Notice2024-19771
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 4.3 To List and Trade Options on Bitcoin Exchange-Traded Funds
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
September 4, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 171 (Wednesday, September 4, 2024)</title>
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[Federal Register Volume 89, Number 171 (Wednesday, September 4, 2024)]
[Notices]
[Pages 71982-71988]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-19771]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100861; File No. SR-CBOE-2024-035]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Rule 4.3 To List and Trade
Options on Bitcoin Exchange-Traded Funds
August 28, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 19, 2024, Cboe Exchange, Inc. (``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 Exchange. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Rule 4.3. The text of the proposed rule change is provided in
Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx">http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx</a>), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the
[[Page 71983]]
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 4.3 regarding the criteria for
underlying securities. Specifically, the Exchange proposes to amend
Rule 4.3, Interpretation and Policy .06(a)(4) to allow the Exchange to
list and trade options on Units \3\ that represent interests in the
following exchange-traded products: the Fidelity Wise Origin Bitcoin
Fund (the ``Fidelity Fund''), the ARK21Shares Bitcoin ETF (the ``ARK
21Shares Fund''), the Invesco Galaxy Bitcoin ETF (the ``Invesco
Fund''), the Franklin Bitcoin ETF (the ``Franklin Fund''), the VanEck
Bitcoin Trust (the ``VanEck Fund''), and the WisdomTree Bitcoin Fund
(the ``WisdomTree Fund''), the Grayscale Bitcoin Trust BTC (the
``Grayscale Fund''), the Bitwise Bitcoin ETF (the ``Bitwise Fund''),
the iShares Bitcoin Trust ETF (the ``iShares Fund''), and the Valkyrie
Bitcoin Fund (the ``Valkyrie Fund'' and, collectively, the ``Bitcoin
Funds''), designating them as ``Units'' deemed appropriate for options
trading on the Exchange. Current Rule 4.3, Interpretation and Policy
.06 provides that, subject to certain other criteria set forth in that
Rule, securities deemed appropriate for options trading include Units
that represent certain types of interests,\4\ including interests in
certain specific trusts that hold financial instruments, money market
instruments, or precious metals (which are deemed commodities).
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\3\ Rule 1.1 defines a ``Unit'' (which may also be referred to
as an exchange-traded fund (``ETF'')) as a share or other security
traded on a national securities exchange and defined as an NMS stock
as set forth in Rule 4.3.
\4\ See Rule 4.3, Interpretation and Policy .06(a), which
permits options trading on Units that represent (1) interests in
registered investment companies (or series thereof) organized as
open-end management investment companies, unit investment trusts or
similar entities that hold portfolios of securities and/or financial
instruments including, but not limited to, stock index futures
contracts, options on futures, options on securities and indexes,
equity caps, collars and floors, swap agreements, forward contracts,
repurchase agreements and reverse purchase agreements (the
``Financial Instruments''), and money market instruments, including,
but no limited to, U.S. government securities and repurchase
agreements (the ``Money Market Instruments'') comprising or
otherwise based on or representing investments in indexes or
portfolios of securities and/or Financial Instruments and Money
Market Instruments (or that hold securities in one or more other
registered investment companies that themselves hold such portfolios
of securities and/or Financial Instruments and Money Market
Instruments); (2) interests in a trust or similar entity that holds
a specified non-U.S. currency deposited with the trust or similar
entity when aggregated in some specified minimum number may be
surrendered to the trust by the beneficial owner to receive the
specified non-U.S. currency and pays the beneficial owner interest
and other distributions on deposited non-U.S. currency, if any,
declared and paid by the trust (``Currency Trust Shares''); (3)
commodity pool interests principally engaged, directly or
indirectly, in holding and/or managing portfolios or baskets of
securities, commodity futures contracts, options on commodity
futures contracts, swaps, forward contracts and/or options on
physical commodities and/or non-U.S. currency (``Commodity Pool
Units''); (4) interests in the SPDR Gold Trust, the iShares COMEX
Gold Trust, the iShares Silver Trust, the Aberdeen Standard Physical
Silver Trust, the Aberdeen Standard Physical Gold Trust, the
Aberdeen Standard Physical Palladium Trust, the Aberdeen Standard
Physical Platinum Trust, the Sprott Physical Gold Trust or the
Goldman Sachs Physical Gold ETF; or (5) an interest in a registered
investment company (``Investment Company'') organized as an open-end
management investment company or similar entity, that invests in a
portfolio of securities selected by the Investment Company's
investment adviser consistent with the Investment Company's
investment objectives and policies, which is issued in a specified
aggregate minimum number in return for a deposit of a specified
portfolio of securities and/or a cash amount with a value equal to
the next determined net asset value (``NAV''), and when aggregated
in the same specified minimum number, may be redeemed at a holder's
request, which holder will be paid a specified portfolio of
securities and/or cash with a value equal to the next determined NAV
(``Managed Fund Share'').
