Direct Edge Holdings LLC in January 2014 and our own acquisition of Bats in February 2017. Additional consolidations and alliances among market participants may create larger internal liquidity pools that may attract trading volume and liquidity away from our exchanges and, therefore, lead to decreased revenues. In addition, consolidations or alliances among our current competitors may achieve cost reductions or other increases in efficiency, which may allow our competitors to offer lower prices or better customer service than we do. These post-merger competitors may be able to achieve efficiencies that allow them to offer lower transaction fees or other financial incentives, which may hinder our ability to stay competitive in listed cash equity securities, options, futures and spot FX. In addition, these mergers may result in stronger competitors than the premerger entities as stand-alone businesses in other markets that we may decide to enter. We depend on third-party service providers for certain services that are important to our business. An interruption, significant increase in fees or cessation of such service by any third party could have a material adverse effect on our business, financial condition and operating results. We depend on a number of service providers, including clearing organizations such as OCC, NSCC, LCH, EuroCCP and SIX x-clear; securities information processors such as the CTA, UTP Securities Information Processor and OPRA; regulatory and other service providers such as FINRA, NFA, OCC and Thesys; the hosts of our data and disaster recovery centers; and various vendors of communications and networking products and services. In addition, we also depend on third party routing and clearing firms who are involved in processing transactions on our behalf. More specifically: · If OCC, NSCC, EuroCCP, LCH and SIX x-clear were unable to perform clearing services, or their clearing members were unable or unwilling to clear through them, transactions could likely not occur on our markets or there may be delays. · OPRA, UTP Securities Information Processor and the CTA consolidate options and equities market information such as last sale reports and quotations. If any of them were unable to provide this information for a sustained period of time, we may be unable to offer trading on our options and equities markets. · We are heavily dependent on technology for our markets, including our data and disaster recovery centers, including those housed by third parties, and certain communications and networking products and services. If this technology is unavailable, and cannot be replaced in a short time period, we may be unable to operate our markets. · FINRA, OCC, and NFA provide certain regulatory services and functions for our options, equities and futures exchanges, while we retain regulatory responsibilities for such services. If FINRA, OCC, or NFA stopped providing services, or provided inadequate services, we may be subject to action by the SEC or CFTC, or may have limitations placed upon our markets. · We rely on Thesys to provide services for the implementation of the CAT. If Thesys stops providing services or provides inadequate services in connection with the implantation of the CAT, we and the other execution venues may incur regulatory liability including action by the SEC or limitations placed upon our markets. In addition, until the SEC approves a funding model that shares the cost of the CAT between the execution venues and industry members, the execution venues may continue to incur additional significant costs or result in the uncollectiblity of promissory notes related to the funding of the implementation and operation of the CAT. · We rely on third party routing and clearing firms to clear trades in U.S. listed cash equity securities routed by us to other markets, and to execute trades in options that we route to other markets. With respect to options, all contracts traded on our exchanges must be cleared through clearing members of OCC. At December 31, 2017, there were ninety seven TPHs that are clearing members of OCC. Two clearing members accounted for approximately 45.1% of transaction and other fees collected through OCC in 2017. The next largest clearing member accounted for approximately 14% of transaction and other fees collected through OCC. Additionally, the two largest clearing members clear the majority of the market-maker sides of transactions at Cboe Options, C2 and at all of the options exchanges. Should a clearing member or liquidity provider withdraw from our options exchanges, enact additional market-makers requirements or market-makers were unable to transfer to another clearing member or other liquidity providers were unable to provide additional liquidity, this could create a significant disruption to the options markets, including ours. We cannot provide assurance that any of these providers will be able to continue to provide these services in an efficient manner or that they will be able to adequately expand their services to meet our needs. An interruption or malfunction in or the cessation of an important service by a third party could cause us to halt trading in some or all of our products or our services, or make us unable to conduct other aspects of our business. In addition, our inability to make alternative arrangements in a timely manner, or at all, could have a material adverse impact on our business, financial condition and operating results. If one or more of the index providers from which we have licenses or service providers with respect to proprietary products fails to maintain the quality and integrity of their indexes or fails to perform under our agreements with them or if customer preferences change, revenues we generate from trading in these proprietary products may suffer. We are a party to an increasing number of license agreements pursuant to which we may list for trading securities options on various indexes including license agreements that we have with S&P, for the S&P 500 Index and S&P 100 Index, S&P, for the DJIA, LSEG, for more than two dozen FTSE Russell indexes, including the Russell 2000 Index, and MSCI Inc., for six MSCI indexes, including the MSCI EAFE Index and MSCI Emerging Markets Index. These license agreements provide that we are authorized to list options on their indexes, and some of the resulting index options are among the most actively traded products on our exchanges. The quality and integrity of each of these indexes are dependent on the ability of the index providers to maintain the index, including by means of the calculation and rebalancing of the index, and we are dependent on the index providers for a number of things, including the provision of index data to us. We also rely on index providers to enforce intellectual property rights against unlicensed uses of the indexes and uses of the indexes that infringe on our licenses. Furthermore, some of our agreements concerning our proprietary products provide for the parties to those agreements to provide important services to us. If any of our index providers are unable to maintain