Notice2025-06350
Self-Regulatory Organizations; NYSE American LLC; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, To Amend Exchange Rule 915 To Permit the Listing and Trading of Options on the Bitwise Ethereum ETF, the Grayscale Ethereum Trust, and the Grayscale Ethereum Mini 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
<html>
<head>
<title>Federal Register, Volume 90 Issue 71 (Tuesday, April 15, 2025)</title>
</head>
<body><pre>
[Federal Register Volume 90, Number 71 (Tuesday, April 15, 2025)]
[Notices]
[Pages 15764-15777]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-06350]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102799; File No. SR-NYSEAMER-2024-45]
Self-Regulatory Organizations; NYSE American LLC; Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, To Amend Exchange
Rule 915 To Permit the Listing and Trading of Options on the Bitwise
Ethereum ETF, the Grayscale Ethereum Trust, and the Grayscale Ethereum
Mini Trust
April 9, 2025.
On July 23, 2024, NYSE American LLC (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade options on the
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
[[Page 15765]]
Bitwise Ethereum ETF, the Grayscale Ethereum Trust, the Grayscale
Ethereum Mini Trust, and any trust that holds ether.\3\ The proposed
rule change was published for comment in the Federal Register on August
13, 2024.\4\ The Commission received comments regarding the
proposal.\5\ On September 24, 2024, pursuant to Section 19(b)(2) of the
Act,\6\ 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.\7\ On February 5,
2024, the Exchange filed Amendment No. 1 to the proposal, which
replaced and superseded the original filing in its entirety. On March
11, 2025, the Exchange filed Amendment No. 2 to the proposal, which
replaces and supersedes Amendment No. 1 in its entirety.\8\ The
Commission received comments regarding the proposal.\9\ The Commission
is publishing this notice to solicit comments on Amendment No. 2 from
interested persons, and is approving the proposed rule change, as
modified by Amendment No. 2, on an accelerated basis.
---------------------------------------------------------------------------
\3\ On May 23, 2024, the Commission approved proposals by NYSE
Arca, Inc. (``NYSE Arca''), The Nasdaq Stock Market LLC, and Cboe
BZX Exchange, Inc. to list and trade the shares of the following
Ethereum-based exchange-traded products: the Grayscale Ethereum
Trust, the Bitwise Ethereum ETF, the iShares Ethereum Trust, the
VanEck Ethereum Trust, the ARK 21Shares Ethereum ETF, the Invesco
Galaxy Ethereum ETF, the Fidelity Ethereum Fund, and the Franklin
Ethereum ETF. See Securities Exchange Act Release No. 100224 (May
23, 2024), 89 FR 46987 (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). On July 17, 2024, the
Commission approved proposals by NYSE Arca to list and trade shares
of the Grayscale Ethereum Mini Trust and the ProShares Ethereum ETF.
See Securities Exchange Act Release No. 100541 (July 17, 2024), 89
FR 59786 (July 23, 2024) (order approving File Nos. SR-NYSEARCA-
2024-44; SR-NYSEARCA-2024-53).
\4\ See Securities Exchange Act Release No. 100666 (Aug. 7,
2024), 89 FR 65957.
\5\ Comments regarding the proposal are available at: <a href="https://www.sec.gov/comments/sr-nyseamer-2024-45/srnyseamer202445.htm">https://www.sec.gov/comments/sr-nyseamer-2024-45/srnyseamer202445.htm</a>.
\6\ 15 U.S.C. 78s(b)(2).
\7\ See Securities Exchange Act Release No. 101157 (Sept. 24,
2024), 89 FR 79678 (Sept. 30, 2024)
\8\ Amendment No. 2 modifies the original filing by narrowing
the scope of the proposal to provide for the listing of options on
Bitwise Ethereum ETF, the Grayscale Ethereum Trust, and the
Grayscale Ethereum Mini Trust (together, the ``Ether Funds''), and
eliminating the inclusion of options on ``any trust that holds
ether;'' specifying a 25,000-contract position and exercise limit
for options on the Ether Funds; excluding the Ether Fund options
from being available for flexible (``FLEX'') option trading;
providing additional information and analysis of trading data for
the Ether Funds in support of this proposal; and supplementing
information related to the Exchange's surveillance program,
including the manner in which it would surveil suspicious trading
activity in the underlying Ether Funds. Amendment No. 2 is available
at: <a href="https://www.sec.gov/comments/sr-nyseamer-2024-45/srnyseamer202445-579495-1665762.pdf">https://www.sec.gov/comments/sr-nyseamer-2024-45/srnyseamer202445-579495-1665762.pdf</a>.
\9\ Comments received regarding the proposal are available at:
<a href="https://www.sec.gov/comments/sr-nyseamer-2024-45/srnyseamer202445.htm">https://www.sec.gov/comments/sr-nyseamer-2024-45/srnyseamer202445.htm</a>.
---------------------------------------------------------------------------
I. The Exchange's Description of the Proposed Rule Change, as Modified
by Amendment No. 2
The Exchange proposes to amend Rule 915 regarding the criteria for
underlying securities. This Amendment No. 2 supersedes and replaces
Amendment No. 1 to the original filing in its entirety. The proposed
rule change is available on the Exchange's website at <a href="http://www.nyse.com">www.nyse.com</a>, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 915 (Criteria for Underlying
Securities). Specifically, the Exchange proposes to amend Rule 915,
Commentary .10 to allow the Exchange to list and trade options on the
following exchange-traded products: the Grayscale Ethereum Trust ETF
(the ``Grayscale Fund'' or ``ETHE''), the Grayscale Ethereum Mini Trust
ETF (the ``Grayscale Mini Fund'' or ``ETH''), and the Bitwise Ethereum
ETF (the ``Bitwise Fund'' or ``ETHW'' and, collectively, the ``Ether
Funds'' or ``Funds'').\10\
---------------------------------------------------------------------------
\10\ See proposed Rule 915, Commentary .10(a). On July 23, 2024,
the Ether Funds began trading on NYSE Arca, Inc. (``NYSE Arca''),
the Exchange's affiliated SRO, after the Commission approved rule
changes to list and trade shares of ``Ether-Based Commodity-Based
Trust Shares'' pursuant to Rule 8.201-E(c)(1) (Commodity-Based Trust
Shares) See Securities Exchange Act Release Nos. 100224 (May 23,
2024), 89 FR 46937 (May 30, 2024) (SR-NYSEARCA-2023-70; SR-NYSEARCA-
2024-31) (order approving the listing and trading of, among other
Ether-Based Exchange-Traded Products, the Bitwise Ethereum ETF and
the Grayscale Ethereum Trust (ETH)); and 100541 (July 17, 2024), 89
FR 59786 (July 23, 2024) (SR-NYSEARCA-2024-44) (order approving the
listing and trading of, among others, the Grayscale Ethereum Trust
Mini).
\11\ See Rule 915, Commentary .06, which permits options trading
on ETFs that are traded on a national securities exchange and are
defined as an ``NMS stock'' in Rule 600(b)(55) of Regulation NMS,
that represent interests in registered investment companies (or
series thereof) organized as open-end management investment
companies, unit investment trusts or similar entities that hold
portfolios of securities and/or financial instruments 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); 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'');
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''); or represents 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''); provided
that all of the conditions listed in Rules 915 and 916 are met.
---------------------------------------------------------------------------
Rule 915 provides that, subject to certain other criteria set forth
in the Rule, securities deemed appropriate for options trading include
Exchange-Traded Fund Shares (or ETFs) as defined in Commentary .06,
that represent certain types of interests \11\ and exchange-traded
products (``ETPs'')
structured as trusts that hold precious metals (which are deemed
commodities).\12\ Recently, the Exchange
[[Page 15766]]
received approval from the Commission to list and trade specific funds
that hold bitcoin (also deemed a commodity).\13\ Like ETPs backed by
precious metals and bitcoin (i.e., commodities), the Exchange proposes
to allow options trading on the Ether Funds that hold ether--which is
also deemed a commodity.\14\
---------------------------------------------------------------------------
\12\ See Rule 915, Commentaries .10 (permitting the listing and
trading of options on shares of the following trusts: SPDR Gold
Trust, the iShares COMEX Gold Trust the iShares Silver Trust, the
ETFS Gold Trust, and the ETFS Silver Trust) and .10(a) (permitting
the listing and trading of options on shares of the BTC Funds).
