Notice2024-24641
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of Amendment Nos. 2 and 3 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 2 and 3, To Permit the Listing and Trading of 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
October 24, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 206 (Thursday, October 24, 2024)</title>
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[Federal Register Volume 89, Number 206 (Thursday, October 24, 2024)]
[Notices]
[Pages 84948-84960]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-24641]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101387; File No. SR-CBOE-2024-035]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of Amendment Nos. 2 and 3 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 2 and
3, To Permit the Listing and Trading of Options on Bitcoin Exchange-
Traded Funds
October 18, 2024.
On August 19, 2024, Cboe Exchange, Inc. (``Cboe'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade options on the Fidelity Wise
Origin Bitcoin Fund, the ARK21Shares Bitcoin ETF, the Invesco Galaxy
Bitcoin ETF, the Franklin Bitcoin ETF, the VanEck Bitcoin Trust, the
WisdomTree Bitcoin Fund, the Grayscale Bitcoin Trust BTC, the Bitwise
Bitcoin ETF, the iShares Bitcoin Trust ETF, and the Valkyrie Bitcoin
Fund.\3\ The proposed rule change was published for comment in the
Federal Register on September 4, 2024.\4\ On September 27, 2024, the
Exchange filed Amendment No. 1 to the proposed rule change. On
September 30, 2024, the Exchange withdrew Amendment No. 1 and filed
Amendment No. 2 to the proposal, which supersedes and replaces the
original proposal in its entirety.\5\ On October 10, 2024, the Exchange
filed Amendment No. 3 to the proposal.\6\ The Commission received no
comments regarding the proposal. The Commission is publishing this
notice to solicit comments on Amendment Nos. 2 and 3 from interested
persons, and is approving the proposed rule change, as modified by
Amendment Nos. 2 and 3, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On January 10, 2024, the Commission approved proposals by
NYSE Arca, Inc., The Nasdaq Stock Market LLC, and Cboe BZX Exchange,
Inc. to list and trade the shares of 11 bitcoin-based commodity-
based trust shares and trust units, including the trusts underlying
the proposed options. See Securities Exchange Act Release No. 99306
(Jan. 10, 2024), 89 FR 3008 (Jan. 17, 2024) (order approving File
Nos. SR-NYSEARCA-2021-90; SR-NYSEARCA-2023-44; SR-NYSEARCA-2023-58;
SR-NASDAQ-2023-016; SR-NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-
CboeBZX-2023-038; SR-CboeBZX-2023-040; SR-CboeBZX-2023-042; SR-
CboeBZX-2023-044; SR-CboeBZX-2023-072) (``Bitcoin ETP Order'').
\4\ See Securities Exchange Act Release No. 100861 (Aug. 28,
2024), 89 FR 71982.
\5\ Amendment No. 2 narrows the scope of the proposal to the
Fidelity Wise Origin Bitcoin Fund and the ARK 21Shares Bitcoin ETF;
proposes new position and exercise limits for options on the funds
and provides justification and analysis for the proposed position
and exercise limits; provides additional discussion of surveillance
procedures that will apply to the proposed options; and eliminates
references to the applicability of specified Interpretations and
Policies in Exchange Rule 8.30.
\6\ Amendment No. 3 narrows the scope of the proposal by
providing that options on the Fidelity Wise Origin Bitcoin Fund and
the ARK 21Shares Bitcoin ETF will not be available for FLEX trading.
FLEX Options are flexible exchange options. A FLEX Option on an
equity security may be referred to as a ``FLEX Equity Option,'' and
a FLEX Option on an index may be referred to as a ``FLEX Index
Option.'' See Exchange Rule 1.1 The Exchange may authorize for
trading a FLEX Option class on any equity security or index if it
may authorize for trading a non-FLEX Option class on that equity
security or index pursuant to Exchange Rules 4.3 and 4.10,
respectively, even if the Exchange does not list that non-FLEX
Option class for trading. See Exchange Rule 4.20. There are no
position limits for FLEX Equity Options, other than as set forth in
Exchange Rules 8.35(c)(1)(B) and (d). See Exchange Rule
8.35(c)(1)(A). Amendment Nos. 2 and 3 are available on the
Exchange's website at <a href="https://www.cboe.com/us/options/regulation/rule_filings/">https://www.cboe.com/us/options/regulation/rule_filings/</a>.
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I. The Exchange's Description of the Proposed Rule Change, as Modified
by Amendment Nos. 2 and 3
The Exchange filed with the Commission a proposal to list and trade
options on the Fidelity Wise Origin Bitcoin Fund and the ARK 21Shares
Bitcoin ETF. 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="https://www.cboe.com/us/options/regulation/rule_filings/">https://www.cboe.com/us/options/regulation/rule_filings/</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 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 \7\ that represent interests in the
Fidelity Wise Origin Bitcoin Fund (the ``Fidelity Fund'') and the ARK
21Shares Bitcoin ETF (the ``ARK 21 Fund'' and, with the Fidelity Fund,
the ``Bitcoin Funds'') \8\, 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,\9\ including interests in certain
[[Page 84949]]
specific trusts that hold financial instruments, money market
instruments, or precious metals (which are deemed commodities).
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\7\ Rule 1.1 defines a ``Unit'' (which may also be referred to
as an 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.
\8\ See Securities Exchange Act Release No. 99306 (January 10,
2024), 89 FR 3008, 3009 (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-2023-028; SR-CboeBZX-2023-038; SR-
CboeBZX-2023-040; SR-CboeBZX-2023-042; SRCboeBZX-2023-044; and SR-
CboeBZX-2023-072) (Order Granting Accelerated Approval of Proposed
Rule Changes, as Modified by Amendments Thereto, to List and Trade
Bitcoin-Based Commodity-Based Trust Shares and Trust Units)
(``Bitcoin ETP Approval Order'').
\9\ 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 not 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 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.\10\ 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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\10\ The trust may include minimal cash.
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The Exchange believes each Bitcoin Fund satisfies the Exchange's
initial listing standards for Units on which the Exchange may list
options. Specifically, each Bitcoin Fund satisfies 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),\11\
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. Each Bitcoin Fund
satisfies Rule 4.3, Interpretation and Policy .06(b)(2), as each is
subject to this creation and redemption process.
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\11\ 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 Exchange believes each Bitcoin Fund satisfies 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.\12\
Each Bitcoin Fund is an NMS Stock as defined in Rule 600 of Regulation
NMS under the Act.\13\ The Exchange believes each Bitcoin Fund is
characterized by a substantial number of outstanding shares that are
widely held and actively traded.
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\12\ 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.
\13\ 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:
------------------------------------------------------------------------
Shares
Bitcoin Fund outstanding
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Fidelity Fund........................................... 201,100,100
ARK 21 Fund............................................. 45,495,000
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Each Bitcoin Fund had significantly more than 7,000,000 shares
outstanding (approximately 29 and 6.5 times that amount, respectively),
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). 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 the 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 21 Fund................................... 69,425 6/26/2024
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As this table shows, each Bitcoin Fund has significantly more than
2,000 beneficial holders (approximately 140 and 35 times more,
respectively), 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).
Therefore, the Exchange believes the shares of each Bitcoin Fund are
widely held.\14\
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\14\ The Exchange continues to believe assets under management
(``AUM''), rather than shares outstanding and number of holders, is
a better measure of investable capacity of ETFs and a more
appropriate figure for determining position and exercise limits of
ETFs and looks forward to further discussions with the Commission
staff on this topic.