the quality and integrity of their indexes, or if any of the index providers or service providers fail to perform their obligations under the agreements, trading in these products, and therefore transaction fees we receive, may be adversely affected or we may not receive the financial benefits of the agreements that we negotiated. We and our licensors may not be able to protect our respective intellectual property rights. We rely on patent, trade secret, copyright and trademark laws, the law of the doctrine of misappropriation and contractual protections to protect our proprietary technology, proprietary products, index methodologies and other proprietary rights. In addition, we rely on the intellectual property rights of our licensors in connection with our listing of exclusively-licensed index and futures products. We and our licensors may not be able to prevent third parties from copying, or otherwise obtaining and using, our intellectual property without authorization, listing our proprietary or exclusively-licensed index products without licenses or otherwise infringing on our rights. We and our licensors may have to rely on litigation to enforce our intellectual property rights, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. We and our licensors may not be successful in this regard. Such litigation, whether successful or unsuccessful, could result in substantial costs to us, diversion of our resources or a reduction in our revenues, any of which could materially adversely affect our business. Any infringement by us on intellectual property rights of others could result in litigation and could have a material adverse effect on our operations. Our competitors, as well as others, have obtained, or may obtain, patents or may otherwise hold intellectual property rights that are related to our technology or the types of products and services we offer or plan to offer. We may not be aware of all intellectual property that may pose a risk of infringement by our products, services or technologies. In addition, some patent applications in the U.S. are confidential until a patent is issued, and therefore we cannot evaluate the extent to which our products and services may be covered or asserted to be covered in pending patent applications. Thus, we cannot be sure that our products and services do not infringe on the rights of others or that others will not make claims of infringement against us. Claims of infringement are not uncommon in our industry, and even if we believe that such claims are without merit, they can be time-consuming and costly to defend and divert management resources and attention. If one or more of our products, services or technologies were determined to infringe a patent or other intellectual property right held by another party, we may be required to pay damages, stop using, developing or marketing those products, services or technologies, obtain a license from the holders of the patents or redesign those products, services or technologies to avoid infringing the patent. If we were required to stop using, developing or marketing certain products, our business, financial condition and operating results could be materially harmed. Moreover, if we were unable to obtain required licenses, we may not be able to redesign our products, services or technologies to avoid infringement, which could materially adversely affect our business, financial condition and operating results. If we fail to attract or retain highly skilled management and other employees, including those experienced with integration of our business, our business may be harmed. Our success largely depends on the skills, experience and continued efforts of management and other key personnel. As a result, to be successful, we must retain and motivate executives and other key employees. We expect to benefit from the integration experience of certain employees who were formerly Bats personnel. However, we have no assurances that these employees will remain with us. The roles and responsibilities of departing executive officers and employees will need to be filled either by existing or new officers and employees, which may require us to devote time and resources to identifying, hiring and integrating replacements for the departed executives and employees that could otherwise be used to advance integration or otherwise pursue business opportunities, which could have a material adverse effect on our overall business, financial condition and operating results. Additionally, certain of our information technology employees will be important to retain during the migration period to effectively manage our technology platforms and to assist in the process of migrating our systems to the Bats’ technology platform. Many of these employees have extensive knowledge and experience in highly technical and complex aspects of Cboe Command. Because of the complexity and risks associated with our business and the specialized knowledge required to conduct this business effectively, and because the growth in our industry has increased demand for qualified personnel, many of our employees could find employment at other companies if they chose to do so, particularly if we fail to continue to provide competitive levels of compensation. Also, our employees may experience uncertainty about their future roles until integration strategies following the Merger are executed. These circumstances may adversely affect our ability to retain key personnel. We also must continue to motivate employees and maintain their focus on our strategies and goals. Doing so may be difficult due to the uncertainty and challenges associated with post-merger integration. In addition, if these personnel were to leave or we are unable to recruit highly qualified personnel, we may experience increased difficulty in the integration process, synergy realization, maintenance of the current technology platform and may not be able to adequately replace such personnel, which could have a material adverse effect on our overall business, results of operations and financial condition. There is substantial competition for qualified and capable personnel in the technology space, which may make it difficult for us to retain and recruit qualified employees in sufficient numbers. If we fail to retain our current employees, it would be difficult and costly to identify, recruit and train replacements needed to continue to conduct and expand our business. In particular, failure to retain and attract qualified systems personnel could result in systems failures. Consequently, our reputation may be harmed, we may incur additional costs and our profitability could decline. There can be no assurance that we will be able to retain and motivate our employees in the same manner as we have historically done. Additionally, effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving our management team and key employees could hinder our strategic planning and execution. Computer and communications systems failures and capacity constraints could harm our reputation and our business. Our business depends on the integrity and performance