Notice2024-07335
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of the Bitwise Ethereum ETF
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
April 8, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 68 (Monday, April 8, 2024)</title>
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[Federal Register Volume 89, Number 68 (Monday, April 8, 2024)]
[Notices]
[Pages 24509-24519]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-07335]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99889; File No. SR-NYSEARCA-2024-31]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of the Bitwise
Ethereum ETF
April 2, 2024.
Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on March 28, 2024, NYSE Arca, Inc. (``NYSE Arca'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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 list and trade shares of the Bitwise
Ethereum ETF (the ``Trust'') under NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares). The proposed rule change is available on the
Exchange's website at <a href="http://www.nyse.com">www.nyse.com</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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
Trust \4\ pursuant to NYSE Arca Rule 8.201-E, which governs the listing
and trading of Commodity Based Trust Shares.\5\
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\4\ The Trust is a Delaware statutory trust. On March 28, 2024,
the Trust filed with the Commission an initial registration
statement (the ``Registration Statement'') on Form S-1 under the
Securities Act of 1933 (15 U.S. C. 77a). The description of the
operation of the Trust herein is based, in part, on the most recent
Registration Statement. The Registration Statement is not yet
effective, and the Shares will not trade on the Exchange until such
time that the Registration Statement is effective.
\5\ Commodity-Based Trust Shares are securities issued by a
trust that represents investors' discrete identifiable and undivided
beneficial ownership interest in the commodities deposited into the
trust.
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According to the Registration Statement, the Trust will not be
registered as an investment company under the Investment Company Act of
1940,\6\ and is not required to register thereunder. The Trust is not a
commodity pool for purposes of the Commodity Exchange Act.\7\
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\6\ 15 U.S.C. 80a-1.
\7\ 17 U.S.C. 1.
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The Exchange represents that the Shares satisfy the requirements of
NYSE Arca Rule 8.201-E and thereby qualify for listing on the
Exchange.\8\
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\8\ With respect to the application of Rule 10A-3 (17 CFR
240.10A-3) under the act, the trust relies on the exemption
contained in Rule 10A-3(c)(7).
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Operation of the Trust \9\
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\9\ The description of the operation of the Trust, the Shares,
and the ether market contained herein is based, in part, on the
Registration Statement. See note 4, supra.
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The Trust will issue the Shares which, according to the
Registration Statement, represent units of undivided beneficial
ownership of the Trust. The Trust is a Delaware statutory trust and
will operate pursuant to a trust agreement (the ``Trust Agreement'')
between Bitwise Investment Advisers, LLC (the ``Sponsor'' or
``Bitwise'') and Delaware Trust Company, as the Trust's trustee (the
``Trustee''). Coinbase Custody Trust Company, LLC will maintain custody
of the Trust's ether (the ``Ether Custodian''). Bank of New York Mellon
will be the custodian for the Trust's cash holdings (in such role, the
``Cash Custodian''), the administrator of the Trust (in such role, the
``Administrator''), and the transfer agent for the Trust (in such role,
the ``Transfer Agent'').
According to the Registration Statement, the investment objective
of the Trust is to seek to provide exposure to the value of ether held
by the Trust, less the expenses of the Trust's operations. In seeking
to achieve its investment objective, the Trust will hold ether and
establish its Net Asset Value (``NAV'') at the end of every business
day by reference to the CME CF Ether Reference Rate--New York Variant
(the ``Pricing Index'').\10\
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\10\ The Pricing Index is designed to provide a daily, 4:00 p.m.
New York time reference rate of the U.S. dollar price of one ether
that may be used to develop financial products. The Pricing Index
uses the same methodology as the CME CF Ether Reference Rate
(``ERR''), which was designed by the CME Group and CF Benchmarks
Ltd. (the ``Benchmark Provider'') to facilitate the cash settlement
of ether futures contracts traded on the Chicago Mercantile Exchange
(``CME''). The only material difference between the Pricing Index
and ERR is that the ERR measures the U.S. dollar price of one ether
as 9f 4:00 p.m. Eastern time (``E.T.''). The CME Group also
publishes the CME CF Ether Real Time Index (the ``CME Ether Real
Time Price''), which is a continuous measure of the U.S. dollar
price of one ether calculated once per second.
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[[Page 24510]]
The Trust's only assets will be ether and cash.\11\ The Trust does
not seek to hold any non-ether crypto assets and has expressly
disclaimed ownership of any such assets in the event the Trust ever
involuntarily comes into possession of such assets.\12\ The Trust will
not use derivatives that may subject the Trust to counterparty and
credit risks. The Trust will process creations and redemptions in cash.
The Trust's only recurring ordinary expense is expected to be the
Sponsor's unitary management fee (the ``Sponsor Fee''), which will
accrue daily and will be payable in ether monthly in arrears. The
Administrator will calculate the Sponsor Fee on a daily basis by
applying an annualized rate to the Trust's total ether holdings, and
the amount of ether payable in respect of each daily accrual shall be
determined by reference to the Pricing Index. Financial institutions
authorized to create and redeem Shares (each, an ``Authorized
Participant'') will deliver, or cause to be delivered, cash in exchange
for Shares of the Trust, and the Trust will deliver cash to Authorized
Participants when those Authorized Participants redeem Shares of the
Trust.
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\11\ The Trust conducts creations and redemptions of its Shares
for cash. Authorized Participants will deliver cash to the cash
Custodian pursuant to creation orders for Shares and the Cash
Custodian will hold such cash until such time as it can be converted
to ether, which the Trust intends to do on the same business day in
which such cash is received by the Cash Custodian. Additionally, the
trust will sell ether in exchange for cash pursuant to redemption
orders of its Shares. In connection with such sales, and approved
Ether Trading Counterparty (defined below) will send cash to the
Cash Custodian. The Cash custodian will hold such cash until it can
be distributed to the redeeming Authorized Participant, which it
intends to do on the same business day in which it is received. In
connection with the purchases and sales of ether pursuant to its
creation and redemption activity, it is possible that the Trust may
retain de minimis amounts of cash as a result of rounding
differences. The trust may also initially hold small amounts of cash
to initiate Trust operations in the immediate aftermath of its
Registration Statement being declared effective. Lastly, the Trust
may also sell ether and temporarily hold cash as part of a
liquidation of the trust or to pay certain extraordinary expenses
not assumed by the Sponsor. Under the Trust Agreement, the sponsor
has agreed to assume the normal operating expenses of the Trust,
subject to certain limitations. For example, the Trust will bear any
indemnification or litigation liabilities as extraordinary expenses.
