Notice2024-27989
Self-Regulatory Organizations; MIAX Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 402, Criteria for Underlying Securities, Exchange Rule 307, Position Limits, and Exchange Rule 309, Exercise Limits To Allow the Exchange To List and Trade Options on the Fidelity Wise Origin Bitcoin Fund (the “Fidelity Fund”) and the ARK 21Shares Bitcoin ETF (the “ARK 21 Fund”)
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
November 29, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 230 (Friday, November 29, 2024)</title>
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[Federal Register Volume 89, Number 230 (Friday, November 29, 2024)]
[Notices]
[Pages 94828-94838]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27989]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101717; File No. SR-MIAX-2024-43]
Self-Regulatory Organizations; MIAX Exchange LLC; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend
Exchange Rule 402, Criteria for Underlying Securities, Exchange Rule
307, Position Limits, and Exchange Rule 309, Exercise Limits To Allow
the Exchange To List and Trade Options on the Fidelity Wise Origin
Bitcoin Fund (the ``Fidelity Fund'') and the ARK 21Shares Bitcoin ETF
(the ``ARK 21 Fund'')
November 22, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 21, 2024, Miami International Securities Exchange, LLC
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Exchange Rule 402, Criteria for
Underlying Securities, Exchange Rule 307, Position Limits, and Exchange
Rule 309, Exercise Limits.
The text of the proposed rule change is available on the Exchange's
website at <a href="https://www.miaxglobal.com/markets/us-options/miax-options/rule-filings">https://www.miaxglobal.com/markets/us-options/miax-options/rule-filings</a>, at MIAX's principal office, 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 Exchange Rule 402, Criteria for
Underlying Securities, Exchange Rule 307, Position Limits, and Exchange
Rule 309, Exercise Limits,\3\ to allow the Exchange to list and trade
options on 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''), designating the Bitcoin Funds as
appropriate for options trading on the Exchange.\4\ This is a
competitive filing based on a similar proposal submitted by Cboe
Exchange, Inc. (``Cboe'') and approved by the Securities and Exchange
Commission (``Commission'').\5\
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\3\ The Exchange notes that its affiliate exchanges, MIAX Pearl
and MIAX Sapphire, submitted substantively identical proposals. The
Exchange notes that all the rules of Chapter III of the MIAX Options
Exchange, including Rules 307 and 309, are incorporated by reference
to MIAX Pearl and MIAX Sapphire. The Exchange also notes that all of
the rules of Chapter III of the MIAX Options Exchange, including
Rules 307 and 309, and the rules of Chapter IV of the MIAX Options
Exchange, including Rule 402, are incorporated by reference to MIAX
Emerald.
\4\ 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 iShares Bitcoin
Trust. 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'').
\5\ See Securities Exchange Act Release No. 101387 (October 18,
2024), 89 FR 84948 (October 24, 2024) (SR-CBOE-2024-35)(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).
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Current Exchange Rule 402(i)(4) provides that securities deemed
appropriate for options trading include shares or other securities
(``Exchange Traded Fund Shares'' or ``ETFs'') that represent certain
types of interests,\6\ including interests in certain specific trusts
that hold financial instruments, money market instruments, or precious
metals (which are deemed commodities).
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\6\ See Exchange Rule 402(i), which permits options trading on
ETFS that: (1) represent 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
(``Funds''), including, but not limited to, stock index futures
contracts, options on futures, options on securities and indices,
equity caps, collars and floors, swap agreements, forward contracts,
repurchase agreements and reverse repurchase 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 broad-based
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) represent interests in a trust or similar
entity that holds a specified non-U.S. currency or currencies
deposited with the trust which when aggregated in some specified
minimum number may be surrendered to the trust or similar entity by
the beneficial owner to receive the specified non-U.S. currency or
currencies and pays the beneficial owner interest and other
distributions on the deposited non-U.S. currency or currencies, if
any, declared and paid by the trust (``Currency Trust Shares''); (3)
represent 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
ETFs''); (4) are issued by the are issued by the SPDR[supreg] Gold
Trust, the iShares COMEX Gold Trust, the iShares Silver Trust, the
ETFS Silver Trust, the Aberdeen Standard Physical Gold Trust, the
ETFS Palladium Trust, the ETFS Platinum Trust, the Sprott Physical
Gold Trust, or the iShares Bitcoin Trust; or (5) represent an
interest in a registered investment company (``Investment Company'')
organized as an open-end management 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''); provided that all of the conditions
listed in (5)(i) and 5(ii) are met.