\13\ On October 19, 2024, the Commission approved the Exchange's
proposal to list and trade options on the Grayscale Bitcoin Trust
(BTC), the Grayscale Bitcoin Mini Trust BTC, and the Bitwise Bitcoin
ETF. See Securities Exchange Act Release No. 101386 (October 18,
2024), 89 FR 84960 (October 24, 2024) (SR-NYSEARCA-2024-49) (the
``BTC Approval Order''). The Commission has also approved for
options trading several other bitcoin-related funds: See, e.g.,
Securities Exchange Act Release Nos. 101128 (September 20, 2024), 89
FR 78942 (September 26, 2024) (SR-ISE-2024-03) (order approving the
listing and trading of options on the iShares Bitcoin Trust (IBIT));
and 101387 (October 18, 2024), 89 FR 84948 (October 24, 2024) (SR-
CBOE-2024-035) (order approving the listing and trading of options
on the Fidelity Wise Origin Bitcoin Fund and the ARK 21Shares
Bitcoin ETF).
\14\ See proposed Rule 915, Commentary .10(a) (expanded to
include the listing and trading of options on shares of ETHE, ETH,
AND ETHW, pursuant to Rule 915 and 916).
---------------------------------------------------------------------------
The Ether Funds are structured as trusts that hold ether. Like ETFs
and ETPs currently deemed appropriate for options trading, the
investment objective of each Ether Fund trust is for its shares to
reflect the performance of ether (less the expenses of the trust's
operations), offering investors an opportunity to gain exposure to
ether without the complexities of ether delivery. Each Ether Fund's
shares represent units of fractional undivided beneficial interest in
the trust, the assets of which consist principally of ether and are
designed to track ether or the performance of the price of ether and
offer access to the ether market.\15\ The Ether Funds provide investors
with cost-efficient alternatives that allow a level of participation in
the ether market through the securities market.
---------------------------------------------------------------------------
\15\ The trust may include minimal cash.
---------------------------------------------------------------------------
The Exchange believes each Ether Fund satisfies the Exchange's
initial listing standards set forth in Commentary .01 to Rule 915.\16\
The Exchange notes that the Ether Funds also satisfy the listing
standard applied to ETFs traded on the Exchange that they be available
for creation and redemption each business day as set forth in
Commentary .06(a)(ii).\17\
---------------------------------------------------------------------------
\16\ Commentary .01 to Rule 915 provides for guidelines to be by
the Exchange when evaluating potential underlying securities for
Exchange option transactions.
\17\ Commentary .06(a)(ii) requires that ETFs must be available
for creation or redemption each business day from or through the
issuer in cash or in kind at a price related to net asset value, and
the issuer must be obligated to issue ETFs in a specified aggregate
number even if some or all of the investment assets required to be
deposited have not been received by the issuer, subject to the
condition that the person obligated to deposit the investments has
undertaken to deliver the investment assets as soon as possible and
such undertaking is secured by the delivery and maintenance of
collateral consisting of cash or cash equivalents satisfactory to
the issuer, as provided in the respective prospectus.
---------------------------------------------------------------------------
First, each of the Ether Funds satisfy the criteria and guidelines
set forth in Rule 915(a). Pursuant to Rule 915(a), a security 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.\18\ Each of the Ether Funds is an NMS Stock as defined
in Rule 600 of Regulation NMS under the Act.\19\ The Exchange believes
each Ether Fund is characterized by a substantial number of outstanding
shares that are widely held and actively traded.
---------------------------------------------------------------------------
\18\ The criteria and guidelines for a security to be considered
widely held and actively traded are set forth in Commentary .01 to
Rule 915, subject to exceptions.
\19\ 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'').
---------------------------------------------------------------------------
As of November 29, 2024, the Ether Funds had the following number
of shares outstanding (and corresponding market capitalization):
------------------------------------------------------------------------
Market
Ether Fund Shares capitalization
outstanding (11/29/24)
------------------------------------------------------------------------
ETHE................................. 177,838,500 $5,425,852,635
ETH.................................. 45,220,787 1,547,003,157
ETHW................................. 16,600,000 430,886,200
------------------------------------------------------------------------
As shown above, each of the Ether 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 Commentary .01(1) to Rule 915.\20\ The
Exchange believes this demonstrates that each Ether Fund is
characterized by a substantial number of outstanding shares.
---------------------------------------------------------------------------
\20\ The Exchange notes that on November 19, 2024, ETH underwent
a reverse stock split, reducing the number of shares outstanding--
and increasing the share price--tenfold.
---------------------------------------------------------------------------
Further, the below table contains information regarding the number
of beneficial holders of the Ether Funds as of December 31, 2024.
------------------------------------------------------------------------
Beneficial
holders (as
Ether Fund of 12/31/
24)
------------------------------------------------------------------------
ETHE....................................................... 112,320
ETH........................................................ 17,396
ETHW....................................................... 5,992
------------------------------------------------------------------------
As this table shows, each Ether 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 corporate stock in order to list options on that
stock pursuant to pursuant to Commentary .01(2) to Rule 915.\21\
Therefore, the Exchange believes the shares of each Ether Fund are
widely held.
---------------------------------------------------------------------------
\21\ The number of beneficial holders of ETH 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.
---------------------------------------------------------------------------
The Exchange also believes that, based on trading volume since the
Funds began trading on July 23, 2024, shares of the Ether 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 ETHE and ETH) or December 31,
2024 (for ETHW). 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 ETHE and ETH) or November 29, 2024-
through December 31, 2024 (for ETHW).\22\
---------------------------------------------------------------------------
\22\ See FactSet, 11/29/2024 and 12/31/24, <a href="https://www.factset.com/data-attribution">https://www.factset.com/data-attribution</a>.
----------------------------------------------------------------------------------------------------------------
Trading volume Trading volume
Ether Fund (shares) (notional $) ADV (shares)
----------------------------------------------------------------------------------------------------------------
ETHE................................................... 427,312,540 $10,289,781,199 4,237,811
ETH.................................................... 172,400,020 4,614,428,230 3,065,796
ETHW................................................... 44,477,060 959,491,343 291,627
----------------------------------------------------------------------------------------------------------------
[[Page 15767]]
As demonstrated above, even though the Ether Funds have been
trading for less than one year, the trading volume for each Ether 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 Commentary .01 to Rule 915. The Exchange
believes this data demonstrates each Ether Fund is characterized by a
substantial number of outstanding shares that are actively traded.
In addition to satisfying the Exchange's initial listing standards,
options on Ether Funds will be subject to the Exchange's continued
listing standards as set forth in Commentary .07 to Rule 916.\23\
Pursuant to Commentary .07 to Rule 916, the Exchange will not open for
trading any additional series of option contracts covering a fund
traded on the Exchange if such fund ceases to be an ``NMS stock'' as
provided for Commentary .01(5) to Rule 915 or the fund is halted from
trading on its primary market.\24\ Additionally, options on funds
traded on the Exchange may be subject to the suspension of opening
transactions as follows: (1) the fund no longer meets the terms of
Commentary .01 to Rule 916; (2) following the initial twelve-month
period beginning upon the commencement of trading of the fund, there
are fewer than 50 record and/or beneficial holders of the fund for 30
or more consecutive trading days; (3) the value of the underlying
commodity is no longer calculated or available; or (4) such other event
occurs or condition exists that in the opinion of the Exchange makes
further dealing on the Exchange inadvisable.
---------------------------------------------------------------------------
\23\ The Exchange proposes to amend Commentary .11 to Rule 916
to include the Ether Funds in the list of ETPs deemed ``Exchange-
Traded Fund Shares'' (or ETFs) for purposes of the continued listing
standards set forth in Commentary .07 to Rule 916. See proposed
Commentary .11 to Rule 916. For avoidance of doubt, the Exchange
refers ``funds'' rather than ``ETFs'' to make clear that the Ether
Funds are subject to these continued listing standards.
\24\ See Commentary .07 to Rule 916.
---------------------------------------------------------------------------
Options on each Ether Fund will be physically settled contracts
with American-style exercise.\25\ Consistent with Rule 903, which
governs the opening of options series on a specific underlying security
(including ETFs and ETPs), the Exchange will open at least one
expiration month for options on each Ether Fund \26\ at the
commencement of trading on the Exchange and may also list series of
options on Ether Funds for trading on a weekly,\27\ monthly,\28\ or
quarterly \29\ basis. The Exchange may also list long-term equity
option series (``LEAPS'') that expire from twelve to thirty-nine months
from the time they are listed.\30\
---------------------------------------------------------------------------
\25\ See Rule 902 (Rights and Obligations of Holders and
Writers), which provides that the rights and obligations of holders
and writers of option contracts of any class of options dealt in on
the Exchange shall be as set forth in the Rules of the Clearing
Corporation. See also OCC Rules, Chapter 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. OCC Rules can be located
at: <a href="https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occrules.pdf">https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occrules.pdf</a>.
