[Federal Register Volume 89, Number 83 (Monday, April 29, 2024)]
[Notices]
[Pages 33414-33427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09064]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100016; File No. SR-NASDAQ-2023-045]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List
and Trade Shares of the iShares Ethereum Trust Under Nasdaq Rule
5711(d), Commodity-Based Trust Shares
April 23, 2024.
On November 21, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
iShares Ethereum Trust (``Trust'') under Nasdaq Rule 5711(d),
Commodity-Based Trust Shares. The proposed rule change was published
for comment in the Federal Register on December 11, 2023.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 99081 (Dec. 5,
2023), 88 FR 85945. Comments on the proposed rule change are
available at: https://www.sec.gov/comments/sr-nasdaq-2023-045/srnasdaq2023045.htm.
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On January 24, 2024, pursuant to section 19(b)(2) of the Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On March 4, 2024, the Commission instituted proceedings
under section 19(b)(2)(B) of the Act \6\ to determine whether to
approve or disapprove the proposed rule change.\7\ On April 19, 2024,
the Exchange filed Amendment No. 1 to the proposed rule change, which
replaced
[[Page 33415]]
and superseded the proposed rule change in its entirety. Amendment No.
1 is described in Items I and II below, which Items have been prepared
by the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule change, as modified by Amendment No. 1,
from interested persons.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 99419, 89 FR 5970
(Jan. 30, 2024).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 99665, 89 FR 16811
(Mar. 8, 2024).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to a proposed rule change to list and trade
shares of the iShares Ethereum Trust (the ``Trust'') under Nasdaq Rule
5711(d) (``Commodity-Based Trust Shares''). The shares of the Trust are
referred to herein as the ``Shares.'' This Amendment No. 1 supersedes
the original filing in its entirety.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, 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 list and trade the Shares under Nasdaq
Rule 5711(d),\8\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange. iShares Delaware Trust Sponsor LLC,
a Delaware limited liability company and an indirect subsidiary of
BlackRock, Inc. (``BlackRock''), is the sponsor of the Trust (the
``Sponsor''). The Shares will be registered with the SEC by means of
the Trust's registration statement on Form S-1 (the ``Registration
Statement'').\9\
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\8\ The Commission approved Nasdaq Rule 5711 in Securities
Exchange Act Release No. 66648 (March 23, 2012), 77 FR 19428 (March
30, 2012) (SR-NASDAQ-2012-013).
\9\ The descriptions of the Trust contained herein are based, in
part, on information in the Registration Statement. The Registration
Statement in not yet effective and the Shares will not trade on the
Exchange until such time that the Registration Statement is
effective.
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Description of the Trust
The Shares will be issued by the Trust, a Delaware statutory trust.
The Trust will operate pursuant to a trust agreement (the ``Trust
Agreement'') between the Sponsor, BlackRock Fund Advisors (the
``Trustee'') as the trustee of the Trust and will appoint a Delaware
Trustee of the Trust (the ``Delaware Trustee'') by such time that the
Registration Statement is effective. The Trust issues Shares
representing fractional undivided beneficial interests in its net
assets. The assets of the Trust will consist only of ether held by a
custodian on behalf of the Trust, except under limited circumstances
when transferred through the Trust's prime broker temporarily
(described below), and cash. Coinbase Custody Trust Company, LLC (the
``Ether Custodian''), is the custodian for the Trust's ether holdings,
and maintains a custody account for the Trust (``Custody Account'');
Coinbase, Inc. (the ``Prime Execution Agent''), an affiliate of the
Ether Custodian, is the prime broker for the Trust and maintains a
trading account for the Trust (``Trading Account''); and another entity
will be the custodian for the Trust's cash holdings (the ``Cash
Custodian'' and together with the Ether Custodian, the ``Custodians'')
and the administrator of the Trust (the ``Trust Administrator''). Under
the Trust Agreement, the Trustee may delegate all or a portion of its
duties to any agent, and has delegated the bulk of the day-to-day
responsibilities to the Trust Administrator and certain other
administrative and record-keeping functions to its affiliates and other
agents. The Trust is not an investment company registered under the
Investment Company Act of 1940, as amended (the ``1940 Act'').
The investment objective of the Trust is to reflect generally the
performance of the price of ether. The Trust seeks to reflect such
performance before payment of the Trust's expenses and liabilities. The
Shares are intended to constitute a simple means of making an
investment similar to an investment in ether through the public
securities market rather than by acquiring, holding and trading ether
directly on a peer-to-peer or other basis or via a digital asset
platforms. The Shares have been designed to remove the obstacles
represented by the complexities and operational burdens involved in a
direct investment in ether, while at the same time having an intrinsic
value that reflects, at any given time, the investment exposure to the
ether owned by the Trust at such time, less the Trust's expenses and
liabilities. Although the Shares are not the exact equivalent of a
direct investment in ether, they provide investors with an alternative
method of achieving investment exposure to ether through the public
securities market, which may be more familiar to them.