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The Bitcoin Funds are Bitcoin-backed commodity ETFs structured as
trusts. Similar to any ETFs currently deemed appropriate for options
trading under Exchange Rule 402(i), 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
[[Page 94829]]
opportunity to gain exposure to Bitcoin without the complexities of
Bitcoin delivery. As is the case for ETFs 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.\7\ 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 ETFs currently deemed appropriate
for options trading are that ETFs 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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\7\ The trust may include minimal cash.
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The Exchange believes each Bitcoin Fund satisfies the Exchange's
initial listing standards for ETFs on which the Exchange may list
options. Specifically, each Bitcoin Fund satisfies the initial listing
standards set forth in Exchange Rule 402(i)(5)(i), as is the case for
other ETFs on which the Exchange lists options (including trusts that
hold commodities). Exchange Rule 402(i)(5)(i) requires that the ETFs
must either (1) meet the criteria and standards set forth in Exchange
Rule 402(a) or 402(b),\8\ 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 ETFs 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 Exchange Rule
402(i)(5(i)(B), as each is subject to this creation and redemption
process.
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\8\ Subparagraphs a and b of Exchange Rule 402 provide for
guidelines to be used 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 Exchange Rule 402. Pursuant to Exchange Rule
402, a security (which includes ETFs) 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 Act, and be characterized by a substantial number of
outstanding shares that are widely held and actively traded.\9\ Each
Bitcoin Fund is an NMS Stock as defined in Rule 600 of Regulation NMS
under the Act.\10\ 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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\9\ The criteria and guidelines for a security to be considered
widely held and actively traded are set forth in Exchange Rule
403(b).
\10\ 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
------------------------------------------------------------------------
Fidelity Fund........................................ 201,100,100
ARK 21 Fund.......................................... 45,495,000
------------------------------------------------------------------------
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
Exchange Rule 402(b)(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:
------------------------------------------------------------------------
Beneficial
Bitcoin Fund holders Date
------------------------------------------------------------------------
Fidelity Fund........................... 279,656 6/27/2024
ARK 21 Fund............................. 69,425 6/26/2024
------------------------------------------------------------------------
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 Exchange Rule 402(b)(2). Therefore, the Exchange
believes the shares of each Bitcoin Fund are widely held.
As demonstrated above, despite the fact that the Bitcoin Funds had
been trading for approximately seven months \11\ 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 Exchange Rule 402(b)(4).
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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\11\ The Bitcoin Funds began trading on January 11, 2024.