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The Bitcoin Funds are Bitcoin-backed commodity ETFs structured as
trusts. Similar to any Unit currently deemed appropriate for options
trading under Rule 4.3, Interpretation and Policy .06, the investment
objective of each Bitcoin Fund trust is for its shares to reflect the
performance of Bitcoin (less the expenses of the trust's operations),
offering investors an opportunity to gain exposure to Bitcoin without
the complexities of Bitcoin delivery. As is the case for Units
currently deemed appropriate for options trading, a Bitcoin Fund's
shares represent units of fractional undivided beneficial interest in
the trust, the assets of which consist principally of Bitcoin and are
designed to track Bitcoin or the performance of the price of Bitcoin
and offer access to the Bitcoin market.\5\ The Bitcoin Funds provide
investors with cost-efficient alternatives that allow a level of
participation in the Bitcoin market through the securities market. The
primary substantive difference between Bitcoin Funds and Units
currently deemed appropriate for options trading are that Units may
hold securities, certain financial instruments, and specified precious
metals (which are deemed commodities), while Bitcoin Funds hold Bitcoin
(which is also deemed a commodity).
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\5\ The trust may include minimal cash.
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The Exchange believes the Bitcoin Funds satisfy the Exchange's
initial listing standards for Units on which the Exchange may list
options. Specifically, the Bitcoin Funds satisfy the initial listing
standards set forth in Rule 4.3, Interpretation and Policy .06(b), as
is the case for other Units on which the Exchange lists options
(including trusts that hold commodities). Rule 4.3, Interpretation and
Policy .06 requires that Units must either (1) meet the criteria and
standards set forth in Rule 4.3, Interpretation and Policy .01(a),\6\
or (2) be available for creation or redemption each business day from
or through the issuer in cash or in kind at a price related to net
asset value, and the issuer must be obligated to issue Units in a
specified aggregate number even if some or all of the investment assets
required to be deposited have not been received by the issuer, subject
to the condition that the person obligated to deposit the investments
has undertaken to deliver the investment assets as soon as possible and
such undertaking is secured by the delivery and maintenance of
collateral consisting of cash or cash equivalents satisfactory to the
issuer, as provided in the respective prospectus. The Bitcoin Funds
satisfy Rule 4.3, Interpretation and Policy .06(b)(2), as they are all
subject to this creation and redemption process.
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\6\ Rule 4.3, Interpretation and Policy .01 provides for
guidelines to be by the Exchange when evaluating potential
underlying securities for Exchange option transactions.
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While not required by the Rules for purposes of options listings,
the majority of the Bitcoin Funds satisfy the criteria and guidelines
set forth in Rule 4.3, Interpretation and Policy .01. Pursuant to Rule
4.3(a), a security (which includes a Unit) on which options may be
listed and traded on the Exchange must be duly registered (with the
Commission) and be an NMS stock (as defined in Rule 600 of Regulation
NMS under the Securities Exchange Act of 1934, as amended (the
``Act'')), and be characterized by a substantial number of outstanding
shares that are widely held and actively traded.\7\ Each of the Bitcoin
Funds is an NMS Stock as defined in Rule 600 of Regulation NMS under
the Act.\8\ The Exchange
[[Page 71984]]
believes each Bitcoin Fund is characterized by a substantial number of
outstanding shares that are widely held and actively traded.