of our computer and communications systems. If our systems cannot expand to cope with increased demand or otherwise fail to perform, including during migrations from the Cboe Command platform to the Bats technology platform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new products and services. These consequences could result in trading outages, lower trading volumes, financial losses, decreased customer service and satisfaction and regulatory sanctions and could have a material adverse effect on our ability to conduct our business. Although we have a back-up plan of significant trading and key corporate systems, the back-up systems or disaster recovery plans may prove to be inadequate in the event of a systems failure or cyber-security breach. Despite having disaster recovery facilities, there can be no guarantees that we will be able to open an efficient, transparent and liquid marketplace, if we can open at all, following a systems failure. Moreover, with extended trading hours, we have to operate our systems longer and have fewer non-trading hours to address any potential concerns with the systems on which we rely. Bats’ markets have experienced occasional systems failures and delays in the past, and we could experience future systems failures and delays. For example, serious technical failures forced Bats to cancel its initial public offering and played a role in the halting of another issuer’s stock for five minutes. Bats has since remedied the failures, but there can be no guarantee that we will not suffer a similar technological failure in the future that damages our reputation and results in increased regulatory scrutiny by the SEC and other governmental authorities. More specifically, our systems may fail, in whole or in part, or may operate slowly, causing, including, one or more of the following: · unanticipated disruption in service to our participants; · failures or delays during peak trading times or times of unusual market volatility; · slower response times and delays in trade execution and processing; · incomplete or inaccurate accounting, recording or processing of trades; and · distribution of inaccurate or untimely market data to participants who rely on this data in their trading activity. Any of these events may cause: · a loss in transaction or other fees due to the inability to provide services for a time; · requests by market participants or others that we reimburse them for financial loss, either within the constraints of the limited liability provisions of our exchanges’ rules or in excess of those amounts; · trading to diminish on our exchanges due to dissatisfaction with the platform; and · one or more of our regulators to investigate or take enforcement action against us. As a consequence of any of these events, our business, financial condition and results of operations could suffer materially. In addition to other measures, we test our systems to confirm whether they will be able to handle anticipated present and future peak trading activity or times of unusual market volatility. However, we cannot assure you that our estimates of future trading volume will be accurate or that our systems will always be able to accommodate actual trading volume without failure or degradation of performance. We anticipate that we will need to continue to make significant investments in hardware, software and telecommunications infrastructure to accommodate the increases in traffic. If we cannot increase the capacity and capabilities of our systems to accommodate increasing trading activity and to execute our business strategy, our ability to maintain or expand our businesses would be adversely affected. The computer systems and communication networks upon which we rely, including those of our service providers, may be vulnerable to security risks, cyber-attack or unauthorized disclosure of confidential information and other disruptions that could harm our business. The secure and reliable operation of our computer systems, our communications networks and the systems of our service providers and market participants is a critical element of our operations. These systems and communications networks may be vulnerable to unauthorized access, including the improper access or disclosure of confidential or personally identifiable information, malware and other security problems, as well as to acts of terrorism, natural disasters, human error, power loss and other events that are beyond our control. Our treatment of confidential information may also be subject to contractual restrictions. Although we currently maintain and expect to maintain security measures designed to protect the integrity of our systems and to protect against unauthorized access, such security measures, systems and facilities may prove inadequate. If our security measures are inadequate or if there are interruptions or malfunctions in our systems or communications networks, we may be subject to contractual liability and damages, loss of business, penalties, unfavorable publicity and our financial condition and operating results could be materially impacted. We may be required to expend significant resources in the event of any real or threatened breaches in security or system failures, including to protect against threatened breaches and to alleviate harm caused by an actual breach, and may suffer harm to our reputation and litigation. Measures we implement for security and otherwise to provide for the confidentiality, integrity and reliability of our systems may prove to be inadequate in preventing system failures or delays in our systems or communications networks, which could lower trading volume and have an adverse effect on our business, financial condition and operating results. Our use of open source software code may subject our software to general release or require us to re-engineer our software, which could harm our business. The Bats technology platform uses open source software code. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open source software. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. In addition, some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code in their software and make any derivative works of the open source code available on unfavorable terms or at no cost. Open source license terms may be ambiguous, and many of the risks associated with usage of open source software cannot be eliminated. We believe that our use of open source software is in compliance with the relevant open source software licenses and does not require disclosure of any of our source code. However, if we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer or discontinue use of our software or take other remedial action. Potential conflicts of interest between our for-profit status and our regulatory responsibilities may adversely affect our business. As a for-profit business with regulatory responsibilities, we are responsible for disciplining TPHs and members for violating our rules, including by imposing fines and sanctions. This may create a conflict of interest between our business interests and our regulatory