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Options on the Bitcoin Funds will also be subject to the Exchange's
continued listing standards set forth in Exchange Rule 403(g), for ETFs
deemed appropriate for options trading pursuant to Exchange Rule
402(i). Specifically, Exchange Rule 403(g) provides that ETFs that were
initially approved for options trading pursuant to Exchange Rule 402(i)
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 ETFs, if the ETFs are
delisted from trading pursuant to Exchange Rule 403(b)(4), are halted
or suspended from trading in their primary market. Additionally,
options on ETFs may be subject to the suspension of opening
transactions in any of the following circumstances: (1) in the case of
options covering ETFs approved for trading
[[Page 94830]]
under Exchange Rule 402(i)(5)(i)(A), in accordance with the terms of
paragraphs (b)(1), (2), and (3) of Exchange Rule 403; (2) in the case
of options covering ETFs approved for trading under Exchange Rule
402(i)(5)(i)(B), following the initial twelve-month period beginning
upon the commencement of trading in the ETFs on a national securities
exchange and are defined as an NMS stock, there are fewer than 50
record and/or beneficial holders of such ETFs 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 ETFs
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 would be physically settled contracts
with American-style exercise.\12\ Consistent with current Exchange Rule
404, which governs the opening of options series on a specific
underlying security (including ETFs), the Exchange will open at least
one expiration month for options on each Bitcoin Fund \13\ at the
commencement of trading on the Exchange and may also list series of
options on a Bitcoin Fund for trading on a weekly,\14\ monthly,\15\ or
quarterly \16\ basis. The Exchange may also list long-term equity
option series (``LEAPS'') that expire from 12 to 39 months from the
time they are listed.\17\
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\12\ See Exchange Rule 401, which provides that the rights and
obligations of holders and writers are set forth in the Rules of the
Options Clearing Corporation (``OCC''); 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).
\13\ See Exchange Rule 404(b). The monthly expirations are
subject to certain listing criteria for underlying securities
described within Exchange Rule 404 and its Interpretations and
Policies. 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 Exchange Rule 404(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. Pursuant to
Exchange Rule 404(e), 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.
\14\ See Exchange Rule 404, Interpretations and Policies .02.
\15\ See Exchange Rule 404, Interpretations and Policies .13.
\16\ See Exchange Rule 404, Interpretations and Policies .03.
\17\ See Exchange Rule 404(d).
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Pursuant to Exchange Rule 404, Interpretation and Policy .06, which
governs strike prices of series of options on ETFs, the interval
between strike prices of series of options on ETFs approved for options
trading pursuant to Exchange Rule 402(i) shall be fixed at a price per
share which is reasonably close to the price per share at which the
underlying security is traded in the primary market at or about the
same time such series of options is first open for trading on the
Exchange, or at such intervals as may have been established on another
options exchange prior to the initiation of trading on the Exchange.
With respect to the Short Term Options Series or Weekly Program, during
the month prior to expiration of an option class that is selected for
the Short Term Option Series Program, the strike price intervals for
the related non-Short Term Option (``Related non-Short Term Option'')
shall be the same as the strike price intervals for the Short Term
Option.\18\ Specifically, the Exchange may open for trading Short Term
Option Series at strike price intervals of (i) $0.50 or greater where
the strike price is less than $100, and $1 or greater where the strike
price is between $100 and $150 for all option classes that participate
in the Short Term Options Series Program; (ii) $0.50 for option classes
that trade in one dollar increments and are in the Short Term Option
Series Program; or (iii) $2.50 or greater where the strike price is
above $150.\19\ Additionally, the Exchange may list series of options
pursuant to the $1 Strike Price Interval Program,\20\ the $0.50 Strike
Program,\21\ and the $2.50 Strike Price Program.\22\ Pursuant to
Exchange Rule 510, where the price of a series of options for a Bitcoin
Fund 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 \23\
consistent with the minimum increments for options on other ETFs listed
on the Exchange. Any and all new series of a Bitcoin Fund options that
the Exchange lists will be consistent and comply with the expirations,
strike prices, and minimum increments set forth in Rules 404 and 510,
as applicable.
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\18\ See Exchange Rule 404, Interpretations and Policies .02(e).
\19\ Id.
\20\ See Exchange Rule 404, Interpretation and Policy .01.
\21\ See Exchange Rule 404, Interpretation and Policy .04.
\22\ See Exchange Rule 404(f).
\23\ See Exchange Rule 510.
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Bitcoin Fund options will trade in the same manner as any other ETF
options on the Exchange. The Exchange Rules that currently apply to the
listing and trading of all ETFs options on the Exchange, including, for
example, Exchange Rules that govern listing criteria, expiration and
exercise prices, minimum increments, position and exercise limits,
margin requirements, customer accounts and trading halt procedures will
apply to the listing and trading of Bitcoin Funds options on the
Exchange in the same manner as they apply to other options on all other
ETFs that are listed and traded on the Exchange, including the
precious-metal backed commodity ETFs already deemed appropriate for
options trading on the Exchange pursuant to current Exchange Rule
402(i)(4).