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\7\ The criteria and guidelines for a security to be considered
widely held and actively traded are set forth in Rule 4.3,
Interpretation and Policy .01, subject to exceptions.
\8\ An ``NMS stock'' means any NMS security other than an
option, and an ``NMS security'' means any security or class of
securities for which transaction reports are collected, processed,
and made available pursuant to an effective transaction reporting
plan (or an effective national market system plan for reporting
transaction in listed options). See 17 CFR 242.600(b)(64)
(definition of ``NMS security'') and (65) (definition of ``NMS
stock'').
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As of August 7, 2024, the Bitcoin Funds had the following number of
shares outstanding:
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Shares
Bitcoin fund outstanding
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Fidelity Fund............................................. 201,100,100
ARK 21Shares Fund......................................... 45,495,000
Invesco Fund.............................................. 7,965,000
Franklin Fund............................................. 11,100,000
VanEck Fund............................................... 9,600,000
WisdomTree Fund........................................... 1,420,000
Grayscale Fund............................................ 296,930,100
Bitwise Fund.............................................. 69,910,000
iShares Fund.............................................. 606,120,000
Valkyrie Fund............................................. 31,335,000
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All but one Bitcoin Fund had more than 7,000,000 shares
outstanding, which is the minimum number of shares of a corporate stock
that the Exchange generally requires to list options on that stock
pursuant to Rule 4.3, Interpretation and Policy .01(a)(1). However, the
Exchange believes shares outstanding (i.e., free float \9\), while
commonly used to determine investable capacities of corporate stocks,
the figure has little utility with respect to ETFs due to the market
structure of ETFs. Proofing of ETF baskets, in addition to the
efficiency of creation/redemption mechanisms, decouple concepts of
``floating'' ETF shares against the impacts of ETF liquidity to the
liquidity of ETF constituents. While ETF market-makers may often limit
the amount of floating ETF shares, primary market mechanisms enable
virtually limitless capacity to create and redeem ETF shares on a daily
basis.\10\ As evidenced during their time in market since beginning
trading in January of 2024, the gross value of daily shares created or
redeemed for each Bitcoin Fund exceeds the assets under management
(``AUM'') of each fund as of August 7, 2024, which was as follows:
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\9\ All outstanding ETF shares are considered free float, as
there are no restricted ETF shares or shares held by insiders, as is
the case with respect to corporate stocks.
\10\ This is the primary reasoning for why the Exchange may list
options on ETFs as long as they are subject to the creation and
redemption process and generally do not need to satisfy the criteria
set forth in Interpretation and Policy .01.
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Bitcoin fund AUM
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Fidelity Fund.................................. 10,240,420,000
ARK 21Shares Fund.............................. 2,887,759,000
Invesco Fund................................... 405,628,500
Franklin Fund.................................. 339,882,800
VanEck Fund.................................... 617,779,500
WisdomTree Fund................................ 81,690,950
Grayscale Fund................................. 20,117,590,000
Bitwise Fund................................... 2,266,633,000
iShares Fund................................... 18,274,490,000
Valkyrie Fund.................................. 527,831,700
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As a result, the Exchange believes this demonstrates that each
Bitcoin Fund is characterized by a substantial number of outstanding
shares.