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[[Page 84950]]
The Exchange also believes the shares of each Bitcoin Fund are
actively traded. As of August 7, 2024, the total trading volume (by
shares) for each fund for the six-month period of February 8 through
August 7, 2024 and the approximate average daily volume (``ADV'') (in
shares and notional) over the 30-day period of July 9 through August 7,
2024 for each Bitcoin Fund was as follows:
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6-Month trading volume 30-Day ADV 30-Day ADV
Bitcoin Fund (shares) (shares) (notional $)
----------------------------------------------------------------------------------------------------------------
Fidelity Fund.......................................... 1,112,861,581 6,014,335 250,354,755
ARK 21 Fund............................................ 297,360,739 1,893,335 90,484,307
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As demonstrated above, despite the fact that the Bitcoin Funds had been
trading for approximately seven months \15\ only as of August 7, 2024,
the six-month trading volume for each as of that date was substantially
higher than 2,400,000 shares (approximately 464 and 124 times that
amount, respectively), which is the minimum 12-month volume the
Exchange generally requires for a corporate stock 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 trading volume for
each Bitcoin Fund was in the top 5% of all ETFs that are currently
trading. The Exchange believes this data demonstrates each Bitcoin Fund
is characterized as having shares that are actively traded.
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\15\ The Bitcoin Funds began trading on January 11, 2024.
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Options on the 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.\16\ 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 \17\ at the
commencement of trading on the Exchange and may also list series of
options on a Bitcoin Fund for trading on a weekly,\18\ monthly,\19\ or
quarterly \20\ 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.
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\16\ 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).
\17\ 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.
\18\ See Rule 4.5(d).
\19\ See Rule 4.5(g).
\20\ See Rule 4.5(e).
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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 on 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.\21\ Additionally, the Exchange may list
series of options pursuant to the $1 Strike Price Interval Program,\22\
the $0.50 Strike Program,\23\ the $2.50 Strike Price Program,\24\ and
the $5 Strike Program.\25\ 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.\26\ 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
[[Page 84951]]
increments set forth in Rules 4.5 and 5.4, as applicable.
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\21\ 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.
\22\ See Rule 4.5, Interpretation and Policy .01(a).
\23\ See Rule 4.5, Interpretation and Policy .01(b).
\24\ See Rule 4.5, Interpretation and Policy .04.
\25\ See Rule 4.5, Interpretation and Policy .01(f).
\26\ 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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Rule 4.20 currently permits the Exchange to authorize for trading a
FLEX option class on any equity security if it may authorize for a
trading a non-FLEX option class on that equity security pursuant to
Rule 4.3. The proposed rule change amends Rule 4.20 to exclude the
Bitcoin Funds from this provision.\27\
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\27\ See Amendment No. 3 at 3.
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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,
expirations, exercise prices, minimum increments, margin requirements,
customer accounts, and trading halt procedures will apply to the
listing and trading of Bitcoin Funds options 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).
The Exchange also proposes to amend Rules 8.30 and 8.42.
Specifically, the Exchange proposes to adopt Rule 8.30, Interpretation
and Policy .10 to provide a position limit of 25,000 same side option
contracts for each Bitcoin Fund option. Additionally, pursuant to the
proposed change to Rule 8.42, Interpretation and Policy .02, the
exercise limits for options on each Bitcoin Fund will be equivalent to
this proposed position limit.\28\
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\28\ The Exchange also proposes to amend the last sentence of
Rule 8.30 by deleting the references to Interpretations and Policies
.02 and .04. Therefore, the rule as proposed would state that limits
shall be determined in the manner described in the Interpretations
and Policies in that Rule. The Exchange believes all the
Interpretations and Policies to Rule 8.30 are relevant for
determining position limits pursuant to Rule 8.30, not just the two
currently specified ones.
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The Exchange determined these proposed position and exercise limits
considering, among other things, the approximate six-month average
daily volume (``ADV'') and outstanding shares of each underlying
Bitcoin Fund (which as discussed above demonstrate that each Bitcoin
Fund is widely held and actively traded and thus justify these
conservatively proposed position limits), as set forth below, along
with market capitalization (as of August 7, 2024):
----------------------------------------------------------------------------------------------------------------
Six-month ADV Outstanding Market capitalization
Underlying Bitcoin Fund (shares) shares ($)
----------------------------------------------------------------------------------------------------------------
Fidelity Fund.................................... 8,902,893 201,100,100 14,217,013,188
ARK 21 Fund...................................... 2,378,886 45,495,000 2,487,666,600
----------------------------------------------------------------------------------------------------------------
The Exchange then compared the number of outstanding shares of the
Bitcoin Funds to those of other ETFs.\29\ The following table provides
the approximate average position (and exercise limit) of ETF options
with similar outstanding shares (as of August 27, 2024), compared to
the proposed position and exercise limit for the Bitcoin Fund options:
\30\
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\29\ Over 80% of the ETFs used for comparison have a limit of at
least 200,000, and more than half have a limit of 250,000.
Additionally, the three-month ADV of the majority of the ETFs used
for comparison was lower than the Fidelity Fund three-month ADV of
5,665,027 shares.
\30\ Nearly 80% of the ETFs used for comparison have a limit of
at least 75,000 (and up to 250,000). Additionally, the three-month
ADV of the majority of ETFs used for comparison was lower (many more
than four times lower) than the ARK 21 Fund three-month ADV of
1,737,327 shares.
------------------------------------------------------------------------
Average
Limit of Proposed
Underlying Bitcoin Fund other ETF limit
options (contracts)
(contracts)
------------------------------------------------------------------------
Fidelity Fund................................. 188,110 25,000
ARK 21 Fund................................... 108,696 25,000
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The Exchange considered current position and exercise limits of
options on ETFs with outstanding shares comparable to those of each
Bitcoin Fund, with the proposed limit significantly lower (between two
and ten times lower) than the average limits of the options on the
other ETFs. As discussed above, the Bitcoin Funds are actively held and
widely traded: (1) each Bitcoin Fund (as of August 7, 2024) had
significantly 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); (2) each Bitcoin Fund (as of the
dates listed above) had significantly 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); and (3) each
Bitcoin Fund had a six-month trading volume substantially higher than
2,400,000 shares, 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.
With respect to outstanding shares, if a market participant held
the maximum number of positions possible pursuant to the proposed
position and exercise limits, the equivalent shares represented by the
proposed position/exercise limit would represent the following
approximate percentage of current outstanding shares:
----------------------------------------------------------------------------------------------------------------
Proposed position/ Percentage of
Underlying Bitcoin Fund exercise limit (in Outstanding outstanding
equivalent shares) shares shares
----------------------------------------------------------------------------------------------------------------
Fidelity Fund.................................... 2,500,000 201,100,100 1.2
ARK 21 Fund...................................... 2,500,000 45,495,000 5.5
----------------------------------------------------------------------------------------------------------------
As this table demonstrates, if a market participant held the maximum
permissible options positions in one of the Bitcoin Fund options and
exercised all of them at the same time, that market participant would
control a small percentage of the outstanding shares of the underlying
Bitcoin Fund.
Cboe Options Rule 8.30, Interpretation and Policy .02, provides two
methods of qualifying for a position limit tier above 25,000 option
contracts.
