Notice2025-02940
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade Options on the Grayscale Ethereum Trust ETF, the Grayscale Ethereum Mini Trust ETF, and the Bitwise Ethereum ETF
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 24, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 35 (Monday, February 24, 2025)</title>
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[Federal Register Volume 90, Number 35 (Monday, February 24, 2025)]
[Notices]
[Pages 10533-10544]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-02940]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102442; File No. SR-CBOE-2025-008]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change, as Modified by Amendment No. 1, To
List and Trade Options on the Grayscale Ethereum Trust ETF, the
Grayscale Ethereum Mini Trust ETF, and the Bitwise Ethereum ETF
February 18, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\
[[Page 10534]]
notice is hereby given that on February 5, 2025, Cboe Exchange, Inc.
(``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. On
February 6, 2025, the Exchange submitted Amendment No. 1 to the
proposal. The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Rules 4.3, 4.20, and 8.30, to allow the Exchange to list and
trade options on the Grayscale Ethereum Trust ETF, the Grayscale
Ethereum Mini Trust ETF, and the Bitwise Ethereum 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="http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx">http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx</a>), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the 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 Rules [sic] 4.3 regarding the
criteria for underlying securities. Specifically, the Exchange proposes
to amend Rule 4.3, Interpretation and Policy .06(a)(4) to allow the
Exchange to list and trade options on Units \3\ that represent
interests in: the Grayscale Ethereum Trust ETF (the ``Grayscale
Fund''), the Grayscale Ethereum Mini Trust ETF (the ``Grayscale Mini
Fund''), and the Bitwise Ethereum ETF (the ``Bitwise Fund'' and,
collectively, the ``Ethereum Funds''),\4\ designating them as ``Units''
deemed appropriate for options trading on the Exchange. This is a
competitive filing based on a similar proposal submitted by NYSE
American, LLC (``NYSE American [sic] which is currently pending with
the Securities and Exchange Commission (the ``Commission'').\5\ 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,\6\ including interests in certain specific trusts
that hold financial instruments, money market instruments, precious
metals (which are deemed commodities), or Bitcoin (which is another
crypto currency and deemed a commodity).\7\ In addition, 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),\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
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.
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\3\ 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.
\4\ See Securities Exchange Act Release Nos. 100224 (May 23,
2024), 89 FR 46937 (May 30, 2024) (SR-NYSEArca-2023-70; SR-NYSEArca-
2024-31; SR-NASDAQ-2023-045; SR-CboeBZX-2023-069; SR-CboeBZX-2023-
070; SR-CboeBZX-2023-087; SR-CboeBZX-2023-095; and SR-CboeBZX-2024-
018) (Order Granting Accelerated Approval of Proposed Rule Changes,
as Modified by Amendments Thereto, to List and Trade Shares of
Ether-Based Exchange-Traded Products) (``Ethereum ETP Approval
Order''); and 100541 (July 17, 2024), 89 FR 59786 (July 23, 2024)
(SR-NYSEArca-2024-44; and SR-NYSEArca-2024-53) (Order Granting
Approval of Proposed Rule Changes To List and Trade Shares of the
Grayscale Ethereum Mini Trust and ProShares Ethereum ETF).
\5\ See Securities Exchange Act Release Nos. 99306 (August 7,
2024), 89 FR 65957 (August 13, 2024) (SR-NYSEAMER-2024-45), as
amended by Amendment No. 1 (February 5, 2025) (``NYSE American
Proposal'').
\6\ 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, the Goldman
Sachs Physical Gold ETF, the Fidelity Wise Origin Bitcoin Fund, the
ARK 21Shares Bitcoin ETF, the iShares Bitcoin Trust, the Grayscale
Bitcoin Trust, the Grayscale Bitcoin Mini Trust, or the Bitwise
Bitcoin ETF (the Fidelity Wise Origin Bitcoin Fund, the ARK 21Shares
Bitcoin ETF, the iShares Bitcoin Trust, the Grayscale Bitcoin Trust,
the Grayscale Bitcoin Mini Trust, and the Bitwise Bitcoin ETF are
referred to as the ``Bitcoin Funds''); 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'').
\7\ On October 18, 2024, the Commission approved the Exchange's
proposal to list and trade options on the Fidelity Wise Origin
Bitcoin Fund and the ARK 21Shares Bitcoin ETF. See Securities
Exchange Act Release No. 101387 (October 18, 2024), 89 FR 84948
(October 24, 2024) (SR-CBOE-2024-035).