Further, the below table contains information regarding the number
of beneficial holders of certain Bitcoin Funds as of the specified
dates:
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Beneficial
Bitcoin fund holders Date
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Fidelity Fund........................... 279,656 6/27/2024
ARK 21Shares Fund....................... 69,425 6/26/2024
Invesco Fund............................ 13,420 6/25/2024
Franklin Fund........................... 12,224 6/27/2024
VanEck Fund............................. 19,061 6/28/2024
WisdomTree Fund......................... 3,509 7/2/2024
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As this table shows, each of these six Bitcoin Funds has more than
2,000 beneficial holders, which is the minimum number of holders the
Exchange generally requires for corporate stock in order to list
options on that stock pursuant to Rule 4.3, Interpretation and Policy
.01(a)(2). The Exchange does not have access to the number of
beneficial holders of the other Bitcoin Funds. However, given those
other four funds have significant trading volumes similar to the
trading volumes of the Bitcoin Funds listed in the table above (as
discussed below), the Exchange believes it is reasonable to expect that
shares of all of the Bitcoin Funds are characterized by a substantial
number of outstanding shares that are widely held.
The Exchange also believes each Bitcoin Fund is characterized by a
substantial number of outstanding shares that are actively traded. As
of August 7, 2024, the total trading volume (by shares and notional)
for each fund since they began trading on January 11, 2024 and the
average daily volume (``ADV'') over the 30-day period of July 9 through
August 7, 2024 for each Bitcoin Fund was as follows:
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Trading volume Trading volume
Bitcoin fund (shares) (notional $) ADV (shares)
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Fidelity Fund....................................... 1,490,261,825 78,936,647,100.20 6,014,335.50
ARK 21Shares Fund................................... 413,159,977 24,787,148,013.81 1,893,335.00
Invesco Fund........................................ 78,609,595 4,578,462,838.89 299,372.94
Franklin Fund....................................... 58,954,975 2,063,321,834.88 338,901.56
VanEck Fund......................................... 59,991,039 4,195,401,686.66 265,605.84
WisdomTree Fund..................................... 39,977,866 2,546,889,570.58 209,501.33
Grayscale Fund...................................... 2,074,101,826 95,371,791,353.17 4,794,193.00
Bitwise Fund........................................ 455,817,104 14,926,192,896.43 2,250,989.25
iShares Fund........................................ 5,209,443,211 185,451,676,432.50 28,406,964.00
Valkyrie Fund....................................... 100,580,329 1,762,278,782.37 349,587.41
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[[Page 71985]]
As demonstrated above, despite the Bitcoin Funds have been trading
for approximately seven months, the trading volume for each is
substantially higher than 2,400,000 shares (between 16 and 620 times
that amount), which is the minimum 12-month volume the Exchange
generally requires for a security in order to list options on that
security as set forth in Rule 4.3, Interpretation and Policy .01.
Additionally, as of August 7, 2024, the six-month ADV for each Bitcoin
Fund is in the top 20% of all ETFs that are currently trading. The
Exchange believes this data demonstrates each Bitcoin Fund is
characterized by a substantial number of outstanding shares that are
actively traded.
Options on Bitcoin Funds will be subject to the Exchange's
continued listing standards set forth in Rule 4.4, Interpretation and
Policy .06 for Units deemed appropriate for options trading pursuant to
Rule 4.3, Interpretation and Policy .06. Specifically, Rule 4.4,
Interpretation and Policy .06 provides that Units that were initially
approved for options trading pursuant to Rule 4.3, Interpretation and
Policy .06 shall be deemed not to meet the requirements for continued
approval, and the Exchange shall not open for trading any additional
series of option contracts of the class covering that such Units, if
the Units cease to be an NMS stock or the Units are halted from trading
in their primary market. Additionally, options on Units may be subject
to the suspension of opening transactions in any of the following
circumstances: (1) in the case of options covering Units approved for
trading under Rule 4.3, Interpretation and Policy .06(b)(1), in
accordance with the terms of paragraphs (a), (b), and (c) of Rule 4.4,
Interpretation and Policy .01; (2) in the case of options covering
Units approved for trading under Rule 4.3 Interpretation and Policy
.06(b)(2) (as is the case for the Bitcoin Funds), following the initial
twelve-month period beginning upon the commencement of trading in the
Units on a national securities exchange and are defined as an NMS
stock, there are fewer than 50 record and/or beneficial holders of such
Units for 30 or more consecutive trading days; (3) the value of the
index or portfolio of securities, non-U.S. currency, or portfolio of
commodities including commodity futures contracts, options on commodity
futures contracts, swaps, forward contracts and/or options on physical
commodities and/or financial instruments and money market instruments
on which the Units are based is no longer calculated or available; or
(4) such other event shall occur or condition exist that in the opinion
of the Exchange makes further dealing in such options on the Exchange
inadvisable.