The Exchange also proposes to amend Rules 307 and 309.
Specifically, the Exchange proposes to amend Supplementary Material .01
to Exchange Rule 307 to provide a position limit of 25,000 same side
option contracts for each Bitcoin Fund option. Additionally, pursuant
to the proposed change to Supplementary Material .01 to Exchange Rule
309, the exercise limits for options on each Bitcoin Fund will be
equivalent to this proposed position limit.
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):
[[Page 94831]]
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Market
Underlying Bitcoin Fund Six-month ADV Outstanding capitalization
(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
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The Exchange then compared the number of outstanding shares of the
Bitcoin Funds to those of other ETFs. 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:
------------------------------------------------------------------------
Average limit
of other ETF Proposed limit
Underlying Bitcoin Fund options (contracts)
(contracts)
------------------------------------------------------------------------
Fidelity Fund........................... \24\ 188,110 25,000
ARK 21 Fund............................. \25\ 108,696 25,000
------------------------------------------------------------------------
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
402(b)(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 402(b)(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 402(b)(3).
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\24\ 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.
\25\ 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.
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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/exercise Percentage of
Underlying Bitcoin Fund 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.
Rule 309 provides two methods of qualifying for a position limit
tier above 25,000 option contracts. 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.
------------------------------------------------------------------------
Minimum Percentage of
Position/Exercise Limit (in Outstanding Outstanding
equivalent shares) Shares Shares (%)
------------------------------------------------------------------------
2,500,000............................ \26\ 6,300,000 40.0
5,000,000............................ 40,000,000 12.5
[[Page 94832]]
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.\27\
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\26\ This 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 404,
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 an even larger percentage of outstanding shares of the
underlying ETF than set forth above.
\27\ 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.
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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 307. 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.
The Exchange further notes that Exchange Rule 1502, which governs
margin requirements applicable to trading on the Exchange, including
options on ETFs, will also apply to the trading of the Bitcoin Fund
options. Notwithstanding the position limits in Exchange Rule 307(d)
and exercise limits in Exchange Rule 309, the Exchange proposes the
position and exercise limits for the options on the Bitcoin Fund to be
25,000 contracts on the same side pursuant to proposed Supplementary
Material .01 to Exchange Rule 307 and proposed Supplementary Material
.01 to Exchange Rule 309.
The Exchange represents that the same surveillance procedures
applicable to all other options on other ETFs currently listed and
traded on the Exchange will apply to options on the Bitcoin Funds. Also
the Exchange represents that it has the necessary systems capacity to
support the new option series. The Exchange believes that its existing
surveillance and reporting safeguards are designed to deter and detect
possible manipulative behavior which might potentially arise from
listing and trading options on ETFs, including the proposed Bitcoin
Funds options.
Today, the Exchange has an adequate surveillance program in place
for options. The Exchange intends to apply those same program
procedures to Bitcoin Fund options that it applies to the Exchange's
other options products.\28\ The Exchange's staff will have access to
the surveillance programs conducted by its affiliate exchanges, MIAX
Pearl and MIAX Sapphire with respect to trading in the shares of 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 to
obtaining surveillance data from MIAX Pearl and MIAX Sapphire, the
Exchange will be able to obtain information regarding trading in the
shares of the underlying Bitcoin Funds from Cboe and other markets
through ISG. In addition, the Exchange has a Regulatory Services
Agreement with the Financial Industry Regulatory Authority (``FINRA'').
