Notice2023-27062
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To List and Trade Shares of the iShares Ethereum Trust Under Nasdaq Rule 5711(d) (Commodity-Based Trust Shares)
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 11, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 236 (Monday, December 11, 2023)</title>
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[Federal Register Volume 88, Number 236 (Monday, December 11, 2023)]
[Notices]
[Pages 85945-85958]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-27062]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99081; File No. SR-NASDAQ-2023-045]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To List and Trade Shares of
the iShares Ethereum Trust Under Nasdaq Rule 5711(d) (Commodity-Based
Trust Shares)
December 5, 2023.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 21, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to a proposed rule change to list and trade
shares of the iShares Ethereum Trust (the ``Trust'') under Nasdaq Rule
5711(d) (``Commodity-Based Trust Shares''). The shares of the Trust are
referred to herein as the ``Shares.''
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/nasdaq/rules">https://listingcenter.nasdaq.com/rulebook/nasdaq/rules</a>, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade the Shares under Nasdaq
Rule 5711(d),\3\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange. iShares Delaware Trust Sponsor LLC,
a Delaware limited liability company and an indirect subsidiary of
BlackRock, Inc. (``BlackRock''), is the sponsor of the Trust (the
``Sponsor''). The Shares will
[[Page 85946]]
be registered with the SEC by means of the Trust's registration
statement on Form S-1 (the ``Registration Statement'').\4\
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\3\ The Commission approved Nasdaq Rule 5711 in Securities
Exchange Act Release No. 66648 (March 23, 2012), 77 FR 19428 (March
30, 2012) (SR-NASDAQ-2012-013).
\4\ The descriptions of the Trust contained herein are based, in
part, on information in the Registration Statement. The Registration
Statement in not yet effective and the Shares will not trade on the
Exchange until such time that the Registration Statement is
effective.
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Description of the Trust
The Shares will be issued by the Trust, a Delaware statutory trust.
The Trust will operate pursuant to a trust agreement (the ``Trust
Agreement'') between the Sponsor, BlackRock Fund Advisors (the
``Trustee'') as the trustee of the Trust and will appoint a Delaware
Trustee of the Trust (the ``Delaware Trustee'') by such time that the
Registration Statement is effective. The Trust issues Shares
representing fractional undivided beneficial interests in its net
assets. The assets of the Trust consist primarily of ether held by a
custodian on behalf of the Trust. Coinbase Custody Trust Company, LLC
(the ``Ether Custodian''), is the custodian for the Trust's ether
holdings; and another entity will be the custodian for the Trust's cash
holdings (the ``Cash Custodian'' and together with the Ether Custodian,
the ``Custodians'') and the administrator of the Trust (the ``Trust
Administrator''). Under the Trust Agreement, the Trustee may delegate
all or a portion of its duties to any agent, and has delegated the bulk
of the day-to-day responsibilities to the Trust Administrator and
certain other administrative and record-keeping functions to its
affiliates and other agents. The Trust is not an investment company
registered under the Investment Company Act of 1940, as amended (the
``1940 Act'').
The investment objective of the Trust is to reflect generally the
performance of the price of ether. The Trust seeks to reflect such
performance before payment of the Trust's expenses and liabilities. The
Shares are intended to constitute a simple means of making an
investment similar to an investment in ether rather than by acquiring,
holding and trading ether directly on a peer-to-peer or other basis or
via a digital asset exchange. The Shares have been designed to remove
the obstacles represented by the complexities and operational burdens
involved in a direct investment in ether, while at the same time having
an intrinsic value that reflects, at any given time, the investment
exposure to the price of ether owned by the Trust at such time, less
the Trust's expenses and liabilities. Although the Shares are not the
exact equivalent of a direct investment in ether, they provide
investors with an alternative method of achieving investment exposure
to the price of ether through the public securities market, which may
be more familiar to them.
Custody of the Trust's Ether
An investment in the Shares is backed by ether held by the Ether
Custodian on behalf of the Trust. The Ether Custodian will keep custody
of all of the Trust's ether, other than that which is maintained in the
Trading Balance with the Prime Broker, in accounts that are required to
be segregated from the assets held by the Ether Custodian as principal
and the assets of its other customers (the ``Vault Balance''), with any
remainder of the Vault Balance held as part of a ``hot storage''.\5\
The Ether Custodian will keep a substantial portion of the private keys
associated with the Trust's ether in ``cold storage'' \6\ (the ``Cold
Vault Balance'') The hardware, software, systems, and procedures of the
Ether Custodian may not be available or cost-effective for many
investors to access directly.
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\5\ A portion of the Trust's ether holdings and cash holdings
from time to time may be held with the Prime Broker, an affiliate of
the Ether Custodian, in the Trading Balance, in connection with in-
kind creations and redemptions of Baskets and the sale of ether to
pay the Sponsor's Fee and Trust expenses not assumed by the Sponsor.
These periodic holdings held in the Trading Balance with the Prime
Broker represent an omnibus claim on the Prime Broker's ether held
on behalf of clients; these holdings exist across a combination of
omnibus hot wallets, omnibus cold wallets, or in accounts in the
Prime Broker's name on a trading venue (including third-party venues
and the Prime Broker's own execution venue) where the Prime Broker
executes orders to buy and sell ether on behalf of its clients.
\6\ The term ``cold storage'' refers to a safeguarding method by
which the private keys corresponding to ether stored on a digital
wallet are removed from any computers actively connected to the
internet. Cold storage of private keys may involve keeping such
wallet on a non-networked computer or electronic device or storing
the public key and private keys relating to the digital wallet on a
storage device (for example, a USB thumb drive) or printed medium
(for example, papyrus or paper) and deleting the digital wallet from
all computers.
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Net Asset Value
The net asset value of the Trust will be equal to the total assets
of the Trust, including but not limited to, all ether and cash less
total liabilities of the Trust, each determined by the Trustee pursuant
to policies established from time to time by the Trustee or its
affiliates or otherwise described herein. The methodology used to
calculate an index (the ``Index'') price to value ether in determining
the net asset value of the Trust may not be deemed consistent with U.S.
generally accepted accounting principles (``GAAP'').
The Sponsor has the exclusive authority to determine the Trust's
net asset value, which it has delegated to the Trustee under the Trust
Agreement. The Trustee has delegated to the Trust Administrator the
responsibility to calculate the net asset value of the Trust and the
NAV, based on a pricing source selected by the Trustee. In determining
the Trust's net asset value, the Trust Administrator values the ether
held by the Trust based on the Index, unless otherwise determined by
the Sponsor in its sole discretion. The CME CF Ether-Dollar Reference
Rate -New York Variant (the ``CF Benchmarks Index'') shall constitute
the Index, unless the CF Benchmarks Index is not available or the
Sponsor in its sole discretion determines not to use the CF Benchmarks
Index as the Index. If the CF Benchmarks Index is not available or the
Sponsor determines, in its sole discretion, that the CF Benchmarks
Index should not be used, the Trust's holdings may be fair valued in
accordance with the policy approved by the Sponsor.
The Trust's periodic financial statements may not utilize net asset
value or NAV to the extent the methodology used to calculate the Index
is deemed not to be consistent with GAAP. For purposes of the Trust's
periodic financial statements, the Trust will utilize a pricing source
that is consistent with GAAP, as of the financial statement measurement
date. The Sponsor will determine in its sole discretion the valuation
sources and policies used to prepare the Trust's financial statements
in accordance with GAAP.
The Sponsor may declare a suspension of the calculation of the NAV
of the Trust under certain circumstances.
Net Asset Value
On each Business Day, as soon as practicable after 4:00 p.m.
Eastern Time (``ET''), the Trust Administrator evaluates the ether held
by the Trust as reflected by the CF Benchmarks Index and determines the
net asset value of the Trust and the NAV. For purposes of making these
calculations, a Business Day means any day other than a day when Nasdaq
is closed for regular trading.
The CF Benchmarks Index employed by the Trust is calculated on each
Business Day by aggregating the notional value of ether U.S. dollar
trading activity across major ether spot platforms. The CF Benchmarks
Index is designed and administered in accordance with IOSCO Principles
for Financial Benchmarks. The
[[Page 85947]]
Administrator of the CF Benchmarks Index is CF Benchmarks Ltd. (the
``Index Administrator''). The CF Benchmarks Index serves as a once-a-
day benchmark rate of the U.S. dollar price of ether denominated in
U.S. dollars (USD/ETH), calculated as of 4:00 p.m. ET. The CF
Benchmarks Index aggregates the trade flow of ether-U.S. dollar markets
operated by several ether spot trading platforms, during an observation
window between 3:00 p.m. and 4:00 p.m. ET into the U.S. dollar price of
ether at 4:00 p.m. ET. Specifically, the CF Benchmarks Index is
calculated based on the ``Relevant Transactions'' \7\ of all spot
trading platforms for ether-USD that meet the CME CF Constituent
Exchange Criteria, which are currently: Bitstamp, Coinbase, Gemini,
itBit, Kraken, and LMAX Digital (the ``Constituent Exchanges''), and
which may change from time to time. Any changes to this composition of
spot trading platforms are announced on the Administrator's website
(<a href="http://www.cfbenchmarks.com">www.cfbenchmarks.com</a>).