\26\ See Rule 903(c), Commentary .03. The monthly expirations
are subject to certain listing criteria for underlying securities
described within Rule 915. 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 903(d), 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.
\27\ See Rule 903(h).
\28\ See Rule 903, Commentary .11.
\29\ See Rule 903, Commentary .09.
\30\ See Rule 903, Commentary .03.
---------------------------------------------------------------------------
Pursuant to Rule 903, Commentary .05(a), which governs strike
prices of series of options on ETFs, the interval between strike prices
of series of options on Ether 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.\31\ Additionally, the Exchange may list series of options
pursuant to the $1 Strike Price Interval Program,\32\ the $0.50 Strike
Program,\33\ the $2.50 Strike Price Program,\34\ and the $5 Strike
Program.\35\ Pursuant to Rule 960NY, where the price of a series of a
Ether 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.\36\ Any and all new series of Ether Fund options that
the Exchange lists will be consistent and comply with the expirations,
strike prices, and minimum increments set forth in Rules 903 and 960NY,
as applicable. Further, the Exchange notes that Rule 462, which governs
margin requirements applicable to the trading of all options on the
Exchange, including options on ETFs and ETPs, will also apply to the
trading of Ether Fund options.
---------------------------------------------------------------------------
\31\ 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 903(h) and
Commentaries .09 and .03 to Rule 903, specifically set forth
intervals between strike prices on Quarterly Options Series, Short
Term Option Series, and Monthly Options Series, respectively.
\32\ See Rule 903, Commentary .06.
\33\ See Rule 903, Commentary .13.
\34\ See Rule 903, Commentary .07(a).
\35\ See Rule 903, Commentary .12.
\36\ If options on an Ether Fund are eligible to participate in
the Penny Interval Program, the minimum increment of $0.01 below
$3.00 and $0.50 above $3.00 would apply. See Rule 960NY(a)(3). See
also Rule 960.1NY (which describes the requirements for the Penny
Interval Program).
---------------------------------------------------------------------------
Rule 903G(a)(1) 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 915, subject to specified exceptions.\37\ At this time, the
Exchange is not proposing to permit Ether Fund options to trade as FLEX
options.\38\
---------------------------------------------------------------------------
\37\ See Rule 903G(a)(1). See generally Section 15 (Flexible
Exchange (``FLEX'') Options).
\38\ The Ether Funds will be excluded from FLEX trading pursuant
to Rule 903G(a)(1), which provides that the Exchange may authorize
FLEX trading of on any equity security that is eligible for non-FLEX
trading under Rule 915 ``except those set forth in Commentary .10(a)
to Rule 915,'' i.e., the Ether Funds. The Exchange may submit a
subsequent rule filing that would permit the Exchange to authorize
FLEX trading of Ether Fund options, which filing may propose changes
to existing FLEX option position limits for such options as
appropriate.
---------------------------------------------------------------------------
Position and Exercise Limits
Position and exercise limits for options, including options on
Ether Funds, are determined pursuant to Rules 904 and 905,
respectively. 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 funds 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 funds 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.\39\
---------------------------------------------------------------------------
\39\ See Commentary .07(a)-(d) to Rule 904. For an option to be
eligible for the 50,000-contract limit, the security underlying the
option must have most recent six-month trading volume of at least
20,000,000 shares, or most recent six-month trading volume of at
least 15,000,000 shares and at least 40,000,000 shares currently
outstanding. For an option to be eligible for the 75,000-contract
limit, the underlying security must have most recent six-month
trading volume of at least 40,000,000 shares, or most recent six-
month trading volume of at least 30,000,000 shares and at least
120,000,000 shares currently outstanding. For an option to be
eligible for the 200,000-contract limit, the underlying security
must have most recent six-month trading volume of at least
80,000,000 shares, or most recent six-month trading volume of at
least 60,000,000 shares and at least 240,000,000 shares currently
outstanding. For an option to be eligible for the 250,000-contract
limit, the security underlying the option must have most recent six-
month trading volume of at least 100,000,000 shares, or most recent
six-month trading volume of at least 75,000,000 shares and at least
300,000,000 shares currently outstanding. The 25,000-contract limit
applies to options on underlying securities that do not qualify for
a higher contract limit. See Commentary .07(e) to Rule 904. In
addition, Commentary .07(f) to Rule 904 establishes higher position
limits for options on certain ETFs.
---------------------------------------------------------------------------
[[Page 15768]]
Position 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. The purpose of position limits, which are set
forth in Rule 904, is 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. As such,
position limits must balance concerns regarding mitigating potential
manipulation and the cost of inhibiting potential hedging activity that
investors may use for legitimate economic purposes. To achieve this
balance, the Exchange proposes to set the position and exercise limits
for the options on the Ether Funds at 25,000 contracts, a limit which
has already been approved for options on ETPs that hold bitcoin.\40\
Capping the position 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 for the
Ether Funds and therefore appropriate given their liquidity. While the
Exchange believes that the proposed 25,000-contract position limit is
conservative for options on the Ether Funds, it nonetheless believes
that, for the reasons set forth below, evidence exists to support a
much higher position limit.\41\
---------------------------------------------------------------------------
\40\ See BTC Approval Order. See also Rule 904, Commentary
.07(f).
\41\ The Exchange may file a subsequent rule change to amend the
position and exercise limit for options on any or all the Ether
Funds based on additional data regarding trading activity, to
continue to balance any concerns regarding manipulation. A higher
position limit would allow institutional investors to utilize
options on the Ether Funds for prudent risk management purposes.
---------------------------------------------------------------------------
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.\42\ The Exchange believes that 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.\43\
---------------------------------------------------------------------------
\42\ See Commentary 07(a)-(d) to Rule 904.
\43\ See FactSet, 11/29/2024 and 12/31,24, <a href="https://www.factset.com/data-attribution">https://www.factset.com/data-attribution</a>. The Exchange notes that the
Commission approved a 25,000-contract position limit for options
trading on the Grayscale Bitcoin Mini Trust BTC which traded
335,492,9030 shares during its first two months of trading--well
over the minimum requisite of 100,000,000 shares as required by
Commentary .07(a) to Rule 904. See BTC Approval Order.
------------------------------------------------------------------------
Ether Fund Total volume
------------------------------------------------------------------------
ETHE........................................... 427,312,540
(7/23/24-11/29/24)
ETH............................................ 172,400,020
(7/23/24-11/29/24)
ETHW........................................... 44,477,060
(7/23/24-12/31/24)
------------------------------------------------------------------------
Specifically, the most-recent trading volume in ETHE and ETH well
exceeds the requisite minimum of 100,000,000 shares necessary to
qualify for the 250,000-contract position and exercise limits.\44\ By
comparison, other options symbols with less trading volume for the
most-recent six months than ETHE and ETH are eligible for position and
exercise limits of at least 250,000.\45\ Further, the most-recent
trading volume for ETHW 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.\46\ 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 Ether Fund.\47\
---------------------------------------------------------------------------
\44\ Per Commentary .07(a) to Rule 904, to qualify for the
250,000-contract position limit for options, the underlying security
must (i) have trading volume of at least 100,000,000 shares during
the most recent six-month trading period; or (ii) have trading
volume of at least 75,000,000 shares during the most recent six-
month trading period and have at least 300,000,000 shares currently
outstanding.
\45\ 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).
\46\ Per Commentary .07(c) to Rule 904, to qualify for the
75,000-contract position limit for options, the underlying security
must have trading volume of at least 40,000,000 shares during the
most recent six-month trading period; or have trading volume of at
least 30,000,000 shares during the most recent six-month trading
period and have at least 120,000,000 shares currently outstanding.
\47\ Per Commentary .07(e) to Rule 904, ``[t]he position limit
shall be 25,000 for all other options'' that do not satisfy the
criteria for the higher position limits set forth in paragraphs (a)-
(d) of Rule 904.
