Notice2025-06349
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Permit the Listing and Trading of Options on the iShares Ethereum Trust
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
April 15, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 71 (Tuesday, April 15, 2025)</title>
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[Federal Register Volume 90, Number 71 (Tuesday, April 15, 2025)]
[Notices]
[Pages 15757-15764]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-06349]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102798; File No. SR-ISE-2024-35]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Permit the
Listing and Trading of Options on the iShares Ethereum Trust
April 9, 2025.
On July 22, 2024, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade options on shares of the iShares Ethereum
Trust (the ``Trust'' or ``ETHA'').\3\ The proposed rule change was
published for comment in the Federal Register on August 12, 2024.\4\ On
September 30, 2024, pursuant to Section 19(b)(2) of the Exchange
Act,\5\ the Commission designated a longer period within which to
approve the proposal, disapprove the proposal, or institute proceedings
to determine whether to disapprove the proposal.\6\ On November 8,
2024, the Commission instituted proceedings under Section 19(b)(2)(B)
of the Act \7\ to determine whether to approve or disapprove the
proposal.\8\ The Commission received comments regarding the proposed
rule change.\9\ On March 3, 2025, the Exchange filed Amendment No. 1 to
the proposal.\10\ The Commission is publishing this notice to solicit
comments on Amendment No. 1 from interested persons, and is approving
the proposed rule change, as modified by Amendment No. 1, on an
accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Commission approved proposals by several exchanges to
list and trade shares of trusts that hold ether, including the
Trust. See Securities Exchange Act Release No. 100224 (May 23,
2024), 89 FR 46937 (May 30, 2024) (order approving File Nos. 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; SR-CboeBZX-2024-018.
\4\ See Securities Exchange Act Release No. 100661 (Aug. 6,
2024), 89 FR 65690 (``Notice'').
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 101154 (Sept. 24,
2024), 89 FR 79664 (Sept. 30, 2024).
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See Securities Exchange Act Release No. 101571 (Nov. 8,
2024), 89 FR 90205 (Nov. 14, 2024) (``Order Instituting
Proceedings'').
\9\ Comments on the proposal are available at <a href="https://www.sec.gov/comments/sr-ise-2024-35/srise202435.htm">https://www.sec.gov/comments/sr-ise-2024-35/srise202435.htm</a>.
\10\ Amendment No. 1 revises the proposal to: establish position
and exercise limits of 25,000 contracts on the same side of the
market for options on the Trust and provide data and analysis to
support the proposed position and exercise limits; provide data
demonstrating that shares in ETHA are widely held and actively
traded; exclude options on the Trust from FLEX trading; provide
additional detail and representations regarding the Exchange's
surveillance procedures for options on the Trust; and correct an
error in the column title header in Options 9, Section 15,
Supplementary Material .01. Amendment No. 1 is available at <a href="https://www.sec.gov/comments/sr-ise-2024-35/srise202435.htm">https://www.sec.gov/comments/sr-ise-2024-35/srise202435.htm</a>.
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I. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
As described in detail in the Notice and Amendment No. 1, the
Exchange proposes to amend its rules to permit the listing and trading
of options on the Trust.\11\ The Exchange states that options on the
Trust will provide investors with an additional, relatively lower cost
investing tool to gain exposure to spot ether as well as a hedging
vehicle to meet their needs in connection with ether products and
positions.\12\
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\11\ See Notice, 89 FR 65690.
\12\ See id. at 65691.
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Options on the Trust will be physically settled with American-style
exercise and will be subject to the Exchange's initial and continued
listing standards.\13\ The Exchange's initial listing standards
require, among other things, that the security underlying a listed
option be ``characterized by a substantial number of outstanding shares
that are widely held and actively traded.'' \14\ The Exchange states
that options on the Trust will trade in the same manner as other
exchange-traded fund (``ETF'') options, and that options on the Trust
will be subject to the Exchange rules that currently apply to the
listing and trading of all ETF options on the Exchange, including, for
example, Exchange rules governing expirations, exercise prices, minimum
increments, margin requirements, customer accounts, and trading halt
procedures.\15\
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\13\ See id. at 65692.
\14\ See Notice, 89 FR at 65692 and ISE Options 4, Section
3(a)(2).
\15\ See Notice, 89 FR at 65692.