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\7\ A ``Relevant Transaction'' is any cryptocurrency versus U.S.
dollar spot trade that occurs during the observation window between
3:00 p.m. and 4:00 p.m. ET on a Constituent Exchange in the ETH/USD
pair that is reported and disseminated by a Constituent Exchange
through its publicly available API and observed by the Index
Administrator.
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If the CF Benchmarks Index is not available or the Sponsor
determines, in its sole discretion, that the CF Benchmarks Index should
not be used, the Trust's holdings may be fair valued in accordance with
the policy approved by the Sponsor.
The Trust is intended to provide a way for Shareholders to obtain
exposure to ether by investing in the Shares rather than by acquiring,
holding and trading ether directly on a peer-to-peer or other basis or
via a digital asset exchange. An investment in Shares of the Trust is
not the same as an investment directly in ether on a peer-to-peer or
other basis or via a digital asset exchange.
Creation and Redemption of Shares
The Trust issues and redeems baskets (``Baskets'') \8\ on a
continuous basis. Baskets are only issued or redeemed in exchange for
an amount of ether determined by the Trustee on each day that Nasdaq is
open for regular trading. No Shares are issued unless the Ether
Custodian or Prime Broker has allocated to the Trust's account the
corresponding amount of ether. The amount of ether necessary for the
creation of a Basket, or to be received upon redemption of a Basket,
will decrease over the life of the Trust, due to the payment or accrual
of fees and other expenses or liabilities payable by the Trust. Baskets
may be created or redeemed only by Authorized Participants, who pay
BlackRock Investments, LLC (``BRIL''), an affiliate of the Trustee that
has been retained by the Trust to perform certain order processing,
Authorized Participant communications, and related services in
connection with the issuance and redemption of Baskets (``ETF
Services''), a transaction fee for each order to create or redeem
Baskets.
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\8\ The Trust issues and redeems Shares only in blocks of a
certain specified size or integral multiples thereof. A block of
Shares is called a ``Basket.'' These transactions take place in
exchange for ether. Baskets will be offered continuously at the net
asset value per Share (``NAV'') for the Basket of Shares on the day
that an order to create a Basket is accepted by the Trust. The Trust
may change the number of Shares in a Basket. Only registered broker-
dealers that become authorized participants by entering into a
contract with the Sponsor and the Trustee (``Authorized
Participants'') may purchase or redeem Baskets. Shares will be
offered to the public from time to time at varying prices that will
reflect the price of ether and the trading price of the Shares on
Nasdaq at the time of the offer.
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Background
Ethereum is free software that is hosted on computers distributed
throughout the globe. It employs an array of computer code-based logic,
called a protocol, to create a unified understanding of ownership,
commercial activity, and economic logic. This allows users to engage in
commerce without the need to trust any of its participants or
counterparties. Ethereum code creates verifiable and unambiguous rules
that assign clear, strong property rights to create a platform for
unrestrained business formation and free exchange. No single
intermediary or entity operates or controls the Ethereum network
(referred to as ``decentralization''), the transaction validation and
recordkeeping infrastructure of which is collectively maintained by a
disparate user base. The Ethereum network allows people to exchange
tokens of value, or ether (``ETH''), which are recorded on a
distributed public recordkeeping system or ledger known as a blockchain
(the ``Ethereum Blockchain''), and which can be used to pay for goods
and services, including computational power on the Ethereum network, or
converted to fiat currencies, such as the U.S. dollar, at rates
determined on digital asset exchanges or in individual peer-to-peer
transactions. Furthermore, by combining the recordkeeping system of the
Ethereum Blockchain with a flexible scripting language that is
programmable and can be used to implement sophisticated logic and
execute a wide variety of instructions, the Ethereum network is
intended to act as a foundational infrastructure layer on top of which
users can build their own custom software programs, as an alternative
to centralized web servers. In theory, anyone can build their own
custom software programs on the Ethereum network. In this way, the
Ethereum network represents a project to expand blockchain deployment
beyond a peer-to-peer private money system into a flexible, distributed
alternative computing infrastructure that is available to all. On the
Ethereum network, ETH is the unit of account that users pay for the
computational resources consumed by running their programs.
Up to now, U.S. retail investors have lacked a U.S. regulated, U.S.
exchange-traded vehicle to gain exposure to ETH. Instead, current
options include: (i) facing the counter-party risk, legal uncertainty,
technical risk, and complexity associated with accessing spot ether or
(ii) over-the-counter ether funds (``OTC ETH Funds'') with high
management fees and potentially volatile premiums and discounts.
Meanwhile, investors in other countries, including Germany, Switzerland
and France, are able to use more traditional exchange listed and traded
products (including exchange-traded funds holding physical ETH) to gain
exposure to ETH. Investors across Europe have access to products which
trade on regulated exchanges and provide exposure to a broad array of
spot crypto assets. U.S. investors, by contrast, are left with fewer
and more risky means of getting ether exposure.\9\
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\9\ The Exchange notes that the list of countries above is not
exhaustive and that securities regulators in a number of additional
countries have either approved or otherwise allowed the listing and
trading of Spot ETH ETPs.
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To this point, the lack of an ETP that holds spot ETH (a ``Spot ETH
ETP'') exposes U.S. investor assets to significant risk because
investors that would otherwise seek cryptoasset exposure through a Spot
ETH ETP are forced to find alternative exposure through generally
riskier means. For example, investors in OTC ETH Funds are not afforded
the benefits and protections of regulated Spot ETH ETPs, resulting in
retail investors suffering losses due to drastic movements in the
premium/discount of OTC ETH Funds. An investor who purchased the
largest OTC ETH Fund in January 2021 and held the position at the end
of 2022 would have suffered a 30% loss due to the change in the
premium/discount, even if the price of ETH did not change. Many retail
investors likely suffered losses due to this premium/discount in OTC
ETH Fund trading; all such losses could have been avoided if a Spot ETH
ETP had been available. Additionally,
[[Page 85948]]
many U.S. investors that held their digital assets in accounts at
FTX,\10\ Celsius Network LLC,\11\ BlockFi Inc.\12\ and Voyager Digital
Holdings, Inc.\13\ have become unsecured creditors in the insolvencies
of those entities. If a Spot ETH ETP was available, it is likely that
at least a portion of the billions of dollars tied up in those
proceedings would still reside in the brokerage accounts of U.S.
investors, having instead been invested in a transparent, regulated,
and well-understood structure--a Spot ETH ETP. To this point, approval
of a Spot ETH ETP would represent a major win for the protection of
U.S. investors in the cryptoasset space. The Trust, like all other
series of Commodity-Based Trust Shares, is designed to protect
investors against the risk of losses through fraud and insolvency that
arise by holding digital assets, including ETH, on centralized
platforms.
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\10\ See FTX Trading Ltd., et al., Case No. 22-11068.
\11\ See Celsius Network LLC, et al., Case No. 22-10964.
\12\ See BlockFi Inc., Case No. 22-19361.
\13\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
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Applicable Standard
The Commission has historically approved or disapproved exchange
filings to list and trade series of Trust Issued Receipts, including
spot based Commodity-Based Trust Shares, on the basis of whether the
listing exchange has in place a comprehensive surveillance sharing
agreement with a regulated market of significant size related to the
underlying commodity to be held.\14\ Prior orders from the Commission
have pointed out that in every prior approval order for Commodity-Based
Trust Shares, there has been a derivatives market that represents the
regulated market of significant size, generally a Commodity Futures
Trading Commission regulated futures market.\15\ Further to this point,
[[Page 85949]]
the Commission's prior orders have noted that the spot commodities and
currency markets for which it has previously approved spot exchange
traded products (``ETPs'') are generally unregulated and that the
Commission relied on the underlying futures market as the regulated
market of significant size that formed the basis for approving the
series of Currency and Commodity-Based Trust Shares, including gold,
silver, platinum, palladium, copper, and other commodities and
currencies. The Commission specifically noted in the Winklevoss Order
that the First Gold Approval Order ``was based on an assumption that
the currency market and the spot gold market were largely
unregulated.'' \16\
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\14\ See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently
disapproved by the Commission. See Securities Exchange Act Release
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the
``Winklevoss Order''). Prior orders from the Commission have pointed
out that in every prior approval order for Commodity-Based Trust
Shares, there has been a derivatives market that represents the
regulated market of significant size, generally a Commodity Futures
Trading Commission (the ``CFTC'') regulated futures market. Further
to this point, the Commission's prior orders have noted that the
spot commodities and currency markets for which it has previously
approved spot ETPs are generally unregulated and that the Commission
relied on the underlying futures market as the regulated market of
significant size that formed the basis for approving the series of
Currency and Commodity-Based Trust Shares, including gold, silver,
platinum, palladium, copper, and other commodities and currencies.