In any event, in the ongoing course of business, the amounts of cash
retained by the Trust are not expected to constitute a material
portion of the Trust's holdings.
\12\ The Trust may, from time to time, passively receive, by
virtue of holding ether, certain additional digital assets (``IR
Assets'') or rights to receive IR Assets (``Incidental Rights'')
through a fork of the Ethereum network or an airdrop of assets. The
Trust will not seek to acquire such IR Assets or Incidental Rights.
Pursuant to the terms of the Trust Agreement, the trust has
disclaimed ownership in any such IR Assets and/or Incidental Rights
to make clear that such assets are not and shall never be considered
assets of the Trust and will not be taken into account for purposes
of determining the trust's NAV or NAV per Share.
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Custody of the Trust's Ether
The Trust's Ether Custodian will maintain custody of all of the
Trust's ether, other than that which is maintained in a trading account
(the ``Trading Balance'') with Coinbase, Inc. (the ``Prime Execution
Agent,'' which is an affiliate of the Ether Custodian), in the Trust
Ether Account. The Trading Balance will only be used in the limited
circumstances in which the Trust is using the Agent Execution Model to
effectuate the purchases and sales of ether. The Ether Custodian
provides safekeeping of ether using a multi-layer cold storage security
platform designed to provide offline security of the ether held by the
Ether Custodian.
Valuation of the Trust's Ether
The net assets of the Trust and its Shares are valued on a daily
basis with reference to the Pricing Index, a standardized reference
rate published by CF Benchmarks Ltd. (the ``Benchmark Provider'') that
is designed to reflect the performance of ether in U.S. dollars. The
Pricing Index was created to facilitate financial products based on
ether. It serves as a once-a-day benchmark rate of the U.S. dollar
price of ether (USD/ETH), calculated as of 4:00 p.m. ET. The Pricing
Index aggregates the trade flow of several major ether trading venues,
during an observation window between 3:00 p.m. and 4:00 p.m. ET into
the U.S. dollar price of one ether at 4:00 p.m. ET. The Pricing Index
currently uses substantially the same methodology as the ERR, including
utilizing the same constituent ether exchanges, which is the underlying
rate to determine settlement of CME ether futures contracts, except
that the Pricing Index is calculated as of 4:00 p.m. ET, whereas the
ERR is calculated as of 4:00 p.m. London time. The Pricing Index, which
was introduced on February 28, 2022, is based on materially the same
methodology (except calculation time) as the ERR, which was first
introduced on June 4, 2018. The CME Group also publishes the CME CF
Ether Real Time Index (the ``CME Ether Real Time Price''), which is a
continuous measure of the U.S. dollar price of one ether calculated
once per second. Each of the Pricing Index, ERR, and the CME Ether Real
Time Price are representative of the ether trading activity on the
Constituent Platforms,\13\ which include, as of the date of this
filing, Bitstamp, Coinbase, Gemini, itBit, LMAX, and Kraken.
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\13\ The ``Constituent Platforms'' are the ether trading venues
included in the Pricing Index.
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The Pricing Index is designed based on the IOSCO Principals for
Financial Benchmarks. The Trust uses the Pricing Index to calculate its
NAV, which is the aggregate U.S. dollar value of ether in the Trust,
based on the Pricing Index, less its liabilities and expenses. ``NAV
per Share'' is calculated by dividing NAV by the number of Shares
currently outstanding.
The Sponsor, in its sole discretion, may cause the Trust to price
its portfolio based upon an index, benchmark, or standard other than
the Pricing Index at any time, with prior notice to the shareholders,
if investment conditions change or the Sponsor believes that another
index, benchmark, or standard better aligns with the Trust's investment
objective and strategy. The Sponsor may make this decision for a number
of reasons, including, but not limited to, a determination that the
Pricing Index price of ether differs materially from the global market
price of ether and/or that third parties are able to purchase and sell
ether on public or private markets not included among the Constituent
Platforms, and such transactions may take place at prices materially
higher or lower than the Pricing Index price. The Sponsor, however, is
under no obligation whatsoever to make such changes in any
circumstance. In the event that the Sponsor intends to establish the
Trust's NAV by reference to an index, benchmark, or standard other than
the Pricing Index, it will provide shareholders with notice in a
prospectus supplement and/or through a current report on Form 8-K or in
the Trust's annual or quarterly reports.
Net Asset Value
Under normal circumstances, the Trust's only asset will be ether
and, under limited circumstances, cash. The Trust's NAV and NAV per
Share will be determined by the Administrator once each Exchange
trading day as of 4:00 p.m. E.T., or as soon thereafter as practicable.
The Administrator will calculate the NAV by multiplying the number of
ether held by the Trust by the Pricing Index for such day, adding any
additional receivables and subtracting the accrued but unpaid
liabilities of the Trust. The NAV per Share is calculated by dividing
the NAV by the number of Shares then outstanding. The Administrator
will determine the price of the Trust's ether by reference to the
[[Page 24511]]
Pricing Index, which is published and calculated as set forth above.
Intraday Trust Value
The Trust uses the CME Ether Real Time Price to calculate an
Indicative Trust Value (``ITV''). One or more major market data vendors
will disseminate the ITV, updated every 15 seconds each trading day as
calculated by the Exchange or a third-party financial data provider
during the Exchange's Core Trading Session (9:30 a.m. to 4:00 p.m.,
E.T.). The ITV will be calculated throughout the trading day by using
the prior day's holdings at the close of business and the most recently
reported price level of the CME Ether Real Time Price as reported by
Bloomberg, L.P. or another reporting service. The ITV will be widely
disseminated by one or more major market data vendors during the NYSE
Arca Core Trading Session.
Creation and Redemption of Shares
The Trust creates and redeems Shares from time to time, but only in
one or more Creation Units, which will initially consist of at least
10,000 Shares, but may be subject to change (``Creation Unit''). A
Creation Unit is only made in exchange for delivery to the Trust or the
distribution by the Trust of an amount of cash, equivalent to the
amount of ether represented by the Creation Unit being created or
redeemed, the amount of which is representative of the combined NAV of
the number of Shares included in the Creation Units being created or
redeemed determined as of 4:00 p.m. E.T. on the day the order to create
or redeem Creation Units is properly received. Except when aggregated
in Creation Units or under extraordinary circumstances permitted under
the Trust Agreement, the Shares are not redeemable securities.