---------------------------------------------------------------------------
With respect to the outstanding shares of each Ether Fund, 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 represented by the proposed position/
exercise limit (2,500,000 shares) would represent the following
approximate percentage of current outstanding shares:
----------------------------------------------------------------------------------------------------------------
Proposed position/
exercise limits Outstanding Percentage of
Ether Fund in equivalent shares (11/29/ outstanding
shares 24) shares
----------------------------------------------------------------------------------------------------------------
ETHE........................................................ 2,500,000 177,838,500 1.4
ETH......................................................... 2,500,000 45,220,787 5.5
ETHW........................................................ 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 Ether 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 Ether 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 Ether Fund (if that market
participant exercised all its options). Based on the number of shares
outstanding for each Ether Fund as of November 29, 2024, the table
below sets forth the approximate number of market participants that
could hold the maximum of 25,000 same side positions in each Ether Fund
that would equate to the number of shares outstanding of that Ether
Fund:
[[Page 15769]]
------------------------------------------------------------------------
Number of
market
Shares participants
Ether Fund outstanding with 25,000
same side
positions
------------------------------------------------------------------------
ETHE.................................... 177,838,500 71
ETH..................................... 45,220,787 18
ETHW.................................... 16,600,000 7
------------------------------------------------------------------------
This means if 71 market participants had 25,000 same side positions
in options on ETHE, each of them would have to simultaneously exercise
all 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 ETH, each of them would
have to simultaneously exercise all 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
ETHW, each of them would have to simultaneously exercise all those
options to create a scenario that may put the underlying security under
stress. The Exchange believes it is highly unlikely for any of these
scenarios to occur; however, even if such event did occur, the Exchange
would not expect any of the Ether Funds to be under stress because such
an event would merely induce the creation of more shares through the
trust's creation and redemption process.
Further, given that the issuer of each Ether Fund may create and
redeem shares that represent an interest in ether, the Exchange
believes it is relevant to compare the size of a position limit to the
market capitalization of the ether market. As of November 29, 2024, the
global supply of ether was approximately 120.44 million, and the price
of one ether was approximately $3,593.49,\48\ which equates to a market
capitalization of approximately $439.78 billion. Consider the proposed
position and exercise limit of 25,000 option contracts for each Ether
Fund option. A position and exercise limit of 25,000 same side
contracts effectively restricts a market participant from holding
positions that could result in the receipt of no more than 2,500,000
shares of ETHE, ETH, and ETHW, as applicable (if that market
participant exercised all its options). The following table shows the
share price of each Ether Fund on November 29, 2024, the value of
2,500,000 shares of the Ether Fund at that price, and the approximate
percentage of that value of the size of the ether market:
---------------------------------------------------------------------------
\48\ See <a href="https://finance.yahoo.com/quote/ETH-USD/history/">https://finance.yahoo.com/quote/ETH-USD/history/</a>.
----------------------------------------------------------------------------------------------------------------
Value of
Nov. 29th 2,500,000 Percentage of
Ether Fund share price shares of ether market
($) Ether Fund ($)
----------------------------------------------------------------------------------------------------------------
ETHE............................................................ $30.15 $75,250,000 0.017
ETH............................................................. 33.84 84,600,000 0.020
ETHW............................................................ 25.80 64,500,000 0.015
----------------------------------------------------------------------------------------------------------------
Therefore, if a market participant with the maximum 25,000 same
side contracts in options on any of ETHE, ETH, or ETHW exercised all
positions at one time, such an event would have no practical impact on
the ether.
The Exchange also reviewed the market capitalization of each Ether
Fund relative to the market capitalization of the entire ether market,
as of November 29, 2024.
----------------------------------------------------------------------------------------------------------------
Market
Ether/shares capitalization (11/ % of total ether
outstanding 29/2024) market
----------------------------------------------------------------------------------------------------------------
Total Ether Market............................ 120,440,000 $432,799,935,600 100.00
ETHE.......................................... 177,838,500 5,425,852,635 1.25
ETH........................................... 45,220,787 1,547,003,157 0.36
ETHW.......................................... 16,600,000 430,886,200 0.10
----------------------------------------------------------------------------------------------------------------
As shown above, the Ether Funds collectively represent
approximately 1.71% of the global supply of ether (120,440,000).\49\
Based on the $30.15 price of a ETHE share on November 29, 2024, a
market participant could have redeemed one ether for approximately 119
ETHE shares. Another 14,354,890,070 ETHE shares could be created before
the supply of ether was exhausted. As a result, 5,742 market
participants would have to simultaneously exercise 25,000 same side
positions in ETHE options to receive shares of the ETHE holding the
entire global supply of ether. Similarly, based on the $33.84 price of
an ETH share on November 29, 2024, a market participant could have
redeemed one ether for approximately 106 ETH shares. Another
12,789,596,206 ETH shares could be created before the supply of ether
was exhausted. As a result, 5,116 market participants would have to
simultaneously exercise 25,000 same side positions in ETH options to
receive shares of ETH holding the entire global supply of ether.
Similarly, based on the $25.80 price of a ETHW share on November 29,
2024, a market participant could have redeemed one ether for
approximately 139 ETHW shares. Another 16,775,191,302 ETHW shares could
be created before the supply of ether was exhausted. As a result, 6,710
market participants would have to simultaneously exercise 25,000 same
side positions in ETHW options to receive shares of ETHW holding the
entire global supply of ether. Unlike the Ether 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 Ether Funds may create, redeem, or split shares
in response to demand. The supply of ether is larger than the available
supply of most securities.\50\ Given the significant unlikelihood of
any of these events ever occurring, the
[[Page 15770]]
Exchange does not believe options on the Ether 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 ether.
---------------------------------------------------------------------------
\49\ See id.
\50\ The market capitalization of ether 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>.
---------------------------------------------------------------------------
The Exchange also believes the proposed limits are appropriate
given position limits for ether futures. For example, the Chicago
Mercantile Exchange (``CME'') imposes a position limit of 8,000 futures
(for the initial spot month) on its ether futures contract.\51\ On
November 29, 2024, CME Jan 25 ether futures settled at $3,629.69. A
position of 8,000 CME ether futures, therefore, would have a notional
value of $1,451,876,000. The following table shows the share price of
each Ether Fund on November 29, 2024, and the approximate number of
option contracts that equates to that notional value:
---------------------------------------------------------------------------
\51\ 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.
------------------------------------------------------------------------
Number of
Ether Fund Nov. 29th option
share price contracts
------------------------------------------------------------------------
ETHE.......................................... $30.15 481,551
ETH........................................... 33.84 429,041
ETHW.......................................... 25.80 562,743
------------------------------------------------------------------------
The approximate number of option contracts for each Ether Fund that
would equate to the notional value of CME ether futures is
significantly higher than the proposed limit of 25,000 options contract
for each Ether 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 ether future is 1, further
demonstrates how conservative the proposed limits of 25,000 options
contracts are for the Ether Fund options.
The Exchange notes, unlike options contracts, CME position limits
are calculated on a net futures-equivalent basis by contract and
include contracts that aggregate into one or more base contracts
according to an aggregation ratio(s).\52\ 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.\53\ If a position exceeds position limits because of an option
assignment, CME permits market participants to liquidate the excess
position within one business day without being considered in violation
of its rules. Additionally, if at the close of trading, a position that
includes options exceeds position limits for futures contracts, when
evaluated using the delta factors as of that day's close of trading but
does not exceed the limits when evaluated using the previous day's
delta factors, then the position shall not constitute a position limit
violation. Considering CME's position limits on futures for ether, the
Exchange believes that that the proposed same side position limits are
more than appropriate for the Ether Fund options.
---------------------------------------------------------------------------
\52\ See CME Rulebook Chapter 5, Position Limit, Position
Accountability and Reportable Level Table in the Interpretations &
Special Notices.
\53\ 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 ether is not relevant to the
determination of position and exercise limits for Ether Fund
options.\54\ Position and exercise limits are not a tool that should be
used to address a potential limited supply of the underlying of an
underlying. Position and exercise limits do not limit the total number
of options that may be held, but rather they limit the number of
positions a single customer may hold or exercise at one time.\55\
``Since the inception of standardized options trading, the options
exchanges have had rules imposing limits on the aggregate number of
options contracts that a member or customer could hold or exercise.''
\56\ Position and exercise limit rules are intended ``to prevent the
establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market so as to
benefit the options position. In particular, position and exercise
limits are designed to minimize the potential for mini-manipulations
and for corners or squeezes of the underlying market. In addition, such
limits serve to reduce the possibility for disruption of the options
market itself, especially in illiquid options classes.'' \57\
---------------------------------------------------------------------------
\54\ See BTC Approval Order, 89 FR at 84965, n. 48 (asserting
that, outside of the bitcoin context, 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 904
were the same as they are today. For reference, the current position
and exercise limits for options on SPDR Gold Shares ETF (``GLD'')
and options on iShares Silver Trust (``SLV'') are 250,000 contracts,
or 10 times that proposed position and exercise limit for the
Bitcoin Fund options.
