Notice2023-28196
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To List and Trade Shares of the Hashdex Nasdaq Ethereum ETF Under Nasdaq Rule 5711(i) (Trust Units)
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 22, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 245 (Friday, December 22, 2023)</title>
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[Federal Register Volume 88, Number 245 (Friday, December 22, 2023)]
[Notices]
[Pages 88687-88689]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-28196]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99200; File No. SR-NASDAQ-2023-035]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To List and Trade Shares of the Hashdex Nasdaq
Ethereum ETF Under Nasdaq Rule 5711(i) (Trust Units)
December 18, 2023.
On September 20, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
Hashdex Nasdaq Ethereum ETF (``Fund'') under Nasdaq Rule 5711(i) (Trust
Units). The proposed rule change was published for comment in the
Federal Register on October 3, 2023.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 98563 (Sept. 27,
2023), 88 FR 68214 (``Notice''). The Commission has received no
comments on the proposal.
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On November 15, 2023, pursuant to Section 19(b)(2) of the Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ This order institutes proceedings under Section 19(b)(2)(B)
of the Act \6\ to determine whether to approve or disapprove the
proposed rule change.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 98948, 88 FR 81156
(Nov. 21, 2023). The Commission designated January 1, 2024, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal
As described in more detail in the Notice,\7\ the Exchange proposes
to list and trade the Shares of the Fund, a series of the Tidal
Commodities Trust I (``Trust''), under Nasdaq Rule 5711(i), which
governs the listing and trading of Trust Units on the Exchange.
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\7\ See Notice, supra note 3.
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The investment objective of the Fund is to have the daily changes
in the net asset value (``NAV'') of the Shares reflect the daily
changes in the price of the Nasdaq Ether Reference Price (NQETH)
(``Benchmark''), less expenses from the Fund's operations.\8\ The
Benchmark is designed to track the price performance of ether.\9\ Under
normal market conditions, the Fund will invest in ether, ether futures
contracts listed on the Chicago Mercantile Exchange, Inc.
(``CME''),\10\ and in cash and cash equivalents.\11\ The Fund will use
the CME's Exchange for Physical (``EFP'') transactions to acquire and
dispose of spot ether.\12\ The Fund will be subject to investment
restrictions on spot ether which cap the Fund's exposure to the ether
spot market to a specified proportion of the Fund's NAV and restrict
the Fund's notional exposure to ether to a set proportion.\13\ The sub-
administrator of the Fund will calculate the NAV of the Fund once each
trading day, as of the earlier of the close of the Nasdaq or 4:00 p.m.
New York time.\14\ To determine the value of Ether Futures Contracts,
the Fund's sub-administrator will use the Ether Futures Contract
settlement price on the exchange on which the contract is traded,
except that the fair value of Ether Futures Contracts may be used when
Ether Futures Contracts close at their price fluctuation limit for the
day. The value of spot ether held by the Fund would be determined by
the Sponsor and by Hashdex Asset Management Ltd. (``Digital Asset
Adviser'') in good faith based on a methodology that is entirely
derived from the settlement prices of Ether Futures Contracts on the
CME and that considers all available facts and all available
information on the valuation
[[Page 88688]]
date.\15\ When the Fund sells or redeems its Shares, it will do so in
cash transactions with authorized participants in blocks of 10,000
Shares.\16\
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\8\ See Notice, 88 FR at 68215. The Fund is managed and
controlled by Toroso Investments LLC (``Sponsor''). See id. at
68214.
\9\ See id.
\10\ According to the Exchange, the CME currently offers two
ether futures contracts: one contract representing 50 ether (``ETH
Contracts'') and another contract representing 0.10 ether (``MET
Contracts,'' and collectively, ``Ether Futures Contracts''). See id.
at 68214.
\11\ See id. at 68214. The Fund will hold a mix of Ether Futures
Contracts, spot ether, and cash and cash equivalents, subject to
certain investment restrictions. See id. at 68219.