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The Exchange initially proposed to apply its existing position and
exercise limit rules to options on the Trust.\16\ Amendment No. 1
revises the proposal to establish position and exercise limits of
25,000 contracts on the same side of the market for options on the
Trust.\17\ The Exchange states that position and exercise limits are
designed to limit the number of options contracts traded on the
exchange in an underlying security that an investor, acting alone or in
concert with others, directly or indirectly, may control.\18\ The
Exchange states that these limits, which are described in ISE Options
9, Sections 13 and 15, are intended 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.\19\
The Exchange further states that position and exercise limits must
balance concerns regarding mitigating potential manipulation and the
cost of inhibiting potential hedging activity that could be used for
legitimate economic purposes.\20\ To achieve this balance, ISE
[[Page 15758]]
proposes to set the Trust's position and exercise limits at 25,000
contracts.\21\ The Exchange states that capping the Trust's position
and exercise limit at 25,000 contracts, the lowest limit available in
options, would address concerns related to manipulation and protection
of investors as this number is conservative.\22\ In considering the
appropriate position limit for the Trust, ISE measured the Trust's
market capitalization and average daily volume (``ADV'') against other
industry data, as explained further below.\23\ The Exchange states
that, as of December 19, 2024, the Trust has 93,352 shareholders.\24\
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\16\ See id. See also ISE Options 9, Sections 13 and 15. The
Exchange states that position and exercise limits for options vary
according to the number of outstanding shares and the trading
volumes of the underlying security over the past six months, where
the largest in capitalization and the most frequently traded
securities 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, re-capitalizations, etc.) on
the same side of the market. See Notice, 89 FR at 65693.
\17\ See Amendment No. 1 at 3. See also proposed Options 9,
Section 13, Supplementary Material .01 and proposed Options 9,
Section 15, Supplementary Material .01.
\18\ See id.
\19\ See id.
\20\ See id.
\21\ See id.
\22\ See id.
\23\ See id. at 3-4. The Exchange states that the data provided
represents the initial 3 months trading in the Trust. See id. at
footnote 1.
\24\ See Amendment No. 1 at 4. The Exchange states that this
number was obtained from Broadridge Financial Solutions, Inc. See
id. at footnote 2.
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First, ISE considered the Trust's market capitalization and ADV,
and the prospective position and exercise limit in relation to other
securities.\25\ In measuring the Trust against other securities, ISE
aggregated market capitalization and volume data for securities
utilizing data from The Options Clearing Corporations (``OCC'').\26\
The Exchange states that the below charts display the trading volume
for the Trust in terms of daily shares and notional volumes during the
period of time the Trust has been trading from July 23, 2024, through
December 14, 2024.\27\ The Exchange states that ADV for this time
period is 5,302,533 shares and the average notional volume for this
time period is $127,825,276.\28\ The Exchange states that both the ADV
and the average notional volume experienced an uptick at launch (which
can be typical for anticipated product launches) then levelled off for
several months.\29\ The Exchange states that renewed growth in the
cryptocurrency market caused increased growth beginning in early
November 2024.\30\
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\25\ See Amendment No. 1 at 4.
\26\ See id. at 4. The Exchange states that the computations are
based on OCC data from October 22, 2024. Data displaying zero values
in market capitalization or ADV were removed. See id. at footnote 3.
\27\ See Amendment No. 1 at 4.
\28\ See id.
\29\ See Amendment No. 1 at 4.
\30\ See id.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN15AP25.001
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[GRAPHIC] [TIFF OMITTED] TN15AP25.002
BILLING CODE 8011-01-C
The Exchange reviewed the market capitalization and ADV of 3,930
options on single stock securities, excluding ETFs.\31\ Next, the
Exchange aggregated this data based on market capitalization and ADV
and grouped option symbols by position limit utilizing statistical
thresholds for ADV and market capitalization for each position limit
category (i.e., 25,000, 50,000 to 65,000, 75,000, 100,000 to less than
250,000, 250,000 to less than 500,000, 500,000 to 1,000,000 and greater
than 1,000,000).\32\ The Exchange states that this exercise was
performed to demonstrate the Trust's position limit relative to other
options symbols in terms of market capitalization and ADV.\33\ The
Exchange states that, for reference, as of October 22, 2024, the market
capitalization for the Trust was 1.16 billion \34\ with an ADV, for the
preceding three months prior to October 22, 2024, of greater than 2.99
million shares.\35\ The Exchange further states that, today, by
comparison, other options symbols with similar market capitalization
and ADV have a position limit of 50,000 contracts or 75,000
contracts.\36\ The Exchange states that, from a 90-day ADV perspective
the statistics indicate that the Trust has a 90 day ADV greater than
all stocks in the 100,000 contracts to 249,000 position limit
range.\37\ Therefore, the Exchange states that the proposed 25,000 same
side position and exercise limits for options on the Trust are
conservative.\38\
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\31\ See Amendment No. 1 at 5. The Exchange states that the
Trust has one asset and therefore is not comparable to a broad based
ETF where there are typically multiple components. See id. at
footnote 5.
\32\ See Amendment No. 1 at 5. ISE Options 9, Section 13(d) sets
out position limits for various contracts. For example, a 25,000-
contract limit applies to those options having an underlying
security that does not meet the requirements for a higher options
contract limit. See id.
\33\ See id.
\34\ See Amendment No. 1 at 5 (citing <a href="https://www.ishares.com/us/products/337614/ishares-ethereum-trust-etf">https://www.ishares.com/us/products/337614/ishares-ethereum-trust-etf</a>. The Exchange states
that the global supply of ether grows each day ether are minted. See
id. at footnote 6.
\35\ See Amendment No. 1 at 5.