\55\ For example, suppose an option has a position limit of
25,000 option contracts and there are a total of 10 investors
trading that option. If all 10 investors max out their positions,
that would result in 250,000 option contracts outstanding at that
time. However, suppose 10 more investors decide to begin trading
that option and also max out their positions. This would result in
500,000 option contracts outstanding at that time. An increase in
the number of investors could cause an increase in outstanding
options even if position limits remain unchanged.
\56\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
\57\ Id.
---------------------------------------------------------------------------
The Exchange notes that a Registration Statement on Form S-1 was
filed with the Commission for each Ether Fund, each of which described
the supply of ether as being unlimited.\58\ Each Registration Statement
permits an unlimited number of shares of the applicable Ether Fund to
be created. Further, the Commission approved proposed rule changes that
permitted the listing and trading of shares of each Ether Fund, which
approval did not comment on the sufficient supply of ether or address
whether there was a risk that permitting an unlimited number of shares
for a Ether Fund would impact the supply of ether.\59\ Therefore, the
Exchange believes the Commission had ample time and opportunity to
consider whether the supply of ether was sufficient to permit the
creation of unlimited Ether 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 ether supply, the proposed positions limits are more than
sufficient to protect investors and the market.
---------------------------------------------------------------------------
\58\ See, e.g., ETHE 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>; ETH 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 ETHW 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>
(``Ether Funds Reg. Stmts.'').
\59\ See BTC Approval Order.
---------------------------------------------------------------------------
Based on the foregoing, the Exchange believes the proposal to list
options on the Ether Funds with positions and exercise limits of 25,000
on the same
[[Page 15771]]
side, the lowest position limit available in the options industry, is
conservative and appropriate given the market capitalization, average
daily volume, and high number of outstanding shares for each of the
Ether Funds. 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 Ether Funds as well as the
ether market.\60\
---------------------------------------------------------------------------
\60\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11). See also BTC
Order.
---------------------------------------------------------------------------
As described herein, options on the Ether Funds will trade in the
same manner as any other ETF or ETP options on the Exchange, except
that the Ether Funds will not be eligible for FLEX option trading. The
Exchange Rules that currently apply to the listing and trading of
options on the Exchange, including, for example, Rules that govern
listing criteria, expiration and exercise prices, minimum increments,
margin requirements, customer accounts and trading halt procedures will
apply to the listing and trading of Ether Funds on the Exchange in the
same manner as they apply to all other ETFs and ETPs that are listed
and traded on the Exchange, including the precious metal-backed
commodity ETPs already deemed appropriate for options trading on the
Exchange pursuant to Commentary .10 to Rule 915. Further, as described
above, Exchange Rules regarding position and exercise limits will
likewise apply to options on the Ether Funds except the that, as
proposed, the position and exercise limits will be set at 25,000 on the
same side.
* * * * *
The Exchange notes that options on Ether Funds would not be
available for trading until The Options Clearing Corporation (``OCC'')
represents to the Exchange that it is fully able to clear and settle
such options. The Exchange has also analyzed its capacity and
represents that it and The Options Price Reporting Authority (``OPRA'')
have the necessary systems capacity to handle the additional traffic
associated with the listing of options on Ether Funds. The Exchange
believes any additional traffic that would be generated from the
trading of options on Ether Funds would be manageable. The Exchange
represents that Exchange members will not have a capacity issue as a
result of this proposed rule change.
The Exchange represents that the same surveillance procedures
applicable to all other options currently listed and traded on the
Exchange will apply to options on Ether Funds, and that it has the
necessary systems capacity to support the new option series. 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 Ether Funds. The Exchange believes that its surveillance
procedures are adequate to properly monitor the trading of options on
Ether 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 Ether Funds and, as
appropriate, would review activity in the underlying Funds when
conducting surveillances for market abuse or manipulation in the
options on the Ether 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 the surveillance that is
conducted by the Exchange's market surveillance staff, the Exchange
would be able to obtain information regarding trading in shares of the
Ether Funds on other exchanges through ISG. Further, the Exchange has a
Regulatory Services Agreement with the Financial Industry Regulatory
Authority (``FINRA''). Pursuant to a multi-party 17d-2 joint plan, all
options exchanges allocate regulatory responsibilities to FINRA to
conduct certain options-related market surveillances.\61\ The Exchange
notes that it will implement any new surveillance procedures it deems
necessary to effectively monitor the trading of options on the Ether
Funds.
---------------------------------------------------------------------------
\61\ Section 19(g)(1) of the Act, among other things, requires
every SRO registered as a national securities exchange or national
securities association to comply with the Act, the rules and
regulations thereunder, and the SRO's own rules, and, absent
reasonable justification or excuse, enforce compliance by its
members and persons associated with its members. See 15 U.S.C.
78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the Act allows
the Commission to relieve an SRO of certain responsibilities with
respect to members of the SRO who are also members of another SRO.
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.
---------------------------------------------------------------------------
The underlying shares of spot ether ETPs, including the Ether
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 ether-
based exchange-traded products:
Each Exchange has a comprehensive surveillance-sharing agreement
with the [CME] via their common membership in the Intermarket
Surveillance Group. This facilitates the sharing of information that
is available to the CME through its surveillance of its markets,
including its surveillance of the CME ether futures market.\62\
---------------------------------------------------------------------------
\62\ See Securities Exchange Act Release No. 100224 (May 23,
2024), 89 FR 46937, 46938 (May 30, 2024) (File Nos. SR-NYSEARCA-
2023-70; SR-NYSEARCA-2024-31; SR-NASDAQ-2023-045; -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
Ether-Based Commodity-Based Trust Shares and Trust Units) (``Ether
ETP Approval Order'').
The Exchange states that, 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].'' \63\
---------------------------------------------------------------------------
\63\ See Ether ETP Approval Order, 89 FR, at 46941.
---------------------------------------------------------------------------
In light of surveillance measures related to both options and
futures as well as the underlying Ether Funds,\64\ the Exchange
believes that existing surveillance procedures are designed to
[[Page 15772]]
deter and detect possible manipulative behavior which might potentially
arise from listing and trading the proposed options on the Ether Funds.
---------------------------------------------------------------------------
\64\ See Amendment No. 2 to Proposed Rule Change to List and
Trade Shares of the Grayscale Ethereum ETF under NYSE Arca Rule
8.201-E (Commodity-Based Trust Shares) (SR-NYSEARCA-2023-70), filed
May 21, 2024, available at <a href="https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370-475871-1363474.pdf">https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370-475871-1363474.pdf</a>; Amendment No. 1 to
Proposed Rule Change to List and Trade Shares of the Bitwise
Ethereum ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) (SR-NYSEARCA-2024-31), filed May 21, 2024, available at
<a href="https://www.sec.gov/comments/sr-nysearca-2024-31/srnysearca202431-475891-1363514.pdf">https://www.sec.gov/comments/sr-nysearca-2024-31/srnysearca202431-475891-1363514.pdf</a>; and Amendment No. 2 to Proposed Rule Change to
List and Trade Shares of the Grayscale Ethereum Mini ETF under NYSE
Arca Rule 8.201-E (Commodity-Based Trust Shares) (SR-NYSEARCA-2024-
44), filed May 22, 2024, available at <a href="https://www.sec.gov/comments/sr-nysearca-2024-44/srnysearca202444-476231-1364174.pdf">https://www.sec.gov/comments/sr-nysearca-2024-44/srnysearca202444-476231-1364174.pdf</a>.
---------------------------------------------------------------------------
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 Ether Funds will be
available via OPRA and major market data vendors.
The Exchange believes that offering options on Ether Funds will
benefit investors by providing them with an additional, relatively
lower cost investing tool to gain exposure to the price of ether and
hedging vehicle to meet their investment needs in connection with
Ether-related products and positions. The Exchange expects investors
will transact in options on Ether Funds in the unregulated over-the-
counter (``OTC'') options market,\65\ but may prefer to trade such
options in a listed environment to receive the benefits of trading
listed options, including (1) enhanced efficiency in initiating and
closing out position; (2) increased market transparency; and (3)
heightened contra-party creditworthiness due to the role of OCC as
issuer and guarantor of all listed options. The Exchange believes that
listing Ether 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 Exchange notes that the ETPs that hold precious metal
commodities on which the Exchange may already list and trade options
are trusts structured in substantially the same manner as Ether 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
options on any ETFs or ETPs that hold commodities (i.e., precious
metals) that it currently lists and trades on the Exchange.