The Commission specifically noted in the Winklevoss Order that the
approval order issued related to the first spot gold ETP ``was based
on an assumption that the currency market and the spot gold market
were largely unregulated.'' See Winklevoss Order at 37592. As such,
the regulated market of significant size test does not require that
the spot ether market be regulated in order for the Commission to
approve this proposal, and precedent makes clear that an underlying
market for a spot commodity or currency being a regulated market
would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to
surveillance sharing agreements with the underlying futures market
in order to determine whether such products were consistent with the
Act.
\15\ See streetTRACKS Gold Shares, Exchange Act Release No.
50603 (Oct. 28, 2004), 69 FR 64614, 64618-19 (Nov. 5, 2004) (SR-
NYSE-2004-22) (the ``First Gold Approval Order''); iShares COMEX
Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR
3749, 3751, 3754-55 (Jan. 26, 2005) (SR-Amex-2004-38); iShares
Silver Trust, Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR
14967, 14968, 14973-74 (Mar. 24, 2006) (SR-Amex-2005-072); ETFS Gold
Trust, Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993,
22994-95, 22998, 23000 (May 15, 2009) (SR-NYSEArca-2009-40); ETFS
Silver Trust, Exchange Act Release No. 59781 (Apr. 17, 2009), 74 FR
18771, 18772, 18775-77 (Apr. 24, 2009) (SR-NYSEArca-2009-28); ETFS
Palladium Trust, Exchange Act Release No. 61220 (Dec. 22, 2009), 74
FR 68895, 68896 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (notice of
proposed rule change included NYSE Arca's representation that
``[t]he most significant palladium futures exchanges are the NYMEX
and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest
exchange in the world for trading precious metals futures and
options,'' and that NYSE Arca ``may obtain trading information via
the Intermarket Surveillance Group,'' of which NYMEX is a member,
Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-
86, 59291 (Nov. 17, 2009)); ETFS Platinum Trust, Exchange Act
Release No. 61219 (Dec. 22, 2009), 74 FR 68886, 68887-88 (Dec. 29,
2009) (SR-NYSEArca-2009-95) (notice of proposed rule change included
NYSE Arca's representation that ``[t]he most significant platinum
futures exchanges are the NYMEX and the Tokyo Commodity Exchange,''
that ``NYMEX is the largest exchange in the world for trading
precious metals futures and options,'' and that NYSE Arca ``may
obtain trading information via the Intermarket Surveillance Group,''
of which NYMEX is a member, Exchange Act Release No. 60970 (Nov. 9,
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009)); Sprott Physical
Gold Trust, Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR
6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-2009-113) (notice of
proposed rule change included NYSE Arca's representation that the
COMEX is one of the ``major world gold markets,'' that NYSE Arca
``may obtain trading information via the Intermarket Surveillance
Group,'' and that NYMEX, of which COMEX is a division, is a member
of the Intermarket Surveillance Group, Exchange Act Release No.
61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 2010)); Sprott
Physical Silver Trust, Exchange Act Release No. 63043 (Oct. 5,
2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) (SR-
NYSEArca-2010-84); ETFS Precious Metals Basket Trust, Exchange Act
Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790 (Aug. 17,
2010) (SR-NYSEArca-2010-56) (notice of proposed rule change included
NYSE Arca's representation that ``the most significant gold, silver,
platinum and palladium futures exchanges are the COMEX and the
TOCOM'' and that NYSE Arca ``may obtain trading information via the
Intermarket Surveillance Group,'' of which COMEX is a member,
Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295,
39298 (July 8, 2010)); ETFS White Metals Basket Trust, Exchange Act
Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 56158 (Sept. 15,
2010) (SR-NYSEArca-2010-71) (notice of proposed rule change included
NYSE Arca's representation that ``the most significant silver,
platinum and palladium futures exchanges are the COMEX and the
TOCOM'' and that NYSE Arca ``may obtain trading information via the
Intermarket Surveillance Group,'' of which COMEX is a member,
Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657,
47660 (Aug. 6, 2010)); ETFS Asian Gold Trust, Exchange Act Release
No. 63464 (Dec. 8, 2010), 75 FR 77926, 77928 (Dec. 14, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change included NYSE
Arca's representation that ``the most significant gold futures
exchanges are the COMEX and the Tokyo Commodity Exchange,'' that
``COMEX is the largest exchange in the world for trading precious
metals futures and options,'' and that NYSE Arca ``may obtain
trading information via the Intermarket Surveillance Group,'' of
which COMEX is a member, Exchange Act Release No. 63267 (Nov. 8,
2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010)); Sprott
Physical Platinum and Palladium Trust, Exchange Act Release No.
68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec. 19, 2012) (SR-
NYSEArca-2012–111) (notice of proposed rule change included
NYSE Arca's representation that ``[f]utures on platinum and
palladium are traded on two major exchanges: The New York Mercantile
Exchange . . . and Tokyo Commodities Exchange'' and that NYSE Arca
``may obtain trading information via the Intermarket Surveillance
Group,'' of which COMEX is a member, Exchange Act Release No. 68101
(Oct. 24, 2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX
Physical--1 oz. Gold Redeemable Trust, Exchange Act Release No.
66930 (May 7, 2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca-
2012-18) (notice of proposed rule change included NYSE Arca's
representation that NYSE Arca ``may obtain trading information via
the Intermarket Surveillance Group,'' of which COMEX is a member,
and that gold futures are traded on COMEX and the Tokyo Commodity
Exchange, with a cross-reference to the proposed rule change to list
and trade shares of the ETFS Gold Trust, in which NYSE Arca
represented that COMEX is one of the ``major world gold markets,''
Exchange Act Release No. 66627 (Mar. 20, 2012), 77 FR 17539, 17542-
43, 17547 (Mar. 26, 2012)); JPM XF Physical Copper Trust, Exchange
Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468, 75469-70, 75472,
75485-86 (Dec. 20, 2012) (SR-NYSEArca-2012-28); iShares Copper
Trust, Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726,
13727, 13729-30, 13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66);
First Trust Gold Trust, Exchange Act Release No. 70195 (Aug. 14,
2013), 78 FR 51239, 51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61)
(notice of proposed rule change included NYSE Arca's representation
that FINRA, on behalf of the exchange, may obtain trading
information regarding gold futures and options on gold futures from
members of the Intermarket Surveillance Group, including COMEX, or
from markets ``with which [NYSE Arca] has in place a comprehensive
surveillance sharing agreement,'' and that gold futures are traded
on COMEX and the Tokyo Commodity Exchange, with a cross-reference to
the proposed rule change to list and trade shares of the ETFS Gold
Trust, in which NYSE Arca represented that COMEX is one of the
``major world gold markets,'' Exchange Act Release No. 69847 (June
25, 2013), 78 FR 39399, 39400, 39405 (July 1, 2013)); Merk Gold
Trust, Exchange Act Release No. 71378 (Jan. 23, 2014), 79 FR 4786,
4786-87 (Jan. 29, 2014) (SR-NYSEArca-2013-137) (notice of proposed
rule change included NYSE Arca's representation that ``COMEX is the
largest gold futures and options exchange'' and that NYSE Arca ``may
obtain trading information via the Intermarket Surveillance Group,''
including with respect to transactions occurring on COMEX pursuant
to CME and NYMEX's membership, or from exchanges ``with which [NYSE
Arca] has in place a comprehensive surveillance sharing agreement,''
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369,
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15,
2016) (SR-NYSEArca-2016-84).
\16\ See Winklevoss Order at 37592.
---------------------------------------------------------------------------
As such, the regulated market of significant size test does not
require that the spot ether market be regulated in order for the
Commission to approve this proposal, and precedent makes clear that an
underlying market for a spot commodity or currency being a regulated
market would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to surveillance
sharing agreements with the underlying futures market in order to
determine whether such products were consistent with the Act. With this
in mind, the Bitcoin Futures market, as defined below, is the proper
market to consider in determining whether there is a related regulated
market of significant size.