\36\ See id. The Exchange states that the median market
capitalization for options subject to the 50,000 contracts position
limit is 788,000,000 million and the median market capitalization
for options subject to the 75,000 contracts position limit is
1,037,000 billion. The Exchange further states that placing the
Trust at the 50,000 contracts position limit would rank it in the
59th percentile in market capitalization and placing the Trust at
75,000 contracts position limit would rank it in the 46th percentile
in market capitalization. See id. at footnote 7.
\37\ See id. at 5.
\38\ See id. at 5-6.
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Second, ISE reviewed the Trust's data relative to the market
capitalization of the entire ether market in terms of exercise risk and
availability of deliverables.\39\ The Exchange states that, utilizing
data as of October 22, 2024, there were 120,392,960 ether in
circulation.\40\ The Exchange states that the price of ether on October
22, 2024, was $2,620 per coin which equates to a market capitalization
of greater than $315 billion.\41\ The Exchange states that if a
position limit of 25,000 options were considered, the exercisable risk
would represent less than 4.3524% of the outstanding shares of the
Trust.\42\ The Exchange states that since the Trust has a creation and
redemption process managed through the issuer, it is also possible to
compare the position limit sought to the total market capitalization of
the entire ether market.\43\ In this case, the exercisable risk
represented by 25,000 options on the Trust would be less than 0.03% of
the market capitalization of all outstanding ether.\44\ The Exchange
states that, assuming a scenario where all 25,000 options on the Trust
shares were exercised given the proposed 25,000 per same side position
limit, this would have a virtually unnoticed impact on the entire ether
market.\45\ The Exchange further states that this analysis demonstrates
that the proposed 25,000 per same side position limit (and exercise
limit) is conservative and appropriate for options on the Trust.\46\
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\39\ See id. at 6.
\40\ See id.
\41\ See id.
\42\ See id. The Exchange states that the 4.4% was calculated as
follows: 2,500,000 (exercisable stock from position limit)/
57,440,000 (shares outstanding on October 22, 2024) = 4.35237%. See
id. at footnote 8.
\43\ See id. at 6.
\44\ See id.
\45\ See id.
\46\ See id.
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Third, the Exchange reviewed the proposed position limit by
comparing it to position limits for derivative products regulated by
the Commodity Futures Trading Commission (``CFTC'').\47\ The Exchange
states that while the CFTC, through the relevant Designated Contract
Markets, only regulates options positions based upon delta equivalents
(creating a less stringent standard), the Exchange examined equivalent
ether futures position limits.\48\ In particular, the Exchange looked
at the Chicago Mercantile Exchange (``CME'') ether futures contract
\49\ that has a position
[[Page 15760]]
limit of 8,000 futures.\50\ On October 22, 2024, CME ether futures
settled at $2,629.\51\ The Exchange states that, using a contract
multiplier of $50, a position limit of 8,000 futures would have a
notional value $1.0516 billion (8,000 x $50 x $2,629).\52\ The Exchange
states that, using an October 22, 2024, share price of $19.91 for
shares of the Trust, a futures position of 8,000 contracts, with a
notional value of $1.0516 billion dollars would equate to an options
position of 528,176 contracts ($1.0516 billion (notional value of 8,000
ether futures contracts)/$19.91 (price of the Trust shares) =
52,817,679 (Trust shares)/100 (the number of shares represented by one
options contract)) = 528,176 options contracts.\53\ The Exchange states
that because substantial sums of any distributed options portfolio are
likely to be out of the money on expiration, an options position limit
equivalent to the CME position limit for ether futures (considering
that all options deltas are <=1.00) should be a bit higher than the CME
implied 528,176 contract limit.\54\
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\47\ See id.
\48\ See id.
\49\ CME Ether Futures are described in Chapter 350 of CME's
Rulebook. See Amendment No. 1 at footnote 9.
\50\ See the Position Accountability and Reportable Level Table
in the Interpretations & Special Notices Section of Chapter 5 of
CME's Rulebook. See Amendment No. 1 at footnote 10.
\51\ Amendment No. 1 at 6.
\52\ See id.
\53\ See id.
\54\ See id. at 6-7.
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The Exchange states that, 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).\55\ Therefore, the Exchange
states that 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.\56\ The Exchange states
that 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.\57\ Additionally, the Exchange states that if, at the
close of trading, a position that includes options exceeds position
limits for futures contracts, when evaluated using the delta factors as
of that day's close of trading, but does not exceed the limits when
evaluated using the previous day's delta factors, then the position
shall not constitute a position limit violation.\58\ Considering CME's
position limits on futures for ether, the Exchange believes that that
the proposed 25,000 per same side position and exercise limit is
conservative and appropriate for options on the Trust.\59\
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\55\ See Amendment No. 1 at 7 (citing <a href="https://www.cmegroup.com/education/courses/market-regulation/position-limits/position-limits-aggregation-of-contracts-and-table.htm">https://www.cmegroup.com/education/courses/market-regulation/position-limits/position-limits-aggregation-of-contracts-and-table.htm</a>).
\56\ See Amendment No. 1 at 7.
\57\ See id.
\58\ See id.
\59\ See id.