---------------------------------------------------------------------------
\65\ The Exchange understands from customers that investors have
historically transacted in options on ETFs in the OTC options market
if such options were not available for trading in a listed
environment.
---------------------------------------------------------------------------
Finally, the Exchange notes that applicable Exchange rules will
require that customers receive appropriate disclosure before trading
options in Ether Funds.\66\ Further, brokers opening accounts and
recommending options transactions must comply with relevant customer
suitability standards.\67\
---------------------------------------------------------------------------
\66\ See Rules 921(c) and (f), and Commentary .01 to Rule 921
and 481.
\67\ See Rule 923.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposed rule change is consistent
with Section 6(b) of the Act \68\ in general and furthers the
objectives of Section 6(b)(5) of the Act \69\ in particular, in that it
is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\68\ 15 U.S.C. 78f(b).
\69\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In particular, the Exchange believes that the proposal to list and
trade options on Ether 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 Ether Funds
will provide investors with an opportunity to realize the benefits of
utilizing options on an Ether Fund, including cost efficiencies and
increased hedging strategies.
The Exchange believes that offering Ether Fund options will benefit
investors by providing them with a relatively lower-cost risk
management tool, which will allow them to manage their positions and
associated risk in their portfolios more easily in connection with
exposure to the price of ether and with ether-related products and
positions. Additionally, the Exchange's offering of Ether Fund options
will provide investors with the ability to transact in such options in
a listed market environment as opposed to in the unregulated OTC
options market, which would increase market transparency and enhance
the process of price discovery conducted on the Exchange through
increased order flow to the benefit of all investors. The Exchange also
notes that it already lists options on other commodity-based ETPs,\70\
which, as described above, are trusts structured in substantially the
same manner as Ether Funds and essentially offer the same objectives
and benefits to investors, just with respect to a different commodity
(i.e., Ether rather than precious metals) and for which the Exchange
has not identified any issues with the continued listing and trading of
commodity-backed ETP options it currently lists for trading.
---------------------------------------------------------------------------
\70\ See Rule 915, Commentaries .10 and .10(a).
---------------------------------------------------------------------------
The Exchange also believes the proposed rule change will remove
impediments to and perfect the mechanism of a free and open market and
a national market system, because it is consistent with current
Exchange Rules previously filed with the Commission. Options on Ether
Funds satisfy the initial listing standards and continued listing
standards currently in the Exchange Rules applicable to options on all
ETFs and ETPs, including ETPs that hold other commodities already
deemed appropriate for options trading on the Exchange. Additionally,
as demonstrated above, each Ether Fund is characterized by a
substantial number of shares that are widely held and actively traded.
Ether Fund options will trade in the same manner as any other ETF or
ETP options--the same Exchange Rules that currently govern the listing
and trading of options, including permissible expirations, strike
prices, minimum increments, and margin requirements, will govern the
listing and trading of options on Ether Funds in the same manner.
The Exchange believes the proposed rule change to exclude the Ether
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 options on these Funds.\71\
---------------------------------------------------------------------------
\71\ The Exchange may submit a subsequent rule filing that would
permit the Exchange to authorize for trading FLEX options on the
Ether Funds (which filing may propose changes to existing FLEX
option position limits for such options if appropriate).
---------------------------------------------------------------------------
The proposed position and exercise limit for options on the Ether
Funds is 25,000 contracts, which proposed limits were recently approved
for certain ETPs that hold bitcoin.\72\ These position and exercise
limits are the lowest position and exercise limits available in the
options industry, are extremely conservative and more than appropriate
given the Ether Funds' market capitalization, average daily volume,
number of beneficial holders, and high number of outstanding
shares.\73\ The proposed position and exercise limits are consistent
with the Act as they addresses concerns related to manipulation and
protection of investors because the position and exercise limits are
extremely conservative and more than appropriate given the Ether Funds
are actively traded.
---------------------------------------------------------------------------
\72\ See BTC Approval Order. See also Rule 904, Commentary
.07(f).
\73\ As noted herein, the Ether Funds collectively represent
approximately 1.71% of the ether market.
---------------------------------------------------------------------------
[[Page 15773]]
The Exchange also believes the proposal to exclude from FLEX
trading options on the Ether Funds (i.e., per Rule 903G(a)) at this
time will remove impediments to and perfect the mechanism of a free and
open market and a national market system because it adds clarity and
transparency to Exchange Rules making them easier to navigate and
understand to the benefit of investors and the public interest.
The Exchange represents that it has the necessary systems capacity
to support the new Ether Fund options. The Exchange believes that its
existing surveillance and reporting safeguards are designed to deter
and detect possible manipulative behavior which might arise from
listing and trading options, including Ether 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 Ether Funds. The Exchange believes that its surveillance
procedures are adequate to properly monitor the trading of options on
Ether 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 Ether Funds and, as
appropriate, would review activity in the underlying Funds when
conducting surveillances for market abuse or manipulation in the
options on the Ether Funds. Additionally, the Exchange is a member of
the ISG under the Intermarket Surveillance Group Agreement. ISG members
work together to coordinate surveillance and investigative information
sharing in the stock, options, and futures markets. In addition to the
surveillance that is conducted by the Exchange's market surveillance
staff, the Exchange would also be able to obtain information regarding
trading in shares of the Ether Funds on other exchanges through ISG.
Further, 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 Ether
Funds.
The underlying shares of spot ether ETPs, including the Ether
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 ether-
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.'' \74\ The Exchange
states that, 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].'' \75\
In light of surveillance measures related to both options and futures
as well as the underlying Ether Funds,\76\ 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 Ether Funds. Further,
the Exchange will implement any new surveillance procedures it deems
necessary to effectively monitor the trading of options on Ether ETPs.
---------------------------------------------------------------------------
\74\ See Ether ETP Approval Order, 89 FR, at 46938.
\75\ See Ether ETP Approval Order, 89 FR at 46941.
\76\ See Amendment No. 2 to Proposed Rule Change to List and
Trade Shares of the Grayscale Ethereum ETF under NYSE Arca Rule
8.201-E (Commodity-Based Trust Shares) (SR-NYSEARCA-2023-70), filed
May 21, 2024, available at <a href="https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370-475871-1363474.pdf">https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370-475871-1363474.pdf</a>; Amendment No. 1 to
Proposed Rule Change to List and Trade Shares of the Bitwise
Ethereum ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) (SR-NYSEARCA-2024-31), filed May 21, 2024, available at
<a href="https://www.sec.gov/comments/sr-nysearca-2024-31/srnysearca202431-475891-1363514.pdf">https://www.sec.gov/comments/sr-nysearca-2024-31/srnysearca202431-475891-1363514.pdf</a>; and Amendment No. 2 to Proposed Rule Change to
List and Trade Shares of the Grayscale Ethereum Mini ETF under NYSE
Arca Rule 8.201-E (Commodity-Based Trust Shares) (SR-NYSEARCA-2024-
44), filed May 22, 2024, available at <a href="https://www.sec.gov/comments/sr-nysearca-2024-44/srnysearca202444-476231-1364174.pdf">https://www.sec.gov/comments/sr-nysearca-2024-44/srnysearca202444-476231-1364174.pdf</a>.
---------------------------------------------------------------------------
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 Ether Funds \77\ and
will require that brokers opening accounts and recommending options
transactions comply with relevant customer suitability standards.\78\
---------------------------------------------------------------------------
\77\ See Rule 921(f). See also Rule 921(c), Commentary .01 to
Rule 921, and Rule 481.
\78\ See Rule 923.
---------------------------------------------------------------------------
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.
Intramarket Competition: The Exchange does not believe that the
proposed rule change will impose any burden on intramarket competition
that is not necessary or appropriate in furtherance of the purposes of
the Act as options on Ether Funds would need to satisfy the initial
listing standards set forth in the Exchange Rules in the same manner as
any other ETF before the Exchange could list options on them.
Additionally, Ether Fund options will be equally available to all
market participants who wish to trade such options. The Exchange Rules
currently applicable to the listing and trading of options on ETFs on
the Exchange will apply in the same manner to the listing and trading
of all options on Ether Funds. Also, and as stated above, the Exchange
already lists options on other commodity-based ETPs.\79\
---------------------------------------------------------------------------
\79\ See Rule 915, Commentary .10.