Further to this point, the Exchange notes that the Commission has
approved proposals related to the listing and trading of funds that
would primarily hold Bitcoin Futures that are registered under the
Securities Act of 1933 (``1933 Act'') instead of the 1940 Act.\17\ In
the Teucrium Approval, the Commission found the Bitcoin Futures market
to be a regulated market of significant size as it relates to Bitcoin
Futures, which was inconsistent with prior disapproval orders for ETPs
that would hold actual bitcoin instead of derivatives contracts (``Spot
Bitcoin ETPs'') that use the same pricing methodology as the Bitcoin
Futures. However, and as discussed below, in recent weeks the SEC has
approved a number of ETH-based exchange-traded funds (``ETFs'') for
trading.
---------------------------------------------------------------------------
\17\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5,
2022) (collectively, with the Teucrium Approval, the ``Bitcoin
Futures Approvals'').
---------------------------------------------------------------------------
Meanwhile, the Commission has continued to disapprove proposals to
list and trade Spot Bitcoin ETPs that would hold spot bitcoin on the
seemingly conflicting basis that the CME Bitcoin Futures market is not
a regulated market of significant size.\18\ In the recently decided
Grayscale Investments, LLC v. Securities and Exchange Commission,\19\
however, the court resolved this conflict by finding that the SEC had
failed to provide a coherent explanation as to why it had approved the
Bitcoin Futures ETPs while disapproving the proposal to list and trade
shares of the Grayscale Bitcoin Trust and vacating the disapproval
order.\20\
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\18\ The proposed spot bitcoin funds are nearly identical to the
Trust but proposed to hold bitcoin instead of ETH.
\19\ Grayscale Investments, LLC v. Securities and Exchange
Commission, et al., Case No. 22-1142 (the ``Grayscale Order'').
\20\ Id.
---------------------------------------------------------------------------
As mentioned above, on October 2, 2023 the SEC approved nine ETH-
based ETFs for trading.\21\ The ETFs hold ETH futures contracts that
trade on the CME and settle using the CME CF Ethereum Reference Rate
(``ERR''), which is priced based on the spot ETH markets Coinbase,
Kraken, LMAX, Bitstamp, Gemini, and itBit, essentially the same spot
markets that are included in the Index that the Trust uses to value its
ETH holdings. Given that the Commission has approved ETFs that offer
exposure to ETH futures, which themselves are priced based on the
underlying spot ETH market, the Sponsor believes that the Commission
must also approve ETPs that offer exposure to spot ETH, like the Trust.
---------------------------------------------------------------------------
\21\ These ETFs included the Bitwise Ethereum Strategy ETF,
Bitwise Bitcoin & Ether Equal Weight Strategy ETF, Hashdex Ether
Strategy ETF, ProShares Ether Strategy ETF, ProShares Bitcoin &
Ether Strategy ETF, ProShares Bitcoin & Ether Equal Weight Strategy
ETF, Valkyrie Bitcoin & Ethereum Strategy ETF, VanEck Ethereum
Strategy ETF, and Volatility Shares Ethereum Strategy ETF
(collectively, the ``ETH Futures Approvals'').
---------------------------------------------------------------------------
In the context of other digital asset-based ETF and ETP proposals
for Bitcoin, the SEC has sought to justify treating futures-based ETFs
differently from spot-based ETFs because of (i) distinctions between
the regulations under which the two products would be registered (under
the 1940 Act for digital-asset futures ETFs and 1933 Act for spot
digital-asset ETPs), and (ii) the existence of regulation and
surveillance-sharing over the CME digital-asset futures market through
the Intermarket Surveillance Group (``ISG''), as compared to the spot
market for those digital assets.\22\
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\22\ See, e.g., Chair Gary Gensler Public Statement, ``Remarks
Before the Aspen Security Forum,'' (August 3, 2021), stating that
the Chair looked forward to the Commission's review of Bitcoin-based
ETF proposals registered under the 1940 Act, ``particularly if those
are limited to [the] CME-traded Bitcoin futures,'' noting the
``significant investor protection'' offered by the 1940 Act, <a href="https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03">https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03</a>; Securities Exchange Act Release No. 93559 (November 12,
2021), 86 FR 64539 (November 18, 2021) (SR-CboeBZX-2021-019) (Order
Disapproving a Proposed Rule Change to List and Trade Shares of the
VanEck Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares) (``VanEck Order'') (denying the first spot bitcoin ETP
registered under the 1933 Act following the first approval of a
bitcoin futures ETF registered under the 1940 Act, noting the
differences in the standard of review that applies to such
products); Securities Exchange Act Release No. 94620 (April 6,
2022), 87 FR 21676 (April 12, 2022) (SR-NYSEArca-2021-53) (Order
Granting Approval of a Proposed Rule Change, as Modified by
Amendment No. 2, to List and Trade Shares of the Teucrium Bitcoin
Futures Fund under NYSE ARCA Rule 8.200-E, Commentary .02 (Trust
Issued Receipts)) (``Teucrium Order'') (approving the first bitcoin
futures ETP registered under the 1933 Act, stating that ``With
respect to the proposed ETP, the underlying bitcoin assets are CME
bitcoin futures contracts. The relevant analysis, therefore, is
whether Arca has a comprehensive surveillance sharing agreement with
a regulated market of significant size related to CME bitcoin
futures contracts. As discussed below, taking into consideration the
direct relationship between the regulated market with which Arca has
a surveillance-sharing agreement and the assets held by the proposed
ETP, as well as developments with respect to the CME bitcoin futures
market--including the launch of exchange-traded funds registered
under the Investment Company Act of 1940 (``1940 Act'') that hold
CME bitcoin futures (``Bitcoin Futures ETFs'')--the Commission
concludes that the Exchange has the requisite surveillance-sharing
agreement.'').
---------------------------------------------------------------------------
While the 1940 Act has certain added investor protections that the
1933 Act does not require, these protections do not seek to allay harms
arising from underlying assets or markets of assets that ETFs hold,
such as the potential for fraud or manipulation in such markets. In
other words, the Sponsor does not believe that the application of the
1940 Act supports the purported justifications the Commission has made
in denying other spot digital asset ETPs. Instead, the 1940 Act seeks
to remedy certain abusive practices in the management of investment
companies such as ETFs, and thus places certain restrictions on ETFs
and ETF sponsors. The 1940 Act explicitly lists out the types of abuses
it seeks to prevent, and places certain restrictions related to
[[Page 85950]]
accounting, borrowing, custody, fees, and independent boards, among
others. Notably, none of these restrictions address an ETF's underlying
assets, whether ETH futures or spot ETH, or the markets from which such
assets' pricing is derived, whether the CME ETH futures market or spot
ETH markets. As a result, the Sponsor believes that the distinction
between registration of ETH futures ETFs under the 1940 Act and the
registration of spot ETH ETPs under the 1933 Act is one without a
difference in the context of ETH-based ETP proposals.
As to (i) above, the Sponsor believes that because the CME ETH
futures market is priced based on the underlying spot ETH market, any
fraud or manipulation in the spot market would necessarily affect the
price of ETH futures, thereby affecting the net asset value of an ETP
holding spot ETH or an ETF holding ETH futures, as well as the price
investors pay for such product's shares. Accordingly, either CME
surveillance can detect spot-market fraud that affects both futures
ETFs and spot ETPs, or that surveillance cannot do so for either type
of product. Having approved ETH futures ETFs in part on the basis of
such surveillance, the Commission has clearly determined that CME
surveillance can detect spot-market fraud that would affect spot ETPs,
and the Sponsor thus believes that it must also approve spot ETH ETPs
on that basis.
In summary, both the Exchange and the Sponsor believe that this
proposal and the included analysis are sufficient to establish that the
CME ETH Futures market represents a regulated market of significant
size as it relates both to the CME ETH Futures market and to the spot
ETH market and that this proposal should be approved.
Additionally, the Sponsor believes that the distinctions between
the 1940 Act and the 1933 Act, and the surveillance-sharing available
for the CME ETH futures market versus the spot ETH market, are not
meaningful in the context of ETH-based ETF and ETP proposals, and that
such reasoning cannot be a basis for the Commission treating ETH
futures ETFs differently from spot ETH ETPs like the Trust. The Sponsor
believes that the Commission's approval of ETH futures ETFs means it
must also approve spot ETH ETPs like the Trust.
CME ETH Futures
CME began offering trading in Ether Futures in February 2021. Each
contract represents 50 ETH and is based on the CME CF Ether-Dollar
Reference Rate.\23\ The contracts trade and settle like other cash-
settled commodity futures contracts. Most measurable metrics related to
CME ETH Futures have generally trended up since launch, although some
metrics have slowed recently. For example, there were 78,571 CME ETH
Futures contracts traded in September 2023 (approximately $6.3 billion)
compared to 163,114 ($11.9 billion) and 130,546 ($21.2 billion)
contracts traded in September 2022, and September 2022
respectively.\24\ The daily correlation between the spot ETH and the
CME ETH Futures is 0.9993 from the period of 10/13/22 through 10/13/
23.\25\ The number of large open interest holders \26\ and unique
accounts trading CME ETH Futures have both increased, even in the face
of heightened Ether price volatility.