[[Page 84952]]
The first method is based on six-month trading volume in the underlying
security, and the second method is based on slightly lower six-month
trading volume and number of shares outstanding in the underlying
security. An underlying stock or ETF that qualifies for method two
based on trading volume and number of shares outstanding would be
required to have the minimum number of outstanding shares as shown in
middle column of the table below.
The table, which provides the equivalent shares of the position
limits applicable to equity options, including ETFs, further represents
the percentages of the minimum number of outstanding shares that an
underlying stock or ETF must have to qualify for that position limit
(under the second method described above), all of which are higher than
the percentages for the Bitcoin Funds.\31\
---------------------------------------------------------------------------
\31\ In the ``Minimum Shares Outstanding'' column in the chart
below, 6,300,000 shares is the minimum number of outstanding shares
an underlying security must have for the Exchange to continue to
list options on that security, so this would be the smallest number
of outstanding shares permissible for any corporate option that
would have a position limit of 25,000 contract. See Rule 4.5,
Interpretation and Policy .01. This rule applies to corporate stock
options but not ETF options, which currently have no requirement
regarding outstanding shares of the underlying ETF for the Exchange
to continue listing options on that ETF. Therefore, there may be ETF
options trading for which the 25,000 contract position limits
represents [sic] an even larger percentage of outstanding shares of
the underlying ETF than set forth above.
------------------------------------------------------------------------
Minimum Percentage of
Position/exercise limit (in equivalent outstanding outstanding
shares) shares shares
------------------------------------------------------------------------
2,500,000................................. 6,300,000 40.0
5,000,000................................. 40,000,000 12.5
7,500,000................................. 120,000,000 6.3
20,000,000................................ 240,000,000 8.3
25,000,000................................ 300,000,000 8.3
------------------------------------------------------------------------
The equivalent shares represented by the proposed position and exercise
limits for each Bitcoin Fund as a percentage of outstanding shares of
the underlying Bitcoin Fund is significantly lower than the percentage
for the lowest possible position limit for equity options of 25,000
(under 6% compared to 40%) and is lower than that percentage for each
current position limit bucket.\32\
---------------------------------------------------------------------------
\32\ As these percentages are based on the minimum number of
outstanding shares an underlying security must have to qualify for
the applicable position limit, these are the highest possible
percentages that would apply to any option subject to that position
and exercise limit.
---------------------------------------------------------------------------
Further, the proposed position and exercise limits for each Bitcoin
Fund option are significantly below the limits that would otherwise
apply pursuant to current Rule 8.30. These position and exercise limits
are the lowest position and exercise limits available in the options
industry, are extremely conservative and more than appropriate given
the market capitalization, average daily volume, and high number of
outstanding shares of the Bitcoin Funds.
All of the above information demonstrates that the proposed
position and exercise limits for the Bitcoin Fund options are more than
reasonable and appropriate. The trading volume, ADV, and outstanding
shares of each Bitcoin Fund demonstrate that these funds are actively
traded and widely held, and proposed position and exercise limits are
well below those of other ETFs with similar market characteristics. The
proposed position and exercise limits are the lowest position and
exercise limits available for equity options in the industry, are
extremely conservative, and are more than appropriate given each
Bitcoin Fund's market capitalization, ADV, and high number of
outstanding shares.
Today, the Exchange has an adequate surveillance program in place
for options. Cboe intends to apply those same program procedures to
options on the Bitcoin Funds that it applies to the Exchange's other
options products.\33\ Cboe's market surveillance staff would have
access to the surveillances conducted by Cboe BZX Exchange, Inc.\34\
with respect to the Bitcoin Funds and would review activity in the
underlying Bitcoin Funds when conducting surveillances for market abuse
or manipulation in the options on the Bitcoin Funds. Additionally, the
Exchange is a member of the Intermarket Surveillance Group (``ISG'')
under the Intermarket Surveillance Group Agreement. ISG members work
together to coordinate surveillance and investigative information
sharing in the stock, options, and futures markets. In addition, Cboe
has a Regulatory Services Agreement with the Financial Industry
Regulatory Authority (``FINRA'') for certain market surveillance,
investigation and examinations functions. Pursuant to a multi-party
17d-2 joint plan, all options exchanges allocate amongst themselves and
FINRA responsibilities to conduct certain options-related market
surveillance that are common to rules of all options exchanges.\35\
---------------------------------------------------------------------------
\33\ The surveillance program includes surveillance patterns for
price and volume movements as well as patterns for potential
manipulation (e.g., spoofing and marking the close).
\34\ Cboe BZX Exchange, Inc. is an affiliated market of the
Exchange.
\35\ Section 19(g)(1) of the Act, among other things, requires
every self-regulatory organization (``SRO'') registered as a
national securities exchange or national securities association to
comply with the Act, the rules and regulations thereunder, and the
SRO's own rules, and, absent reasonable justification or excuse,
enforce compliance by its members and persons associated with its
members. See 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section
17(d)(1) of the Act allows the Commission to relieve an SRO of
certain responsibilities with respect to members of the SRO who are
also members of another SRO (``common members''). Specifically,
Section 17(d)(1) allows the Commission to relieve an SRO of its
responsibilities to: (i) receive regulatory reports from such
members; (ii) examine such members for compliance with the Act and
the rules and regulations thereunder, and the rules of the SRO; or
(iii) carry out other specified regulatory responsibilities with
respect to such members.
---------------------------------------------------------------------------
The underlying shares of spot bitcoin exchange-traded products
(``ETPs''), including the Bitcoin Funds, are also subject to safeguards
related to addressing market abuse and manipulation. As the Commission
stated in its order approving proposals of several exchanges to list
and trade shares of spot bitcoin-based ETPs, ``[e]ach Exchange has a
comprehensive surveillance-sharing agreement with the CME via their
common membership in the Intermarket Surveillance Group. This
facilitates the sharing of information that is available to the CME
through its surveillance of its markets, including its surveillance of
the CME bitcoin futures market.\36\ The Exchange states that, given the
consistently high correlation between the CME Bitcoin futures market
and the spot bitcoin market, as confirmed by the Commission through
robust correlation analysis, the Commission was able to conclude that
such surveillance sharing agreements could reasonably be
[[Page 84953]]
``expected to assist in surveilling for fraudulent and manipulative
acts and practices in the specific context of the [Bitcoin ETPs].''
\37\ In light of surveillance measures related to both options and
futures as well as the underlying Bitcoin Funds,\38\ the Exchange
believes that existing surveillance procedures are designed to deter
and detect possible manipulative behavior which might potentially arise
from listing and trading the proposed options on the Bitcoin Funds.
Further, the Exchange will implement any new surveillance procedures it
deems necessary to effectively monitor the trading of options on
Bitcoin ETPs.
---------------------------------------------------------------------------
\36\ See Bitcoin ETP Approval Order.
\37\ See Bitcoin ETP Approval Order, 89 FR at 3010-11.
\38\ See Securities Exchange Act Release Nos. 99290 (January 8,
2024), 89 FR 2338, 2343, 2347-2348 (January 12, 2024) (SR-CboeBZX-
2023-044) Notice of Filing of Amendment No. 3 to a Proposed Rule
Change to List and Trade Shares of the Fidelity Wise Origin Bitcoin
Fund Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares); and
99288 (January 8, 2024), 89 FR 2387, 2392, 2399-2400 (January 12,
2024) (SR-CboeBZX-2023-028) (Notice of Filing of Amendment No. 5 to
a Proposed Rule Change To List and Trade Shares of the ARK 21Shares
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares). See also Securities Exchange Act Release No. 99306 (January
10, 2024), 89 FR 3008, 3009 (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-2023-028; SR-CboeBZX-2023-038; SR-
CboeBZX-2023-040; SR-CboeBZX-2023-042; SRCboeBZX-2023-044; and SR-
CboeBZX-2023-072) (Order Granting Accelerated Approval of Proposed
Rule Changes, as Modified by Amendments Thereto, to List and Trade
Bitcoin-Based Commodity-Based Trust Shares and Trust Units)
(``Bitcoin ETP Approval Order'').