Options on each Bitcoin Fund will be physically settled contracts
with American-style exercise.\11\ Consistent with current Rule 4.5,
which governs the opening of options series on a specific underlying
security (including Units), the Exchange will open at least one
expiration month for options on each Bitcoin Fund \12\ at the
commencement of trading on the Exchange and may also list series of
options on a Bitcoin Fund for trading on a weekly,\13\ monthly,\14\ or
quarterly \15\ basis. The Exchange may also list long-term equity
option series (``LEAPS'') that expire from 12 to 180 months from the
time they are listed.\16\
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\11\ See Rule 4.2, which provides that the rights and
obligations of holders and writers are set forth in the Rules of the
Options Clearing Corporation (``OCC''); and Equity Options Product
Specifications (January 3, 2024), available at Equity Options
Specifications (<a href="http://cboe.com">cboe.com</a>); see also OCC Rules, Chapters VIII (which
governs exercise and assignment) and Chapter IX (which governs the
discharge of delivery and payment obligations arising out of the
exercise of physically settled stock option contracts).
\12\ See Rule 4.5(b). The monthly expirations are subject to
certain listing criteria for underlying securities described within
Rule 4.3. Monthly listings expire the third Friday of the month. The
term ``expiration date'' (unless separately defined elsewhere in the
OCC By-Laws), when used in respect of an option contract (subject to
certain exceptions), means the third Friday of the expiration month
of such option contract, or if such Friday is a day on which the
exchange on which such option is listed is not open for business,
the preceding day on which such exchange is open for business. See
OCC By-Laws Article I, Section 1. Pursuant to Rule 4.5(c),
additional series of options of the same class may be opened for
trading on the Exchange when the Exchange deems it necessary to
maintain an orderly market, to meet customer demand or when the
market price of the underlying stock moves more than five strike
prices from the initial exercise price or prices. New series of
options on an individual stock may be added until the beginning of
the month in which the options contract will expire. Due to unusual
market conditions, the Exchange, in its discretion, may add a new
series of options on an individual stock until the close of trading
on the business day prior to expiration.
\13\ See Rule 4.5(d).
\14\ See Rule 4.5(g).
\15\ See Rule 4.5(e).
\16\ See Rule 4.5(f).
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Pursuant to Rule 4.5, Interpretation and Policy .07, which governs
strike prices of series of options on Units, the interval of strikes
prices for series of options Bitcoin Funds will be $1 or greater when
the strike price is $200 or less and $5 or greater where the strike
price is over $200.\17\ Additionally, the Exchange may list series of
options pursuant to the $1 Strike Price Interval Program,\18\ the $0.50
Strike Program,\19\ the $2.50 Strike Price Program,\20\ and the $5
Strike Program.\21\ Pursuant to Rule 5.4, where the price of a series
of a Bitcoin Fund option is less than $3.00, the minimum increment will
be $0.05, and where the price is $3.00 or higher, the minimum increment
will be $0.10.\22\ Any and all new series of Bitcoin Fund options that
the Exchange lists will be consistent and comply with the expirations,
strike prices, and minimum increments set forth in Rules 4.5 and 5.4,
as applicable.
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\17\ The Exchange notes that for options listed pursuant to the
Short Term Option Series Program, the Monthly Options Series
Program, and the Quarterly Options Series Program, Rules 4.5(d),
(e), and (g) specifically sets forth intervals between strike prices
on Quarterly Options Series, Short Term Option Series, and Monthly
Options Series, respectively.
\18\ See Rule 4.5, Interpretation and Policy .01(a).
\19\ See Rule 4.5, Interpretation and Policy .01(b).
\20\ See Rule 4.5, Interpretation and Policy .04.