\8\ 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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The Ethereum Funds are Ethereum-backed commodity ETFs structured as
trusts. Similar to any Unit currently
[[Page 10535]]
deemed appropriate for options trading under Rule 4.3, Interpretation
and Policy .06, the investment objective of each Ethereum Fund is for
its shares to reflect the performance of Ethereum (less the expenses of
the trust's operations), offering investors an opportunity to gain
exposure to Ethereum without the complexities of Ethereum delivery. As
is the case for Units currently deemed appropriate for options trading,
a Ethereum Fund's shares represent units of fractional undivided
beneficial interest in the trust, the assets of which consist
principally of Ethereum and are designed to track Ethereum or the
performance of the price of Ethereum and offer access to the Ethereum
market.\9\ The Ethereum Funds provide investors with cost-efficient
alternatives that allow a level of participation in the Ethereum market
through the securities market. The Ethereum Funds are similar to the
Bitcoin Funds, except that those funds hold Bitcoin (another
cryptocurrency) rather than Ethereum, which are already eligible for
options trading on the Exchange.
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\9\ The trust may include minimal cash.
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The Exchange's initial listing standards for Units on which options
may be listed and traded on the Exchange will apply to the Ethereum
Funds. 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.\10\
Additionally, Rule 4.3(a), Pursuant to 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 Ethereum 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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\10\ 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.
\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 the Ethereum Funds satisfy the criteria and
guidelines set forth in Rule 4.3, Interpretation and Policy .01.
Pursuant to Rule 4.3(a), a security (which includes a Unit) on which
options may be listed and traded on the Exchange must be duly
registered (with the Commission) and be an NMS stock (as defined in
Rule 600 of Regulation NMS under the Act, and be characterized by a
substantial number of outstanding shares that are widely held and
actively traded.\12\ Each of the Ethereum Funds is an NMS Stock as
defined in Rule 600 of Regulation NMS under the Act.\13\ Further, the
Exchange believes each Ethereum 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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With respect to the Grayscale Fund, the Grayscale Mini Fund, and
the Bitwise Fund, the Exchange reviewed the data presented by NYSE
American in its filing with respect to shares outstanding (and
corresponding market capitalization), number of beneficial holders, and
trading volume. As of November 29, 2024, the Ethereum Funds had the
following number of shares outstanding (and corresponding market
capitalization):
------------------------------------------------------------------------
Market value (11/
Ethereum Fund Shares outstanding 29/24)
------------------------------------------------------------------------
Grayscale Fund.................. 177,838,500 $5,425,852,635
Grayscale Mini Fund............. 45,220,787 1,547,003,157
Bitwise Fund.................... 16,600,000 430,886,200
------------------------------------------------------------------------
As shown above, each of the Ethereum Funds 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.\14\ The Exchange believes this demonstrates that each
Ethereum Fund is characterized by a substantial number of outstanding
shares. Further, the below table contains information regarding the
number of beneficial holders of the Ethereum Funds as of December 31,
2024.
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\14\ The Exchange notes that on November 19, 2024, the Grayscale
Mini Fund underwent a reverse stock split, reducing the number of
shares outstanding--and increasing the share price--tenfold.
------------------------------------------------------------------------
Beneficial holders
Ethereum Fund (as of 12/31/24)
------------------------------------------------------------------------
Grayscale Fund.................................... 112,320
Grayscale Mini Fund............................... 17,396
Bitwise Fund...................................... 5,992
------------------------------------------------------------------------
As this table shows, each Ethereum Fund has significantly more than
2,000 beneficial holders (approximately 56, 9, and 3 times more,
respectively), which is the minimum number of holders the Exchange
generally requires for
[[Page 10536]]
corporate stock in order to list options on that stock pursuant to
pursuant to Rule 4.3, Interpretation and Policy .01.\15\ Therefore, the
Exchange believes the shares of each Ethereum Fund are widely held.
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\15\ The number of beneficial holders of the Grayscale Mini Fund
may have been impacted by the 10:1 reverse stock split, as investors
with fewer than 10 shares would have received a cash payout. See id.
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The Exchange also believes that, based on trading volume since the
Ethereum Funds began trading on July 23, 2024, shares of the Ethereum
Funds are actively traded. In particular, the table below sets forth
the total trading volume (by shares and notional) from the inception of
trading through either November 29, 2024 (for the Grayscale Fund and
the Grayscale Mini Fund) or December 31, 2024 (for the Bitwise Fund).
In addition, the below table illustrates the average daily volume
(``ADV'') over the 30-day period of either October 29, 2024-through
November 29, 2024 (for the Grayscale Fund and the Grayscale Mini Fund)
or November 29, 2024-through December 31, 2024 (for the Bitwise
Fund).\16\
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\16\ See FactSet, 11/29/2024 and 12/31/24, <a href="https://www.factset.com/data-attribution">https://www.factset.com/data-attribution</a>.