---------------------------------------------------------------------------
\23\ The CME CF Ether-Dollar Reference Rate is based on a
publicly available calculation methodology based on pricing sourced
from several crypto exchanges and trading platforms, including
Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
\24\ Source: Bloomberg, BlackRock calculations. Data as of 10/
18/2023 for period shown (2/8/2021 to 9/30/2023).
\25\ Source: S&P Ethereum Index, S&P CME Ether Futures Index
(Spot).
\26\ A large open interest holder in CME ETH Futures is an
entity that holds at least 25 contracts, which is the equivalent of
1250 ether. At a price of approximately $1,867 per ether on 7/31/
2023, more than 59 firms had outstanding positions of greater than
$2.3 million in CME ETH Futures.
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BILLING CODE 8011-01-P
[[Page 85951]]
[GRAPHIC] [TIFF OMITTED] TN11DE23.000
[GRAPHIC] [TIFF OMITTED] TN11DE23.001
BILLING CODE 8011-01-C
Preventing Fraudulent and Manipulative Practices
---------------------------------------------------------------------------
\27\ The Exchange believes that ETH is resistant to price
manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of ETH trading render it difficult and
prohibitively costly to manipulate the price of ETH. The
fragmentation across ETH platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of ETH prices
through continuous trading activity challenging. To the extent that
there are ETH exchanges engaged in or allowing wash trading or other
activity intended to manipulate the price of ETH on other markets,
such pricing does not normally impact prices on other exchange
because participants will generally ignore markets with quotes that
they deem non-executable. Moreover, the linkage between the ETH
markets and the presence of arbitrageurs in those markets means that
the manipulation of the price of ETH price on any single venue would
require manipulation of the global ETH price in order to be
effective. Arbitrageurs must have funds distributed across multiple
trading platforms in order to take advantage of temporary price
dislocations, thereby making it unlikely that there will be strong
concentration of funds on any particular ETH exchange or OTC
platform. As a result, the potential for manipulation on a trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market
pricing differences.
---------------------------------------------------------------------------
In order for any proposed rule change from an exchange to be
approved, the Commission must determine that, among other things, the
proposal is consistent with the requirements of section 6(b)(5) of the
Act, specifically including: (i) the requirement that a national
securities exchange's rules are designed to prevent fraudulent and
manipulative acts and practices; \27\ and (ii) the requirement that an
exchange proposal be designed, in general, to protect investors and the
public interest.
[[Page 85952]]
The Exchange believes that this proposal is consistent with the
requirements of section 6(b)(5) of the Act and that this filing
sufficiently demonstrates that the CME ETH Futures market represents a
regulated market of significant size and that, on the whole, the
manipulation concerns previously articulated by the Commission are
sufficiently mitigated to the point that they are outweighed by
quantifiable investor protection issues that would be resolved by
approving this proposal.
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance sharing
agreement in place \28\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\29\ The only remaining
issue to be addressed is whether the ETH Futures market constitutes a
market of significant size, which both the Exchange and the Sponsor
believe that it does. The terms ``significant market'' and ``market of
significant size'' include a market (or group of markets) as to which:
(a) there is a reasonable likelihood that a person attempting to
manipulate the ETP would also have to trade on that market to
manipulate the ETP, so that a surveillance sharing agreement would
assist the listing exchange in detecting and deterring misconduct; and
(b) it is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\30\
---------------------------------------------------------------------------
\28\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance-sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in the ISG
constitutes such a surveillance sharing agreement. See Securities
Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595
(March 3, 2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix
Disapproval'').
\29\ For a list of the current members and affiliate members of
ISG, see <a href="https://www.isgportal.com/">https://www.isgportal.com/</a>.
\30\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------
The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance sharing agreement.\31\
---------------------------------------------------------------------------
\31\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
---------------------------------------------------------------------------
(A) Reasonable Likelihood That a Person Attempting To Manipulate the
ETP Would Also Have To Trade on That Market To Manipulate the ETP
In light of the similarly high correlation between spot ETH/CME ETH
Futures and spot bitcoin/CME Bitcoin Futures (.998 vs. .999,
respectively),\32\ applying the same rationale that the Commission
applied to a Bitcoin Futures ETF in the Bitcoin Futures Approvals and
the ETH Futures ETFs in the ETH Futures Approvals also indicates that
this test is satisfied for this proposal. In the Teucrium Approval, the
SEC stated:
---------------------------------------------------------------------------
\32\ Source: S&P Ethereum Index, S&P CME Ether Futures Index
(Spot), S&P Bitcoin Index, and S&P CME Bitcoin Futures Index (Spot).
---------------------------------------------------------------------------
The CME ``comprehensively surveils futures market conditions and
price movements on a real time and ongoing basis in order to detect and
prevent price distortions, including price distortions caused by
manipulative efforts.'' Thus, the CME's surveillance can reasonably be
relied upon to capture the effects on the CME futures market caused by
a person attempting to manipulate the proposed futures ETP by
manipulating the price of CME futures contracts, whether that attempt
is made by directly trading on the CME futures market or indirectly by
trading outside of the CME futures market. As such, when the CME shares
its surveillance information with Arca, the information would assist in
detecting and deterring fraudulent or manipulative misconduct related
to the non cash assets held by the proposed ETP.\33\
---------------------------------------------------------------------------
\33\ See Teucrium Approval at 21679.
---------------------------------------------------------------------------
The assumptions from this statement are also true for CME ETH
Futures, a number of which have recently been approved by the
Commission.\34\ CME ETH Futures pricing is based on pricing from spot
ETH markets. The statement from the Teucrium Approval that ``CME's
surveillance can reasonably be relied upon to capture the effects on
the CME BTC futures market caused by a person attempting to manipulate
the proposed futures ETP by manipulating the price of CME BTC futures
contracts . . . indirectly by trading outside of the CME BTC futures
market,'' makes clear that the Commission believes that CME's
surveillance can capture the effects of trading on the relevant spot
markets on the pricing of CME BTC Futures. This same logic would extend
to CME ETH Futures markets where CME's surveillance would be able to
capture the effects of trading on the relevant spot markets on the
pricing of CME ETH Futures. This was further acknowledged in the
Grayscale lawsuit when Judge Rao stated ``. . . the Commission in the
Teucrium order recognizes that the futures prices are influenced by the
spot prices, and the Commission concludes in approving futures ETPs
that any fraud on the spot market can be adequately addressed by the
fact that the futures market is a regulated one . . .'' The Exchange
agrees with the Commission on this point and notes that the pricing
mechanism applicable to the Shares is similar to that of the CME ETH
Futures.
---------------------------------------------------------------------------
\34\ See supra footnote 21.
---------------------------------------------------------------------------
As such, the part (a) of the significant market test outlined above
is satisfied and that common membership in ISG between the Exchange and
CME would assist the listing exchange in detecting and deterring
misconduct in the Shares in the same way that it would be for the
Bitcoin Futures ETPs, the ETH Futures ETPs and Spot Bitcoin ETPs.
(B) Predominant Influence on Prices in Spot and ETH Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the CME ETH Futures
market or spot market for a number of reasons. First, because the Trust
would not hold CME ETH Futures contracts, the only way that it could be
the predominant force on prices in that market is through the spot
markets that CME ETH Futures contracts use for pricing.\35\ The Sponsor
notes that ETH total 24-hour spot
[[Page 85953]]
trading volume has averaged $9.1B over the year ending October 16,
2023,\36\ with approximately $1.7B occurring on venues whose trades are
included in the sponsor's benchmark.\37\ The Sponsor expects that the
Trust would represent a very small percentage of this daily trading
volume in the spot ETH market even in its most aggressive projections
for the Trust's assets and, thus, the Trust would not have an impact on
the spot market and therefore could not be the predominant force on
prices in the CME ETH Futures market. Second, much like the CME Bitcoin
Futures market, the CME ETH Futures market has progressed and matured
significantly. As the court found in the Grayscale Order ``Because the
spot market is deeper and more liquid than the futures market,
manipulation should be more difficult, not less.'' The Exchange and
sponsor agree with this sentiment and believe it applies equally to the
spot ETH and CME ETH Futures markets.
---------------------------------------------------------------------------
\35\ This logic is reflected by the court in the Grayscale Order
at 17-18. Specifically, the court found that ``Because Grayscale
owns no futures contracts, trading in Grayscale can affect the
futures market only through the spot market . . . But Grayscale
holds just 3.4 percent of outstanding bitcoin, and the Commission
did not suggest Grayscale can dominate the price of bitcoin.''