Authorized Participants are the only persons that may place orders
to create and redeem Creation Units. Authorized Participants must be
(1) registered broker-dealers or other securities market participants,
such as banks and other financial institutions, that are not required
to register as broker-dealers to engage in securities transactions
described below, and (2) Depository Trust Company (``DTC'')
participants. To become an Authorized Participant, a person must enter
into an Authorized Participant Agreement with the Trust and/or the
Trust's marketing agent (the ``Marketing Agent'').
According to the Registration Statement, when purchasing or selling
ether in response to the purchase of Creation Units or the redemption
of Creation Units, which will be processed in cash, the Trust would do
so pursuant to either (1) a ``Trust-Directed Trade Model,'' or (2) an
``Agent Execution Model,'' which are each described in more detail
below.
The Trust intends to utilize the Trust-Directed Trade Model for all
purchases and sales of ether and would only utilize the Agent Execution
Model in the event that no ether trading counterparty approved by the
Sponsor (an ``Ether Trading Counterparty'') \14\ is able to effectuate
the Trust's purchase or sale of ether. Under the Trust-Directed Trade
Model, in connection with receipt of a purchase order or redemption
order, the Sponsor, on behalf of the Trust, would be responsible for
acquiring ether from an approved Ether Trading Counterparty in an
amount equal to the Basket Amount. When seeking to purchase ether on
behalf of the Trust, the Sponsor will seek to purchase ether at
commercially reasonable price and terms from any of the approved Ether
Trading Counterparties.\15\ Once agreed upon, the transaction will
generally occur on an ``over-the-counter'' basis.
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\14\ The Ether Trading Counterparties with which the Sponsor
will engage in ether transactions are unaffiliated third-parties
that are not acting as agents of the Trust, the Sponsor or the
Authorized Participant, and all transactions will be done on an
arms-length basis. There is no countractual relationship between the
Trust, the sponsor or the Ether Trading Counterparty. When seeking
to sell ether on behalf of the Trust, the Sponsor will seek to sell
ether at commercially reasonable price and terms to any of the
spproved Ether Trading Counterparties. Once agreed upon, the
transaction will generally occur on an ``over-the-counter'' basis.
\15\ The Sponsor will maintain ownership and control of ether in
a manner consistent with good delivery requirements for spot
commodity transactions.
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Whether utilizing the Trust-Directed Trade Model or the Agent
Execution Model, the Authorized Participants will deliver only cash to
create shares and will receive only cash when redeeming Shares.
Further, Authorized Participants will not directly or indirectly
purchase, hold, deliver, or receive ether as part of the creation or
redemption process or otherwise direct the Trust or a third party with
respect to purchasing, holding, delivering, or receiving ether as part
of the creation or redemption process. Additionally, under either the
Trust-Directed Trade Model or the Agent Execution Model, the Trust will
create Shares by receiving ether from a third party that is not the
Authorized Participant and is not affiliated with the Sponsor or the
Trust, and the Trust--not the Authorized Participant--is responsible
for selecting the third party to deliver the ether. The third party
will not be acting as an agent of the Authorized Participant with
respect to the delivery of the ether to the Trust or acting at the
direction of the Authorized Participant with respect to the delivery of
the ether to the Trust. Additionally, the Trust will redeem Shares by
delivering ether to a third party that is not the Authorized
Participant and is not affiliated with the Sponsor or the Trust, and
the Trust--not the Authorized Participant--is responsible for selecting
the third party to receive the ether. Finally, the third party will not
be acting as an agent of the Authorized Participant with respect to the
receipt of the ether from the Trust or acting at the direction of the
Authorized Participant with respect to the receipt of the ether from
the Trust.
Acquiring and Selling Ether Pursuant to Creation and Redemption of
Shares Under the Trust-Directed Trade Model
Under the Trust-Directed Trade Model and as set forth in the
Registration Statement, on any business day, an Authorized Participant
may create Shares by placing an order to purchase one or more Creation
Units with the Transfer Agent through the Marketing Agent. Such orders
are subject to approval by the Marketing Agent and the Transfer Agent.
For purposes of processing creation and redemption orders, a ``business
day'' means any day other than a day when the Exchange is closed for
regular trading (``Business Day''). To be processed on the date
submitted, creation orders must be placed before 4:00 p.m. E.T. or the
close of regular trading on the Exchange, whichever is earlier, but may
be required to be placed earlier at the discretion of the Sponsor. A
purchase order will be effective on the date it is received by the
Transfer Agent and approved by the Marketing Agent (``Purchase Order
Date'').
Creation Units are processed in cash. By placing a purchase order,
an Authorized Participant agrees to deposit, or cause to be deposited,
an amount of cash equal to the quantity of ether attributable to each
Share of the Trust (net of accrued but unpaid expenses and liabilities)
multiplied by the number of Shares (10,000) comprising a Creation Unit
(the ``Basket Amount''). The Sponsor will cause to be published each
Business Day, prior to the commencement of trading on the Exchange, the
Basket Amount relating to a Creation Unit applicable for such Business
Day. That amount is derived by multiplying the Basket Amount by the
value of ether ascribed by the Pricing Index. However, the Authorized
Participant is also responsible for any additional cash required to
account for the price at which the Trust agrees to purchase the
requisite amount of ether
[[Page 24512]]
from an Ether Trading Counterparty to the extent it is greater than the
Pricing Index price on each Purchase Order Date.
Prior to the delivery of Creation Units, the Authorized Participant
must also have wired to the Transfer Agent the nonrefundable
transaction fee due for the creation order. Authorized Participants may
not withdraw a creation request. If an Authorized Participant fails to
consummate the foregoing, the order may be cancelled.
Following the acceptance of a purchase order, the Authorized
Participant must wire the cash amount described above to the Cash
Custodian, and the Ether Trading Counterparty must deposit the required
amount of ether with the Ether Custodian by the end of the day E.T. on
the Business Day following the Purchase Order Date. The ether will be
purchased from Ether Trading Counterparties that are not acting as
agents of the Trust or agents of the Authorized Participant. These
transactions will be done on an arms-length basis, and there is no
contractual relationship between the Trust, the Sponsor, or the Ether
Trading Counterparty to acquire such ether. Prior to any movement of
cash from the Cash Custodian to the Ether Trading Counterparty or
movement of Shares from the Transfer Agent to the Authorized
Participant's DTC account to settle the transaction, the ether must be
deposited at the Ether Custodian.