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Trading volume Trading volume
Ethereum Fund (shares) (notional $) ADV (shares)
----------------------------------------------------------------------------------------------------------------
Grayscale Fund............................................ 427,312,540 $10,289,781,199 4,237,811
Grayscale Mini Fund....................................... 172,400,020 4,614,428,230 3,065,796
Bitwise Fund.............................................. 44,477,060 959,491,343 291,627
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As demonstrated above, even though the Ethereum Funds have been
trading for less than one year, the trading volume for each Ethereum
Fund is substantially higher than 2,400,000 shares (roughly 178, 72,
and 16 times that amount), which is the minimum 12-month volume the
Exchange generally requires for a security in order to list options on
that security as set forth in Rule 4.3, Interpretation and Policy .01.
The Exchange believes this data demonstrates each Ethereum Fund is
characterized by a substantial number of outstanding shares that are
actively traded.
Options on the Ethereum Funds will also 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 Ethereum 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 Ethereum Fund will be physically settled contracts
with American-style exercise.\17\ 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 Ethereum Fund \18\ at the
commencement of trading on the Exchange and may also list series of
options on a Ethereum Fund for trading on a weekly,\19\ monthly,\20\ or
quarterly \21\ 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.\22\
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\17\ 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).
\18\ 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.
\19\ See Rule 4.5(d).
\20\ See Rule 4.5(g).
\21\ See Rule 4.5(e).
\22\ See Rule 4.5(f).
\23\ 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.
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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 Ethereum 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.\23\ Additionally, the Exchange may list
series of options pursuant to the $1 Strike Price Interval Program,\24\
the $0.50 Strike Program,\25\ the $2.50 Strike Price Program,\26\ and
the $5 Strike Program.\27\ Pursuant to
[[Page 10537]]
Rule 5.4, where the price of a series of an Ethereum 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.\28\ Any
and all new series of Ethereum Fund options that the Exchange lists
will be consistent and comply with the expirations, strike prices, and
minimum increments set forth in Rules 4.5 and 5.4, as applicable.
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\24\ See Rule 4.5, Interpretation and Policy .01(a).
\25\ See Rule 4.5, Interpretation and Policy .01(b).
\26\ See Rule 4.5, Interpretation and Policy .04.
\27\ See Rule 4.5, Interpretation and Policy .01(f).
\28\ If options on an Ethereum 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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Ethereum 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 Ethereum 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 and the Bitcoin Funds already deemed appropriate for
options trading on the Exchange pursuant to current Rule 4.3,
Interpretation and Policy .06(a)(4).
Rule 4.20 currently permits the Exchange to authorize for trading a
FLEX option class on any equity security if it may authorize for
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
Ethereum Funds from this provision.
Position and exercise limits for options on ETFs, including options
on Ethereum Funds, are determined pursuant to Rules 8.30 and 8.42,
respectively. Position and exercise limits for ETF options vary
according to the number of outstanding shares and the trading volumes
of the underlying ETF over the past six months, where the largest in
capitalization and the most frequently traded ETFs have an option
position and exercise limit of 250,000 contracts (with adjustments for
splits, re-capitalizations, etc.) on the same side of the market; and
smaller capitalization ETFs have position and exercise limits of
200,000, 75,000, 50,000 or 25,000 contracts (with adjustments for
splits, recapitalizations, etc.) on the same side of the market.
The Exchange proposes to amend Rule 8.30. Specifically, the
Exchange proposes to amend Rule 8.30, Interpretation and Policy .10 to
provide a position limit of 25,000 same side option contracts for each
Ethereum Fund option. Additionally, pursuant to Rule 8.42,
Interpretation and Policy .02, the exercise limits for options on each
Ethereum Fund will be equivalent to this proposed position limit.
In considering the appropriate position and exercise limits for the
Ethereum Funds, the Exchange reviewed the data presented by NYSE
American in its filing with respect to the Bitwise Fund, the Grayscale
Fund and the Grayscale Mini Fund.\29\ NYSE American aggregated market
capitalization, volume, and shares outstanding data of the Ethereum
Funds and compared that data to those of other ETFs, and compared the
proposed position limit of the Ethereum Funds to the position limits of
the options overlying those other ETFs. The Exchange reviewed NYSE
American's data that demonstrated that each of these three Bitcoin
Funds would easily qualify for much higher position limits available to
other ETFs and ETPs pursuant to the criterion in Rule 8.30,
Interpretation and Policy .02.\30\
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\29\ See NYSE American Proposal.
\30\ See Rule 8.30, Interpretation and Policy .02.
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As noted above, Exchange Rules set forth position (and exercise)
limits for options, which vary according to the number of shares
outstanding and the amount of trading in underlying during the most
recent six-month period.\31\ Although the Ethereum Funds have been
trading for less than six months [sic], the trading volume in each Fund
is sufficient to qualify the Funds for position limits in excess of the
proposed 25,000-contract limit, as shown below.\32\
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\31\ See Rule 8.30, Interpretation and Policy .02.