\36\ Source: CoinGecko.
\37\ Source: CoinGecko, The Block, and BlackRock calculations.
---------------------------------------------------------------------------
(C) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
SSA With Ether Spot Market
The Exchange is also proposing to take additional steps to those
described above to supplement its ability to obtain information that
would be helpful in detecting, investigating, and deterring fraud and
market manipulation in the Commodity-Based Trust Shares.
On June 8, 2023, the Exchange reached an agreement on terms with
Coinbase, Inc. (``Coinbase'') to enter into a Surveillance-Sharing
Agreement, and the associated term sheet became effective as of June
16, 2023. Based on this agreement on terms, the Exchange and Coinbase
will finalize and execute a definitive agreement that the parties
expect to be executed prior to allowing trading of the Commodity-Based
Trust Shares. Trading of ETH on Coinbase represents a significant
portion of US-based ETH trading. The Sponsor has stated to the Exchange
that, based on publicly available data reported by spot ether platforms
active in the U.S. market, trading on Coinbase has represented
approximately 66% of US-dollar to ether trading on such U.S.-based
platforms out of total YTD volume across these platforms of
approximately U.S. $93 billion, as of October 16, 2023.\38\
---------------------------------------------------------------------------
\38\ This analysis is based on the following spot ether
platforms: Coinbase, Binance US, Kraken, Bitstamp, Gemini, and
itBit.
---------------------------------------------------------------------------
The Surveillance Sharing Agreement is expected to be a bilateral
surveillance-sharing agreement between Nasdaq and Coinbase that is
intended to supplement the Exchange's market surveillance program. The
Surveillance Sharing Agreement is expected to have the hallmarks of a
surveillance-sharing agreement between two members of the ISG, which
would give the Exchange supplemental access to data regarding spot
ether trades on Coinbase where the Exchange determines it is necessary
as part of its surveillance program for the Commodity-Based Trust
Shares. This means that the Exchange expects to receive market data for
orders and trades from Coinbase, which it will utilize in surveillance
of the trading of Commodity-Based Trust Shares. In addition, the
Exchange can request further information from Coinbase related to spot
ether trading activity on the Coinbase exchange platform, if the
Exchange determines that such information would be necessary to detect
and investigate potential manipulation in the trading of the Commodity-
Based Trust Shares.
(ii) Designed To Protect Investors and the Public Interest
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ETH through OTC ETH Funds is greater than $5
billion. With that growth, so too has grown the quantifiable investor
protection issues to U.S. investors through premium/discount volatility
and management fees for OTC ETH Funds. The Exchange believes that, as
described above, the concerns related to the prevention of fraudulent
and manipulative acts and practices have been sufficiently addressed to
be consistent with the Act and, to the extent that the Commission
disagrees with that assertion, such concerns are now at the very least
outweighed by investor protection concerns. As such, the Exchange
believes that approving this proposal (and comparable proposals)
provides the Commission with the opportunity to allow U.S. investors
with access to ETH in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii) reducing management fees through
meaningful competition; (iii) reducing risks and costs associated with
investing in ETH Futures ETFs and operating companies that are
imperfect proxies for ETH exposure; and (iv) providing an alternative
to custodying spot ETH.
Spot and Proxy Exposure to Ether
Exposure to ether through an ETP also presents certain advantages
for retail investors compared to buying spot ether directly. The most
notable advantage from the Sponsor's perspective is the elimination of
the need for an individual retail investor to either manage their own
private keys or to hold ether through a cryptocurrency exchange that
lacks sufficient protections. Typically, retail exchanges hold most, if
not all, retail investors' ether in ``hot'' (internet connected)
storage and do not make any commitments to indemnify retail investors
or to observe any particular cybersecurity standard. Meanwhile, a
retail investor holding spot ether directly in a self-hosted wallet may
suffer from inexperience in private key management (e.g., insufficient
password protection, lost key, etc.), which point of failure could
cause them to lose some or all of their ether holdings. Thus, with
respect to custody of the Trust's ether assets, the Trust presents
advantages from an investment protection standpoint for retail
investors compared to owning spot ether directly or via a digital asset
exchange.
Availability of Information
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) the prior business
day's NAV; (b) the prior business day's Official Closing Price; (c)
calculation of the premium or discount of such Official Closing Price
against such NAV; (d) data in chart form displaying the frequency
distribution of discounts and premiums of the Official Closing Price
against the NAV, within appropriate ranges for each of the four
previous calendar quarters (or for the life of the Trust, if shorter);
(e) the prospectus; and (f) other applicable quantitative information.
The Trust Administrator will also disseminate the Trust's holdings on a
daily basis on the Trust's website. The price of ether will be made
available by one or more major market data vendors, updated at least
every 15 seconds during the Regular Market Session. Information about
the CF Benchmarks Index, including key elements of how the CF
Benchmarks Index is calculated, will be publicly available at https://
[[Page 85954]]
www.cfbenchmarks.com/. Also, an estimated value that reflects an
estimated intraday value of the Trust's portfolio (the ``Intraday
Indicative Value'' or ``IIV''), will be disseminated.
One or more major market data vendors will provide an IIV per Share
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Market
Session (9:30 a.m. to 4:00 p.m. (ET)). The IIV will be calculated by
using the prior day's closing NAV per Share as a base and updating that
value during the Exchange's Regular Market Session to reflect changes
in the value of the Trust's NAV during the trading day.
The IIV disseminated during the Exchange's Regular Market Session
should not be viewed as an actual real time update of the NAV, which
will be calculated only once at the end of each trading day. The IIV
will be widely disseminated on a per Share basis every 15 seconds
during the Exchange's Regular Market Session by one or more major
market data vendors. In addition, the IIV will be available through
online information services.
The NAV for the Trust will be calculated by the Trust Administrator
once a day and will be disseminated daily to all market participants at
the same time. Quotation and last sale information regarding the Shares
will be disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
Initial and Continued Listing
The Shares will be subject to Nasdaq Rule 5711(d)(vi), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange will obtain a representation
that the Trust's NAV will be calculated daily and will be made
available to all market participants at the same time. Upon termination
of the Trust, the Shares will be removed from listing. The Delaware
Trustee, will be a trust company having substantial capital and surplus
and the experience and facilities for handling corporate trust
business, as required under Nasdaq Rule 5711(d)(vi)(D) and no change
will be made to the Delaware Trustee without prior notice to and
approval of the Exchange.
As required in Nasdaq Rule 5711(d)(vii), the Exchange notes that
any registered market maker (``Market Maker'') in the Shares must file
with the Exchange, in a manner prescribed by the Exchange, and keep
current a list identifying all accounts for trading the underlying
commodity, related futures or options on futures, or any other related
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker in
the Shares shall trade in the underlying commodity, related futures or
options on futures, or any other related derivatives, in an account in
which a registered Market Maker, directly or indirectly, controls
trading activities, or has a direct interest in the profits or losses
thereof, which has not been reported to the Exchange as required by
Nasdaq Rule 5711(d). In addition to the existing obligations under
Exchange rules regarding the production of books and records, the
registered Market Maker in the Shares shall make available to the
Exchange such books, records or other information pertaining to
transactions by such entity or any limited partner, officer or approved
person thereof, registered or non-registered employee affiliated with
such entity for its or their own accounts in the underlying commodity,
related futures or options on futures, or any other related
derivatives, as may be requested by the Exchange.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. The Exchange will
allow trading in the Shares from 4:00 a.m. to 8:00 p.m. (ET). The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. The Shares of the Trust will conform to
the initial and continued listing criteria set forth in Nasdaq Rule
5711(d).
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in Nasdaq Rules 4120 and 4121, including
without limitation the conditions specified in Nasdaq Rule 4120(a)(9)
and the trading pauses under Nasdaq Rules 4120(a)(11) and (12).
Trading may be halted because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable. These may include: (1) the extent to which trading is not
occurring in the ether underlying the Shares; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance of a
fair and orderly market are present.
If the IIV or the value of the underlying futures contract is not
being disseminated as required, the Exchange may halt trading during
the day in which the interruption to the dissemination of the IIV or
the value of the underlying futures contract occurs. If the
interruption to the dissemination of the IIV or the value of the
underlying ether persists past the trading day in which it occurred,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption.
In addition, if the Exchange becomes aware that the NAV with
respect to the Shares is not disseminated to all market participants at
the same time, it will halt trading in the Shares until such time as
the NAV is available to all market participants.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. Trading of Shares on
the Exchange will be subject to the Exchange's surveillance procedures
for derivative products. The Exchange will require the Trust to
represent to the Exchange that it will advise the Exchange of any
failure by the Trust to comply with the continued listing requirements,
and, pursuant to its obligations under section 19(g)(1) of the Exchange
Act, the Exchange will surveil for compliance with the continued
listing requirements. If the Trust is not in compliance with the
applicable listing requirements, the Exchange will commence delisting
procedures under the Nasdaq 5800 Series. In addition, the Exchange also
has a general policy prohibiting the distribution of material, non-
public information by its employees.