---------------------------------------------------------------------------
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 two classes, 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,\39\ 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 positions; (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.
---------------------------------------------------------------------------
\39\ 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.
---------------------------------------------------------------------------
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.\40\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \41\ 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) \42\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78f(b).
\41\ 15 U.S.C. 78f(b)(5).
\42\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes that the proposal to list and
trade options on the 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
the 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,\43\ 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.
---------------------------------------------------------------------------
\43\ See Rule 4.3, Interpretation and Policy .06(a)(4).
---------------------------------------------------------------------------
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 the
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
[[Page 84954]]
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 applicable margin requirements, will govern the
listing and trading of options on Bitcoin Funds in the same manner.
The Exchange believes the proposed rule change to exclude the
Bitcoin Funds from being eligible for trading as FLEX options is
consistent with the Act, because it will permit the Exchange to
continue to participate in ongoing discussions with the Commission
regarding appropriate position limits for ETF options.\44\
---------------------------------------------------------------------------
\44\ The Exchange will submit a separate rule filing that would
permit the Exchange to authorize for trading FLEX options on the
Bitcoin Funds (which filing may propose changes to existing FLEX
option position limits for such options if appropriate). See
Amendment No. 3 at 4.
---------------------------------------------------------------------------
The Exchange believes the proposed position and exercise limits are
designed to prevent fraudulent and manipulative acts and practices and
promote just and equitable principles of trade, as they 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 in this Amendment No. 2 for the Bitcoin Fund options are 25,000
contracts, which is currently the lowest limit applicable to any equity
options (including ETF options).\45\ The Exchange believes the proposed
position and exercise limits are extremely conservative for each
Bitcoin Fund option given the trading volume and outstanding shares for
each. The information above demonstrates that the average position and
exercise limits of options on ETFs with comparable outstanding shares
and trading volume to those of the Bitcoin Funds are significantly
higher than the proposed position and exercise limits for Bitcoin Fund
options. Therefore, the proposed position and exercise limits for the
Bitcoin Fund options are conservative relative to options on ETFs with
comparable market characteristics.
---------------------------------------------------------------------------
\45\ See Rule 8.30. The Exchange notes in the initial Rule
Filing, the position and exercise limit for each Bitcoin Fund option
would have been 25,000 contracts once the options began trading
(pursuant to Rule 8.30, no Bitcoin Fund option would have a higher
position and exercise limit until the next time the Exchange
conducted the review of limits). Therefore, this Amendment No. 2 is
proposing to adopt the same or lower position and exercise limits as
were practically proposed in the initial Rule Filing.
---------------------------------------------------------------------------
Further, given that the issuer of each Bitcoin Fund may create and
redeem shares that represent an interest in Bitcoin, the Exchange
believes it is relevant to compare the size of a position limit to the
market capitalization of the Bitcoin market. As of August 27, 2024, the
global supply of Bitcoin was 19,745,940, and the price of one Bitcoin
was approximately $59,466.82,\46\ which equates to a market
capitalization of approximately $1.165 trillion. Consider the proposed
position and exercise limit of 25,000 option contracts for each Bitcoin
Fund option. A position and exercise limit of 25,000 same side
contracts effectively restricts a market participant from holding
positions that could result in the receipt of no more than 2,500,000 of
Fidelity Fund shares or ARK 21 Fund shares, as applicable (if that
market participant exercised all its options. The following table shows
the share price of each Bitcoin Fund on August 27, 2024, the value of
2,500,000 shares of the Bitcoin Fund at that price, and the approximate
percentage of that value of the size of the Bitcoin market:
---------------------------------------------------------------------------
\46\ See <a href="http://Blockchain.com">Blockchain.com</a> [verbar] Charts--Total Circulating
Bitcoin.
----------------------------------------------------------------------------------------------------------------
Value of 2,500,000
Bitcoin Fund August 27, 2024 share shares of Bitcoin Fund Percentage of
price ($) ($) bitcoin market
----------------------------------------------------------------------------------------------------------------
Fidelity Fund.............................. 54.33 135,825,000 0.01%
ARK 21 Fund................................ 62.08 155,200,000 0.01%
----------------------------------------------------------------------------------------------------------------
Therefore, if a market participant with the maximum 25,000 same
side contracts in either Fidelity Fund options or ARK 21 Fund options
exercised all positions at one time, such an event would have no
practical impact on the Bitcoin market.
The Exchange also believes the proposed limits are appropriate
given position limits for Bitcoin futures. For example, the Chicago
Mercantile Exchange (``CME'') imposes a position limit of 2,000 futures
(for the initial spot month) on its Bitcoin futures contract.\47\ On
August 28, 2024, CME Aug 24 Bitcoin Futures settled at $58,950. A
position of 2,000 CME Bitcoin futures, therefore, would have a notional
value of $589,500,000. The following table shows the share price of
each Bitcoin Fund on August 28, 2024 and the approximate number of
option contracts that equates to that notional value:
---------------------------------------------------------------------------
\47\ See CME Rulebook Chapter 350 (description of CME Bitcoin
Futures) and Chapter 5, Position Limit, Position Accountability and
Reportable Level Table in the Interpretations & Special Notices.
Each CME Bitcoin futures contract is valued at five Bitcoins as
defined by the CME CF Bitcoin Reference Rate (``BRR''). See CME Rule
35001.
------------------------------------------------------------------------
August 28, Number of
Bitcoin Fund 2024 Share option
price ($) contracts
------------------------------------------------------------------------
Fidelity Fund................................. 51.47 114,532
ARK 21 Fund................................... 58.83 100,203
------------------------------------------------------------------------
The approximate number of option contracts for each Bitcoin Fund
that equate to the notional value of CME Bitcoin futures is
significantly higher than the proposed limit of 25,000 options contract
for each Bitcoin Fund option. The fact that many options ultimately
expire out-of-the-money and thus are not exercised for shares of the
underlying, while the delta of a Bitcoin Future is 1, further
demonstrates how conservative the proposed limits of 25,000 options
contracts are for the Bitcoin Fund options.
The Exchange notes, unlike options contracts, CME position limits
are calculated on a net futures-equivalent basis by contract and
include contracts that aggregate into one or more base contracts
according to an aggregation ratio(s).\48\ Therefore, if a portfolio
includes positions in options on futures, CME would aggregate those
positions into the underlying futures contracts in accordance with a
table published by CME on a delta equivalent value for the relevant
spot month, subsequent spot month, single month and all month position
limits.\49\ If a position exceeds position limits because of an option
assignment, CME permits market participants to liquidate the excess
[[Page 84955]]
position within one business day without being considered in violation
of its rules. Additionally, if at the close of trading, a position that
includes options exceeds position limits for futures contracts, when
evaluated using the delta factors as of that day's close of trading but
does not exceed the limits when evaluated using the previous day's
delta factors, then the position shall not constitute a position limit
violation. Considering CME's position limits on futures for Bitcoin,
the Exchange believes that that the proposed same side position limits
are more than appropriate for the Bitcoin Fund options.