responsibilities. Any failure by us to fulfill our regulatory obligations could significantly harm our reputation, increase regulatory scrutiny or cause the SEC or CFTC to take action against us, all of which could adversely affect our business, results of operations or financial condition. Damage to our reputation could have a material adverse effect on our business, financial condition and operating results. We believe one of our competitive strengths is our strong industry reputation. Various issues may give rise to reputational risk, including issues relating to: · the representation of our business in the media; · the quality and benefits of using our proprietary products, including the reliability and functionality of our transaction-based business, and the accuracy of our market data; · the ability to execute our business plan, key initiatives or new business ventures and the ability to keep up with changing customer demands and regulatory initiatives; · our regulatory compliance and our enforcement of compliance on our customers; · the accuracy of our financial statements and other financial and statistical information; · the quality of our corporate governance structure; · the quality of our disclosure controls and internal controls over financial reporting, including any failures in supervision; · the integrity and performance of our computer and communications systems; · security breaches, including any unauthorized delivery of proprietary data to third parties; · management of our outsourcing relationships, including our relationship with FINRA and NFA; · any misconduct or fraudulent activity by our employees, especially senior management, or other persons formerly or currently associated with us; · our listings business and our enforcement of our listing rules; and · any negative publicity surrounding our listed companies. Damage to our reputation could cause a reduction in the trading volume on our exchanges or cause us to lose customers. This, in turn, may have a material adverse effect on our business, financial condition and operating results. If our risk management and compliance methods are not effective, our business, financial condition and operating results may be adversely affected. Our ability to comply with all applicable laws and rules is largely dependent on our establishment and maintenance of compliance, audit, risk and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit and risk management personnel. These systems and procedures may not be fully effective. We face the risk of intervention by regulatory authorities, including extensive examination and surveillance activity. In the case of actual or alleged non-compliance with applicable laws or regulations, we could be subject to investigations and judicial or administrative proceedings that may result in substantial penalties, settlements or civil lawsuits, including by customers, for damages, which may be substantial. In the past, the SEC has brought actions against exchange operators, including us, for failing to fulfill their obligations to have an effective regulatory system. Any failure to comply with applicable laws and rules could adversely affect our business, reputation, financial condition and operating results and, in extreme cases, our ability to conduct our business or portions thereof. As the parent company for SROs, we are responsible for maintaining exchanges that comply with securities and futures laws, SEC and CFTC regulations and the rules of the respective exchanges. We have methods to identify, monitor and manage our risks. Management of legal and regulatory risk requires policies and procedures to properly monitor, record and verify a large number of transactions and events. If our policies, procedures, and compliance systems are not effective or we are not successful in monitoring or evaluating the risks to which we are or may be exposed, our business, reputation, financial condition and operating results could be materially adversely affected. We cannot provide assurance that our policies and procedures will always be effective, or that our management, compliance department, enterprise risk management committee and internal audit department would be able to identify any such ineffectiveness. If these functions, policies and procedures are not effective, we may be subject to monetary or other penalties by our regulators, and our insurance policies may not provide adequate coverage. As one of the world's largest exchange holding companies, we may be at a greater risk for a cyber-attack and other cyber security risks. The frequency of cyber-attacks is increasing in general, and a variety of threat actors have specifically targeted the financial services industry. At the date of this filing, we have no evidence of any material cases of data theft, corruption or destruction of data or compromised customer data. However, there is no assurance that this will remain the case. Security breaches may lead to increased scrutiny by our regulators and have significant costs in terms of cash outlays, business disruption, revenue losses, internal labor, overhead and other expenses. Measures we implement to monitor our network environment and protect our infrastructure against security breaches and misappropriation of our intellectual property assets may prove insufficient, which could cause us to lose market participants, experience lower trading volume, incur significant liabilities or have a negative impact on our competitive advantage. Misconduct by our TPHs, members, participants or others could harm us. We run the risk that our TPHs, members, participants or other persons who use our markets or our products or our employees may engage in fraud, market or product manipulation or other misconduct, which could result in regulatory sanctions and serious harm to our reputation, especially because we are the parent company of SROs. It is not always possible to deter misconduct, or market or product manipulation, and the precautions we take to prevent and detect this activity may not be effective in all cases. In addition, misconduct, or market or product manipulation by, or failures of, participants on our or other exchanges may discourage trading on our exchanges or of our products, which could reduce revenues. Financial or other problems experienced by third parties could have an adverse effect on our business. We are exposed to credit risk from third parties, including customers, clearing agents and counterparties. For example, we are exposed to credit risk for transaction fees we bill to customers on a monthly basis in arrears. Our customers and other third parties may default on their obligations to us due to a lack of liquidity, operational failure, bankruptcy or other reasons. In addition, with respect to orders Cboe Trading routes to other markets for execution on behalf of our customers, Cboe Trading is exposed to counterparty credit risk in the case of failure to perform on the part of our routing and clearing firms who are involved in processing equities and options transactions on our behalf, as well as failure on the part of such