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In analyzing the proposed position limit for options on the Trust,
the Exchange also considered the supply of ether.\60\ Specifically, the
Exchange examined the number of market participants with a position
limit of 25,000 contracts that would need to exercise in unison to put
the underlying asset under stress.\61\ In the case of options on the
Trust, the proposed 25,000 same side position and exercise limit
effectively restricts a market participant from holding positions that
could be exercised in excess of 2,500,000 shares of the Trust.\62\
Utilizing data from October 22, 2024, the Exchange states that the
Trust had 57,440,000 shares outstanding, therefore 22.976 participants
would have to simultaneously exercise their position limits in order to
create a scenario that may put the underlying asset (shares of the
Trust) under stress.\63\ The Exchange states that, historically, from
observation only, it appears that no more than five market participants
holding options positions in any single security have exercised in
unison in any option.\64\ The Exchange states that, as unlikely an
occurrence as all market participants exercising their positions in
unison would be, if it were to occur, it should be noted that even such
an occurrence would not likely put the Trust under stress as economic
incentives would induce the creation of more shares through the ETF
creation and redemption process.\65\
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\60\ See id.
\61\ See id.
\62\ See id.
\63\ See id.
\64\ See id.
\65\ See id.
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The Exchange further states that, given that the current global
supply of ether, the underlying asset of the Trust, as of October 22,
2024, is 120,392,960 \66\ coins and each ether coin can currently be
exchanged (ether to USD and then USD to Trust shares) for 131.6 shares
of the Trust, another 15,843, 979.598 shares of the Trust could be
created.\67\ In addition, the Exchange states that, as of October 22,
2024, a 25,000 contract position limit for options on the Trust would
represent less than 4.3524% of the outstanding shares of the Trust
(2,500,000 (position limit exercise)/57,440,000 (shares outstanding of
the Trust)) = less than 4.3524%.\68\ Also, the Exchange states that, as
of October 22, 2024, a 25,000 contract position limit for options on
the Trust would represent less than .01578% of the global supply of
ether (2,500,000 (position limit exercise)/120,392,960 (number of
ether) x 131.6 (Trust shares per ether)) = <.01578%.\69\ The Exchange
states that the proposed position and exercise limits are consistent
with the Act as they address concerns related to manipulation and
protection of investors, are the lowest position and exercise limits
available in the options industry, and are conservative and appropriate
given the Trust's market capitalization, ADV, and number of outstanding
shares.\70\
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\66\ See Amendment No. 1 at 8 (citing <a href="https://www.ishares.com/us/products/337614/ishares-ethereum-trust-etf">https://www.ishares.com/us/products/337614/ishares-ethereum-trust-etf</a>).
\67\ See Amendment No. 1 at 8.
\68\ See Amendment No. 1 at 8 and <a href="https://coinmarketcap.com/currencies/ethereum/">https://coinmarketcap.com/currencies/ethereum/</a>.
\69\ See Amendment No. 1 at 8.
\70\ See id.
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In addition, Amendment No. 1 revises Supplementary Material .01 to
Option 9, Section 15, related to exercise limits, to change the column
header in that rule from ``Position Limit'' to ``Exercise Limit'' to
describe the limit represented in that column.\71\ The Exchange states
that this change will bring greater clarity to the limit represented in
that column.\72\
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\71\ See id. at 8-9.
\72\ See id. at 9.
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The Exchange states that Options 3A, Section 3(a) permits the
Exchange to authorize 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 Options 4, Section 3.\73\ At this
time, the Exchange is not proposing to permit the Trust to trade as a
FLEX Option.\74\ The Exchange proposes to modify Options 3A, Section
3(a) to specify this exception.\75\
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\73\ See id.
\74\ See id.
\75\ See id. The Exchange states that it will continue ongoing
discussions with the Commission regarding appropriate position
limits for the Trust and plans to submit a separate rule filing that
would permit the Exchange to authorize for trading FLEX options on
the Trust (which filing may propose changes to existing FLEX option
position limits for such options if appropriate). See id. at 10.
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[[Page 15761]]
The Exchange states that it has an adequate surveillance program in
place for options and that it intends to apply the same program
procedures to options on the Trust that it applies to the Exchange's
other options products.\76\ 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 Trust
options.\77\ The Exchange states that it would implement any new
surveillance procedures it deemed necessary to effectively monitor the
trading of options on the Trust.\78\ The Exchange further states that
its market surveillance staff would have access to the surveillances
conducted by Nasdaq \79\ with respect to the Trust and would review
activity in the underlying Trust when conducting surveillances for
market abuse or manipulation in the options on the Trust.\80\
Additionally, the Exchange states that it is a member of the
Intermarket Surveillance Group (``ISG'') under the Intermarket
Surveillance Group Agreement.\81\ The Exchange states that ISG members
work together to coordinate surveillance and investigative information
sharing in the stock, options, and futures markets.\82\ In addition to
obtaining information from Nasdaq, the Exchange states that it would be
able to obtain information regarding trading of shares of the Trust on
other exchanges through ISG.\83\ In addition, the Exchange states that
it has a Regulatory Services Agreement with the Financial Industry
Regulatory Authority (``FINRA'') and that, 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.\84\
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\76\ See id. at 11. The Exchange states that 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). See id. at footnote 15.