\12\ See id. at 68219. According to the Exchange, EFP
transactions are a type of private agreement between two parties to
trade a futures position for the underlying asset. In an EFP
transaction, two parties exchange equivalent but offsetting
positions in an Ether Futures Contract and the underlying physical
ether. In the context of the Fund, these transactions will be used
to purchase and sell spot ether by delivering or receiving the
equivalent futures position. See id. at 68229.
\13\ See id. at 68227-28.
\14\ See id. at 68231. The Fund's NAV will include any
unrealized profit or loss on open ether futures contacts and any
other credit or debit accruing to the Fund but unpaid or not
received by the Fund. See id.
\15\ See id. at 68222, 68231-32. According to the Exchange, this
``futures-based spot price'' methodology involves a calculation that
is sensitive to both the length of time (``tenor'') until each Ether
Futures Contract is due for settlement and the final settlement
price for each contract. The calculation takes into account each
contract's tenor and the tenor squared. This approach is designed to
give more importance to contracts that are due for settlement in the
near term. The calculation produces a set of weighting factors, with
each factor indicating the contribution of the corresponding Ether
Futures Contract to the estimated current spot price of ether. The
estimated spot price is the component of the result corresponding to
a tenor of zero days. The Sponsor and Digital Asset Advisor do not
use data from ether trading platforms or directly from spot ether
trading activity in determining the value of spot ether held by the
Fund. See id. at 68222-23.
\16\ See id. at 68232-33.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2023-035 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \17\ to determine whether the proposed rule
change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change, as discussed below. Institution of
proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. Rather, as
described below, the Commission seeks and encourages interested persons
to provide comments on the proposed rule change.
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\17\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\18\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices'' and ``to protect investors and the
public interest.'' \19\
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\18\ Id.
\19\ 15 U.S.C. 78f(b)(5).
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The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice, in addition to any other comments they may wish to
submit about the proposed rule change. In particular, the Commission
seeks comment on the following questions and asks commenters to submit
data where appropriate to support their views:
1. Given the nature of the underlying assets held by the Fund, has
the Exchange properly filed its proposal to list and trade the Shares
under Nasdaq Rule 5711(i) (Trust Units)? \20\
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\20\ Nasdaq Rule 5711(i)(3)(B) defines the term ``Trust Units''
as a security that is issued by a trust or other similar entity that
is constituted as a commodity pool that holds investments comprising
or otherwise based on any combination of futures contracts, options
on futures contracts, forward contracts, swap contracts, commodities
and/or securities.
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2. The Exchange raises similar arguments to support the listing and
trading of the Shares as those made in proposals to list and trade spot
bitcoin exchange-traded products (``Bitcoin ETPs''). Do commenters
agree that arguments to support the listing of Bitcoin ETPs apply
equally to the Shares? Are there particular features related to ether
and its ecosystem, including its proof of stake consensus mechanism and
concentration of control or influence by a few individuals or entities,
that raise unique concerns about ether's susceptibility to fraud and
manipulation?
3. What are commenters' views on whether the proposed Fund and
Shares would be susceptible to manipulation? What are commenters' views
generally on whether the Exchange's proposal is designed to prevent
fraudulent and manipulative acts and practices? What are commenters'
views generally with respect to the liquidity and transparency of the
ether markets and the ether markets' susceptibility to manipulation?
4. Based on data and analysis provided by the Exchange,\21\ what
are commenters views on whether the CME, on which CME ether futures
trade and through which the Fund intends to engage in EFP transactions
to purchase or sell spot ether, represents a regulated market of
significant size related to spot ether? \22\ What are commenters' views
on whether there is a reasonable likelihood that a person attempting to
manipulate the Shares would also have to trade on the CME to manipulate
the Shares? \23\ Do commenters agree with the Exchange that trading in
the Shares would not be the predominant influence on prices in the CME
ether futures market? \24\
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\21\ See Notice, 88 FR at 68218, 68220-21, 68226-27.
\22\ See id. at 68219.
\23\ See id. at 68219-20.
\24\ See id. at 68220-21.