\32\ See FactSet, 11/29/2024 and 12/31,24, <a href="https://www.factset.com/data-attribution">https://www.factset.com/data-attribution</a>.
------------------------------------------------------------------------
Ethereum Fund Total volume
------------------------------------------------------------------------
Grayscale Fund............................ 427,312,540 (7/23/24-11/29/
24).
Grayscale Mini Fund....................... 172,400,020 (7/23/24-11/29/
24).
Bitwise Fund.............................. 44,477,060 (7/23/24-12/31/
24).
------------------------------------------------------------------------
Based on this trading volume, the most-recent trading volume in the
Grayscale Fund and the Grayscale Mini Fund well exceeds the requisite
minimum of 100,000,000 shares necessary to qualify for the 250,000-
contract position and exercise limits.\33\ By comparison, the
underlying of other options with six-month trading volume less than the
volumes in the table above are eligible for position and exercise
limits of at least 250,000.\34\ Further, the most-recent trading volume
for the Bitwise Fund well exceeded the requisite minimum of 40,000,000
shares necessary to qualify for the 75,000-contract position (and
exercise) limit, which is three times the proposed 25,000-contract
limit.\35\ Finally, the proposed 25,000-contract position limit is the
default for options that do not otherwise qualify for a higher limit
and is therefore an adequate limit for each Ethereum Fund.\36\
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\33\ Rule 8.30, Interpretation and Policy .02(e) states that to
be eligible for the 250,000 option contract limit, either the most
recent six-month trading volume of the underlying security must have
totaled at least 100,000,000 shares; or the most recent six-month
trading volume of the underlying security must have totaled at least
75,000,000 shares and the underlying security must have at least
300,000,000 currently outstanding.
\34\ See <a href="https://www.theocc.com/Market-Data/Market-Data-Reports/Series-and-Trading-Data/Series-Search">https://www.theocc.com/Market-Data/Market-Data-Reports/Series-and-Trading-Data/Series-Search</a> (including the following
symbols that have a position limit of 250,000: GLD, IAU, SLV, SIVR,
SGOL).
\35\ Rule 8.30, Interpretation and Policy .02(c) states that to
be eligible for the 75,000 option contract limit, either the most
recent six-month trading volume of the underlying security must have
totaled at least 40,000,000 shares; or the most recent six-month
trading volume of the underlying security must have totaled at least
30,000,000 shares and the underlying security must have at least
120,000,000 currently outstanding.
\36\ Rule 8.30, Interpretation and Policy .02(a) states that the
25,000 option contract limit applies to those options having an
underlying security that does not meet the requirements for a higher
option contract limit.
---------------------------------------------------------------------------
Second, with respect to the outstanding shares of these three
Ethereum Funds, the Exchange reviewed NYSE American's data regarding
the outstanding shares of each of these Ethereum Funds. NYSE American
performed an exercise to demonstrate that if a market participant held
the maximum number of contracts possible pursuant to the proposed
position and exercise limits (25,000 contracts), the equivalent shares
[[Page 10538]]
represented by the proposed position and exercise limits (2,500,000
shares) would represent the following approximate percentage of
outstanding shares as of November 29, 2024:
----------------------------------------------------------------------------------------------------------------
Proposed position/ Percentage of
Ethereum Fund exercise limits in Outstanding outstanding
equivalent shares shares shares
----------------------------------------------------------------------------------------------------------------
Grayscale Fund........................................ 2,500,000 177,838,500 1.4
Grayscale Mini Fund................................... 2,500,000 45,220,787 5.5
Bitwise Fund.......................................... 2,500,000 16,600,000 15.1
----------------------------------------------------------------------------------------------------------------
As this table demonstrates, if a market participant held the
maximum permissible options positions in one of the Ethereum 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 Ethereum Fund. For example, 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 Ethereum
Fund (if that market participant exercised all its options). NYSE
American used the number of shares outstanding for each Ethereum Fund
as of November 29, 2024, and calculated the approximate number of
market participants that could hold the maximum of 25,000 same side
positions in each Ethereum Fund that would equate to the number of
shares outstanding of that Ethereum Fund:
----------------------------------------------------------------------------------------------------------------
Number of market
Bitcoin Fund Outstanding participants with 25,000
shares same side positions
----------------------------------------------------------------------------------------------------------------
Grayscale Fund..................................................... 177,838,500 71
Grayscale Mini Fund................................................ 45,220,787 18
Bitwise Fund....................................................... 16,600,000 7
----------------------------------------------------------------------------------------------------------------
This means if 71 market participants had 25,000 same side positions
in options on the Grayscale Fund, 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 options on the
Grayscale Mini Fund, each of them would have to simultaneously exercise
all of those options to create a scenario that may put the underlying
security under stress. Finally, this means if 7 market participants had
25,000 same side positions in options on the Bitwise Fund, 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 this to occur; however,
even if such event did occur, the Exchange would not expect any of the
Ethereum 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.