\77\ See Notice, 89 FR at 65693.
\78\ See Notice, 89 FR at 65693.
\79\ The Exchange states that the Nasdaq Stock Market LLC is an
affiliated market of the Exchange. See id. at footnote 16.
\80\ See id. at 11.
\81\ See id.
\82\ See id.
\83\ See id.
\84\ The Exchange states that 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 Amendment No. 1 at footnote
17 and 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. The Exchange
further states that 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: receive
regulatory reports from such members; examine such members for
compliance with the Act and the rules and regulations thereunder,
and the rules of the SRO; or carry out other specified regulatory
responsibilities with respect to such members. See Amendment No. 1
at footnote 17.
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The Exchange states that underlying shares of spot ether-based
exchange-traded products (``ETPs''), including the Trust, are also
subject to safeguards related to addressing market abuse and
manipulation.\85\ The Exchange states that, as the Commission stated in
its order approving proposals of several exchanges to list and trade
shares of spot ether-based ETPs, including the Trust (``Ether ETP
Order''): \86\
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\85\ See Amendment No. 1 at 11.
\86\ See id. and Securities Exchange Act Release No. 100224 (May
23, 2024), 89 FR 46937, 46941 (May 23, 2024) (File Nos. 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;
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).
Each Exchange has a comprehensive surveillance-sharing agreement
with the Chicago Mercantile Exchange (``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.\87\
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\87\ Ethereum ETP Order, 89 FR at 46941.
The Exchange states that in the Ether ETP Order, given the
consistently high correlation between the CME ether futures market and
the spot ether 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].'' \88\
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\88\ Amendment No. 1 at 12 and Ethereum ETP Order, 89 FR at
46938.
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In light of surveillance measures related to both options and
futures as well as the underlying Trust,\89\ 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 Trust.\90\
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\89\ See Amendment No. 1 at 12 and Securities Exchange Act
Release No. 100016 (April 23, 2024), 89 FR 33414, 33425-33426 (April
292, 2024) (SR-NASDAQ-2023-045) (Notice of Filing of Amendment No. 2
to Proposed Rule Change to List and Trade Shares of the iShares
Ethereum Trust Under Nasdaq Rule 5711(d) (Commodity-Based Trust
Shares).
\90\ See Amendment No. 1 at 12.
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The Exchange states that both the Exchange and the Options Price
Reporting Authority, LLC 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 the Trust.\91\
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\91\ See Notice, 89 FR at 65693.
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II. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange,\92\ and, in particular,
the requirements of Section 6 of the Act.\93\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\94\ which requires that an exchange have
rules designed to prevent fraudulent and manipulative acts and
practices, to remove impediments to and perfect the mechanism of a free
and open market, and to protect investors and the public interest.
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\92\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\93\ 15 U.S.C. 78f.
\94\ 15 U.S.C. 78f(b)(5).
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The Order Instituting Proceedings sought comment on issues raised
by the proposal, including whether the proposal included sufficient
data and analysis to support a conclusion that the proposal is
consistent with the requirements of Section 6(b)(5) of the Act. As
discussed more fully below, commenters raised concerns regarding the
potential risks of the proposed options to individual investors and the
financial system.\95\
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\95\ See letters from Benjamin L. Schiffrin, Director of
Securities Policy, Better Markets, Inc., dated Dec. 5, 2024
(``Better Markets Letter''); and Robert Rutkowski, dated Dec. 6,
2024 (``Rutkowski Letter'').
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A. Widely Held and Actively Traded
The Exchange's initial listing standards require, among other
things, that the security underlying a listed option be ``characterized
by a substantial number of outstanding shares that are widely held and
actively traded.'' \96\ As described above, the
[[Page 15762]]
Exchange states that the Trust had 57,440,000 shares outstanding as of
October 22, 2024, and 93,352 shareholders, as of December 19, 2024.\97\
The Exchange states that from July 23, 2024, through December 14, 2024,
the ADV for shares of the Trust was 5,302,533 shares and the average
notional volume was $127,825,276.\98\ The Exchange states that, as of
October 22, 2024, the market capitalization of the Trust was $1.16
billion.\99\
---------------------------------------------------------------------------
\96\ See ISE Options 4, Section 3(a)(2).
\97\ See Amendment No. 1 at 4 and 7.
\98\ See Amendment No. 1 at 4.
\99\ See Amendment No. 1 at 5.
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The Commission has reviewed the Exchange's analysis and publicly
available data regarding the Trust. Based on this review of information
provided by the Exchange and publicly available information--including
information regarding the number of shares outstanding and the number
of shareholders of the Trust, the ADV of shares of the Trust, and the
market capitalization of the Trust--the Commission concludes that it is
reasonable for the Exchange to determine that the Trust satisfies the
requirement of ISE Options 4, Section 3(a)(2) that the security
underlying a listed option be widely held and actively traded.