\21\ See Rule 4.5, Interpretation and Policy .01(f).
\22\ If options on a Bitcoin Fund are eligible to participate in
the Penny Interval Program, the minimum increment will be $0.01 for
series with a price below $3.00 and $0.05 for series with a price at
or above $3.00. See 5.4(d) (which describes the requirements for the
Penny Interval Program).
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Bitcoin Fund options will trade in the same manner as any other
Unit options on the Exchange. The Exchange Rules that currently apply
to the listing and trading of all Unit options on the Exchange,
including, for example, Rules that govern listing criteria, expiration
and exercise prices, minimum increments, position and exercise limits,
margin requirements, customer accounts and trading halt procedures will
apply to the listing and trading of Bitcoin Funds on the Exchange in
the same manner as they apply to other options on all other Units that
are listed and traded on the Exchange, including the precious-metal
backed commodity Units already deemed appropriate for options trading
on the Exchange pursuant to current Rule 4.3, Interpretation and Policy
.06(a)(4).
Position and exercise limits for options on Units, including
options on Bitcoin Funds, are determined pursuant to Rules 8.30 and
8.42, respectively. Position and exercise limits for Unit options vary
according to the number of outstanding shares and the trading volumes
of the underlying Unit over the past six months, where the largest in
capitalization and the most frequently traded Units have an option
position and exercise limit of 250,000 contracts (with adjustments for
splits, re-capitalizations, etc.) on the same side of the market; and
smaller capitalization Units have position and exercise limits of
200,000, 75,000, 50,000 or 25,000 contracts (with adjustments for
splits, re-capitalizations, etc.) on the same side
[[Page 71986]]
of the market.\23\ The Exchange further notes that Rule 10.3, which
governs margin requirements applicable to the trading of all options on
the Exchange, including options on Units, will also apply to the
trading of Bitcoin Fund options.
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\23\ As Bitcoin Funds do not currently trade, options on Bitcoin
Funds would be subject to the 25,000 option contract limit.
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The Exchange represents that the same surveillance procedures
applicable to all other options on Units currently listed and traded on
the Exchange will apply to options on Bitcoin Funds, and that it has
the necessary systems capacity to support the new option series. The
Exchange believes that its existing surveillance and reporting
safeguards are designed to deter and detect possible manipulative
behavior which might potentially arise from listing and trading Unit
options, including precious metal-commodity backed Unit options, as
proposed. Also, the Exchange may obtain information from CME Group
Inc.'s designated contract markets that are members of the Intermarket
Surveillance Group related to any financial instrument that is based,
in whole or in part, upon an interest in or performance of Bitcoin, as
applicable.
The Exchange has also analyzed its capacity and represents that it
believes the Exchange and OPRA have the necessary systems capacity to
handle the additional traffic associated with the listing of new series
that may result from the introduction of options on Bitcoin Funds up to
the number of expirations currently permissible under the Rules.
Because the proposal is limited to Units on a single commodity, the
Exchange believes any additional traffic that may be generated from the
introduction of Bitcoin Fund options will be manageable.
The Exchange believes that offering options on Bitcoin Funds will
benefit investors by providing them with an additional, relatively
lower cost investing tool to gain exposure to the price of Bitcoin and
hedging vehicle to meet their investment needs in connection with
Bitcoin-related products and positions. The Exchange expects investors
will transact in options on Bitcoin Funds in the unregulated over-the-
counter (``OTC'') options market (if the Commission approves Bitcoin
Funds for exchange-trading),\24\ but may prefer to trade such options
in a listed environment to receive the benefits of trading listing
options, including (1) enhanced efficiency in initiating and closing
out position; (2) increased market transparency; and (3) heightened
contra-party creditworthiness due to the role of OCC as issuer and
guarantor of all listed options. The Exchange believes that listing
Bitcoin Fund options may cause investors to bring this liquidity to the
Exchange, would increase market transparency and enhance the process of
price discovery conducted on the Exchange through increased order flow.