NYSE American also performed an exercise to compare the size of the
proposed position limit to the market capitalization of the Ethereum
market given that the issuer of each of these three Ethereum Funds may
create and redeem shares that represent an interest in Ethereum. NYSE
American took the global supply of Ethereum, which was 120.44 million
and the price of one Ethereum, which was approximately $3,593.49,\37\
which equates to a market capitalization of approximately $439.78
billion. Consider the proposed position and exercise limit of 25,000
option contracts for each Ethereum Fund option. A position and exercise
limit of 25,000 same side contracts effectively restricts a market
participant from holding positions that could result in the receipt of
no more than 2,500,000 shares of the Grayscale Fund, Grayscale Mini
Fund, and Bitwise Fund, as applicable (if that market participant
exercised all its options). NYSE American considered the share price of
each Bitcoin Fund on November 29, 2024 and calculated the value of
2,500,000 shares of the Ethereum Fund at that price, and the
approximate percentage of that value of the size of the Ethereum
market:
---------------------------------------------------------------------------
\37\ See <a href="https://finance.yahoo.com/quote/ETH-USD/history">https://finance.yahoo.com/quote/ETH-USD/history</a>.
----------------------------------------------------------------------------------------------------------------
Value of 2,500,000 Percentage of
Bitcoin Fund Share price ($) shares Bitcoin market
----------------------------------------------------------------------------------------------------------------
Grayscale Fund......................................... 30.15 75,250,000 0.017
Grayscale Mini Fund.................................... 33.84 84,600,000 0.020
Bitwise Fund........................................... 25.80 64,500,000 0.015
----------------------------------------------------------------------------------------------------------------
Therefore, if a market participant with the maximum 25,000 same
side contracts in options on the Grayscale Fund, the Grayscale Mini
Fund, or the Bitwise Fund exercised all positions at one time, such an
event would have no practical impact on the Ethereum market.
The Exchange also reviewed NYSE American's data regarding the
market capitalization of each of these three Ethereum Funds relative to
the market
[[Page 10539]]
capitalization of the entire Ethereum market, as of November 29, 2024:
----------------------------------------------------------------------------------------------------------------
Ethereum/shares % of Total
outstanding Market value ($) Bitcoin market
----------------------------------------------------------------------------------------------------------------
Total Ethereum Market.................................. 120,440,000 432,799,935,600 100
Grayscale Fund......................................... 177,838,500 5,425,852,635 1.25
Grayscale Mini Fund.................................... 45,220,787 1,547,003,157 0.36
Bitwise Fund........................................... 16,600,000 430,886,200 0.10
----------------------------------------------------------------------------------------------------------------
As this data gathered by NYSE American demonstrates, the Ethereum
Funds collectively represent approximately 1.71% of the global supply
of Ethereum (120,440,000).\38\ Based on the $30.15 price of a Grayscale
Fund share on November 29, 2024, a market participant could have
redeemed one Ethereum for approximately 119 Grayscale Fund shares.
Another 14,354,890,070 Grayscale Fund shares could be created before
the supply of Ethereum was exhausted. As a result, 5,742 market
participants would have to simultaneously exercise 25,000 same side
positions in Grayscale Fund options to receive shares of the Grayscale
Fund holding the entire global supply of Ethereum. Similarly, based on
the $33.84 price of a Grayscale Mini Fund share on November 29, 2024, a
market participant could have redeemed one Ethereum for approximately
106 Grayscale Mini Fund shares. Another 12,789,596,206 Grayscale Mini
Fund shares could be created before the supply of Ethereum was
exhausted. As a result, 5,116 market participants would have to
simultaneously exercise 25,000 same side positions in Grayscale Mini
Fund options to receive shares of Grayscale Mini Fund holding the
entire global supply of Ethereum. Similarly, based on the $25.80 price
of a Bitwise Fund share on November 29, 2024, a market participant
could have redeemed one Ethereum for approximately 139 Bitwise Fund
shares. Another 16,775,191,302 Bitwise Fund shares could be created
before the supply of Ethereum was exhausted. As a result, 6,710 market
participants would have to simultaneously exercise 25,000 same side
positions in Bitwise Fund options to receive shares of Bitwise Fund
holding the entire global supply of Ethereum. Unlike the Ethereum
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 Ethereum Funds may
create, redeem, or split shares in response to demand. The supply of
Ethereum is larger than the available supply of most securities.\39\
Given the significant unlikelihood of any of these events ever
occurring, the Exchange does not believe options on the Ethereum 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 Ethereum.
---------------------------------------------------------------------------
\38\ See id.