---------------------------------------------------------------------------
\48\ See CME Rulebook Chapter 5, Position Limit, Position
Accountability and Reportable Level Table in the Interpretations &
Special Notices.
\49\ Id.
---------------------------------------------------------------------------
The Exchange believes the proposed position and exercise limits in
this Amendment No. 2 will have no material impact to the supply of
Bitcoin. For example, consider again the proposed position limit of
25,000 option contracts for each Bitcoin Fund option. As noted above, a
position limit of 25,000 same side contracts effectively restricts a
market participant from holding positions that could result in the
receipt of no more than 2,500,000 shares of the applicable Bitcoin Fund
(if that market participant exercised all its options). As of August 7,
2024, the Bitcoin Funds had the number of shares outstanding set forth
in the table below. The table below also sets forth the approximate
number of market participants that could hold the maximum of 25,000
same side positions in each Bitcoin Fund that would equate to the
number of shares outstanding of that Bitcoin Fund:
------------------------------------------------------------------------
Number of
market
Shares participants
Bitcoin Fund outstanding with 25,000
same side
positions
------------------------------------------------------------------------
Fidelity Fund.............................. 201,100,100 80
ARK 21 Fund................................ 45,495,000 18
------------------------------------------------------------------------
This means if 80 market participants had 25,000 same side positions
in Fidelity Fund options, each of them would have to simultaneously
exercise all of those options to create a scenario that may put the
underlying security under stress. Similarly, this means if 18 market
participants had 25,000 same side positions in ARK 21 Fund options,
each of them would have to simultaneously exercise all of those options
to create a scenario that may put the underlying security under stress.
The Exchange believes it is highly unlikely for either such event to
occur; however, even if either such event did occur, the Exchange would
not expect either Bitcoin Fund to be under stress because such an event
would merely induce the creation of more shares through the trust's
creation and redemption process.
As of August 7, 2024, the global supply of Bitcoin was
approximately 19,736,528.\50\ Based on the $47.88 price of a Fidelity
Fund share on August 7, 2024, a market participant could have redeemed
one Bitcoin for approximately 1,149 Fidelity Fund shares. Another
22,677,270,672 Fidelity Fund shares could be created before the supply
of Bitcoin was exhausted. As a result, 9,070 market participants would
have to simultaneously exercise 25,000 same side positions in Fidelity
Fund options to receive shares of the Fidelity Fund holding the entire
global supply of Bitcoin. Similarly, based on the $54.68 price of an
ARK 21 Fund share on August 7, 2024, a market participant could have
redeemed one Bitcoin for approximately 1,006 ARK 21 Fund Shares.
Another 19,855 ARK 21 Fund shares could be created before the supply of
Bitcoin were exhausted. As a result, 7,941 market participants would
have to simultaneously exercise 25,000 same side positions in ARK 21
Fund options to receive shares of the ARK 21 Fund holding the entire
global supply of Bitcoin. Unlike the Bitcoin Funds, the number of
shares that corporations may issue is limited. However, like
corporations, which authorize additional shares, repurchase shares, or
split their shares, the Bitcoin Funds may create, redeem, or split
shares in response to demand. While the supply of Bitcoin is limited to
21,000,000, it is believed that it will take more than 100 years to
fully mine the remaining Bitcoin.\51\ The supply of Bitcoin is larger
than the available supply of most securities.\52\ Given the significant
unlikelihood of any of these events ever occurring, the Exchange does
not believe options on the Bitcoin Funds should be subject to position
and exercise limits even lower than those proposed (which are already
equal to the lowest available limit for equity options in the industry)
to protect the supply of Bitcoin.\53\
---------------------------------------------------------------------------
\50\ See <a href="http://Blockchain.com">Blockchain.com</a> [verbar] Charts--Total Circulating
Bitcoin (which also shows the price of one Bitcoin equal to
$55,033.47).
\51\ See Pre-Effective Amendment No. 5 to Form S-1 Registration
Statement No. 333-254652, Fidelity Fund, filed January 9, 2024, at
53-54; and Amendment No. 8 to Form S-1 Registration Statement No.
333-257474, ARK 21 Fund, filed January 9, 2024, at 15.
\52\ The market capitalization of Bitcoin would rank in the top
10 among securities. See <a href="https://companiesmarketcap.com/usa/largest-companies-in-the-usa-by-market-cap/">https://companiesmarketcap.com/usa/largest-companies-in-the-usa-by-market-cap/</a>.
\53\ This would be even more unlikely with respect to the
Bitcoin Funds for which the Exchange proposes lower position limits.
---------------------------------------------------------------------------
The Exchange believes the available supply of Bitcoin is not
relevant to the determination of position and exercise limits for
options overlying the Bitcoin Funds.\54\ Position and exercise limits
are not a tool that should be used to address a potential limited
supply of the underlying of an underlying. Position and exercise limits
do not limit the total number of options that may be held, but rather
they limit the number of positions a single customer may hold or
exercise at one time.\55\ ``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.'' \56\ Position and exercise limit 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
[[Page 84956]]
disruption of the options market itself, especially in illiquid options
classes.'' \57\
---------------------------------------------------------------------------
\54\ The Exchange is unaware of any proposed rule change related
to position and exercise limits for any equity option (including
commodity ETF options) for which the Commission required
consideration of whether the available supply of an underlying
(whether it be a corporate stock or an ETF) or the contents of an
ETF (commodity or otherwise) should be considered when an exchange
proposed to establish those limits. 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''). The Exchange notes when the Commission approved this
filing, the position limits in Rule 8.30 were the same as they are
today. For reference, the current position and exercise limits for
options on SPDR Gold Shares ETF (``GLD'') and options on iShares
Silver Trust (``SLV'') are 250,000 contracts, or 10 times that
proposed position and exercise limit for the Bitcoin Fund options.
\55\ For example, suppose an option has a position limit of
25,000 option contracts and there are a total of 10 investors
trading that option. If all 10 investors max out their positions,
that would result in 250,000 option contracts outstanding at that
time. However, suppose 10 more investors decide to begin trading
that option and also max out their positions. This would result in
500,000 option contracts outstanding at that time. An increase in
the number of investors could cause an increase in outstanding
options even if position limits remain unchanged.
\56\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
\57\ See id.
---------------------------------------------------------------------------
The Exchange notes that a Registration Statement on Form S-1 was
filed with the Commission for each Bitcoin Fund, each of which
described the supply of Bitcoin as being limited to 21,000,000 (of
which approximately 90% had already been mined), and that the limit
would be reached around the year 2140.\58\ Each Registration Statement
permits an unlimited number of shares of the applicable Bitcoin ETF to
be created. Further, the Commission approved proposed rule changes that
permitted the listing and trading of shares of each Bitcoin Fund, which
approval did not comment on the sufficient supply of Bitcoin or address
whether there was a risk that permitting an unlimited number of shares
for a Bitcoin Fund would impact the supply of Bitcoin.\59\ Therefore,
the Exchange believes the Commission had ample time and opportunity to
consider whether the supply of Bitcoin was sufficient to permit the
creation of unlimited Bitcoin Fund shares, and does not believe
considering this supply with respect to the establishment of position
and exercise limits is appropriate given its lack of relevance to the
purpose of position and exercise limits. However, given the significant
size of the Bitcoin supply, the proposed positions limits are more than
sufficient to protect investors and the market.