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5. The Exchange states that the Fund intends to adopt ``an
innovative approach to mitigate the risks of fraud and manipulation
that are unique to the Fund'' by ``structur[ing] the operation of the
Fund such that the regulated market of significant size in relation to
the Fund is the [CME] because it is the same market on which the Fund
trades its non-cash assets.'' \25\ The Exchange further states that the
Fund has features that underscore its significant interrelationship
with the CME, including that the Fund (i) utilizes futures-based
pricing for spot ether such that the NAV calculation for the spot ether
holdings of the Fund will be derived from the CME ether futures curve;
(ii) is subject to investment restrictions on spot ether; (iii) will
use CME EFP transactions to acquire and dispose of spot ether ``instead
of transactions on unregulated spot exchanges''; and (iv) will utilize
only cash creations and redemptions.\26\ Based on the structure and
operation of the Fund and the Fund's investments as described in the
filing, what are commenters' views on whether the CME represents a
regulated market of significant size related to spot ether? \27\
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\25\ See id. at 68219.
\26\ See id.
\27\ See id.
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6. The Fund will only use CME EFP transactions to acquire and
dispose of spot ether.\28\ The Exchange states that ``trading activity
in EFP transactions is sporadic'' but that, ``[n]onetheless, the
Sponsor believes that a large number of liquidity providers are ready
to execute this type of transaction and can provide enough liquidity to
support the [Fund's] demand.'' \29\ Do commenters agree? Why or why
not?
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\28\ See, e.g., id. at 68229-30.
\29\ See id. at 68230.
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7. The value of spot ether held by the Fund would be determined
using a futures-based spot price methodology that is derived from the
settlement prices of ether futures contracts on the CME.\30\ The
Exchange presents data \31\ that it states ``strongly suggests that
[futures-based spot pricing] is a suitable choice for the NAV
calculation.'' \32\ The Exchange states that futures-based spot pricing
``could create some level of uncertainty due to the potential
divergences between the [futures-based spot price] and the spot prices
observed in unregulated markets'' but that authorized participants
``will always be in a position to hedge their exposure using
exclusively the [CME ether futures market], which will make them more
likely to provide liquidity to the Fund
[[Page 88689]]
thus making its market price converge to its NAV.'' \33\ Do commenters
agree with the Exchange? Why or why not?
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\30\ See id. at 68231.
\31\ See id. at 68222-25.
\32\ See id. at 68225.
\33\ See id.
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8. Some sponsors of proposed ether exchange-traded products have
made statements regarding the correlation between ether spot markets
and the CME ether futures market.\34\ What are commenters' views on the
correlation between the ether spot market and the CME ether futures
market? What are commenters' views on the extent to which a
surveillance-sharing agreement with the CME would assist in detecting
and deterring fraud and manipulation that impacts an exchange-traded
product (``ETP'') that also holds spot ether, and on whether
correlation analysis provides any evidence to this effect? What are
commenters' views on the Sponsor's own statistical analysis of the
relationship between prices in certain unregulated ether markets and
prices of CME ether futures contracts? \35\ What are commenters' views
generally on whether an ETP that holds only CME ether futures and an
ETP that also holds spot ether are similar products?
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\34\ See, e.g., Notice of Filing of a Proposed Rule Change to
List and Trade Shares of the VanEck Ethereum ETF under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange Act
Release No. 98457 (Sept. 20, 2023), 88 FR 66076 (Sept. 26, 2023),
66081 (stating that ``The Sponsor's research indicates daily
correlation between the spot ETH and the CME ETH Futures is 0.998
from the period of 9/1/22 through 9/1/23.'').
\35\ See Notice, 88 FR at 68226-27.
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III. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, and
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\36\
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\36\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Acts Amendments of 1975, Senate Comm.
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by January 12, 2024. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
January 26, 2024.
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#0371766f662e606c6e6e666d7770437066602d646c75"><span class="__cf_email__" data-cfemail="1163647d743c727e7c7c747f6562516274723f767e67">[email protected]</span></a>. Please include
file number SR-NASDAQ-2023-035 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-2023-035. 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-2023-035 and should
be submitted on or before January 12, 2024. Rebuttal comments should be
submitted by January 26, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
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\37\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-28196 Filed 12-21-23; 8:45 am]
BILLING CODE 8011-01-P
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