The Ether Trading Counterparty must deposit the required amount of
ether by end of day E.T. on the Business Day following the Purchase
Order Date prior to any movement of cash from the Cash Custodian or
Shares from the Transfer Agent. Upon receipt of the deposit amount of
ether at the Ether Custodian from the Ether Trading Counterparty, the
Ether Custodian will notify the Sponsor that the ether has been
received. The Sponsor will then notify the Transfer Agent that the
ether has been received, and the Transfer Agent will direct DTC to
credit the number of Shares ordered to the Authorized Participant's DTC
account and will wire the cash previously sent by the Authorized
Participant to the Ether Trading Counterparty to complete settlement of
the Purchase Order and the acquisition of the ether by the Trust, as
described above.
As between the Trust and the Authorized Participant, the expense
and risk of the difference between the value of ether calculated by the
Administrator for daily valuation using the Pricing Index and the price
at which the Trust acquires the ether will be borne solely by the
Authorized Participant to the extent that the Trust pays more for ether
than the price used by the Trust for daily valuation. Any such
additional cash amount will be included in the amount of cash
calculated by the Administrator on the Purchase Order Date,
communicated to the Authorized Participant on the Purchase Order Date,
and wired by the Authorized Participant to the Cash Custodian on the
day following the Purchase Order Date. If the Ether Trading
Counterparty fails to deliver the ether to the Ether Custodian, no cash
is sent from the Cash Custodian to the Ether Trading Counterparty, no
Shares are transferred to the Authorized Participant's DTC account, the
cash is returned to the Authorized Participant, and the Purchase Order
is cancelled.
Under the Trust-Directed Trade Model and according to the
Registration Statement, the procedures by which an Authorized
Participant can redeem one or more Creation Units mirror the procedures
for the creation of Creation Units. On any Business Day, an Authorized
Participant may place an order with the Transfer Agent through the
Marketing Agent to redeem one or more Creation Units. To be processed
on the date submitted, redemption orders must be placed before 4:00
p.m. E.T. or the close of regular trading on the Exchange, whichever is
earlier, or earlier as determined by the Sponsor. A redemption order
will be effective on the date it is received by the Transfer Agent and
approved by the Marketing Agent (``Redemption Order Date''). The
redemption procedures allow Authorized Participants to redeem Creation
Units and do not entitle an individual shareholder to redeem any Shares
in an amount less than a Creation Unit, or to redeem Creation Units
other than through an Authorized Participant. In connection with
receipt of a redemption order accepted by the Marketing Agent and
Transfer Agent, the Sponsor, on behalf of the Trust, is responsible for
selling the ether to an approved Ether Trading Counterparty in an
amount equal to the Basket Amount.
The redemption distribution from the Trust will consist of a
transfer to the redeeming Authorized Participant, or its agent, of the
amount of cash the Trust received in connection with a sale of the
Basket Amount of ether to an Ether Trading Counterparty made pursuant
to the redemption order. The Sponsor will cause to be published each
Business Day, prior to the commencement of trading on the Exchange, the
redemption distribution amount relating to a Creation Unit applicable
for such Business Day. The redemption distribution amount is derived by
multiplying the Basket Amount by the value of ether ascribed by the
Pricing Index. However, as between the Trust and the Authorized
Participant, the expense and risk of the difference between the value
of ether ascribed by the Pricing Index and the price at which the Trust
sells the ether will be borne solely by the Authorized Participant to
the extent that the Trust receives less for ether than the value
ascribed by Pricing Index.
Prior to the delivery of Creation Units, the Authorized Participant
must also have wired to the Transfer Agent the nonrefundable
transaction fee due for the redemption order.
The redemption distribution due from the Trust will be delivered by
the Transfer Agent to the Authorized Participant once the Cash
Custodian has received the cash from the Ether Trading Counterparty.
The Ether Custodian will not send the Basket Amount of ether to the
Ether Trading Counterparty until the Cash Custodian has received the
cash from the Ether Trading Counterparty and is instructed by the
Sponsor to make such transfer. Once the Ether Trading Counterparty has
sent the cash to the Cash Custodian in an agreed upon amount to settle
the agreed upon sale of the Basket Amount of ether, the Transfer Agent
will notify Sponsor. The Sponsor will then notify the Ether Custodian
to transfer the ether to the Ether Trading Counterparty, and the
Transfer Agent will wire the ether proceeds to the Authorized
Participant once the Trust's DTC account has been credited with the
Shares represented by the Creation Unit from the redeeming Authorized
Participant. Once the Authorized Participant has delivered the Shares
represented by the Creation Unit to be redeemed to the Trust's DTC
account, the Cash Custodian will wire the requisite amount of cash to
the Authorized Participant. If the Trust's DTC account has not been
credited with all of the Shares of the Creation Unit to be redeemed,
the redemption distribution will be delayed until such time as the
Transfer Agent confirms receipt of all such Shares. If the Ether
Trading Counterparty fails to deliver the cash to the Cash Custodian,
the transaction will be cancelled, and no transfer of ether or Shares
will occur.
Acquiring and Selling Ether Pursuant to Creation and Redemption of
Shares Under the Agent Execution Model
Under the Agent Execution Model, Coinbase, Inc. (``Coinbase Inc.''
or the ``Prime Execution Agent,'' an affiliate of the Ether Custodian),
acting in an agency capacity, would conduct ether purchases and sales
on behalf of the Trust with third parties through its
[[Page 24513]]
Coinbase Prime service pursuant to the Prime Execution Agent Agreement.
To utilize the Agent Execution Model, the Trust may maintain some ether
or cash in a trading account (the ``Trading Balance'') with the Prime
Execution Agent. The Prime Execution Agent Agreement provides that the
Trust does not have an identifiable claim to any particular ether (and
cash); rather, the Trust's Trading Balance represents an entitlement to
a pro rata share of the ether (and cash) the Prime Execution Agent
holds on behalf of customers who hold similar entitlements against the
Prime Execution Agent. In this way, the Trust's Trading Balance
represents an omnibus claim on the Prime Execution Agent's ether (and
cash) held on behalf of the Prime Execution Agent's customers.