Pursuant to a multi-party 17d-2 joint plan, all options exchanges
allocate regulatory responsibilities to FINRA to conduct certain
options-related market surveillance that are common to rules of all
options exchanges.\29\
---------------------------------------------------------------------------
\28\ The surveillance program includes real-time patterns for
price and volume movements and post-trade surveillance patterns
(e.g., spoofing, marking the close, pinging, phishing).
\29\ Section 19(g)(1) of the Act, among other things, requires
every 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 Bitcoin ETP Order:
Each 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.\30\
---------------------------------------------------------------------------
\30\ See Bitcoin ETP Order, 89 FR at 3010-11.
---------------------------------------------------------------------------
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 ``expected to
assist in surveilling for fraudulent and
[[Page 94833]]
manipulative acts and practices in the specific context of the
[Bitcoin ETPs].'' \31\
---------------------------------------------------------------------------
\31\ See Bitcoin ETP Order, 89 FR at 3010-11.
In light of surveillance measures related to both options and
futures as well as the underlying Bitcoin Funds,\32\ 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 represents that it will implement any new
surveillance procedures it deems necessary to effectively monitor the
trading of options on Bitcoin Funds.
---------------------------------------------------------------------------
\32\ 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 (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'').
---------------------------------------------------------------------------
The Exchange has also analyzed its capacity and represents that it
believes the Exchange and Options Price Reporting Authority or ``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 one class, the Exchange believes any additional traffic
that may be generated from the introduction of Bitcoin Funds 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 ETPs in the unregulated over-the-
counter (``OTC'') options market (if the Commission approves Bitcoin
ETPs for exchange-trading),\33\ but may prefer to trade such options in
a listed environment to receive the benefits of trading listing
options, including (1) enhanced efficiency in initiating and closing
out position; (2) increased market transparency; and (3) heightened
contra-party creditworthiness due to the role of OCC as issuer and
guarantor of all listed options. The Exchange believes that listing
Bitcoin Fund options may cause investors to bring this liquidity to the
Exchange, would increase market transparency and enhance the process of
price discovery conducted on the Exchange through increased order flow.
The ETFs 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 ETFs options, including ETFs that hold commodities
(i.e., precious metals) that it currently lists and trades on the
Exchange.
---------------------------------------------------------------------------
\33\ The Exchange understands from customers that investors have
historically transacted in options on ETFs 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.\34\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \35\ 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) \36\ requirement that the rules
of an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\34\ 15 U.S.C. 78f(b).
\35\ 15 U.S.C. 78f(b)(5).
\36\ 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 a greater opportunity to
realize the benefits of utilizing options on an ETF based on a Bitcoin
Fund, including cost efficiencies and increased hedging strategies. The
Exchange believes that offering Bitcoin Funds options will benefit
investors by providing them with an additional, relatively lower-cost
risk management tool, allowing them to manage, more easily, their
positions and associated risks in their portfolios 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 option 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 ETFs,\37\
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 ETF options it currently lists for trading.
---------------------------------------------------------------------------
\37\ See Exchange Rule 402(i)(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
Bitcoin Funds must satisfy the initial listing standards and continued
listing standards currently in the Exchange Rules, applicable to
options on all ETFs, including ETFs that hold other commodities already
deemed appropriate for options trading on the Exchange. Additionally,
as demonstrated above, each Bitcoin Fund is characterized by a
substantial number of shares that are widely held and actively traded.
Bitcoin Fund options will trade in the same manner as any other ETF
options--the same Exchange Rules that including permissible
[[Page 94834]]
expirations, strike prices, minimum increments, position and exercise
limits (as proposed herein), and margin requirements, will govern the
listing and trading of options on the Bitcoin Funds.
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 for options on each of the Bitcoin Funds is 25,000 contracts.
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 each of the Bitcoin Funds market
capitalization, average daily volume, and high number of 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.