Custody of the Trust's Ether and Creation and Redemption
An investment in the Shares is backed by ether held by the Ether
Custodian on behalf of the Trust. All of the Trust's ether will be held
in the Custody Account, other than the Trust's ether which is
temporarily maintained in the Trading Account under limited
circumstances, i.e., in connection with creation and redemption Basket
\10\ activity or sales of ether deducted from the Trust's holdings in
payment of Trust expenses or the Sponsor's fee (or, in extraordinary
circumstances, upon liquidation of the Trust). The Custody Account
includes all of the Trust's ether held at the Ether Custodian, but does
not include the Trust's ether temporarily maintained at the Prime
Execution Agent in the Trading Account from time to time. The Ether
Custodian will keep all of the private keys associated with the Trust's
ether held in the Custody Account in ``cold storage''.\11\ The
hardware, software, systems, and procedures of the Ether Custodian may
not be available or cost-effective for many investors to access
directly.
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\10\ The Trust issues and redeems Shares only in blocks of
40,000 or integral multiples thereof. A block of 40,000 Shares is
called a ``Basket.'' These transactions take place in exchange for
ether.
\11\ The term ``cold storage'' refers to a safeguarding method
by which the private keys corresponding to the Trust's ether are
generated and stored in an offline manner, subject to layers of
procedures designed to enhance security. Private keys are generated
by the Ether Custodian in offline computers that are not connected
to the internet so that they are more resistant to being hacked.
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The Trust's ether holdings and cash holdings from time to time may
temporarily be maintained in the Trading Account held with the Prime
Execution Agent, an affiliate of the Ether Custodian. Coinbase Inc.
serves as the Trust's Prime Execution Agent pursuant to the Trust's
agreement with the Prime Execution Agent (``Prime Execution Agent
Agreement''). In this capacity, the Prime Execution Agent facilitates
the
[[Page 33416]]
buying and selling of ether by the Trust in response to cash creations
and redemptions between the Trust and registered broker-dealers that
are Depositary Trust Company (``DTC'') participants that enter into an
authorized participant agreement with the Sponsor and the Trustee
(``Authorized Participants''), and the sale of ether to pay the
Sponsor's fee, any other Trust expenses not assumed by the Sponsor, to
the extent applicable, and in extraordinary circumstances, in
connection with the liquidation of the Trust's ether.
The Authorized Participants will deliver only cash to create shares
and will receive only cash when redeeming shares. Further, Authorized
Participants will not directly or indirectly purchase, hold, deliver,
or receive ether as part of the creation or redemption process or
otherwise direct the Trust or a third party with respect to purchasing,
holding, delivering, or receiving ether as part of the creation or
redemption process.
The Trust will create shares by receiving ether from a third party
that is not the Authorized Participant and the Trust--not the
Authorized Participant--is responsible for selecting the third party to
deliver the ether. Further, the third party will not be acting as an
agent of the Authorized Participant with respect to the delivery of the
ether to the Trust or acting at the direction of the Authorized
Participant with respect to the delivery of the ether to the Trust. The
Trust will redeem shares by delivering ether to a third party that is
not the Authorized Participant and the Trust--not the Authorized
Participant--is responsible for selecting the third party to receive
the ether. Further, the third party will not be acting as an agent of
the Authorized Participant with respect to the receipt of the ether
from the Trust or acting at the direction of the Authorized Participant
with respect to the receipt of the ether from the Trust. The third
party will be unaffiliated with the Trust and the Sponsor.
In connection with cash creations and cash redemptions, the
Authorized Participants will submit orders to create or redeem Baskets
of Shares exclusively in exchange for cash. The Trust will engage in
ether transactions to convert cash into ether (in association with
creation orders) and ether into cash (in association with redemption
orders). The Trust will conduct its ether purchase and sale
transactions by, in its sole discretion, choosing to trade directly
with designated third parties (each, an ``Ether Trading
Counterparty''), who are not registered broker-dealers pursuant to
written agreements between each such Ether Trading Counterparty and the
Trust, or choosing to trade through the Prime Execution Agent acting in
an agency capacity with third parties through its Coinbase Prime
service \12\ pursuant to the Prime Execution Agent Agreement. Ether
Trading Counterparties settle trades with the Trust using their own
accounts at the Prime Execution Agent when trading with the Trust.
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\12\ The Coinbase Prime service is an execution service pursuant
to which Coinbase will execute ether orders for the Trust by
accessing liquidity from sources such as ether trading platforms,
which can include Coinbase's own platform, and other liquidity
providers. Trades can be executed according to an algorithm or on
the basis of firm quotes sought by requests-for-quote (``RFQ'') for
a two-way price sent to liquidity providers. Algorithmic trades can
be self-directed or executed by Coinbase's high touch execution
desk, Coinbase Execution Services.