To avoid having to pre-fund purchases or sales of ether in
connection with cash creations and redemptions and sales of ether to
pay Trust expenses not assumed by the Sponsor, to the extent
applicable, the Trust may borrow ether or cash as trade credit (``Trade
Credit'') from Coinbase Credit, Inc. (the ``Trade Credit Lender'') on a
short-term basis pursuant to the Coinbase Credit Committed Trade
Financing Agreement (the ``Trade Financing Agreement'').
On the day of the Purchase Order Date, the Trust would enter into a
transaction to buy ether through the Prime Execution Agent for cash.
Because the Trust's Trading Balance may not be funded with cash on the
Purchase Order Date for the purchase of ether in connection with the
Purchase Order under the Agent Execution Model, the Trust may borrow
Trade Credits in the form of cash from the Trade Credit Lender pursuant
to the Trade Financing Agreement or may require the Authorized
Participant to deliver the required cash for the Purchase Order on the
Purchase Order Date. The extension of Trade Credits on the Purchase
Order Date allows the Trust to purchase ether through the Prime
Execution Agent on the Purchase Order Date, with such ether being
deposited in the Trust's Trading Balance.
On the day following the Purchase Order Date (the ``Purchase Order
Settlement Date''), the Trust would deliver Shares to the Authorized
Participant in exchange for cash received from the Authorized
Participant. Where applicable, the Trust would use the cash to repay
the Trade Credits borrowed from the Trade Credit Lender. On the
Purchase Order Settlement Date for a Purchase Order utilizing the Agent
Execution Model, the ether associated with the Purchase Order and
purchased on the Purchase Order Date is swept from the Trust's Trading
Balance with the Prime Execution Agent to the Trust Ether Account with
the Ether Custodian pursuant to a regular end-of-day sweep process.
Transfers of ether into the Trust's Trading Balance are off-chain
transactions and transfers from the Trust's Trading Balance to the
Trust Ether Account are ``on-chain'' transactions represented on the
ether blockchain. Any financing fee owed to the Trade Credit Lender is
deemed part of trade execution costs and embedded in the trade price
for each transaction.
For a Redemption Order utilizing the Agent Execution Model, on the
day of the Redemption Order Date the Trust would enter into a
transaction to sell ether through the Prime Execution Agent for cash.
The Trust's Trading Balance with the Prime Execution Agent may not be
funded with ether on trade date for the sale of ether in connection
with the redemption order under the Agent Execution Model, when ether
remains in the Trust Ether Account with the Ether Custodian at the
point of intended execution of a sale of ether. In those circumstances
the Trust may borrow Trade Credits in the form of ether from the Trade
Credit Lender, which allows the Trust to sell ether through the Prime
Execution Agent on the Redemption Order Date, and the cash proceeds are
deposited in the Trust's Trading Balance with the Prime Execution
Agent. On the business day following the Redemption Order Date (the
``Redemption Order Settlement Date'') for a redemption order utilizing
the Agent Execution Model where Trade Credits were utilized, the Trust
delivers cash to the Authorized Participant in exchange for Shares
received from the Authorized Participant. In the event Trade Credits
were used, the Trust will use the ether that is moved from the Trust
Ether Account with the Ether Custodian to the Trading Balance with the
Prime Execution Agent to repay the Trade Credits borrowed from the
Trade Credit Lender.
For a redemption of Creation Units utilizing the Agent Execution
Model, the Sponsor would instruct the Ether Custodian to prepare to
transfer the ether associated with the redemption order from the Trust
Ether Account with the Ether Custodian to the Trust's Trading Balance
with the Prime Execution Agent. On the Redemption Order Settlement
Date, the Trust would enter into a transaction to sell ether through
the Prime Execution Agent for cash, and the Prime Execution Agent
credits the Trust's Trading Balance with the cash. On the same day, the
Authorized Participant would deliver the necessary Shares to the Trust
and the Trust delivers cash to the Authorized Participant.
Fee Accrual
According to the Registration Statement, the Trust's only recurring
ordinary expense is expected to be the Sponsor Fee, which will accrue
daily and will be payable in ether monthly in arrears. The
Administrator will calculate the Sponsor Fee on a daily basis by
applying an annualized rate to the Trust's total ether holdings, and
the amount of ether payable in respect of each daily accrual shall be
determined by reference to the Pricing Index.
CME Ether Futures Market
CME began offering trading in ether futures on February 8,
2021.\16\ Each contract represents fifty ether and is based on the ERR.
The contracts trade and settle like other cash settled commodity
futures contracts.
---------------------------------------------------------------------------
\16\ See ``CME Group Announces Launch of Ether Futures,''
February 8, 2021, available at <a href="https://www.cmegroup.com/media-room/press-releases/2021/2/08/cme_group_announceslaunchofetherfutures.html">https://www.cmegroup.com/media-room/press-releases/2021/2/08/cme_group_announceslaunchofetherfutures.html</a>.
---------------------------------------------------------------------------
Most measurable metrics related to ether futures have trended up
since launch. For example, there were 174,261 ether futures contracts
traded in February 2024 (approximately $24.3 billion) compared to
182,631 contracts ($14.9 billion), 160,108 contracts ($23.1 billion),
and 17,149 contracts ($1.5 billion) traded in February 2023, February
2022, and February 2021, respectively.\17\
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\17\ Data from CME Volume and average dAily Volume Reports,
available at <a href="https://www.cmegroup.com/market-data/volume-open-interest.html#volumeTotals">https://www.cmegroup.com/market-data/volume-open-interest.html#volumeTotals</a>.
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[[Page 24514]]
[GRAPHIC] [TIFF OMITTED] TN08AP24.015
Open interest was 3792 ether futures contracts in February 2024
(approximately $529 million) compared to 4919 contracts ($337 million),
4014 contracts ($578 million), and 877 contracts ($77 million) in
February 2023, February 2022, and February 2021 respectively.\18\
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\18\ Data from CME Open Interest Reports, available at <a href="https://www.cmegroup.com/market-data/volume-openinterest.gtml#openInterestTools">https://www.cmegroup.com/market-data/volume-openinterest.gtml#openInterestTools</a>.