The Units that hold financial instruments, money market instruments, or
precious metal commodities on which the Exchange may already list and
trade options are trusts structured in substantially the same manner as
Bitcoin Funds and essentially offer the same objectives and benefits to
investors, just with respect to different assets. The Exchange notes
that it has not identified any issues with the continued listing and
trading of any Unit options, including Units that hold commodities
(i.e., precious metals) that it currently lists and trades on the
Exchange.
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\24\ The Exchange understands from customers that investors have
historically transacted in options on Units in the OTC options
market if such options were not available for trading in a listed
environment.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\25\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \26\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \27\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\25\ 15 U.S.C. 78f(b).
\26\ 15 U.S.C. 78f(b)(5).
\27\ Id.
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In particular, the Exchange believes that the proposal to list and
trade options on Bitcoin Funds will remove impediments to and perfect
the mechanism of a free and open market and a national market system
and, in general, protect investors because offering options on Bitcoin
Funds will provide investors with an opportunity to realize the
benefits of utilizing options on a Bitcoin Fund, including cost
efficiencies and increased hedging strategies. The Exchange believes
that offering Bitcoin Fund options will benefit investors by providing
them with a relatively lower-cost risk management tool, which will
allow them to manage their positions and associated risk in their
portfolios more easily in connection with exposure to the price of
Bitcoin and with Bitcoin-related products and positions. Additionally,
the Exchange's offering of Bitcoin Fund options will provide investors
with the ability to transact in such options in a listed market
environment as opposed to in the unregulated OTC options market, which
would increase market transparency and enhance the process of price
discovery conducted on the Exchange through increased order flow to the
benefit of all investors. The Exchange also notes that it already lists
options on other commodity-based Units,\28\ which, as described above,
are trusts structured in substantially the same manner as Bitcoin Funds
and essentially offer the same objectives and benefits to investors,
just with respect to a different commodity (i.e., Bitcoin rather than
precious metals) and for which the Exchange has not identified any
issues with the continued listing and trading of commodity-backed Unit
options it currently lists for trading.
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\28\ See Rule 4.3, Interpretation and Policy .06(a)(4).
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The Exchange also believes the proposed rule change will remove
impediments to and perfect the mechanism of a free and open market and
a national market system, because it is consistent with current
Exchange Rules previously filed with the Commission. Options on Bitcoin
Funds satisfy the initial listing standards and continued listing
standards currently in the Exchange Rules applicable to options on all
Units, including Units that hold other commodities already deemed
appropriate for options trading on the Exchange. Additionally, as
demonstrated above, each Bitcoin Fund is characterized by a substantial
number of shares that are widely held and actively traded. Bitcoin Fund
options will trade in the same manner as any other Unit options--the
same Exchange Rules that currently govern the listing and trading of
all Unit options, including permissible expirations, strike prices and
minimum increments, and
[[Page 71987]]
applicable position and exercise limits and margin requirements, will
govern the listing and trading of options on Bitcoin Funds in the same
manner.
The Exchange believes the proposed position and exercise limits for
the Bitcoin Fund options are consistent with the Exchange Act, will
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, protect investors
and the public interest, because these position and exercise limits are
designed to address potential manipulative schemes and adverse market
impacts surrounding the use of options, such as disrupting the market
in the security underlying the options. The proposed position and
exercise limits are the same limits that apply to other ETF options,
including other commodity ETF options. The Exchange believes proposed
position and exercise limits balance the liquidity provisioning in the
market against the prevention of manipulation, as they currently do for
other equity options (including commodity ETF options). The Exchange
believes the available supply in the markets of Bitcoin is not relevant
when establishing position limits for options on the Bitcoin Funds, as
what is held by an ETF has historically not been a relevant factor
considered by the Commission when it has considered rule filings to
list options on ETFS, including commodity ETFs. The Commission has
previously stated:
Since the inception of standardized options trading, the options
exchanges have had rules imposing limits on the aggregate number of
options contracts that a member or customer could hold or exercise.