\39\ The market capitalization of ethereum would rank in the top
20 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>.
---------------------------------------------------------------------------
NYSE American compared the proposed position limits to the position
limit of CME Ethereum futures. The Chicago Mercantile Exchange
(``CME'') imposes a position limit of 8,000 futures (for the initial
spot month) on its ethereum futures contract.\40\ On November 29, 2024,
CME Jan 25 Ethereum Futures settled at $3,629.69. A position of 8,000
CME Ethereum futures, therefore, would have a notional value of
$1,451,876,000. The following table shows the share price of each
Ethereum Fund on November 29, 2024, and the approximate number of
option contracts that equates to that notional value:
---------------------------------------------------------------------------
\40\ See CME Rulebook Chapter 349 (description of CME ether
futures) and Chapter 5, Position Limit, Position Accountability and
Reportable Level Table in the Interpretations & Special Notices.
Each CME ether futures contract is valued at fifty ethers as defined
by the CME CF Ether Reference Rate (``ERR''). See CME Rulebook
Chapter 349.
----------------------------------------------------------------------------------------------------------------
Share price
Ethereum Fund ($) Number of option contracts
----------------------------------------------------------------------------------------------------------------
Grayscale Fund................................................... 30.15 481,551
Grayscale Mini Fund.............................................. 33.84 429,041
Bitwise Fund..................................................... 25.80 562,743
----------------------------------------------------------------------------------------------------------------
The approximate number of option contracts for each Ethereum Fund
that would equate to the notional value of CME Ethereum futures is
significantly higher than the proposed limit of 25,000 options contract
for each Ethereum 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 an Ethereum future is 1, further
demonstrates how conservative the proposed limits of 25,000 options
contracts are for the Ethereum Fund options.
The Exchange notes, again, 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).\41\ 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.\42\ 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
[[Page 10540]]
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 Ethereum, the Exchange believes
that that the proposed same side position limits are more than
appropriate for the Ethereum options.
---------------------------------------------------------------------------
\41\ See CME Rulebook Chapter 5, Position Limit, Position
Accountability and Reportable Level Table in the Interpretations &
Special Notices.
\42\ Id.
---------------------------------------------------------------------------
Consistent with its position regarding the irrelevance of bitcoin
supply to position limits for options on bitcoin ETPs, the Exchange
likewise believes the available supply of Ethereum is not relevant to
the determination of position and exercise limits for Ethereum Fund
options.\43\ 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.\44\
``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.''
\45\ 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 disruption of the options
market itself, especially in illiquid options classes.'' \46\
---------------------------------------------------------------------------
\43\ 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.
\44\ 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.
\45\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
\46\ Id.
---------------------------------------------------------------------------
The Exchange notes that a Registration Statement on Form S-1 was
filed with the Commission for each Ethereum Fund, each of which
described the supply of Ethereum as being unlimited.\47\ Each
Registration Statement permits an unlimited number of shares of the
applicable Ethereum Fund to be created. Further, the Commission
approved proposed rule changes that permitted the listing and trading
of shares of each Ethereum Fund, which approval did not comment on the
sufficient supply of Ethereum or address whether there was a risk that
permitting an unlimited number of shares for a Ethereum Fund would
impact the supply of ether.\48\ Therefore, the Exchange believes the
Commission had ample time and opportunity to consider whether the
supply of ethereum was sufficient to permit the creation of unlimited
Ethereum 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 Ethereum
supply, the proposed positions limits are more than sufficient to
protect investors and the market.
---------------------------------------------------------------------------
\47\ See, e.g., Grayscale Fund Form S-1 Registration Statement,
at p. 77, <a href="https://www.sec.gov/Archives/edgar/data/2020455/000119312524106957/d756153ds1.htm">https://www.sec.gov/Archives/edgar/data/2020455/000119312524106957/d756153ds1.htm</a>; Grayscale Mini Fund Amendment No.
5 to Form S-1 Registration Statement, at p. 79, <a href="https://www.sec.gov/Archives/edgar/data/2020455/000119312524181081/d756153ds1a.htm">https://www.sec.gov/Archives/edgar/data/2020455/000119312524181081/d756153ds1a.htm</a>; and
Bitwise Fund Form S-1 Registration Statement 1, at p. 17, <a href="https://www.sec.gov/Archives/edgar/data/2013744/000199937124007581/bitwise-s1a_061824.htm">https://www.sec.gov/Archives/edgar/data/2013744/000199937124007581/bitwise-s1a_061824.htm</a> (``Ethereum Funds Reg. Stmts.'').
\48\ See Ethereum ETP Approval Order.