[GRAPHIC] [TIFF OMITTED] TN08AP24.016
The number of large open interest holders has increased as well, as
demonstrated in the figure that follows.\19\
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\19\ A large open interest holder in ether futures is an entity
that holds at least 25 contracts, which is the equivalent of 1250
ether. Data fromThe Block, available at <a href="https://www.theblock.co/data/crypto-markets/cme-cots/large-open-interest-holders-of-cme-ether-futures">https://www.theblock.co/data/crypto-markets/cme-cots/large-open-interest-holders-of-cme-ether-futures</a>.
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[[Page 24515]]
[GRAPHIC] [TIFF OMITTED] TN08AP24.017
The Commodity Futures Trading Commission (``CFTC'') regulates the
CME ether futures market, and both the Exchange and CME are members of
the Intermarket Surveillance Group (``ISG'').\20\
---------------------------------------------------------------------------
\20\ For a list of the current members and affiliate members of
ISG, see <a href="https://www.isgportal.com/">https://www.isgportal.com/</a>.
---------------------------------------------------------------------------
Background
Ethereum is free software that is hosted on computers distributed
throughout the globe. Ethereum 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, 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, which are recorded
on a distributed, public recordkeeping system or ledger known as a
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 spot
trading platforms or in individual peer-to-peer transactions. By
combining the recordkeeping system of the Ethereum blockchain with a
flexible scripting language that can be used to implement a wide
variety of instructions, the Ethereum network is intended to act as a
public computational layer on top of which users can build their own
public software programs, as an alternative to centralized web
services. On the Ethereum network, ether is the unit of account that
users pay for the computational resources consumed by running programs
of their choice.
Previously, U.S. retail investors have lacked a U.S. regulated,
U.S. exchange-traded vehicle to gain direct exposure to ether. Instead,
current options include: (i) facing the counter-party risk, legal
uncertainty, technical risk, and complexity associated with accessing
spot ether directly, or (ii) over-the-counter ether funds (``OTC Ether
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 spot ether) to gain exposure to ether.\21\
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\21\ 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 allowd the listing and
trading of Spot ETH ETPs.
---------------------------------------------------------------------------
To this point, the lack of an ETP that holds spot ether (a ``Spot
Ether ETP'') exposes U.S. investor assets to significant risk because
investors who would otherwise seek exposure through a Spot Ether ETP
are forced to find alternative exposure through generally riskier
means. For example, investors in OTC Ether Funds are not afforded the
benefits and protections of regulated Spot Ether ETPs, resulting in
retail investors potentially suffering losses due to drastic movements
in the premium/discount of OTC Ether Funds. Additionally, many U.S.
investors who held their digital assets in accounts at FTX,\22\ Celsius
Network LLC,\23\ BlockFi Inc.,\24\ and Voyager Digital Holdings,
Inc.\25\ have become unsecured creditors in the insolvencies of those
entities. The Sponsor believes that, if a Spot Ether ETP had been
available to U.S. investors, 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 the transparent, regulated, and well-understood structure
of a Spot Ether ETP. The Sponsor thus believes that the approval of a
Spot Ether ETP would represent a major step towards protection of U.S.
investors.
---------------------------------------------------------------------------
\22\ See FTX Trading Ltd., et al., Case No. 22-11068.
\23\ See Celsius Network LLC, et al., Case No. 22-10964.
\24\ See BlockFi Inc., Case No. 22-19361.
\25\ 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, Commodity-Based Trust Shares, on the
[[Page 24516]]
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.\26\ However, the
Commission recently approved the listing and trading of shares of spot
bitcoin exchange-traded products (``Spot Bitcoin ETP''), finding that
there were ``other means'' of preventing fraud and manipulation
sufficient to satisfy the requirements of section 6(b)(5) of the
Exchange Act.\27\ In the Spot Bitcoin ETP Approval Order, the
Commission concluded, through a robust correlation analysis, that fraud
or manipulation that impacts prices in spot bitcoin markets would
likely similarly impact CME bitcoin futures prices.\28\ The Commission
further found that, because the CME's surveillance can assist in
detecting those impacts on CME bitcoin futures prices, a listing
exchange's comprehensive surveillance sharing agreement (``CSSA'') with
the CME can be reasonably expected to assist in surveilling for
fraudulent and manipulative acts and practices in the specific context
of the Spot Bitcoin ETP.
---------------------------------------------------------------------------
\26\ See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018) (SR-BatsBZX-2016-30) (Order
Setting Aside Action by Delegated Authority and Disapproving a
Proposed Rule Change, as Modified by Amendments No. 1 and 2, to List
and Trade Shares of the Winklevoss Bitcoin Trust) (``Winklevoss
Order''). In the Winklevoss Order, the commission set forth both the
importance and definition of a surveilled, regulated market of
significant size, explaining that, for approved commodity-trust
ETPs, ``there has been in every case at least one significant,
regulated market for trading futures on the underlying commodity--
whether gold, silve, platinum, palladium, or copper--and the ETP
listing exchange has entered into surveillance-sharing agreements
with, or hel Intermarket Surveillance Group membership in common
with, the market.'' Winklevoss Order, 83 FR at 37594.
\27\ See Securities Exchange Act Release No. 34-99306 (January
10, 2024), 89 FR 3008 (January 17, 2024) (SR-NYSEARCA-2021-90; SR-
NYSEARCA-2023-44; SR-NYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-
NASDAQ-2023-019; SR-CboeBZX-2023028; SR-CboeBZX-2023-038; SR-
CboeBZX-2023-040; SR-CboeBZX-2023-042; SR-CboeBZX-2023-044; SR-
CboeBZX-2023-072 (Order Granting Accelerated Appproval of Proposed
Rule Changes, as Modified by Amendments Thereto, to List and Trade
Bitcoin-Based Commodity-Based Trust Shares and Trust Units) (the
``Sopt Bitcoing ETP Approval Order'').
\28\ In the Spot Bitcoin ETP Approval Order, the Commission
noted that ``[lsqb]t[rsqb]he robustness of the Commissions's
correlation analysis rests on the pre-requisites of (1) the
correlations being calculated with repect to bitcoin futures that
trade on the CME, a U.S. market regulated by the CFTC, (2) the
lengthy sample period of price returns for both the CME bitcoin
futures market and the spot bitcoin market, (3) the frequent intra-
day trading data in both the CME bitcoin futures market and the spot
bitcoin market over that lengthy sample period, and (4) the
consistency of the correlation results throughout the lengthy sample
period.'' Spot Bitcoin ETP Approval Order, 89 FR at 3010 n.38.