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,\38\ which equates to a market
capitalization of approximately $1.165 trillion. Consider the proposed
position and exercise limit of 25,000 option contracts for each Bitcoin
Fund option. A position and exercise limit of 25,000 same side
contracts effectively restricts a market participant from holding
positions that could result in the receipt of no more than 2,500,000 of
Fidelity Fund shares or ARK 21 Fund shares, as applicable (if that
market participant exercised all its options. The following table shows
the share price of each Bitcoin Fund on August 27, 2024, the value of
2,500,000 shares of the Bitcoin Fund at that price, and the approximate
percentage of that value of the size of the Bitcoin market:
---------------------------------------------------------------------------
\38\ See <a href="http://Blockchain.com">Blockchain.com</a> [verbar] Charts--Total Circulating
Bitcoin.
----------------------------------------------------------------------------------------------------------------
Value of
August 27, 2,500,000 shares Percentage of
Underlying Bitcoin Fund 2024 share of bitcoin fund bitcoin market
price ($) ($) (%)
----------------------------------------------------------------------------------------------------------------
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.\39\ 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 $589,500,000. The following table shows the share price of
each Bitcoin Fund on August 28, 2024 and the approximate number of
option contracts that equates to that notional value:
---------------------------------------------------------------------------
\39\ See CME Rulebook Chapter 350 (description of CME Bitcoin
Futures) and Chapter 5, Position Limit, Position Accountability and
Reportable Level Table in the Interpretations & Special Notices.
Each CME Bitcoin futures contract is valued at five Bitcoins as
defined by the CME CF Bitcoin Reference Rate (``BRR''). See CME Rule
35001.
------------------------------------------------------------------------
August 28, Number of
Underlying Bitcoin Fund 2024 share option
price ($) 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).\40\ 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.\41\ If a position exceeds position limits because of an option
assignment, CME permits market participants to liquidate the excess
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
[[Page 94835]]
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.
---------------------------------------------------------------------------
\40\ See CME Rulebook Chapter 5, Position Limit, Position
Accountability and Reportable Level Table in the Interpretations &
Special Notices.
\41\ Id.
---------------------------------------------------------------------------
The Exchange believes the proposed position and exercise limits
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
Underlying 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.\42\ 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.\43\ The supply of Bitcoin is larger
than the available supply of most securities.\44\ 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.\45\
---------------------------------------------------------------------------
\42\ 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).
\43\ 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.
\44\ 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>.
\45\ 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.\46\ 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.\47\ ``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.'' \48\ 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
[[Page 94836]]
exercise limits are designed to minimize the potential for mini-
manipulations and for corners or squeezes of the underlying market. In
addition, such limits serve to reduce the possibility for disruption of
the options market itself, especially in illiquid options classes.''
\49\
---------------------------------------------------------------------------
\46\ 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 Cboe 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.
\47\ 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.
\48\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
\49\ 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.\50\ 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.\51\ 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.
---------------------------------------------------------------------------
\50\ 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.
\51\ See Bitcoin ETP 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.\52\
---------------------------------------------------------------------------
\52\ 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 ETF options,
including Bitcoin Fund options.
Today, the Exchange has an adequate surveillance program in place
for options. The Exchange intends to apply those same program
procedures to options on the Bitcoin Fund that it applies to the
Exchange's other options products.\53\ The Exchange's staff will have
access to the surveillance programs conducted by its affiliate
exchanges, MIAX Pearl and MIAX Sapphire with respect to the underlying
Bitcoin Funds when conducting surveillances for market abuse or
manipulation in the options on the Bitcoin Funds. The Exchange will
review activity in the underlying Bitcoin Fund when conducting
surveillances for market abuse or manipulation in the options on the
Bitcoin Funds. Additionally, the Exchange is a member of the 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 to obtaining
surveillance data from MIAX Pearl and MIAX Sapphire, the Exchange will
be able to obtain information from Cboe and other markets through ISG.
In addition, the Exchange has a Regulatory Services Agreement with
FINRA. Pursuant to a multi-party 17d-2 joint plan, all options
exchanges allocate regulatory responsibilities to FINRA to conduct
certain options-related market surveillance that are common to rules of
all options exchanges.\54\
---------------------------------------------------------------------------
\53\ The surveillance program includes real-time patterns for
price and volume movements and post-trade surveillance patterns
(e.g., spoofing, marking the close, pinging, phishing).