---------------------------------------------------------------------------
All of the above information demonstrates that the proposed
position and exercise limits for the Ethereum Fund options are more
than reasonable and appropriate. The trading volume, ADV, and
outstanding shares of each Ethereum 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 Ethereum Fund's market capitalization and ADV. 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 Ethereum Funds as well as the Ethereum
market.\49\
---------------------------------------------------------------------------
\49\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
---------------------------------------------------------------------------
Today, the Exchange has an adequate surveillance program in place
for options. Cboe intends to apply those same program procedures to
options on the Ethereum Funds that it applies to the Exchange's other
options products, including options on the Bitcoin Funds.\50\ Cboe's
market surveillance staff would have access to the surveillances
conducted by Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe
EDGA Exchange, Inc., and Cboe EDGX Exchange, Inc.\51\ with respect to
the Ethereum Funds and would review activity in the underlying Ethereum
Funds when conducting surveillances for market abuse or manipulation in
the options on the Ethereum 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
information from its affiliated markets, the Exchange would be able to
obtain information regarding trading in shares of the Ethereum Funds
from their primary listing markets and from other markets that trade
shares of the Ethereum Funds through ISG. 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
[[Page 10541]]
surveillance that are common to rules of all options exchanges.\52\
---------------------------------------------------------------------------
\50\ 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).
\51\ Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA
Exchange, Inc., and Cboe EDGX Exchange, Inc. are affiliated markets
of the Exchange.
\52\ 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 Ethereum ETPs, including the Ethereum
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
Ethereum-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
ethereum futures market.'' \53\ The Exchange states that, given the
consistently high correlation between the CME Ethereum 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 [Ethereum ETPs].'' \54\ In
light of surveillance measures related to both options and futures as
well as the underlying Ethereum Funds,\55\ 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 Ethereum Funds.
Further, the Exchange will implement any new surveillance procedures it
deems necessary to effectively monitor the trading of options on
Ethereum ETPs.
---------------------------------------------------------------------------
\53\ See Ethereum ETP Approval Order, at 46938 (footnotes
excluded).
\54\ See id.
\55\ See id.
---------------------------------------------------------------------------
Finally, quotation and last sale information for ETFs is available
via the Consolidated Tape Association (``CTA'') high speed line.
Quotation and last sale information for such securities is also
available from the exchange on which such securities are listed.
Quotation and last sale information for options on Ethereum Funds will
be available via OPRA and major market data vendors.
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 Ethereum Funds up
to the number of expirations currently permissible under the Rules.
The Exchange believes that offering options on Ethereum Funds will
benefit investors by providing them with an additional, relatively
lower cost investing tool to gain exposure to the price of Ethereum and
hedging vehicle to meet their investment needs in connection with
Ethereum-related products and positions. The Exchange expects investors
will transact in options on Ethereum Funds in the unregulated over-the-
counter (``OTC'') options market,\56\ 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 Ethereum 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 Ethereum 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 and Bitcoin) that it currently lists and trades on the Exchange.
---------------------------------------------------------------------------
\56\ 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.
---------------------------------------------------------------------------
Finally, the Exchange notes that applicable Exchange rules will
require that customers receive appropriate disclosure before trading
options in Ethereum Funds.\57\ Further, brokers opening accounts and
recommending options transactions must comply with relevant customer
suitability standards.\58\
---------------------------------------------------------------------------
\57\ See Rules 9.1(b) and (e).
\58\ See Rule 9.3.
---------------------------------------------------------------------------
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.\59\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \60\ 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) \61\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78f(b).
\60\ 15 U.S.C. 78f(b)(5).
\61\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes that the proposal to list and
trade options on the Ethereum 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 Ethereum Funds will provide investors with a greater opportunity to
realize the benefits of utilizing options on an ETF based on spot
Ethereum, including cost efficiencies and increased hedging strategies.
The Exchange believes that offering options on a competitively
priced ETF based on spot Ethereum 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 spot Ethereum.
Additionally, the Exchange's offering of Ethereum Fund options will
provide investors with the ability to
[[Page 10542]]
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. Today, the Exchange lists options on other commodity
(including Ethereum [sic]) ETFs structured as a trust, which
essentially offer the same objectives and benefits to investors, and
for which the Exchange has not identified any issues with the continued
listing and trading of options on those ETFs.