Additionally, on June 8, 2023, the Exchange reached an agreement on
terms with Coinbase to enter into a Surveillance Sharing Agreement, and
the associated term sheet became effective as of June 16, 2023. Based
on this agreement on terms, the Exchange and Coinbase will finalize and
execute a definitive agreement that the parties expect to be executed
prior to allowing trading of the Commodity-Based Trust Shares. Trading
of ether on Coinbase represents a significant portion of US-based ether
trading. The Sponsor has stated to the Exchange that, based on publicly
available data reported by spot ether platforms active in the U.S.
market, trading on Coinbase has represented approximately 66% of US-
dollar to ETH trading on such U.S.-based platforms out of total YTD
volume
[[Page 85955]]
across these platforms of approximately U.S. $93 billion, as of October
16, 2023.\39\
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\39\ This analysis is based on the following spot ether
platforms: Coinbase, Binance US, Kraken, Bitstamp, Gemini, and
itBit.
---------------------------------------------------------------------------
The Surveillance Sharing Agreement is expected to be a bilateral
surveillance-sharing agreement between Nasdaq and Coinbase that is
intended to supplement the Exchange's market surveillance program. The
Surveillance Sharing Agreement is expected to have the hallmarks of a
surveillance-sharing agreement between two members of the ISG, which
would give the Exchange supplemental access to data regarding spot
ether trades on Coinbase where the Exchange determines it is necessary
as part of its surveillance program for the Commodity-Based Trust
Shares. This means that the Exchange expects to receive market data for
orders and trades from Coinbase, which it will utilize in surveillance
of the trading of Commodity-Based Trust Shares. In addition, the
Exchange can request further information from Coinbase related to spot
ether trading activity on the Coinbase exchange platform, if the
Exchange determines that such information would be necessary to detect
and investigate potential manipulation in the trading of the Commodity-
Based Trust Shares.
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (1) the procedures for purchases
and redemptions of Shares in Creation Units (and that Shares are not
individually redeemable); (2) Section 10 of Nasdaq General Rule 9,
which imposes suitability obligations on Nasdaq members with respect to
recommending transactions in the Shares to customers; (3) how
information regarding the IIV is disseminated; (4) the risks involved
in trading the Shares during the Pre-Market and Post Market Sessions
when an updated IIV will not be calculated or publicly disseminated;
(5) the requirement that members deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (6) trading information. The
Information Circular will also discuss any exemptive, no action and
interpretive relief granted by the Commission from any rules under the
Act.
Additionally, the Information Circular will reference that the
Trust is subject to various fees and expenses described in the Draft
Registration Statement. The Information Circular will also disclose the
trading hours of the Shares. The Information Circular will disclose
that information about the Shares will be publicly available on the
Trust's website.
2. Statutory Basis
The Exchange believes that the proposal is consistent with section
6(b) of the Act \40\ in general and section 6(b)(5) of the Act \41\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\40\ 15 U.S.C. 78f.
\41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has approved numerous series of Trust Issued
Receipts,\42\ including Commodity-Based Trust Shares,\43\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices; and
(ii) the requirement that an exchange proposal be designed, in general,
to protect investors and the public interest. The Exchange believes
that this proposal is consistent with the requirements of section
6(b)(5) of the Act because this filing sufficiently demonstrates that
the CME ETH Futures market represents a regulated market of significant
size and that, on the whole, the manipulation concerns previously
articulated by the Commission are sufficiently mitigated to the point
that they are outweighed by quantifiable investor protection issues
that would be resolved by approving this proposal.
---------------------------------------------------------------------------
\42\ See Exchange Rule 5720.
\43\ Commodity-Based Trust Shares, as described in Exchange Rule
5711(d), are a type of Trust Issued Receipt.
---------------------------------------------------------------------------
Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order for a proposal to list and trade a series of Commodity-
Based Trust Shares to be deemed consistent with the Act, the Commission
requires that an exchange demonstrate that there is a comprehensive
surveillance-sharing agreement in place with a regulated market of
significant size. Both the Exchange and CME are members of ISG.\44\ As
such, the only remaining issue to be addressed is whether the ETH
Futures market constitutes a market of significant size, which the
Exchange and the Sponsor believes that it does. The terms ``significant
market'' and ``market of significant size'' include a market (or group
of markets) as to which: (a) there is a reasonable likelihood that a
person attempting to manipulate the ETP would also have to trade on
that market to manipulate the ETP, so that a surveillance-sharing
agreement would assist the listing exchange in detecting and deterring
misconduct; and (b) it is unlikely that trading in the ETP would be the
predominant influence on prices in that market.\45\
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\44\ For a list of the current members and affiliate members of
ISG, see <a href="https://www.isgportal.com/">https://www.isgportal.com/</a>.
\45\ See Wilshire Phoenix Disapproval.
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The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\46\
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\46\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a ``cannot be
manipulated'' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.
Id. at 37582.
---------------------------------------------------------------------------
(a) Reasonable Likelihood That a Person Attempting To Manipulate the
ETP Would Also Have To Trade on That Market To Manipulate the ETP
The significant market test requires that there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to manipulate the ETP, so that a
surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct.
In light of the similarly high correlation between spot ETH/CME ETH
Futures and spot bitcoin/CME Bitcoin Futures (.998 vs. .999,
respectively),\47\
[[Page 85956]]
applying the same rationale that the Commission applied to a Bitcoin
Futures ETF in the Bitcoin Futures Approvals also indicates that this
test is satisfied for this proposal. In the Teucrium Approval, the SEC
stated:
---------------------------------------------------------------------------
\47\ Source: S&P Ethereum Index, S&P CME Ether Futures Index
(Spot), S&P Bitcoin Index, and S&P CME Bitcoin Futures Index (Spot).
---------------------------------------------------------------------------
The CME ``comprehensively surveils futures market conditions and
price movements on a real time and ongoing basis in order to detect and
prevent price distortions, including price distortions caused by
manipulative efforts.'' Thus, the CME's surveillance can reasonably be
relied upon to capture the effects on the CME futures market caused by
a person attempting to manipulate the proposed futures ETP by
manipulating the price of CME futures contracts, whether that attempt
is made by directly trading on the CME futures market or indirectly by
trading outside of the CME futures market. As such, when the CME shares
its surveillance information with Arca, the information would assist in
detecting and deterring fraudulent or manipulative misconduct related
to the non cash assets held by the proposed ETP.\48\
---------------------------------------------------------------------------
\48\ See Teucrium Approval at 21679.
---------------------------------------------------------------------------
The assumptions from this statement are also true for CME ETH
Futures. CME ETH Futures pricing is based on pricing from spot ETH
markets. The statement from the Teucrium Approval that ``CME's
surveillance can reasonably be relied upon to capture the effects on
the CME BTC futures market caused by a person attempting to manipulate
the proposed futures ETP by manipulating the price of CME BTC futures
contracts . . . indirectly by trading outside of the CME BTC futures
market,'' makes clear that the Commission believes that CME's
surveillance can capture the effects of trading on the relevant spot
markets on the pricing of CME BTC Futures. This same logic would extend
to CME ETH Futures markets where CME's surveillance would be able to
capture the effects of trading on the relevant spot markets on the
pricing of CME ETH Futures. This was further acknowledged in the
Grayscale lawsuit when Judge Rao stated ``. . . the Commission in the
Teucrium order recognizes that the futures prices are influenced by the
spot prices, and the Commission concludes in approving futures ETPs
that any fraud on the spot market can be adequately addressed by the
fact that the futures market is a regulated one . . .'' The Exchange
agrees with the Commission on this point and notes that the pricing
mechanism applicable to the Shares is similar to that of the CME ETH
Futures. This view is also consistent with the Sponsor's research.
As such, the Exchange believes that part (a) of the significant
market test outlined above is satisfied and that common membership in
ISG between the Exchange and CME would assist the listing exchange in
detecting and deterring misconduct in the Shares in the same way that
it would be for both Bitcoin Futures ETPs and Spot Bitcoin ETPs.