---------------------------------------------------------------------------
In support of this proposed rule change to permit the listing and
trading of a Spot Ether ETP, the Sponsor has conducted a similarly
robust correlation analysis between the spot ether markets and the CME
ether futures market to determine if fraud or manipulation that impacts
prices in spot ether markets would be likely to similarly impact CME
ether futures prices. The Sponsor used stationary time series of price
returns data at hourly, five-minute, and one-minute intervals for the
spot ETH/USD trading pair on Coinbase and Kraken, as well as for the
closest-to-maturity CME ether futures contract, over a lengthy sample
period from August 1, 2021 through March 20, 2024. Pearson correlation
statistics were calculated for the full sample period, as well as for
rolling three-month segments within the sample period. The Sponsor's
correlation analysis utilized frequent intra-day trading data over the
sample period on this subset of spot ether platforms and on the CME
ether futures market as well.
The results of the Sponsor's analysis support that the CME ether
futures market has been highly correlated with this subset of the spot
ether platforms throughout the past two and a half years. The
correlation between the CME ether futures market and this subset of
spot ether platforms for the full sample period is no less than 98.6%
using data at an hourly interval; 90.0% using data at a five-minute
interval; and 70.9% using data at a one-minute interval. The rolling
three-month correlation results are similar, ranging between 95.7 and
99.3% using data at an hourly interval; 86.8 and 92.9% using data at a
five-minute interval; and 65.0 and 79.5% using data at a one-minute
interval.
Correlations Between Certain Spot Ether Markets and the CME Ether Futures Market
--------------------------------------------------------------------------------------------------------------------------------------------------------
Coinbase Kraken
-----------------------------------------------------------------------------------------------
Hourly 5 Minutes 1 Minute Hourly 5 Minutes 1 Minute
--------------------------------------------------------------------------------------------------------------------------------------------------------
Full Sample: 08/01/21 to 03/20/24....................... 98.6 90.0 70.9 98.6 90.3 72.6
Rolling Three-Month Correlations Over the Full Sample
Period:
Maximum............................................. 99.3 92.7 78.7 99.3 92.9 79.5
Minimum............................................. 95.7 86.8 65.0 95.7 87.2 67.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
The Sponsor believes that the results of its robust correlation
analysis constitute empirical evidence that prices generally move in
close (although not perfect) alignment between the spot ether market
and the CME ether futures market. As a result, the Sponsor believes
that fraud or manipulation that impacts prices in spot ether markets
would likely similarly impact CME ether futures prices, and therefore,
because CME surveillance can assist in detecting those impacts on CME
ether futures prices, the Exchange and CME's common membership in the
ISG \29\ can be reasonably expected to assist the Exchange in
surveilling for fraudulent and manipulative acts and practices in the
spot ether markets in satisfaction of the requirement of section
6(b)(5) of the Exchange Act that there are ``other means'' of
preventing fraud and manipulation.
---------------------------------------------------------------------------
\29\ The Commission has previously recognized that common
membership between a listing exchange and a futures market such as
the cME in the ISG functions as ``the equivalent of a comprehensive
surveillance sharing agreement.'' See Securities Exchange Act
Release No. 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019)
(SR-NYSEArca-2019-01) (Order Disapproving a Proposed Rule Change, as
Modified by Amendment No. 1, Relating to the Listing and Trading of
Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201-
E).
---------------------------------------------------------------------------
Availability of Information
The NAV per Share 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. The ITV will be calculated every 15 seconds throughout the core
trading session each trading day.
[[Page 24517]]
The Sponsor will cause information about the Shares to be posted to
the Trust's website (<a href="https://www.bitwiseinvestments.com/">https://www.bitwiseinvestments.com/</a>): (1) the NAV
and NAV per Share for each Exchange trading day, posted at end of day;
(2) the daily holdings of the Trust, before 9:30 a.m. E.T. on each
Exchange trading day; (3) the Trust's effective prospectus, in a form
available for download; and (4) the Shares' ticker and CUSIP
information, along with additional quantitative information updated on
a daily basis for the Trust. For example, the Trust's website will
include (1) the prior Business Day's trading volume, the prior Business
Day's reported NAV and closing price, and a calculation of the premium
and discount of the closing price or mid-point of the bid/ask spread at
the time of NAV calculation (``Bid/Ask Price'') against the NAV; and
(2) data in chart format displaying the frequency distribution of
discounts and premiums of the daily closing price or Bid/Ask Price
against the NAV, within appropriate ranges, for at least each of the
four previous calendar quarters. The Trust's website will be publicly
available prior to the public offering of Shares and accessible at no
charge.
Investors may obtain on a 24-hour basis ether pricing information
based on the Pricing Index, ERR, and CME Ether Real Time Price, spot
ether market prices and ether futures price from various financial
information service providers. Current ether spot market prices are
also available with bid/ask spreads from ether trading platforms,
including the Constituent Platforms of the Pricing Index.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services.
Information regarding the previous day's closing price and trading
volume information for the Shares will be published daily in the
financial section of newspapers.
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 of the Trust.\30\ Trading in Shares of the Trust
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable.
---------------------------------------------------------------------------
\30\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------
The Exchange may halt trading during the day in which an
interruption to the dissemination of the ITV or the CME Ether Real Time
Index occurs.\31\ If the interruption to the dissemination of the ITV
or the CME Ether Real Time Price 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.
---------------------------------------------------------------------------
\31\ A limit up/limit down condition in the futures market would
not be considered an interruption requiring the Trust to be halted.
---------------------------------------------------------------------------
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. Shares will trade on
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. E.T. in
accordance with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading
Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Rule 7.6-E, the minimum price variation (``MPV'') for quoting
and entry of orders in equity securities traded on the NYSE Arca
Marketplace is $0.01, with the exception of securities that are priced
less than $1.00 for which the MPV for order entry is $0.0001.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain
restrictions on Equity Trading Permit (``ETP'') Holders acting as
registered Market Makers in Commodity-Based Trust Shares to facilitate
surveillance.\32\ The Exchange represents that, for initial and
continued listing, the Trust will be in compliance with Rule 10A-3
under the Act,\33\ as provided by NYSE Arca Rule 5.3-E. A minimum of
100,000 Shares of the Trust will be outstanding at the commencement of
trading on the Exchange.