The Exchange also believes the proposal to permit options on the
Ethereum Funds will remove impediments to and perfect the mechanism of
a free and open market and a national market system, because options on
the Ethereum Funds will comply with current Exchange Rules. Options on
the Ethereum Funds must satisfy the initial listing standards and
continued listing standards currently in the Rules, applicable to
options on all ETFs, including options on other commodity ETFs already
deemed appropriate for options trading on the Exchange pursuant to Rule
4.3, Interpretation and Policy .06(a)(d). Additionally, as demonstrated
above, the Ethereum Funds are characterized by a substantial number of
shares that are widely held and actively traded. Further, Rules that
currently govern the listing and trading of options on ETFs, including
permissible 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 Ethereum 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 Ethereum 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 Ethereum Fund's market
capitalization, ADV, and high number of outstanding shares. The
proposed position limit, and exercise limit, is consistent with the Act
as it addresses concerns related to manipulation and protection of
investors because, as demonstrated above, the position limit (and
exercise limit) is extremely conservative and more than appropriate
given the Ethereum Funds are actively traded. In support of the
proposed position and exercise limits for options on the Ethereum Funds
are 25,000 contracts, the Exchange is citing the in depth analysis NYSE
American did in their filing. As noted above, in NYSE American
Proposal, NYSE American considered the: (1) applicable Ethereum Fund's
market capitalization and ADV, and proposed position limit in relation
to other securities; (2) market capitalization of the entire Ethereum
market in terms of exercise risk and availability of deliverables; (3)
proposed position limit by comparing it to position limits for
derivative products regulated by the CFTC; and (4) supply of Ethereum.
Based on the Exchange's review of these analyses, the Exchange believes
that the setting position and exercise limits for options on each of
the Ethereum Funds is 25,000 contracts is more than appropriate. 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 Ethereum market.\62\
---------------------------------------------------------------------------
\62\ 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 Ethereum 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 Ethereum Fund options. The Exchange's existing surveillance
and reporting safeguards are designed to deter and detect possible
manipulative behavior which might arise from listing and trading
options on ETFs and ETPs, such as (existing) precious metal-commodity
backed ETP options as well as the proposed options on Ethereum Funds.
The Exchange believes that its surveillance procedures are adequate to
properly monitor the trading of options on Ethereum Funds in all
trading sessions and to deter and detect violations of Exchange rules.
Specifically, the Exchange's market surveillance staff will have access
to surveillances that it conducts, and that FINRA conducts on its
behalf, with respect to the Ethereum Funds and, as appropriate, would
review activity in the underlying Funds when conducting surveillances
for market abuse or manipulation in the options on the Ethereum 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, the Exchange has a
Regulatory Services Agreement with the FINRA and as noted herein,
pursuant to a multi-party 17d-2 joint plan, all options exchanges
allocate regulatory responsibilities to FINRA to conduct certain
options-related market surveillances. Further, the Exchange will
implement any new surveillance procedures it deems necessary to
effectively monitor the trading of options on the Ethereum Funds.
The underlying shares of spot Ethereum ETPs, including the Ethereum
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
Ethereum-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 ether futures
market.'' \63\ The Exchange states that, given the consistently high
correlation between the CME ethereum futures market and the spot
ethereum 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 [Ether ETPs].'' \64\ In light
of the foregoing, 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 Ethereum Funds. Further, the Exchange will
implement any new surveillance procedures it deems necessary to
[[Page 10543]]
effectively monitor the trading of options on Ethereum ETPs.
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\63\ See Ethereum ETP Approval Order, 89 FR, at 46938.
\64\ See Ethereum ETP Approval Order, 89 FR at 46941.
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The Exchange believes the proposed rule change to exclude the
Ethereum 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.\65\
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\65\ The Exchange will submit a separate rule filing that would
permit the Exchange to authorize for trading FLEX options on the
Bitcoin [sic] Funds (which filing may propose changes to existing
FLEX option position limits for such options if appropriate).
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Finally, the Exchange notes that this proposal 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
applicable Exchange rules will require that customers receive
appropriate disclosure before trading options in Ethereum Funds \66\
and will require that brokers opening accounts and recommending options
transactions must comply with relevant customer suitability
standards.\67\
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\66\ See Rules 9.1(b) and (e).
\67\ See Rule 9.3.
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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. 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 Ethereum Fund options
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 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 Ethereum Funds
options on the Exchange in the same manner as they apply to other
options on all other Fund Shares that are listed and traded on the
Exchange. Also, and as stated above, the Exchange already lists options
on other commodity-based Units (including Bitcoin-based).\68\ Further,
the Ethereum 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.
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\68\ See Rule 4.3, Interpretation and Policy .06(a)(4).
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The Exchange does not believe that the proposal to list and trade
options on Ethereum 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 Ethereum 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. The Exchange notes that listing and trading Ethereum 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 Ethereum 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 Ethereum
prices and Ethereum-related products and positions on a listed options
exchange.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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#552720393078363a3838303b2126152630367b323a23"><span class="__cf_email__" data-cfemail="6f1d1a030a420c0002020a011b1c2f1c0a0c41080019">[email protected]</span></a>. Please include
file number SR-CBOE-2025-008 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-2025-008. 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
[[Page 10544]]
SR-CBOE-2025-008 and should be submitted on or before March 17, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\69\
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\69\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-02940 Filed 2-21-25; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on February 24, 2025.
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.