\54\ Section 19(g)(1) of the Act, among other things, requires
every 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 ETPs, including the Bitcoin
Funds, are also subject to safeguards related to addressing market
abuse and manipulation. As the Commission stated in Bitcoin ETP Order:
Each 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.\55\
---------------------------------------------------------------------------
\55\ See Bitcoin ETP Order, 89 FR at 3010-11.
---------------------------------------------------------------------------
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 ``expected to assist in surveilling for
fraudulent and manipulative acts and practices in the specific context
of the [Bitcoin ETPs].'' \56\
---------------------------------------------------------------------------
\56\ See Bitcoin ETP Order, 89 FR at 3010-11.
---------------------------------------------------------------------------
In light of surveillance measures related to both options and
futures as well as the underlying Bitcoin Funds,\57\ 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 represents that it will implement any new
surveillance procedures it deems necessary to effectively monitor the
trading of options on the Bitcoin Funds. Finally, the Commission has
previously approved the listing and trading of options on other
commodity ETFs structured as a trust, such as SPDR[supreg] Gold
Trust,\58\ the iShares COMEX Gold
[[Page 94837]]
Trust \59\ the iShares Silver Trust,\60\ the ETFS Gold Trust,\61\ and
the ETFS Silver Trust.\62\
---------------------------------------------------------------------------
\57\ See Securities Exchange Act Release No. 99295 (January 8,
2024), 89 FR 2321, 2334-35 (January 12, 2024) (SR-NASDAQ-2023-016)
(Notice of Filing of Amendment No. 1 to a Proposed Rule Change To
List and Trade Shares of the iShares Bitcoin Trust Under Nasdaq Rule
5711(d)).
\58\ See Securities Exchange Act Release No. 57897 (May 30,
2008), 73 FR 32061 (June 5, 2008) (SR-Amex-2008-15; SR-CBOE-2005-11;
SR-ISE-2008-12; SR-NYSEArca-2008-52; and SRPhlx-2008-17) (Order
Granting Approval of a Proposed Rule Change, as Modified, and Notice
of Filing and Order Granting Accelerated Approval of Proposed Rule
Changes, as Modified, Relating to Listing and Trading Options on the
SPDR Gold Trust).
\59\ See Securities Exchange Act Release No. 59055 (December 4,
2008), 73 FR 75148 (December 10, 2008) (SR-Amex-2008-68; SR-BSE-
2008-51; SR-CBOE-2008-72; SR-ISE-2008-58; SRNYSEArca-2008-66; and
SR-Phlx-2008-58) (Notice of Filing and Order Granting Accelerated
Approval of Proposed Rule Changes Relating to the Listing and
Trading Options on Shares of the iShares COMEX Gold Trust and the
iShares Silver Trust).
\60\ Id.
\61\ See Securities Exchange Act Release No. 61483 (February 3,
2010), 75 FR 6753 (February 10, 2010) (SR-CBOE-2010-007; SR-ISE-
2009-106; SR-NYSEAmex-2009-86; and SR-NYSEArca-2009-110) (Order
Granting Approval of Proposed Rule Changes and Notice of Filing and
Order Granting Accelerated Approval of a Proposed Rule Change
Relating to Listing and Trading Options on the ETFS Gold Trust and
the ETFS Silver Trust).
\62\ Id.
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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. In this regard and as
indicated above, the Exchange notes that the rule change is being
proposed as a competitive response to filings submitted by Cboe.\63\
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\63\ See supra note 5.
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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 options on 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. Further, options on the Bitcoin Funds will be subject
to Exchange Rules that currently govern the listing and trading of
options on ETFs, including permissible expirations, strike prices,
minimum increments, position and exercise limits (including as proposed
to modify herein), and margin requirements. Also, and as stated above,
the Exchange already lists options on other commodity ETFs structured
as a trust.\64\ 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 ETF for the Exchange to continue listing
options on them.