Commenters expressed concerns regarding the potential impact of
spot ether based-ETP options on the traditional financial system.\100\
Two commenters stated that ether's Proof-of-Stake protocol presents a
higher risk of runs because it requires more capital.\101\ One
commenter stated that options on spot ether-based ETPs ``would threaten
financial stability by further entangling traditional finance with a
volatile asset that would be susceptible to runs.'' \102\ Another
commenter stated that a run on ether could have harmful consequences
for investors.\103\
---------------------------------------------------------------------------
\100\ See Better Markets Letter at 3-4; and Rutkowski Letter at
1.
\101\ See Better Markets Letter at 3 and Rutkowski Letter at 1.
\102\ Better Markets Letter at 4. See also Rutkowski Letter at
1.
\103\ See Rutkowski Letter at 1.
---------------------------------------------------------------------------
The Commission acknowledges the comments regarding the potential
impact of ether-based ETP options on the traditional financial system.
Pursuant to Section 19(b)(2) of the Exchange Act, however, the
Commission must approve a proposed rule change filed by a national
securities exchange if it finds that the proposed rule change is
consistent with the applicable requirements of the Exchange Act.\104\
For the reasons discussed herein, the Commission finds that the
proposed rule change satisfies the requirements of the Exchange Act,
including the requirements in Section 6(b)(5) that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to remove impediments to and perfect
the mechanism of a free and open market, and to protect investors and
the public interest.
---------------------------------------------------------------------------
\104\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
---------------------------------------------------------------------------
B. Position and Exercise Limits
Position and exercise limits serve as a regulatory tool designed to
deter manipulative schemes and adverse market impacts surrounding the
use of options. Since the inception of standardized options trading,
the options exchanges have had rules limiting the aggregate number of
options contracts that a member or customer may hold or exercise.
Options position and exercise limits are intended to prevent the
establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market to benefit
the options position.\105\ In addition, such limits serve to reduce the
possibility of disruption in the options market itself, especially in
illiquid classes.\106\ As the Commission has previously recognized,
markets with active and deep trading interest, as well as with broad
public ownership, are more difficult to manipulate or disrupt than less
active and deep markets with smaller public floats.\107\ The Commission
also has recognized that position and exercise limits must be
sufficient to prevent investors from disrupting the market for the
underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security.\108\ At the same time, the
Commission has recognized that limits must not be established at levels
that are so low as to discourage participation in the options market by
institutions and other investors with substantial hedging needs or to
prevent specialists and market-makers from adequately meeting their
obligations to maintain a fair and orderly market.\109\
---------------------------------------------------------------------------
\105\ See Securities Exchange Act Release No. 39489 (Dec. 24,
1997), 63 FR 276, 279 (Jan 5. 1998) (order approving File No. SR-
Cboe-97-11).
\106\ Id.
\107\ Id.
\108\ See, e.g., Securities Exchange Act Release Nos. 21907
(Mar. 29, 1985), 50 FR 13440, 13441 (Apr. 4, 1985) (order approving
File Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-25, and SR-PSE-
85-1); and 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan. 12, 1999)
(order approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-98-33; and
Phlx-98-36).
\109\ See id.
---------------------------------------------------------------------------
In Amendment No. 1, the Exchange proposes to amend Options 9,
Section 13, Supplementary Material .01 and Options 9, Section 15,
Supplementary Material .01 to adopt position and exercise limits of
25,000 contracts on the same side of the market for options on the
Trust.\110\ In proposing these position and exercise limits, the
Exchange considered, among other things, the ADV, market
capitalization, and outstanding shares of the Trust.\111\ The Exchange
states that, from July 23, 2024, through December 14, 2024, the ADV for
shares of the Trust was 5,302,533 shares and the average notional
volume was $127,825,276.\112\ In addition, the Exchange states that the
proposed position and exercise limits represented less than 4.3524% of
the 57,440,000 shares of the Trust outstanding as of October 22,
2024.\113\ The Exchange further states that, as of October 22, 2024,
the market capitalization of the Trust was $1.16 billion.\114\ The
Exchange states that other options symbols with similar market
capitalization and ADV have a position limit of 50,000 contracts or
75,000 contracts, and that the proposed position and exercise limits
are conservative.\115\
---------------------------------------------------------------------------
\110\ See Amendment No. 1 at 3.
\111\ See Amendment No. 1 at 4-8.
\112\ See Amendment No. 1 at 4.
\113\ See Amendment No. 1 at 6.
\114\ See Amendment No. 1 at 5.
\115\ See Amendment No. 1 at 5-6.
---------------------------------------------------------------------------
The Exchange also compared the size of the position and exercise
limits to the market capitalization of the ether market, which,
according to the Exchange, had a market capitalization greater than
$315 billion as of October 22, 2024.\116\ Accordingly, the Exchange
states that a position limit of 25,000 contracts would represent an
exercisable risk of less than 0.03% of the market capitalization of all
outstanding ether and that the exercise of 25,000 options on the Trust
``would have a virtually unnoticed impact on the entire ether market.''
\117\
---------------------------------------------------------------------------
\116\ See Amendment No. 1 at 6.
\117\ Amendment No. 1 at 6.