---------------------------------------------------------------------------
\58\ See Pre-Effective Amendment No. 5 to Form S-1 Registration
Statement No. 333-254652, Fidelity Fund, filed January 9, 2024, at
53--54; and Amendment No. 8 to Form S-1 Registration Statement No.
333-257474, ARK 21 Fund, filed January 9, 2024, at 15.
\59\ See Bitcoin ETP Approval Order.
---------------------------------------------------------------------------
Based on the above information demonstrating, among other things,
that each Bitcoin Fund is characterized by a substantial number of
outstanding shares that are actively traded and widely held, the
Exchange believes the proposed position and exercise limits are
extremely conservative compared to those of ETF options with similar
market characteristics. The proposed position and exercise limits
reasonably and appropriately balance the liquidity provisioning in the
market against the prevention of manipulation. The Exchange believes
these proposed limits are effectively designed to prevent an individual
customer or entity from establishing options positions that could be
used to manipulate the market of the underlying as well as the Bitcoin
market.\60\
---------------------------------------------------------------------------
\60\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
---------------------------------------------------------------------------
The Exchange represents that it has the necessary systems capacity
to support the new Bitcoin Fund options. As discussed above, 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.
Finally, the Exchange believes the proposed change to amend the
last sentence of Rule 8.30 by deleting the references to
Interpretations and Policies .02 and .04 is consistent with the Act and
will perfect the mechanism of a free and open market, by clarifying and
making more accurate the Exchange's Rulebook.
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 the Bitcoin Funds will be
equally available to all market participants who wish to trade such
options and will trade generally in the same manner as other options.
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, expirations, exercise prices, minimum
increments, margin requirements, customer accounts, and trading halt
procedures will apply to the listing and trading of Bitcoin Funds
options 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.
Also, and as stated above, the Exchange already lists options on other
commodity-based Units.\61\ Further, the Bitcoin Funds would need to
satisfy the maintenance listing standards set forth in the Exchange
Rules in the same manner as any other Unit for the Exchange to continue
listing options on them.
---------------------------------------------------------------------------
\61\ See Rule 4.3, Interpretation and Policy .06(a)(4).
---------------------------------------------------------------------------
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.\62\ 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.
---------------------------------------------------------------------------
\62\ The Exchange notes the Commission recently approved a rule
filing of another exchange to permit the listing and trading of
options on the iShares Bitcoin Trust. See Securities Exchange Act
Release No. 101128 (September 20, 2024), 89 FR 78942 (September 26,
2024) (SR-ISE-2024-03).
---------------------------------------------------------------------------
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.
Finally, the Exchange does not believe the proposed change to amend
the last sentence of Rule 8.30 by deleting the references to
Interpretations and Policies .02 and .04 will impose any burden on
intermarket competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The change is clarifying in
nature, as the Exchange believes all the Interpretations and Policies
to Rule 8.30 are relevant for determining position limits pursuant to
Rule 8.30, not just the two currently specified ones, and therefore,
the proposed change makes the Exchange's Rulebook more accurate.
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.
[[Page 84957]]
III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 2 and 3, is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange,\63\ and, in particular,
the requirements of Section 6 of the Act.\64\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\65\ which requires that an exchange have
rules designed to prevent fraudulent and manipulative acts and
practices, to remove impediments to and perfect the mechanism of a free
and open market, and to protect investors and the public interest.
---------------------------------------------------------------------------
\63\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\64\ 15 U.S.C. 78f.
\65\ 15 U.S.C. 78f(b)(5).
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A. Widely Held and Actively Traded
The Exchange's initial listing standards require, among other
things, that the security underlying a listed option be ``characterized
by a substantial number of outstanding shares that are widely held and
actively traded.'' \66\ As described above, the Exchange states that,
as of August 7, 2024, the Fidelity Fund had 201,100,100 shares
outstanding and that, as of June 27, 2024, the Fidelity Fund had
279,656 beneficial holders.\67\ The Exchange states that, as of August
7, 2024, the ARK 21 Fund had 45,495,000 shares outstanding and that, as
of June 26, 2024, the ARK 21 Fund had 69,425 beneficial holders.\68\ In
addition, the Exchange states that, as of August 7, 2024, the Fidelity
Fund had six-month total trading volume of 1,112,861,581 shares and,
for the period from July 9, 2024, through August 7, 2024, 30-day
average daily volume of 6,014,335 shares and 30-day average notional
daily volume of $250,354,755.\69\ The Exchange states that, as of
August 7, 2024, the ARK 21 Fund had six-month total trading volume of
297,360,739 shares and, for the period from July 9, 2024, through
August 7, 2024, 30-day average daily volume of 1,893,335 shares and 30-
day average notional daily volume of $90,484,307.\70\ The Exchange
further states that, as of August 7, 2024, the trading volume for both
Bitcoin Funds was in the top 5% of all ETFs trading at that time.\71\
In addition, the Exchange states that, as of August 7, 2024, the
Fidelity Fund had a market capitalization of $14,217,013,188 and the
ARK 21 Fund had a market capitalization of $2,487,666,600.\72\
---------------------------------------------------------------------------
\66\ See Exchange Rule 4.3(a)(2).
\67\ See Amendment No. 2 at 8 and 12.
\68\ See id.
\69\ See Amendment No. 2 at 8.
\70\ See id.
\71\ See Amendment No. 2 at 9.
\72\ See id. at 12.
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The Commission has reviewed the Exchange's analysis and publicly
available data regarding the Bitcoin Funds. Based on this review of
information provided by the Exchange and publicly available
information--including information regarding the number of shares
outstanding and the number of beneficial holders for each Bitcoin Fund,
the ADV of each Bitcoin Fund, and the market capitalization of each
Bitcoin Fund--the Commission concludes that it is reasonable for the
Exchange to determine that the Bitcoin Funds satisfy the requirement of
Exchange Rule 4.3(a)(2) that the security underlying a listed option be
widely held and actively traded.
B. Position and Exercise Limits
Position and exercise limits serve as a regulatory tool designed to
deter manipulative schemes and adverse market impact surrounding the
use of options. Since the inception of standardized options trading,
the options exchanges have had rules limiting the aggregate number of
options contracts that a member or customer may hold or exercise.
Options position and exercise limits are intended to prevent the
establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market to benefit
the options position.\73\ In addition, such limits serve to reduce the
possibility of disruption in the options market itself, especially in
illiquid classes.\74\ As the Commission has previously recognized,
markets with active and deep trading interest, as well as with broad
public ownership, are more difficult to manipulate or disrupt than less
active and deep markets with smaller public floats.\75\ The Commission
also has recognized that position and exercise limits must be
sufficient to prevent investors from disrupting the market for the
underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security.\76\ At the same time, the
Commission has recognized that limits must not be established at levels
that are so low as to discourage participation in the options market by
institutions and other investors with substantial hedging needs or to
prevent specialists and market-makers from adequately meeting their
obligations to maintain a fair and orderly market.\77\
---------------------------------------------------------------------------
\73\ See Securities Exchange Act Release No. 39489 (Dec. 24,
1997), 63 FR 276, 279 (Jan 5. 1998) (order approving File No. SR-
Cboe-97-11) (``Position Limit Order'').
\74\ Id.
\75\ Id.
\76\ See, e.g., Securities Exchange Act Release Nos. 21907 (Mar.