---------------------------------------------------------------------------
Intermarket Competition: The Exchange does not believe that the
proposal to list and trade options on Ether 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 Ether Fund options trading on the Exchange may make the
Exchange a more attractive marketplace to market participants at other
exchanges, such market participants are free to elect to become market
participants on the Exchange. Additionally, other options exchanges are
free to amend their listing rules, as applicable, to permit them to
list and trade options on Ether Funds. The Exchange notes that listing
and trading Ether 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,
[[Page 15774]]
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 Ether 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 ether prices and ether-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
No written comments were solicited or received with respect to the
proposed rule change.
III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change, as modified by Amendment No. 2, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange,\80\ and, in particular,
the requirements of Section 6 of the Act.\81\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\82\ 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.
---------------------------------------------------------------------------
\80\ 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).
\81\ 15 U.S.C. 78f.
\82\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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.\83\
---------------------------------------------------------------------------
\83\ 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'').
---------------------------------------------------------------------------
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.'' \84\ As described above, the Exchange states that,
as of November 29, 2024, ETHE had 177,838,500 shares outstanding, ETH
had 45,220,787 shares outstanding, and ETHW had 16,600,000 shares
outstanding.\85\ The Exchange states that, as of December 31, 2024,
ETHE had 112,320 beneficial holders, ETH had 17,396 beneficial holders,
and ETHW had 5,992 beneficial holders.\86\ In addition, the Exchange
states that, from July 23, 2024, through November 29, 2024, ETHE had
trading volume of 427,312,540 shares ($10,289,781,199 notional) and ETH
had trading volume of 172,400,020 shares ($4,614,428,230 notional), and
that, from July 23, 2024, through December 31, 2024, ETHW had trading
volume of 44,477,060 shares ($959,491,343 notional).\87\ The Exchange
further states that for a 30-day period from October 29, 2024, through
November 29, 2024, ETHE had 30-day ADV of 4,237,811 shares and ETH had
30-day ADV of 3,065,796 shares.\88\ The Exchange states that for a 30-
day period from November 29, 2024, through December 31, 2024, ETHW had
30-day ADV of 291,627 shares.\89\ In addition, the Exchange states
that, as of November 29, 2024, ETHE had market capitalization of
$5,425,852,635, ETH had market capitalization of $1,547,003,157, and
ETHW had market capitalization of $430,886,200.\90\
---------------------------------------------------------------------------
\84\ See Exchange Rule 915(a)(2).
\85\ See Amendment No. 2 at 6.
\86\ See Amendment No. 2 at 7.
\87\ See Amendment No. 2 at 7.
\88\ See Amendment No. 2 at 7.
\89\ See Amendment No. 2 at 7.
\90\ See Amendment No. 2 at 13.
---------------------------------------------------------------------------
The Commission has reviewed the Exchange's analysis and publicly
available data regarding the Ether Funds. Based on this review of
information provided by the Exchange and publicly available
information--including information regarding the number of shares
outstanding and the number of beneficial holders for each Ether Fund,
the ADV of each Ether Fund, and the market capitalization of each Ether
Fund--the Commission concludes that it is reasonable for the Exchange
to determine that the Ether Funds satisfy the requirement of Exchange
Rule 915(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.\91\
Two commenters stated that ether's Proof-of-Stake protocol presents a
higher risk of runs because it requires more capital.\92\ The 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.'' \93\ Another commenter
stated that a run on ether could have harmful consequences for
investors.\94\
---------------------------------------------------------------------------
\91\ See Better Markets Letter at 3-4; and Rutkowski Letter at
1.
\92\ See Better Markets Letter at 3 and Rutkowski Letter at 1.
\93\ Better Markets Letter. at 4. See also Rutkowski Letter at
1.
\94\ See Rutkowski Letter at 1.
---------------------------------------------------------------------------
The Commission acknowledges the comments regarding the potential
impact of ether-based ETP options, including the proposed Ether Fund
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.\95\ 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.
---------------------------------------------------------------------------
\95\ 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
[[Page 15775]]
create incentives to manipulate or disrupt the underlying market to
benefit the options position.\96\ In addition, such limits serve to
reduce the possibility of disruption in the options market itself,
especially in illiquid classes.\97\ 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.\98\ 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.\99\ 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.\100\
---------------------------------------------------------------------------
\96\ See Securities Exchange Act Release No. 39489 (Dec. 24,
1997), 63 FR 276, 279 (Jan 5. 1998) (order approving File No. SR-
Cboe-97-11) (``Position Limit Order'').
\97\ Id.
\98\ Id.
\99\ 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).
\100\ See id.
---------------------------------------------------------------------------
The Exchange proposes a position limit of 25,000 contracts on the
same side of the market for options on each Ether Fund and an
equivalent exercise limit.\101\ In proposing these position and
exercise limits, the Exchange considered, among other things, the ADV,
outstanding shares, and market capitalization of each Ether Fund.\102\
The Exchange states that Exchange Rule 904, Commentary .07(a)(i)
establishes a position limit of 250,000 contracts for options on an
underlying security with six-month trading volume of 100,000,000
shares.\103\ The Exchange states that, for the period from July 23,
2024, through November 29, 2024, ETHE and ETH had trading volumes of
427,312,540 shares and 172,400,020 shares, respectively.\104\ The
Exchange states that other options symbols, including commodity-based
ETP options, with lower six-month trading volume than ETHE and ETH are
eligible for position and exercise limits of at least 250,000
contracts.\105\ The Exchange states that, for the period from July 23,
2024, through December 31, 2024, ETHW had trading volume of 44,477,060
shares, which exceeds the 40,000,000 share trading volume necessary to
qualify for a position limit of 75,000 contracts.\106\ The Exchange
further states that, as of November 29, 2024, the number of shares
represented by the proposed position and exercise limits were equal to
approximately 1.4% of the outstanding shares of ETHE, 5.5% of the
outstanding shares of ETH, and 15.1% of the outstanding shares of
ETHW.\107\ The Exchange states that the proposed ``position and
exercise limits are the lowest position and exercise limits available
in the options industry, are extremely conservative and more than
appropriate given the Ether Funds' market capitalization, average daily
volume, number of beneficial holders, and high number of outstanding
shares.'' \108\
---------------------------------------------------------------------------
\101\ See Amendment No. 2 and proposed Exchange Rule 904,
Commentary .07(f) and Exchange Rule 905(a)(i).
\102\ See Amendment No. 2 at 17.
\103\ See Amendment No. 2 at 11.
\104\ See Amendment No. 2 at 11.
\105\ See Amendment No. 2 at 11.
\106\ See Amendment No. 2 at 11 and Exchange Rule 904,
Supplementary Material .07(c).
\107\ See Amendment No. 2 at 12.
\108\ Amendment No. 2 at 21.
---------------------------------------------------------------------------
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 of approximately
$439.78 billion as of November 29, 2024.\109\ The Exchange calculated
that with a position limit of 25,000 contracts (2,500,000 shares of the
underlying Ether Fund), as of November 29, 2024, a market participant
could hold a position in shares of ETHE that represented 0.017% of the
ether market, a position in ETH that represented 0.020% of the ether
market, and a position in ETHW that represented 0.015% of the ether
market, positions that the Exchange states ``would have no practical
impact on the ether market.'' \110\
---------------------------------------------------------------------------
\109\ See Amendment No. 2 at 13.
\110\ Amendment No. 2 at 13.
---------------------------------------------------------------------------
The Exchange states that the proposed position and exercise limits
also are appropriate given position limits for ether futures.\111\ The
Exchange states that the CME establishes a position limit of 8,000
ether futures for the spot month and that, as of November 29, 2024,
such a position would have had a notional value of $1,451,876,000.\112\
The Exchange states that, as of that date, 481,551 ETHE options,
429,041 ETH options, and 562,743 ETHW options would be the equivalent
of the $1,451,876,000 CME ether futures notional value.\113\ The
Exchange states that the option contract equivalent numbers are
significantly higher than the proposed position and exercise limit of
25,000 contracts.\114\
---------------------------------------------------------------------------
\111\ See Amendment No. 2 at 14-15.
\112\ See No. 2 at 14.
\113\ See Amendment No. 2 at 14-15.
\114\ See Amendment No. 2 at 15.