---------------------------------------------------------------------------
The Exchange also compared to the proposed position and exercise
limits to the CME's position limit of 8,000 futures for ether
futures.\118\ According to the Exchange, as of October 22, 2024, a
position of 8,000 futures had a notional value of $1.0516 billion,
which would equate to a position limit of 528,176 contracts for options
on the Trust.\119\
[[Page 15763]]
The Exchange states that, considering CME's position limits for ether
futures, the proposed position and exercise limits are ``conservative
and appropriate for options on the Trust.'' \120\
---------------------------------------------------------------------------
\118\ See Amendment No. 1 at 6.
\119\ See Amendment No. 1 at 6.
\120\ Amendment No. 1 at 7.
---------------------------------------------------------------------------
In addition, the Exchange states that, as of October 22, 2024, with
57,440,000 Trust shares outstanding, 22.976 market participants would
have to simultaneously exercise their positions to create a scenario
that would place the shares of the Trust under stress.\121\ The
Exchange states that the proposed position and exercise limits are
conservative and appropriate given the Trust's market capitalization,
average daily volume, and number of outstanding shares.\122\ The
Exchange further states that the proposed position and exercise limits
for options on the Trust will address manipulation and investor
protection concerns.\123\
---------------------------------------------------------------------------
\121\ See Amendment No. 1 at 7.
\122\ See Amendment No. 1 at 8.
\123\ See Amendment No. 1 at 3.
---------------------------------------------------------------------------
The Commission finds that the proposed position and exercise limits
are consistent with the Act and, in particular, with the requirements
in Section 6(b)(5) that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest. As discussed above, the
Commission has recognized that position and exercise limits must be
sufficient to prevent investors from disrupting the market for the
underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security.\124\ In addition, the
Commission has stated previously that rules regarding position and
exercise limits are intended to prevent the establishment of options
positions that can be used or might create incentives to manipulate or
disrupt the underlying market so as to benefit the options
position.\125\ Based on its review of the data and analysis provided by
the Exchange, the Commission concludes that the proposed position and
exercise limits satisfy these objectives. Specifically, the Commission
has considered and reviewed the Exchange's analysis that, as of October
22, 2024, the proposed position and exercise limits of 25,000 contracts
represented less than 4.3524% of the outstanding shares of the
Trust.\126\ The Commission also has considered and reviewed the
Exchange's statement that with a position limit of 25,000 contracts and
57,440,000 shares of the Trust outstanding, approximately 22 market
participants would have to simultaneously exercise their positions to
place shares of the Trust under stress.\127\ Based on the Commission's
review of this information and analysis, the Commission concludes that
the proposed position and exercise limits are designed to prevent
investors from disrupting the market for the underlying security by
acquiring and exercising a number of options contracts disproportionate
to the deliverable supply and average trading volume of the underlying
security, and to prevent the establishment of options positions that
can be used or might create incentives to manipulate or disrupt the
underlying market so as to benefit the options position.
---------------------------------------------------------------------------
\124\ See supra note 107 and accompanying text.
\125\ See Securities Exchange Act Release No. 57352 (Feb.19,
2008), 73 FR 10076, 10080 (Feb. 25, 2008) (order approving File No.
SR-Cboe-2008-07).
\126\ See Amendment No. 1 at 6.
\127\ See Amendment No. 1 at 7.
---------------------------------------------------------------------------
The proposal excludes options on the Trust from FLEX trading.\128\
Excluding options on the Trust from FLEX trading will allow the
Commission to consider the listing of FLEX options on the Trust in the
context of any separate proposal the Exchange files to list such
options.
---------------------------------------------------------------------------
\128\ See Amendment No. 1 at 9-10 and proposed Options 3A,
Section 3(a).
---------------------------------------------------------------------------
C. Surveillance
The Exchange states that it will apply its existing options
surveillance program procedures to options on the Trust,\129\ and that
it would implement any new surveillance procedures it deemed necessary
to effectively monitor the trading of options on the Trust.\130\ The
Exchange states that its market surveillance staff will have access to
the surveillances conducted by Nasdaq with respect to the Trust and
that it would review activity in the underlying Trust when conducting
surveillances for market abuse or manipulation in the options on the
Trust.\131\ In addition, the Exchange states that it is a member of ISG
and that the Exchange would be able to obtain information regarding
trading in shares of the Trust on other exchanges through ISG.\132\ The
Exchange further states that ISG members work together to coordinate
surveillance and investigative information sharing in the stock,
options, and futures markets.\133\
---------------------------------------------------------------------------
\129\ See Amendment No. 1 at 11.
\130\ See Notice, 89 FR at 65693.
\131\ See Amendment No. 1 at 11.
\132\ See Amendment No. 1 at 11.
\133\ See Amendment No. 1 at 11.
---------------------------------------------------------------------------
Together, these surveillance procedures should allow the Exchange
to investigate suspected manipulations or other trading abuses in
options on the Trust.