29, 1985), 50 FR 13440, 13441 (Apr. 4, 1985) (order approving File
Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-25, and SR-PSE-85-1);
and 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan. 12, 1999) (order
approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-98-33; and Phlx-
98-36).
\77\ See id.
---------------------------------------------------------------------------
The Exchange proposes a position limit of 25,000 contracts on the
same side of the market for options on each Bitcoin Fund and an
equivalent exercise limit.\78\ In proposing these position and exercise
limits, the Exchange considered, among other things, the approximate
six-month ADV, outstanding shares, and market capitalization of each
Bitcoin Fund.\79\ The Exchange states that the proposed position and
exercise limits of 25,000 contracts are significantly lower than the
position and exercise limits of options on other ETFs with a similar
number of outstanding shares.\80\ In addition, the Exchange states that
the number of shares represented by the proposed position and exercise
limits were equal to approximately 1.2% of the outstanding shares of
the Fidelity Fund and approximately 5.5% of the outstanding shares of
the ARK 21 Fund.\81\ The Exchange further states that ``[t]he proposed
position and exercise limits are the lowest position and exercise
limits available for equity options in the industry, are extremely
conservative, and are more than appropriate given each Bitcoin Fund's
market capitalization, ADV, and high number of outstanding share.''
\82\
---------------------------------------------------------------------------
\78\ See Amendment No. 2 and proposed Exchange Rules 8.30,
Interpretation and Policy .10, and 8.42, Interpretation and Policy
.02.
\79\ See Amendment No. 2 at 13-14.
\80\ The Exchange states that options on ETFs with outstanding
shares similar to the Fidelity Fund had average position and
exercise limits of 188,110 contracts, and that options on ETFs with
outstanding shares similar to the ARK 21 Fund had average position
and exercise limits of 108,696 contracts. See Amendment No. 2 at 13.
\81\ See Amendment No. 2 at 14 (using outstanding shares as of
August 7, 2024).
\82\ Amendment No. 2 at 16.
---------------------------------------------------------------------------
The Exchange also compared the size of the position and exercise
limits to the market capitalization of the Bitcoin market, which,
according to the Exchange, had a market capitalization of
[[Page 84958]]
$1.165 trillion as of August 27, 2024.\83\ The Exchange calculated that
with a position limit of 25,000 contracts (2,500,000 shares of the
underlying Fund), as of August 27, 2024, a market participant could
hold a position in shares of the Fidelity Fund that represented 0.01%
of the bitcoin market, and a position in ARK 21 Fund shares that
represented 0.01% of the Bitcoin market, positions that the Exchange
states ``would have no practical impact on the Bitcoin market.'' \84\
---------------------------------------------------------------------------
\83\ See Amendment No. 2 at 23.
\84\ Id.
---------------------------------------------------------------------------
The Exchange states that the proposed position and exercise limits
also are appropriate given position limits for Bitcoin futures.\85\ The
Exchange states that the Chicago Mercantile Exchange (``CME'')
establishes a position limit of 2,000 Bitcoin futures for the spot
month and that, as of August 28, 2024, such a position would have had a
notional value of $589,500,000.\86\ The Exchange states that, as of
that date, 114,532 options on the Fidelity Fund, and 100,203 options on
the ARK 21 Fund, would be the equivalent of the $589,500,000 CME
bitcoin futures notional value.\87\ The Exchange states that the option
contract equivalent numbers are significantly higher than the proposed
position and exercise limit of 25,000 contracts.\88\
---------------------------------------------------------------------------
\85\ See id.
\86\ See id. at 23-24.
\87\ See id. at 24.
\88\ See id.
---------------------------------------------------------------------------
In addition, the Exchange states that with a position limit of
25,000 contracts, 80 market participants, each with a position of
25,000 contracts, would have to exercise all of their Fidelity Fund
options to place the Fidelity Fund shares under stress, and 18 market
participants, each with a position of 25,000 contracts, would have
exercise all of their ARK 21 Fund options to place the ARK 21 Fund
shares under stress.\89\ Based on the information provided,
demonstrating, among other things, that each Bitcoin Fund is
characterized by a substantial number of outstanding shares that are
actively traded and widely held, the Exchange believes the proposed
position and exercise limits are extremely conservative compared to
those of ETF options with similar market characteristics.\90\ The
Exchange states that the proposed position and exercise limits
reasonably and appropriately balance the liquidity provisioning in the
market against the prevention of manipulation. The Exchange further
states that the proposed limits are effectively designed to prevent an
individual customer or entity from establishing options positions that
could be used to manipulate the market of the underlying as well as the
Bitcoin market.\91\
---------------------------------------------------------------------------
\89\ The Exchange bases this calculation on the number of
Fidelity Fund and ARK 21 Fund shares outstanding as of August 7,
2024. See Amendment No. 2 at 26.
\90\ See id. at 34.
\91\ See id. at 29-30 (citing the Position Limit Order, supra
note 70).
---------------------------------------------------------------------------
The Commission finds that the proposed position and exercise limits
are consistent with the Act, and in particular, with the requirements
in Section 6(b)(5) that the rules of a national securities exchange
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest. As discussed above, the
Commission has recognized that position and exercise limits must be
sufficient to prevent investors from disrupting the market for the
underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security.\92\ In addition, the
Commission has stated previously that rules regarding position and
exercise limits 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.\93\ Based on its review of the data and analysis provided by
the Exchange, the Commission concludes that the proposed position and
exercise limits satisfy these objectives. Specifically, the Commission
has considered and reviewed the Exchange's analysis that, as of August
7, 2024, the proposed position and exercise limits of 25,000 contracts
represented 1.2% of the outstanding shares of the Fidelity Fund and
5.5% of the outstanding shares of the ARK 21 Fund.\94\ The Commission
also has considered and reviewed the Exchange's statement that with a
position limit of 25,000 contracts, 80 market participants, each with a
same side position of 25,000 contracts, would have to exercise all of
their Fidelity Fund options to place the Fidelity Fund shares under
stress, and 18 market participants, each with a same side position of
25,000 contracts, would have to exercise all of their ARK 21 Fund
options to place the ARK 21 Fund shares under stress.\95\ Based on the
Commission's review of this information and analysis, the Commission
concludes that the proposed position and exercise limits are designed
to prevent investors from disrupting the market for the underlying
securities by acquiring and exercising a number of options contracts
disproportionate to the deliverable supply and average trading volume
of the underlying security, and 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.
---------------------------------------------------------------------------
\92\ See supra note 73 and accompanying text.
\93\ See Securities Exchange Act Release No. 57352 (Feb. 19,
2008), 73 FR 10076, 10080 (Feb. 25, 2008) (order approving File No.
SR-Cboe-2008-07).
\94\ See Amendment No. 2 at 14.
\95\ The Exchange bases this calculation on the number of
Fidelity Fund and ARK 21 Fund shares outstanding as of August 7,
2024. See Amendment No. 2 at 25-26.
---------------------------------------------------------------------------
The proposal excludes the Bitcoin Fund options from FLEX
trading.\96\ Excluding Bitcoin Fund options from FLEX trading will
allow the Commission to consider the listing of FLEX options on the
Bitcoin Funds in the context of any separate proposal the Exchange
files to list such options.
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\96\ The Exchange states that excluding Bitcoin Fund options
from FLEX trading will allow the Exchange to continue to participate
in ongoing discussions with the Commission regarding appropriate
position limits for ETF options. See Amendment No. 3 at 4.