brokers to pass back any transactional rebates. Wedbush Securities Inc. (“Wedbush”), and Morgan Stanley & Co. LLC (“Morgan Stanley”) guarantee equity trades until one day after the trade date, after which time NSCC provides a guarantee. Thus, Cboe Trading is potentially exposed to credit risk to the counterparty to an equity trade routed to another market center between the trade date and one day after the trade date in the event that Wedbush or Morgan Stanley fails to perform. With respect to U.S. listed equity options and futures, we deliver matched trades of our customers to the OCC, which acts as a central counterparty on all transactions occurring on Cboe Options, C2, BZX, EDGX and CFE and, as such, guarantees clearance and settlement of all of our matched options and futures trades. With respect to U.S. equities, Cboe Trading has counterparty credit risk exposure to Wedbush and Morgan Stanley related to clearing until the day following the trade date. Cboe Trading uses Wedbush to clear trades routed through affiliates of Credit Suisse Securities (USA) LLC as well as for trades routed directly to other exchanges and optionally dark pools. Morgan Stanley clears trades routed through the Morgan Stanley routing brokers and also clears executions routed to most dark pools. Cboe Trading maintains counterparty credit risk exposure from routing brokers with respect to rebates earned until completion of the routing brokers next invoice cycle following the execution. With respect to U.S. listed equity and exchange traded product options, Cboe Trading is subject to counterparty credit risk exposure with respect to rebates earned from routing brokers until completion of the routing brokers’ next invoice cycle has completed for an execution. Our exposure to credit risk may be further impacted by volatile securities markets that may affect the ability of our customers and other third parties to satisfy their contractual obligations to us. Moreover, we may not be successful in managing our credit risk through reporting and control procedures or by maintaining credit standards. Any losses arising from such defaults or other credit losses could adversely affect our financial condition and operating results. While neither Cboe FX nor Cboe SEF has direct counterparty risk, Cboe FX or Cboe SEF may suffer a decrease in transaction volume if a bank or prime broker experiences an event that causes other prime brokers to decrease or revoke the credit available to the prime broker experiencing the event. Therefore, Cboe FX and Cboe SEF may have risk that is related to the credit of the banks and prime brokers that trade spot FX on the Cboe FX platform, or non-deliverable forward FX transactions on Cboe SEF. We may be required to assume ownership of a position in securities in connection with our order routing service, which could subject us to trading losses when our broker-dealer disposes of that position. We offer a smart-order routing service through our broker-dealer subsidiary, Cboe Trading, which provides its customers with access to other market centers when we route their orders to those market centers for execution. In connection with this service, we may assume ownership of a position in securities. This may occur, for example, when a market center to which we have routed a customer’s order experiences systems problems and is unable to determine the status of that order. When this happens, we may make a business decision to provide a cancellation notice to our customer, relieving our customer of any liability with respect to the order. We may be informed later, however, that the order was executed at the market center to which we routed it, in which case Cboe Trading would be required to take ownership of that securities position. Our third party clearing brokers maintain error accounts on behalf of Cboe Trading into which such positions settle, and we require the respective clearing broker to trade out of those positions as expeditiously as possible, which could result in our incurring trading losses. We may not effectively manage our growth, which could materially harm our business, financial condition and operating results. We have experienced increased volume on our futures exchange, extended trading hours on our futures exchange and in SPX and VIX options and developed several proprietary products. We also experienced a substantial expansion of our business following our acquisition of Bats, which significantly expanded our product line across asset classes, broadened our geographic reach with strong pan-European equities and global FX positions and diversified our business mix with significant non-transactional revenue streams. Bats has also experienced significant growth in its business since its inception in 2005, with material expansions into diverse businesses including European listed cash equity securities, U.S. listed equity options and global institutional spot FX trading. In addition, in 2017, we acquired the assets of Silexx. We expect that our business will continue to grow, which may place a significant strain on our management, personnel, systems and resources. We must continually improve our operational, financial and regulatory systems and managerial controls and procedures, and may need to continue to expand, train and manage our workforce. We must also maintain close coordination among our technology, legal, accounting, finance, marketing, sales, regulatory and compliance functions. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business, financial condition and operating results could be materially harmed. Furthermore, failure to successfully expand into new asset classes or new geographies may adversely affect our growth strategy and our future profitability. Our continued growth will require increased investment by us in technology, facilities, personnel, and financial and management systems and controls. It also will require expansion of our procedures for monitoring and assuring our compliance with applicable regulations, and we will need to integrate, train and manage a growing employee base. The expansion of our existing businesses, any expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes, which may be more extensive and broader in scope than those we have historically required. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionally greater than or equal to the increase in our costs associated with this growth, our business, financial condition and operating results will be adversely affected. Our ability to implement or amend rules could be limited or delayed because of regulation, which could negatively affect our ability to implement needed changes. Our exchanges registered with the SEC must submit proposed rule changes to the SEC for its review and, in many cases, its approval. Even where a proposed rule change may be effective upon filing with the SEC, the SEC retains the right to suspend and disapprove such a rule change. Also, the CFTC may stay or disapprove rules that we file with it for CFE or Cboe SEF. The rule review process can be lengthy and can significantly delay the implementation of proposed rule changes that we believe are necessary to the operation of our markets. If the SEC or CFTC delays or does not allow one of our exchanges to implement a rule change, this could negatively affect our ability to make needed changes or implement business activities. Similarly, the SEC must approve amendments to our exchange subsidiaries’ certificates of incorporation and bylaws as well as certain amendments to the certificate of incorporation and bylaws of Cboe Global Markets. The SEC may decide not to approve a proposed amendment or may delay such approval in a manner that could negatively affect our ability to make a desired change, which could prevent or delay us from improving the operations of our markets or recognize income from new products. Changes in the tax laws and regulations affecting us, our products and our market participants could have a material adverse effect on our business. Legislation may be proposed, both domestically and internationally, that could add a transaction tax on our products or change the way that our market participants are taxed on the products they trade on our markets. If such proposals were to become law, they could have a negative impact on the securities industry and on us by making transactions more costly to market participants, which may reduce trading and could make our markets less competitive. In addition to proposed tax changes that could affect our market participants, like other corporations, we are subject to taxes at federal, state and local levels, as well as in non-U.S. jurisdictions. Changes in tax laws, regulations or policies or successful claims by tax authorities could result in our having to pay higher taxes, which would in turn reduce our net income. If this occurs, we may experience a higher effective state tax rate. We selectively explore acquisition opportunities and strategic alliances relating to other businesses, products or technologies. We may not be successful in integrating other businesses, products or technologies with our business. Any such transaction also may not produce the results we anticipate, which could adversely affect our business, financial condition and operating results. We selectively explore and pursue acquisition and other opportunities to strengthen our business and grow our company. We may enter into business combination transactions, make acquisitions or enter into strategic partnerships, joint ventures or alliances, any of which may be material. The market for acquisition targets and strategic alliances is highly competitive, which could make it more difficult to find appropriate merger or acquisition opportunities. If we are required to raise capital by incurring debt or issuing additional equity for any reason in connection with a strategic acquisition or investment, financing may not be available or the terms of such financing may not be favorable to us and our stockholders, whose interests may be diluted by the issuance of additional stock. The process of integration may produce unforeseen regulatory issues and operating difficulties and expenditures and may divert the attention of management from the ongoing operation of our business and harm our reputation. We may not successfully achieve the integration objectives, and we may not realize the anticipated cost savings, revenue growth and synergies in full or at all, or it may take longer to realize them than expected, any of which could negatively impact our business, financial condition and operating results. See also “Risks Relating to the Merger” for additional information. Prior to the Merger, Bats generated a significant percentage of its total revenues from, and was provided with significant liquidity in its markets and other services by, entities who are affiliates of its former significant stockholders, and there is no assurance that such entities will continue to generate such revenue or provide such liquidity and other services following the Merger. Prior to the Merger, Bats earned a significant percentage of its revenue from customers who are affiliates of its former significant stockholders. In addition, Bats relied on, and we continue to rely on, certain entities who are affiliates of former significant Bats stockholders to route orders that were not routed directly by Bats and to clear certain trades routed to other markets. The proportionate stake in the combined company of these former Bats stockholders is significantly less than their stake in Bats prior to the Merger, so there may be less incentive for the affiliates of Bats’ former stockholders to maintain their business relationships with us at the pre-existing levels or at all. If the affiliates of Bats’ former stockholders do not remain customers at their pre-existing levels or at all or if any of the affiliates of Bats’ former stockholders do not continue to route and clear trades as they did prior to the Merger, we may experience decreased revenues and business interruptions, which could have a material adverse effect on our business, financial condition and operating results. Fluctuations in our quarterly operating results may negatively affect the valuation of our common stock. Our business experiences seasonal fluctuations, reflecting reduced trading activity generally during the third quarter of each year and during the last month of each year. As a result, it is possible that our operating results or other operating metrics may fail to meet the expectations of stock market analysts and investors. If this happens, the market price of our common stock may be adversely affected. We may be required to inject further capital into OCC or EuroCCP. OCC is the sole provider of clearing on all of our options and futures exchanges. Under OCC's capital plan, each of OCC's existing exchange stockholders, which include Cboe Options, agreed to provide its pro rata share in replenishment capital, up to a maximum of $40 million per exchange stockholder, if certain capital thresholds are breached. In addition, Cboe Europe owns 20% of EuroCCP, which is one of three interoperable central counterparties used to clear trades conducted on Cboe Europe. If OCC or EuroCCP were to experience financial difficulties, Cboe Options and Cboe Europe, as applicable, might be required to inject further capital into them in order to maintain their working or regulatory capital. In a worst case scenario, OCC or EuroCCP, as applicable, might have their regulatory license suspended or withdrawn, or might have to wind down. This may result in a loss to Cboe Options and Cboe Europe of their respective investments in OCC and EuroCCP and withdrawals of OCC or EuroCCP as clearing houses, which could have a material adverse effect on our business, financial condition and operating results. Our operations outside of the U.S. expose us to currency risk. In addition to our operations in the U.S., we have operations in the U.K., continental Europe, Ecuador, Hong Kong and Singapore. We, therefore, have significant exposure to exchange rate movements between the British pound, the Euro, the Hong Kong dollar, and the Singapore dollar against the