D. Retail Customers
Commenters expressed concern that the listing of options on spot
ether-based ETPs would harm retail investors because of the volatility
of ether.\134\ One commenter, who stated that ether dropped 22% over a
24-hour period in August of 2024, further stated that ``[a]pproving
options trading on an ETP with such a volatile underlying asset would
inevitably harm retail investors.'' \135\ Another commenter stated that
retail investors ``could suffer immense harm'' from trading options on
ether-based ETPs.\136\
---------------------------------------------------------------------------
\134\ See Better Markets Letter at 3; and Rutkowski Letter at 1.
\135\ Better Markets Letter at 3.
\136\ Rutkowski Letter at 1.
---------------------------------------------------------------------------
Existing rules governing broker-dealer conduct when dealing with
retail customers will apply to the proposed Trust options. For example,
the Exchange's rules require its members to ``exercise due diligence to
learn the essential facts as to the customer and his investment
objectives and financial situation.'' \137\ In fulfilling this
obligation, the member must consider, among other things, a customer's
investment objectives; employment status; estimated annual income;
estimated net worth; and investment experience and knowledge.\138\
Further, FINRA's heightened suitability requirements for options
trading accounts require that a person recommending an opening position
in any option contract have ``a reasonable basis for believing, at the
time of making the recommendation, that the customer has such knowledge
and experience in financial matters that he may reasonably be expected
to be capable of evaluating the risks of the recommended transaction,
and is financially able to bear the risks of the recommended position
in the option contract.'' \139\
---------------------------------------------------------------------------
\137\ See ISE Options 10, Section 6(b).
\138\ See id.
\139\ See FINRA Rule 2360(b)(19).
---------------------------------------------------------------------------
E. Additional Change
The proposal to revise the column title header in Options 9,
Section 15, Supplementary Material .01 from ``Position Limit'' to
``Exercise Limit'' is consistent with the protection of investors
because it corrects an error in the rule text and helps to ensure the
accuracy of the Exchange's rules.
[[Page 15764]]
III. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 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#b7c5c2dbd29ad4d8dadad2d9c3c4f7c4d2d499d0d8c1"><span class="__cf_email__" data-cfemail="ee9c9b828bc38d8183838b809a9dae9d8b8dc0898198">[email protected]</span></a>. Please include
file number SR-ISE-2024-35 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-ISE-2024-35. 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-ISE-2024-35 and should be
submitted on or before May 6, 2025.
IV. Accelerated Approval of Amendment No. 1
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, for approving Amendment No. 1 prior to the 30th day after the
date of publication of notice of Amendment No. 1 in the Federal
Register. Amendment No. 1 proposes position and exercise limits for
options on the Trust and provides justification and analysis for the
proposed position and exercise limits; provides data designed to show
that shares of the Trust are widely held and actively traded; excludes
options on the Trust from FLEX trading; provides additional discussion
of the surveillance procedures that will apply to the proposed options;
and corrects a typographical error in the column title header of
Options 9, Section 15, Supplementary Material .01. In Amendment No. 1
the Exchange provided data and analysis supporting the proposed
position and exercise limits and stated, among other things, that the
proposed position and exercise limits would represent less than 4.3524%
of the outstanding shares of the Trust.\140\ The Commission concludes
that the proposed position and exercise limits are designed to minimize
the potential for manipulations or disruptions of the underlying
market.\141\ Amendment No. 1 also provides data and analysis designed
to demonstrate that shares of the Trust are widely held and actively
traded and describes in greater detail the surveillance procedures that
will apply to the proposed options on the Trust. This additional
information assists the Commission in evaluating the proposal and
determining that the proposal is consistent with the Act and the rules
and regulations thereunder applicable to a national securities
exchange, as discussed above. Amendment No. 1 also revises the proposal
to exclude options on the Trust from FLEX trading. Excluding options on
the Trust from FLEX trading will allow the Commission to consider the
listing of FLEX options on the Trust in the context of any separate
proposal the Exchange files to list such options. In addition,
Amendment No. 1 corrects a typographical error in Options 9, Section
15, Supplementary Material .01, which will help to ensure the accuracy
of the Exchange's rules. Accordingly, the Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,\142\ to approve the proposed
rule change, as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------
\140\ See Amendment No. 1 at 6.
\141\ The Commission recognizes that position limits should not
be established at levels that are so low as to discourage
participation in the options market by institutions and other
investors with substantial hedging needs or to prevent specialists
and market makers from adequately meeting their obligations to
maintain a fair and orderly market. See, e.g., Securities Exchange
Act Release Nos. 21907 (Mar. 29, 1985), 50 FR 13440 (Apr. 4, 1985)
(order approving File Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-
25, and SR-PSE-85-1); 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan.
12, 1999) (order approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-
98-33; and Phlx-98-36). The Commission finds that the proposed
position and exercise limits are consistent with these objectives.
\142\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
V. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, the requirements of Section 6(b)(5) of the Act.\143\
---------------------------------------------------------------------------
\143\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\144\ that the proposed rule change (SR-ISE-2024-35), as modified
by Amendment No. 1, is approved.
---------------------------------------------------------------------------
\144\ 15 U.S.C. 78s(b)(2).
By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-06349 Filed 4-14-25; 8:45 am]
BILLING CODE 8011-01-P
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