(b) Predominant Influence on Prices in Spot and ETH Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in CME ETH Futures market
or spot market for a number of reasons. First, because the Trust would
not hold CME ETH Futures contracts, the only way that it could be the
predominant force on prices in that market is through the spot markets
that CME ETH Futures contracts use for pricing.\49\ The Sponsor notes
that ETH total 24-hour spot trading volume has averaged $9.1B over the
year ending October 16, 2023,\50\ with approximately $1.7B occurring on
venues whose trades are included in the sponsor's benchmark.\51\ The
Sponsor expects that the Trust would represent a very small percentage
of this daily trading volume in the spot ETH market even in its most
aggressive projections for the Trust's assets and, thus, the Trust
would not have an impact on the spot market and therefore could not be
the predominant force on prices in the CME ETH Futures market. Second,
much like the CME Bitcoin Futures market, the CME ETH Futures market
has progressed and matured significantly. As the court found in the
Grayscale Order ``Because the spot market is deeper and more liquid
than the futures market, manipulation should be more difficult, not
less.'' The Exchange and sponsor agree with this sentiment and believe
it applies equally to the spot ETH and CME ETH Futures markets.
---------------------------------------------------------------------------
\49\ This logic is reflected by the court in the Grayscale Order
at 17-18. Specifically, the court found that ``Because Grayscale
owns no futures contracts, trading in Grayscale can affect the
futures market only through the spot market . . . But Grayscale
holds just 3.4 percent of outstanding bitcoin, and the Commission
did not suggest Grayscale can dominate the price of bitcoin.''
\50\ Source: CoinGecko.
\51\ Source: CoinGecko, The Block, and BlackRock calculations.
---------------------------------------------------------------------------
(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
Surveillance Sharing Agreement With Ether Spot Market
The Exchange is also proposing to take additional steps to those
described above to supplement its ability to obtain information that
would be helpful in detecting, investigating, and deterring fraud and
market manipulation in the Commodity-Based Trust Shares.
On June 8, 2023 the Exchange reached an agreement on terms with
Coinbase, to enter into a Surveillance-Sharing Agreement, and the
associated term sheet became effective as of June 16, 2023. Based on
this agreement on terms, the Exchange and Coinbase will finalize and
execute a definitive agreement that the parties expect to be executed
prior to allowing trading of the Commodity-Based Trust Shares. Trading
of ETH on Coinbase represents a significant portion of US-based ETH
trading. The Sponsor has stated to the Exchange that, based on publicly
available data reported by spot ether platforms active in the U.S.
market, trading on Coinbase has represented approximately 66% of US-
dollar to ether trading on such U.S.-based platforms out of total YTD
volume across these platforms of approximately U.S. $93 billion, as of
October 16, 2023.\52\
---------------------------------------------------------------------------
\52\ This analysis is based on the following spot ether
platforms: Coinbase, Binance US, Kraken, Bitstamp, Gemini, and
itBit.
---------------------------------------------------------------------------
The Surveillance Sharing Agreement is expected to be a bilateral
surveillance-sharing agreement between Nasdaq and Coinbase that is
intended to supplement the Exchange's market surveillance program. The
Surveillance Sharing Agreement is expected to have the hallmarks of a
surveillance-sharing agreement between two members of the ISG, which
would give the Exchange supplemental access to data regarding spot
ether trades on Coinbase where the Exchange determines it is necessary
as part of its surveillance program for the Commodity-Based Trust
Shares. This means that the Exchange expects to receive market data for
orders and trades from Coinbase, which it will utilize in surveillance
of the trading of Commodity-Based Trust Shares. In addition, the
Exchange can request further information from Coinbase related to spot
ether trading activity on the Coinbase exchange platform, if the
Exchange determines that such information would be necessary to detect
and investigate potential manipulation in the trading of the Commodity-
Based Trust Shares.
[[Page 85957]]
Designed To Protect Investors and the Public Interest
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ETH through OTC ETH Funds is greater than $5
billion. With that growth, so too has grown the quantifiable investor
protection issues to U.S. investors through premium/discount volatility
and management fees for OTC ETH Funds. The Exchange believes that, as
described above, the concerns related to the prevention of fraudulent
and manipulative acts and practices have been sufficiently addressed to
be consistent with the Act and, to the extent that the Commission
disagrees with that assertion, such concerns are now at the very least
outweighed by investor protection concerns. As such, the Exchange
believes that approving this proposal (and comparable proposals)
provides the Commission with the opportunity to allow U.S. investors
with access to ETH in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii) reducing management fees through
meaningful competition; (iii) reducing risks and costs associated with
investing in ETH Futures ETFs and operating companies that are
imperfect proxies for ETH exposure; and (iv) providing an alternative
to custodying spot ETH.
Commodity-Based Trust Shares--Nasdaq Rule 5711(d)
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed on the Exchange pursuant to the initial and
continued listing criteria in Nasdaq Rule 5711(d). The Exchange
believes that its surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange during all trading
sessions and to deter and detect violations of Exchange rules and the
applicable federal securities laws. Trading of the Shares through the
Exchange will be subject to the Exchange's surveillance procedures for
derivative products, including Commodity-Based Trust Shares. The issuer
has represented to the Exchange that it will advise the Exchange of any
failure by the Trust or the Shares to comply with the continued listing
requirements, and, pursuant to its obligations under section 19(g)(1)
of the Exchange Act, the Exchange will surveil for compliance with the
continued listing requirements. If the Trust or the Shares are not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under the Nasdaq 5800 Series. The
Exchange may obtain information regarding trading in the Shares and
listed ETH derivatives via the ISG, from other exchanges who are
members or affiliates of the ISG, or with which the Exchange has
entered into a comprehensive surveillance sharing agreement.
Availability of Information
The Exchange also believes that the proposal promotes market
transparency in that a large amount of information is currently
available about ETH and will be available regarding the Trust and the
Shares. In addition to the price transparency of the CF Benchmarks
Index, the Trust will provide information regarding the Trust's ETH
holdings as well as additional data regarding the Trust.
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) the prior business
day's NAV; (b) the prior business day's Official Closing Price; (c)
calculation of the premium or discount of such Official Closing Price
against such NAV; (d) data in chart form displaying the frequency
distribution of discounts and premiums of the Official Closing Price
against the NAV, within appropriate ranges for each of the four
previous calendar quarters (or for the life of the Trust, if shorter);
(e) the prospectus; and (f) other applicable quantitative information.
The Trust Administrator will also disseminate the Trust's holdings on a
daily basis on the Trust's website. The price of ether will be made
available by one or more major market data vendors, updated at least
every 15 seconds during the Regular Market Session. Information about
the CF Benchmarks Index, including key elements of how the CF
Benchmarks Index is calculated, will be publicly available at <a href="https://www.cfbenchmarks.com/">https://www.cfbenchmarks.com/</a>. Also, an estimated value that reflects an
estimated IIV, will be disseminated.
One or more major market data vendors will provide an IIV per Share
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Market
Session (9:30 a.m. to 4:00 p.m. (ET)). The IIV will be calculated by
using the prior day's closing NAV per Share as a base and updating that
value during the Exchange's Regular Market Session to reflect changes
in the value of the Trust's NAV during the trading day.
The IIV disseminated during the Exchange's Regular Market Session
should not be viewed as an actual real time update of the NAV, which
will be calculated only once at the end of each trading day. The IIV
will be widely disseminated on a per Share basis every 15 seconds
during the Exchange's Regular Market Session by one or more major
market data vendors. In addition, the IIV will be available through
online information services.
The NAV for the Trust will be calculated by the Trust Administrator
once a day and will be disseminated daily to all market participants at
the same time. Quotation and last sale information regarding the Shares
will be disseminated through the facilities of the CTA.
Quotation and last sale information for ether is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters, as well as CF Benchmarks. Information relating
to trading, including price and volume information, in ETH is available
from major market data vendors and from the exchanges on which ETH is
traded. Depth of book information is also available from ETH exchanges.
The normal trading hours for ETH exchanges are 24 hours per day, 365
days per year.
In sum, the Exchange believes that this proposal is consistent with
the requirements of section 6(b)(5) of the Act, that this filing
sufficiently demonstrates that the e CME ETH Futures market represents
a regulated market of significant size, and that on the whole the
manipulation concerns previously articulated by the Commission are
sufficiently mitigated to the point that they are outweighed by
investor protection issues that would be resolved by approving this
proposal.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change rather will facilitate the listing and trading of
additional exchange-traded product that will enhance competition among
both market participants and listing venues, to the benefit of
investors and the marketplace.
[[Page 85958]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#cbb9bea7aee6a8a4a6a6aea5bfb88bb8aea8e5aca4bd"><span class="__cf_email__" data-cfemail="deacabb2bbf3bdb1b3b3bbb0aaad9eadbbbdf0b9b1a8">[email protected]</span></a>. Please include
file number SR-NASDAQ-2023-045 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NASDAQ-2023-045. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NASDAQ-2023-045 and should
be submitted on or before January 2, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-27062 Filed 12-8-23; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on December 11, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.