U.S. dollar. Significant inflation or changes in foreign exchange rates with respect to one or more of these currencies could occur as a result of general economic conditions, acts of war or terrorism, changes in governmental monetary or tax policy, Brexit or changes in local interest rates. These exchange rate differences will affect the translation of our non-U.S. results of operations and financial condition into U.S. dollars as part of our consolidated financial statements. Any decision to pay dividends on our common stock is at the discretion of our board of directors and depends upon the earnings of our operating subsidiaries. Accordingly, there can be no guarantee that we will pay dividends to our stockholders. Any decision to pay dividends on our common stock in the future will be at the discretion of our board of directors, which may determine not to declare dividends at all or at a reduced amount. The board’s determination to declare dividends will depend upon our profitability and financial condition, contractual restrictions, restrictions imposed by applicable law and the SEC and other factors that the board deems relevant. As a holding company with no significant business operations of its own, Cboe Global Markets depends entirely on distributions, if any, it may receive from its subsidiaries to meet its obligations and pay dividends to its stockholders. If these subsidiaries are not profitable, or even if they are and they determine to retain their profits for use in their businesses, we will be unable to pay dividends to our stockholders. Certain provisions in our organizational documents could prevent or delay a change of control. Our organizational documents contain provisions that could block actions that stockholders might find favorable, including discouraging, delaying or preventing a change of control or any unsolicited acquisition proposals for us. These include provisions: · prohibiting stockholders from acting by written consent; · requiring advance notice of director nominations and of business to be brought before a meeting of stockholders; and · limiting the persons who may call special stockholders’ meetings. · In addition, our organizational documents include provisions that: · restrict any person from voting or causing the voting of shares of stock representing more than 20% of our outstanding voting capital stock; and · restrict any person from beneficially owning shares of stock representing more than 20% of the outstanding shares of our capital stock. Furthermore, our board of directors has the authority to issue shares of preferred stock in one or more series and to fix the rights and preferences of these shares without stockholder approval. Any series of our preferred stock is likely to be senior to our common stock with respect to dividends, liquidation rights and, possibly, voting rights. The ability of the board of directors to issue preferred stock also could have the effect of discouraging unsolicited acquisition proposals, thus adversely affecting the market price of our common stock. Delaware law makes it difficult for stockholders that have recently acquired a large interest in a corporation to cause the merger or acquisition of the corporation against the board’s wishes. Under Section 203 of the Delaware General Corporation Law, a Delaware corporation may not engage in any merger or other business combination with an interested stockholder for a period of three years following the date that the stockholder became an interested stockholder except in limited circumstances, including by approval of the corporation’s board of directors. We indirectly hold 100% of the issued share capital and voting rights in Cboe Europe and its wholly owned subsidiary, Cboe Chi-X Europe. As a result, any person who holds, or has voting power with respect to, 10% or more of the outstanding shares of our common stock is subject to certain regulatory requirements under U.K. law. A person that indirectly acquires control in a FCA entity is required to file a change in control notice with the FCA. Though both are FCA regulated entities, the statutorily prescribed change in control notification threshold for Cboe Europe is acquisition of voting power with respect to 20% or more of the issued share capital thereof. The change in control notification threshold for Cboe Chi-X Europe is acquisition of voting power with respect to 10% or more of the issued share capital thereof. Therefore, any person who holds, or has voting power with respect to, 10% or more of the outstanding shares of our common stock will be required to file a change in control notice in respect of Cboe Chi-X Europe and, if this holding is in excess of 20%, also for Cboe Europe. This obligation may discourage, delay or prevent accumulations of 10% or more of our common stock. Risks Relating to the Merger We may not realize all of the anticipated benefits of the Merger or such benefits may take longer to realize than expected. Our ability to realize the anticipated benefits of the Merger will depend, to a large extent, on our ability to integrate our businesses with Bats’ businesses. The combination of two independent companies is a complex, costly and time-consuming process. As a result, our combined company is required to devote significant management attention and resources to integrating our business practices and operations with those of Bats. If integration is implemented ineffectively, it could preclude realization of the full benefits expected from the Merger, including synergies, cause an interruption of, or a loss of momentum in, the activities of the combined company and could seriously harm our results of operations. In addition, the overall integration of the two companies may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of client relationships and diversion of management’s attention, and may cause our stock price to decline. The difficulties of operating our combined company include: · unanticipated issues in migrating information technology, communications and other systems; · unforeseen expenses or delays associated with the integration or the Merger; · managing a significantly larger company; · the potential diversion of management focus and resources from other strategic opportunities and from operational matters; · maintaining employee morale and retaining key management and other key employees; · integrating two unique business cultures, which may prove to be incompatible; · the possibility of faulty assumptions underlying expectations regarding the integration process and expense synergies; · integrating corporate and administrative infrastructures and eliminating duplicative operations; · coordinating geographically separate organizations; · managing costs or inefficiencies associated with integrating the operations of the combined company; and · making any necessary modifications to internal financial control standards to comply with the Sarbanes Oxley Act of 2002 and the rules and regulations promulgated thereunder. Many of these factors are outside of our control, and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could