---------------------------------------------------------------------------
In addition, the Exchange states that, based on the number of
shares outstanding for each Ether Fund as of November 29, 2024, and
with a position limit of 25,000 option contracts, 71 market
participants, each with a same side position of 25,000 contracts, would
have to exercise all of their ETHE options to place the ETHE shares
under stress; 18 market participants, each with a same side position of
25,000 contracts, would have to exercise all of their ETH options to
place the ETH shares under stress; and seven market participants, each
with a same side position of 25,000 contracts, would have to exercise
all of their ETHW options to place the ETHW shares under stress.\115\
The Exchange states that the proposed position and exercise limits
``are extremely conservative and more than appropriate given the Ether
Funds' market capitalization, average daily volume, number of
beneficial holders, and high number of outstanding shares.'' \116\ The
Exchange states that the proposed position and exercise limits
reasonably and appropriately balance the liquidity provisioning in the
market against the prevention of manipulation.\117\ The Exchange
further states that the proposed limits are effectively designed to
prevent an individual customer or entity from establishing options
positions that could be used to manipulate the market of the underlying
Ether Funds as well as the ether market.\118\
---------------------------------------------------------------------------
\115\ See Amendment No. 2 at 12.
\116\ Amendment No. 2 at 21.
\117\ See Amendment No. 2 at 17.
\118\ See id. at 17 (citing the Position Limit Order supra note
89).
---------------------------------------------------------------------------
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
[[Page 15776]]
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.\119\ 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.\120\ 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 November 29, 2024, the proposed
position and exercise limits of 25,000 contracts represented
approximately 1.4% of the outstanding shares of ETHE, 5.5% of the
outstanding shares of ETH, and 15.1% of the outstanding shares of
ETHW.\121\ The Commission also has considered and reviewed the
Exchange's statement that, as of November 29, 2024, with a position
limit of 25,000 contracts, 71 market participants, each with a same
side position of 25,000 contracts, would have to exercise all of their
ETHE options to place the ETHE shares under stress; 18 market
participants, each with a same side position of 25,000 contracts, would
have to exercise all of their ETH options to place the ETH shares under
stress; and seven market participants, each with a same side position
of 25,000 contracts, would have to exercise all of their ETHW options
to place the ETHW shares under stress.\122\ Based on the Commission's
review of this information and analysis, the Commission concludes that
the proposed position and exercise limits are designed to prevent
investors from disrupting the market for the underlying securities by
acquiring and exercising a number of options contracts disproportionate
to the deliverable supply and average trading volume of the underlying
security, and to prevent the establishment of options positions that
can be used or might create incentives to manipulate or disrupt the
underlying market so as to benefit the options position.
---------------------------------------------------------------------------
\119\ See supra note 92 and accompanying text.
\120\ 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).
\121\ See Amendment No. 2 at 12.
\122\ See id.
---------------------------------------------------------------------------
The proposal excludes the Ether Fund options from FLEX
trading.\123\ Excluding Ether Fund options from FLEX trading will allow
the Commission to consider the listing of FLEX options on the Ether
Funds in the context of any separate proposal the Exchange files to
list such options.
---------------------------------------------------------------------------
\123\ See Exchange Rule 903G(a)(1) and proposed Exchange Rule
915, Commentary .10(a). The Exchange states that excluding Ether
Fund options from FLEX trading will allow the Exchange to continue
to participate in ongoing discussions with the Commission regarding
appropriate position limits for options on the Ether Funds. See
Amendment No. 2 at 21.
---------------------------------------------------------------------------
C. Surveillance
As described more fully above, the Exchange states that the same
surveillance procedures applicable to all other options currently
listed and traded on the Exchange will apply to options on the Ether
Funds, and that the Exchange will implement any new surveillance
procedures it deems necessary to effectively monitor the trading of
options on the Ether Funds.\124\ The Exchange states that its market
surveillance staff will have access to surveillances that it conducts,
and that FINRA conducts on its behalf, with respect to the Ether Funds
and, as appropriate, would review activity in the underlying Funds when
conducting surveillances for market abuse or manipulation in the
options on the Ether Funds.\125\ Additionally, the Exchange states that
it is a member of the Intermarket Surveillance Group (``ISG'') under
the Intermarket Surveillance Group Agreement, and that ISG members work
together to coordinate surveillance and investigative information
sharing in the stock, options, and futures markets.\126\ The Exchange
states that, in addition to the surveillance conducted by the
Exchange's market surveillance staff, the Exchange would also be able
to obtain information regarding trading in shares of the Ether Funds on
other exchanges though ISG.\127\
---------------------------------------------------------------------------
\124\ See Amendment No. 2 at 18.
\125\ See Amendment No. 2 at 18.
\126\ See id.
\127\ See id.
---------------------------------------------------------------------------
Together, these surveillance procedures should allow the Exchange
to investigate suspected manipulations or other trading abuses in
options on the Ether Funds.
D. Retail Customers
Commenters expressed concern that the listing of options on spot
ether-based exchange-traded products (``ETPs'') would harm retail
investors because of the volatility of ether.\128\ 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.''
\129\ Another commenter stated that retail investors ``could suffer
immense harm'' from trading options on ether-based ETPs.\130\
---------------------------------------------------------------------------
\128\ See Better Markets Letter at 3; and Rutkowski Letter at 1.
\129\ Better Markets Letter at 3.
\130\ Rutkowski Letter at 1.
---------------------------------------------------------------------------
Existing rules governing broker-dealer conduct when dealing with
retail customers will apply to the proposed Ether Fund options. For
example, the Exchange's rules require its members to ``exercise due
diligence to learn the essential facts as to the customer and his
investment objectives and financial situation.'' \131\ 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.\132\ 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.'' \133\
---------------------------------------------------------------------------
\131\ See Amendment No. 2 at 19-20 and Exchange Rule 921(c).
\132\ See Exchange Rule 921, Commentary .01.
\133\ See FINRA Rule 2360(b)(19).
---------------------------------------------------------------------------
IV. Solicitation of Comments on Amendment No. 2 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 2 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#7f0d0a131a521c1012121a110b0c3f0c1a1c51181009"><span class="__cf_email__" data-cfemail="daa8afb6bff7b9b5b7b7bfb4aea99aa9bfb9f4bdb5ac">[email protected]</span></a>. Please include
file number SR-NYSEAMER-2024-45 on the subject line.
[[Page 15777]]
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-NYSEAMER-2024-45. 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-NYSEAMER-2024-45 and should
be submitted on or before May 6, 2025.
V. Accelerated Approval of Amendment No. 2
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, for approving Amendment No. 2 prior to the 30th day after the
date of publication of notice of Amendment No. 2 in the Federal
Register. As described more fully above, Amendment No. 2 narrows the
scope of the proposal to provide for the listing and trading of options
on the Ether Funds; provides additional information and analysis of
trading data for the Ether Funds in support of the proposal, including
the proposed position and exercise limits of 25,000 contracts; provides
additional information related to the Exchange's surveillance program,
including the manner in which the Exchange would surveil suspicious
trading activity in the underlying Ether Funds; and provides that the
Exchange will not list FLEX options on the Ether Funds. Amendment No. 2
provides data and analysis supporting the proposed position and
exercise limits and states, among other things, that the proposed
position and exercise limits would represent approximately 1.4% of the
outstanding shares of ETHE, 5.5% of the outstanding shares of ETH, and
15.1% of the outstanding shares of ETHW.\134\ Amendment No. 2 also
describes in greater detail the surveillance procedures that will apply
to the proposed Ether Fund options. The additional information
regarding these procedures assists the Commission in evaluating the
proposal and determining that the proposal is consistent with the Act
and the rules and regulations thereunder applicable to a national
securities exchange, as discussed above. In addition, Amendment No. 2
revises the proposal to exclude Ether Fund options from FLEX trading.
Excluding Ether Fund options from FLEX trading will allow the
Commission to consider the listing of FLEX options on the Ether Funds
in the context of any separate proposal to list such options.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\135\ to approve the proposed rule change, as
modified by Amendment No. 2 on an accelerated basis.
---------------------------------------------------------------------------
\134\ See Amendment No. 2 at 12.
\135\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
VI. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change, as modified by Amendment No. 2, 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.\136\
---------------------------------------------------------------------------
\136\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\137\ that the proposed rule change (SR-NYSEAMER-2024-45), as
modified by Amendment No. 2, is approved.
---------------------------------------------------------------------------
\137\ 15 U.S.C. 78s(b)(2).
By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-06350 Filed 4-14-25; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on April 15, 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.