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\64\ See Exchange Rule 402(i)(4).
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The Exchange does not believe that the proposal to list to list and
trade Bitcoin Funds options 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 the Bitcoin Funds. The Exchange notes that listing and trading
Bitcoin Fund options on the Exchange will subject such options to
transparent exchange-based rules as well as price discovery and
liquidity, as opposed to alternatively trading such options in the OTC
market.
The Exchange believes that the proposed rule change may relieve any
burden on, or otherwise promote, competition as it is designed to
increase competition for order flow on the Exchange in a manner that is
beneficial to investors by providing them with a lower-cost option to
hedge their investment portfolios. The Exchange notes that it operates
in a highly competitive market in which market participants can readily
direct order flow to competing venues that offer similar products.
Ultimately, the Exchange believes that offering Bitcoin Fund options
for trading on the Exchange will promote competition by providing
investors with an additional, relatively low-cost means to hedge their
portfolios and meet their investment needs in connection with Bitcoin
prices and Bitcoin-related products and positions on a listed options
exchange.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \65\ and Rule 19b-4(f)(6) thereunder.\66\
Because the foregoing proposed rule change does not: (i) significantly
affect the protection of investors or the public interest; (ii) impose
any significant burden on competition; and (iii) become operative for
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, it has become effective pursuant to
Section 19(b)(3)(A)(iii) of the Act \67\ and subparagraph (f)(6) of
Rule 19b-4 thereunder.\68\
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\65\ 15 U.S.C. 78s(b)(3)(A)(iii).
\66\ 17 CFR 240.19b-4(f)(6).
\67\ 15 U.S.C. 78s(b)(3)(A)(iii).
\68\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Commission waives this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \69\ under the
Act does not normally become operative prior to 30 days after the date
of the filing. However, pursuant to Rule 19b-4(f)(6)(iii),\70\ the
Commission may designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has requested that the Commission waive the 30-day operative delay so
that the proposal may become operative immediately upon filing. The
Commission previously approved the listing of options on the Fidelity
Wise Origin Bitcoin Fund the ARK 21Shares Bitcoin ETF.\71\ The Exchange
has provided information regarding the underlying Bitcoin Funds,
including, among other things, information regarding trading volume,
the number of beneficial holders, and the market capitalization of the
Bitcoin Funds. The proposal also establishes position and exercise
limits for options on the Bitcoin Funds and provides information
regarding the surveillance procedures that will apply to Bitcoin Fund
options. The Commission believes that waiver of the operative delay
could benefit investors by providing an additional venue for trading
Bitcoin Fund options. Therefore, the Commission believes that waiver of
the 30-day operative delay is consistent with the protection of
investors and the public interest. Accordingly, the Commission hereby
waives the 30-day operative delay and designates the proposed rule
change as operative upon filing.\72\
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\69\ 17 CFR 240.19b-4(f)(6).
\70\ 17 CFR 240.19b-4(f)(6)(iii).
\71\ See Securities Exchange Act Release No. 101387 (October 18,
2024), 89 FR 84948 (October 24, 2024) (SR-Cboe-2024-035) (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).
\72\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the
[[Page 94838]]
public interest, for the protection of investors, or otherwise in
furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#d3a1a6bfb6feb0bcbebeb6bda7a093a0b6b0fdb4bca5"><span class="__cf_email__" data-cfemail="deacabb2bbf3bdb1b3b3bbb0aaad9eadbbbdf0b9b1a8">[email protected]</span></a>. Please include
file number SR-MIAX-2024-43 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-MIAX-2024-43. 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-MIAX-2024-43 and should be
submitted on or before December 20, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\73\
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\73\ 17 CFR 200.30-3(a)(12), (59).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27989 Filed 11-27-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on November 29, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.