These rules are intended to prevent the establishment of options
positions that can be used or might create incentives to manipulate
or disrupt the underlying market so as to benefit the options
position. In particular, position and exercise limits are designed
to minimize the potential for mini-manipulations and for corners or
squeezes of the underlying market. In addition, such limits serve to
reduce the possibility for disruption of the options market itself,
especially in illiquid options classes.\29\
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\29\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
As the Commission itself notes, the position limits are ``intended
to prevent the establishment of options positions that can be used . .
. to manipulate or disrupt the underlying market'' (emphasis added).
When the Commission previously approved Rules to list options on other
commodity ETFs, the Commission did not require consideration of whether
the available supply of those commodities should be considered when the
Exchange established those position limits.\30\ The Exchange notes that
position limits in the Exchange's Rules at that time were the same as
they are today as set forth in Rule 8.30 (and as proposed to be
applicable to options on the Bitcoin Funds).
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\30\ See, e.g., Securities Exchange Act Release No. 57894 (May
30, 2008), 73 FR 32061 (June 5, 2008) (SR-CBOE-2005-11) (approval
order in which the Commission stated that the ``listing and trading
of Gold Trust Options will be subject to the exchanges' rules
pertaining to position and exercise limits and margin'').
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The Exchange represents that it has the necessary systems capacity
to support the new Bitcoin Fund options. The Exchange believes that its
existing surveillance and reporting safeguards are designed to deter
and detect possible manipulative behavior which might arise from
listing and trading Unit options, including Bitcoin Fund options.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange does not
believe that the proposed rule change will impose any burden on
intramarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act as Bitcoin Funds would need to
satisfy the initial listing standards set forth in the Exchange Rules
in the same manner as any other Unit before the Exchange could list
options on them. Additionally, Bitcoin Fund options will be equally
available to all market participants who wish to trade such options.
The Exchange Rules currently applicable to the listing and trading of
options on Units on the Exchange will apply in the same manner to the
listing and trading of all options on Bitcoin Funds. Also, and as
stated above, the Exchange already lists options on other commodity-
based Units.\31\
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\31\ See Rule 4.3, Interpretation and Policy .06(a)(4).
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The Exchange does not believe that the proposal to list and trade
options on Bitcoin Funds will impose any burden on intermarket
competition that is not necessary or appropriate in furtherance of the
purposes of the Act. To the extent that the advent of Bitcoin Fund
options trading on the Exchange may make the Exchange a more attractive
marketplace to market participants at other exchanges, such market
participants are free to elect to become market participants on the
Exchange. Additionally, other options exchanges are free to amend their
listing rules, as applicable, to permit them to list and trade options
on Bitcoin Funds. The Exchange notes that listing and trading Bitcoin
Fund options on the Exchange will subject such options to transparent
exchange-based rules as well as price discovery and liquidity, as
opposed to alternatively trading such options in the OTC market.
The Exchange believes that the proposed rule change may relieve any
burden on, or otherwise promote, competition as it is designed to
increase competition for order flow on the Exchange in a manner that is
beneficial to investors by providing them with a lower-cost option to
hedge their investment portfolios. The Exchange notes that it operates
in a highly competitive market in which market participants can readily
direct order flow to competing venues that offer similar products.
Ultimately, the Exchange believes that offering Bitcoin Fund options
for trading on the Exchange will promote competition by providing
investors with an additional, relatively low-cost means to hedge their
portfolios and meet their investment needs in connection with Bitcoin
prices and Bitcoin-related products and positions on a listed options
exchange.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received written comments on 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 Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act.
[[Page 71988]]
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#96e4e3faf3bbf5f9fbfbf3f8e2e5d6e5f3f5b8f1f9e0"><span class="__cf_email__" data-cfemail="c1b3b4ada4eca2aeacaca4afb5b281b2a4a2efa6aeb7">[email protected]</span></a>. Please include
file number SR-CBOE-2024-035 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-CBOE-2024-035. 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-CBOE-2024-035 and should be
submitted on or before September 25, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-19771 Filed 9-3-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on September 4, 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.