---------------------------------------------------------------------------
\32\ Under NYSE Arca Rule 8.201-E(g), and ETP Holder as a
registered Market Maker in the Shares is required to provide the
Exchange with information relating to its accounts for trading in
the underlying commodity, related futures or options on futures, or
any other related derivatives. Commentary .04 of NYSE Arca Rule
11.3-E. requires an ETP Holder acting as a registered Market Maker,
and its affiliates, in the Shares to establish, maintain and enforce
written policies and procedures reasonably designed to prevent the
misuse of any material nonpublic information with respect to such
products, an components of the related products, any physical asset
or commodity underlying the product, applicable currencies,
underlying indexes, related futures or options on futures, and any
related derivative instruments (including the Shares). As a general
matter, the Exchange has regulatory jurisdiction over its ETP Holder
and their associated persons, which include any person or entity
controlling an ETP Holder. To the extent the Exchange may be found
to lack jurisdiction over a subsidiary or affiliate of an ETP Holder
that does business only in commodities or futures contracts, the
Exchange could obtain information regarding the activities of such
subsidiary or affiliate through surveillance sharing agreements with
regulatory organizations of which such subsidiary or affiliate is a
member.
\33\ 17 CFR 240.10A-3. See note 8, supra.
---------------------------------------------------------------------------
Surveillance
The Exchange represents that trading in the Shares of the Trust
will be subject to the existing trading surveillances administered by
the Exchange, as well as cross-market surveillances administered by
FINRA on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities
laws.\34\ The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions
and to deter and detect violations of Exchange rules and federal
securities laws applicable to trading on the Exchange.
---------------------------------------------------------------------------
\34\ FINRA conducts cross-market surveillance on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
---------------------------------------------------------------------------
The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares with other
markets and other entities that are members of the ISG, and the
Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in the Shares from such markets
and other entities. In addition, the Exchange may obtain information
regarding trading in the Shares from markets and other entities that
are members of ISG or with which the Exchange has in place a CSSA. The
Exchange is also able to obtain information regarding trading in the
Shares in connection with ETP Holders'
[[Page 24518]]
proprietary or customer trades on any relevant market.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolios of the Trust, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange listing rules specified in this rule filing shall constitute
continued listing requirements for listing the Shares on the Exchange.
The Sponsor has represented 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 Act, the Exchange will monitor 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 NYSE Arca Rule 5.5-E(m).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders in an ``Information Bulletin'' of the special
characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (1)
the procedures for creations of Shares in Creation Units; (2) NYSE Arca
Rule 9.2-E(a), which imposes a duty of due diligence on its ETP Holders
to learn the essential facts relating to every customer prior to
trading the Shares; (3) information regarding how the value of the ITV
and the Pricing Index is disseminated; (4) the possibility that trading
spreads and the resulting premium or discount on the Shares may widen
during the Opening and Late Trading Sessions, when an updated ITV 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.
In addition, the Information Bulletin will reference that the Trust
is subject to various fees and expenses as described in the annual
report. The Information Bulletin will disclose that information about
the Shares of the Trust is publicly available on the Trust's website.
The Information Bulletin will also reference the fact that there is no
regulated source of last sale information regarding ether, that the
Commission has no jurisdiction over the trading of ether as a
commodity, and that the CFTC has regulatory jurisdiction over the
trading of ether futures contracts and options on ether futures
contracts.
The Information Bulletin will also discuss any relief, if granted,
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under section 6(b)(5) \35\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices and to protect
investors and the public interest in that the Shares will be listed and
traded on the Exchange pursuant to the initial and continued listing
criteria in NYSE Arca Rule 8.201-E. Further, the Exchange has
demonstrated its ability to share information with the CME, pursuant to
common ISG membership, can be reasonably expected to assist the
Exchange in surveilling for fraudulent and manipulative acts and
practices with respect to trading in the Shares, such that there are
sufficient means of preventing fraud and manipulation sufficient to
satisfy the requirements of section 6(b)(5) of the Exchange Act. As
discussed above, the results of the Sponsor's comprehensive correlation
analysis support that prices on the spot ether and CME ether futures
markets generally move in close alignment; accordingly, it is likely
that fraud or manipulation that impacts prices in spot ether markets
would likely similarly impact CME ether futures prices.
The Exchange has in place surveillance procedures that are adequate
to properly monitor Exchange trading in the Shares in all trading
sessions and to deter and detect attempted manipulation of the Shares
or other violations of Exchange rules and applicable federal securities
laws. The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares and ether futures
with the CME and other markets and other entities that are members of
the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both,
may obtain trading information regarding trading in the Shares from
such markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares from markets and other
entities that are members of ISG or with which the Exchange has in
place a CSSA. The Exchange is also able to obtain information regarding
trading in the Shares and ether futures or the underlying ether through
ETP Holders, in connection with such ETP Holders' proprietary or
customer trades which they effect through ETP Holders on any relevant
market.
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the CTA. The Trust's website
will also include a form of the prospectus for the Trust that may be
downloaded. The website will include the Shares' ticker and CUSIP
information, along with additional quantitative information updated on
a daily basis for the Trust. The Trust's website will include (1) daily
trading volume, the prior Business Day's reported NAV and closing
price, and a calculation of the premium and discount of the closing
price or mid-point of the Bid/Ask Price against the NAV; and (ii) data
in chart format displaying the frequency distribution of discounts and
premiums of the daily closing price or Bid/Ask Price against the NAV,
within appropriate ranges, for at least each of the four previous
calendar quarters. The Trust's website will be publicly available prior
to the public offering of Shares and accessible at no charge.
Trading in Shares of the Trust will be halted if the circuit
breaker parameters in NYSE Arca Rule 7.12-E have been reached or
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of a
new type of exchange-traded product based on the price of ether that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures that are adequate to properly monitor
trading in the Shares in all trading sessions and to deter and detect
violations of Exchange rules and applicable federal securities laws.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose
[[Page 24519]]
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of a new
type of Commodity-Based Trust Share based on the price of ether that
would enhance competition among market participants, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
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 self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the 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#2755524b420a44484a4a424953546754424409404851"><span class="__cf_email__" data-cfemail="8af8ffe6efa7e9e5e7e7efe4fef9caf9efe9a4ede5fc">[email protected]</span></a>. Please include
file number SR-NYSEARCA-2024-31 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-NYSEARCA-2024-31. 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-NYSEARCA-2024-31 and should
be submitted on or before April 29, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-07335 Filed 4-5-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on April 8, 2024.
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.