materially adversely impact our business, financial condition and results of operations. In addition, even if the combined company’s operations are integrated successfully, we may not realize the full benefits of the Merger, including the synergies, cost savings and growth opportunities. These benefits may not be achieved within the anticipated time frame, or at all. As a result, we cannot assure you that the Merger will result in the realization of the full benefits anticipated. We incurred substantial indebtedness to finance the Merger, which may decrease our business flexibility and adversely affect our business, financial condition and operating results. We incurred indebtedness of approximately $1.65 billion to finance a portion of the cash component of the Merger consideration, refinance indebtedness of Bats and its subsidiaries and pay related fees and expenses. The indebtedness consists of a $1 billion unsecured term loan facility and $650 million in senior unsecured notes. We also entered into a $150 million revolving credit facility in December 2016, which may be used to fund working capital and for other general corporate purposes. We refinanced $300 million of the amounts outstanding under the term loan facility with new senior unsecured notes. As of December 31, 2017, we had $300 million outstanding under the term loan facility, $900 million of senior unsecured notes and no funds outstanding under the revolving credit facility. Prior to entering into the merger agreement, we did not have any indebtedness and were not subject to any financial covenants. The financial and other covenants to which we have agreed and our increased indebtedness may have the effect of reducing our flexibility to respond to changing business and economic conditions, thereby placing us at a competitive disadvantage compared to competitors that have less indebtedness and making us more vulnerable to general adverse economic and industry conditions. Our increased indebtedness will also increase future borrowing costs, and the covenants pertaining thereto may also limit our ability to repurchase shares of our common stock, increase dividends or obtain additional financing to fund working capital, capital expenditures, acquisitions or general corporate requirements. We are also required to dedicate a larger portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes, including working capital, capital expenditures and general corporate purposes. Further, a portion of our borrowings are at variable rates of interest, which exposes us to the risk of increased interest rates unless we enter into offsetting hedging transactions. Our ability to make payments on and to refinance our debt obligations and to fund planned capital expenditures depend on our ability to generate cash from our operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could impede the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business. Additionally, we may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all. Any of the foregoing consequences could adversely affect our business, financial condition and operating results. Deterioration in our credit profile may increase our costs of borrowing money. We have received investment grade credit ratings from S&P Global Ratings (BBB+) and Moody’s Investor Service (Baa1). Ratings from credit agencies are not recommendations to buy, sell or hold our securities, and each rating should be evaluated independently of any other rating. There is no assurance that we will maintain such credit ratings, since credit ratings may be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating below investment grade, our borrowing costs could increase. A failure to migrate our information technology systems successfully following the Merger or a material disruption in our information technology systems could adversely affect our business, financial condition and operating results. We rely extensively on our information technology systems. The failure of information technology systems to operate effectively, difficulty in migrating our information technology systems, inconsistencies in standards, controls, procedures and policies and problems with transitioning to upgraded or replacement systems could adversely impact our business, financial condition and operating results. In addition, a number of our TPHs are not connected to Bats’ technology platforms and must complete the process of connecting to these platforms as part of the migration. The process of migrating information technology systems may take longer, cost more and provide fewer synergies than initially anticipated. There may also be new regulations adopted during the transition period that require systems changes, which could divert attention away from migration process and cause delays. To the extent this occurs, the benefits of the proposed transaction may be reduced or delayed or may never come to fruition. Although our combined management team has experience with migrating other businesses to Bats’ technology platform, there are certain portions of our business, such as open outcry trading that have not yet been supported by Bats’ technology platform. We currently expect to complete the migration of our information technology systems in phases over a four-year period following the Merger. However, we may not be able to successfully achieve the transition on the timetable currently contemplated, and the transition may not be successful or could encounter various difficulties and unexpected issues. Any delays or issues that we encounter in the transition could have a material adverse effect on our businesses and could negatively affect our reputation, which in turn could have a material adverse effect on our overall business, results of operations and financial condition, as well as impair customer confidence in our product offerings and overall services. If our goodwill, investments in non-consolidated subsidiaries and intangible assets become impaired, the resulting charge to earnings may be significant. Accounting standards in the U.S. require that one party to the Merger be identified as the acquirer. In accordance with these standards, the Merger was accounted for as an acquisition of Bats by Cboe and followed the acquisition method of accounting for business combinations. The assets and liabilities of Bats were consolidated with our assets and liabilities. The excess of the purchase price over the fair values of Bats’ assets and liabilities was recorded as goodwill. We will be required to assess investments in non-consolidated subsidiaries and intangible assets for impairment at least annually. Goodwill impairment testing is performed annually in the fiscal fourth quarter or more frequently if conditions exist that indicate that the asset may be impaired. In the future, we may take charges against earnings resulting from impairment. Any determination requiring the write-off of a significant portion of our goodwill, intangible assets or investments in non-consolidated subsidiaries could adversely affect our results of operations and financial condition. Item 1B.