---------------------------------------------------------------------------
C. Surveillance
As described more fully above, the Exchange states that it will
apply its existing options surveillance program procedures to options
on the Bitcoin Funds.\97\ The Exchange states that its market
surveillance staff would have access to the surveillances conducted by
Cboe BZX Exchange, Inc.\98\ with respect to the Bitcoin Funds and would
review activity in the underlying Bitcoin Funds when conducting
surveillances for market abuse or manipulation in the options on the
Bitcoin Funds.\99\ Additionally, the Exchange states that it is a
member of the Intermarket Surveillance Group (``ISG'') under the
Intermarket Surveillance Group Agreement, and that ISG members work
together to coordinate surveillance and investigative information
sharing in the stock, options, and futures markets.\100\ CME also is a
member of ISG. In
[[Page 84959]]
approving the Bitcoin ETPs, the Commission concluded that:
---------------------------------------------------------------------------
\97\ The surveillance program includes surveillance patterns for
price and volume movements as well as patterns for potential
manipulation (e.g., spoofing and marking the close). See Amendment
No. 2 at 16.
\98\ Cboe BZX Exchange, Inc. is an affiliated market of the
Exchange. See Amendment No. 2 at 17, footnote 28.
\99\ See Amendment No. 2 at 17.
\100\ See id.
fraud or manipulation that impacts prices in spot bitcoin markets
would likely similarly impact CME bitcoin futures prices. And
because the CME's surveillance can assist in detecting those impacts
on CME bitcoin futures prices, the Exchanges' comprehensive
surveillance-sharing agreement with the CME--a U.S. regulated market
whose bitcoin futures market is highly correlated to spot bitcoin--
can reasonably be expected to assist in surveilling for fraudulent
and manipulative acts and practices in the specific context of [the
Bitcoin ETPs].\101\
---------------------------------------------------------------------------
\101\ See Bitcoin ETP Order, 89 FR at 3010-11.
Together, these surveillance procedures should allow the Exchange
to investigate suspected manipulations or other trading abuses in
options on the Bitcoin Funds.
D. Retail Customers
Existing rules governing broker-dealer conduct when dealing with
retail customers will apply to the proposed Bitcoin Fund options. For
example, the Exchange's rules require its members to ``exercise due
diligence to learn the essential facts as to the customer and his
investment objectives and financial situation.'' \102\ In fulfilling
this obligation, the member must consider, among other things, a
customer's investment objectives; employment status; estimated annual
income; estimated net worth; and investment experience and
knowledge.\103\ Further, FINRA's heightened suitability requirements
for options trading accounts require that a person recommending an
opening position in any option contract have ``a reasonable basis for
believing, at the time of making the recommendation, that the customer
has such knowledge and experience in financial matters that he may
reasonably be expected to be capable of evaluating the risks of the
recommended transaction, and is financially able to bear the risks of
the recommended position in the option contract.'' \104\
---------------------------------------------------------------------------
\102\ See Exchange Rule 9.1(b).
\103\ See id.
\104\ See FINRA Rule 2360(b)(19).
---------------------------------------------------------------------------
E. Additional Change
The Exchange proposes to amend Exchange Rule 8.30 to delete
references to Interpretation and Policies .02 and .04. The Exchange
states that the proposed change is designed to clarify the rule by
indicating that all of the Interpretations and Policies to Exchange
Rule 8.30 are relevant for determining position limits pursuant to
Exchange Rule 8.30, not just the two currently specified provisions.
The Commission agrees that this change will help to clarify and ensure
the accuracy of Exchange Rule 8.30 by indicating that all of the
Interpretations and Policies to Exchange Rule 8.30, not only
Interpretation and Policies .02 and .04, apply when determining
position limits.
IV. Solicitation of Comments on Amendment Nos. 2 and 3 to the Proposed
Rule Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment Nos. 2 and 3 are 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#9defe8f1f8b0fef2f0f0f8f3e9eeddeef8feb3faf2eb"><span class="__cf_email__" data-cfemail="6a181f060f47090507070f041e192a190f09440d051c">[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 November 14, 2024.
V. Accelerated Approval of Amendment Nos. 2 and 3
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, for approving Amendment Nos. 2 and 3 prior to the 30th day
after the date of publication of notice of Amendment Nos. 2 and 3 in
the Federal Register. Amendment No. 2 narrows the scope of the proposal
to the Fidelity Fund and the ARK 21 Fund; proposes new position and
exercise limits for options on the Bitcoin Funds and provides
justification and analysis for the proposed position and exercise
limits; provides additional discussion of surveillance procedures that
will apply to the proposed options; and eliminates references to the
applicability of specified Interpretations and Policies in Exchange
Rule 8.30. As described above, in Amendment No. 2 the Exchange provided
data and analysis supporting the proposed position and exercise limits
and stated, among other things, that the proposed position and exercise
limits would represent 1.2% of the outstanding shares of the Fidelity
Fund and 5.5% of the outstanding shares of the ARK 21 Fund.\105\ The
Commission concludes that the proposed position and exercise limits are
designed to minimize the potential for manipulations or disruptions of
the underlying market.\106\ Amendment No. 2 also describes in greater
detail the surveillance procedures that will apply to the proposed
Bitcoin Fund options. The additional information regarding these
procedures assists the Commission in evaluating the proposal and
determining that the proposal is consistent with the Act and the rules
and regulations thereunder applicable to a national securities
exchange, as discussed above. The proposed change to Exchange Rule 8.30
to delete references to specified Interpretations and Policies, and to
indicate that all of the Interpretations and Policies in
[[Page 84960]]
Exchange Rule 8.30 apply when determining position limits, is designed
to clarify and make the Exchange's rule more accurate. Amendment No. 3
revises the proposal to exclude Bitcoin Fund options from FLEX trading.
Excluding Bitcoin Fund options from FLEX trading will allow the
Commission to consider the listing of FLEX options on the Bitcoin Funds
in the context of any separate proposal the Exchange files to list such
options. Accordingly, the Commission finds good cause, pursuant to
Section 19(b)(2) of the Act,\107\ to approve the proposed rule change,
as modified by Amendment Nos. 2 and 3, on an accelerated basis.
---------------------------------------------------------------------------
\105\ See Amendment No. 2.
\106\ The Commission recognizes that position limits should not
be established at levels that are so low as to discourage
participation in the options market by institutions and other
investors with substantial hedging needs or to prevent specialists
and market makers from adequately meeting their obligations to
maintain a fair and orderly market. See, e.g., Securities Exchange
Act Release Nos. 21907 (Mar. 29, 1985), 50 FR 13440 (Apr. 4, 1985)
(order approving File Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-
25, and SR-PSE-85-1); 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan.
12, 1999) (order approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-
98-33; and Phlx-98-36). The Commission finds that the proposed
position and exercise limits are consistent with these objectives.
\107\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
VI. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change, as modified by Amendment Nos. 2 and 3, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, the requirements of Section 6(b)(5) of the
Act.\108\
---------------------------------------------------------------------------
\108\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\109\ that the proposed rule change (SR-CBOE-2024-035), as modified
by Amendment Nos. 2 and 3, is approved.
---------------------------------------------------------------------------
\109\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\110\
---------------------------------------------------------------------------
\110\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-24641 Filed 10-23-24; 8:45 am]
BILLING CODE 8011-01-P
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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.