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For a creation of a Basket of Shares, the Authorized Participant
will be required to submit the creation order by an early order cutoff
(``Creation Early Cutoff Time''). The Creation Early Cutoff Time will
initially be 6:00 p.m. ET on the business day prior to trade date.
On the date of the Creation Early Cutoff Time for a creation order,
the Trust will choose, in its sole discretion, to enter into a
transaction with an Ether Trading Counterparty or the Prime Execution
Agent to buy ether in exchange for the cash proceeds from such creation
order. On settlement date for a creation, the Trust delivers Shares to
the Authorized Participant in exchange for cash received from the
Authorized Participant. Also, on or around the settlement date, the
Ether Trading Counterparty or Prime Execution Agent, as applicable,
deposits the required ether pursuant to its trade with the Trust into
the Trust's Trading Account in exchange for cash. In the event the
Trust has not been able to successfully execute and complete settlement
of an ether transaction by the settlement date of the creation order,
the Authorized Participant will be given the option to (1) cancel the
creation order, or (2) accept that the Trust will continue to attempt
to complete the execution, which will delay the settlement date of the
creation order. With respect to a creation order, as between the Trust
and the Authorized Participant, the Authorized Participant is
responsible for the dollar cost of the difference between the ether
price utilized in calculating NAV per Share on trade date and the price
at which the Trust acquires the ether to the extent the price realized
in buying the ether is higher than the ether price utilized in the NAV.
To the extent the price realized in buying the ether is lower than the
price utilized in the NAV, the Authorized Participant shall get to keep
the dollar impact of any such difference.
Because the Trust's Trading Account may not be funded with cash on
trade date for the purchase of ether associated with a cash creation
order, the Trust may borrow trade credits (``Trade Credits'') in the
form of cash from Coinbase Credit, Inc. (the ``Trade Credit Lender''),
an affiliate of the Prime Execution Agent, under the trade financing
agreement (``Trade Financing Agreement'') or may require the Authorized
Participant to deliver the required cash for the creation order on
trade date. The extension of Trade Credits on trade date allows the
Trust to purchase ether through the Prime Execution Agent on trade
date, with such ether being deposited in the Trust's Trading Account.
On settlement date for a creation order, the Trust delivers Shares to
the Authorized Participant in exchange for cash received from the
Authorized Participant. To the extent Trade Credits were utilized, the
Trust uses the cash to repay the Trade Credits borrowed from the Trade
Credit Lender. On settlement date for a creation order, the ether
purchased is swept from the Trust's Trading Account to the Trust's
Custody Account pursuant to a regular end-of-day sweep process.
For a redemption of a Basket of Shares, the Authorized Participant
will be required to submit a redemption order by an early order cutoff
(the ``Redemption Early Cutoff Time''). The Redemption Early Cutoff
Time will initially be 6:00 p.m. ET on the business day prior to trade
date. On the date of the Redemption Early Cutoff Time for a redemption
order, the Trust may choose, in its sole discretion, to enter into a
transaction with an Ether Trading Counterparty or the Prime Execution
Agent, to sell ether in exchange for cash. After the Redemption Early
Cutoff Time, the Trust instructs the Ether Custodian to prepare to move
the associated ether from the Trust's Custody Account to the Trust's
Trading Account. On settlement date for a redemption order, the
Authorized Participant delivers the necessary Shares to the Trust, and
on or around settlement date, an Ether Trading Counterparty or Prime
Execution Agent, as applicable, delivers the cash associated with the
Trust's sale of ether to the Trust in exchange for the Trust's ether,
and the Trust delivers cash to the Authorized Participant. In the event
the Trust has not been able to successfully execute and complete
settlement of an ether transaction by the settlement date, the
Authorized Participant will be given the option to
[[Page 33417]]
(1) cancel the redemption order, or (2) accept that the Trust will
continue to attempt to complete the execution, which will delay the
settlement date. With respect to a redemption order, between the Trust
and the Authorized Participant, the Authorized Participant will be
responsible for the dollar cost of the difference between the ether
price utilized in calculating the NAV per Share on trade date and the
price realized in selling the ether to raise the cash needed for the
cash redemption order to the extent the price realized in selling the
ether is lower than the ether price utilized in the NAV. To the extent
the price realized in selling the bitcoin is higher than the price
utilized in the NAV, the Authorized Participant will get to keep the
dollar impact of any such difference.
The Trust may use financing in connection with a redemption order
when ether remains in the Trust's Custody Account at the point of
intended execution of a sale of ether. In those circumstances, the
Trust may borrow Trade Credits in the form of ether from the Trade
Credit Lender, which allows the Trust to sell ether through the Prime
Execution Agent on trade date, and the cash proceeds are deposited in
the Trust's Trading Account. On settlement date for a redemption order,
the Trust delivers cash to the Authorized Participant in exchange for
Shares received from the Authorized Participant. In the event financing
was used, the Trust will use the ether moved from the Trust's Custody
Account to the Trading Account to repay the Trade Credits borrowed from
the Trade Credit Lender.
Net Asset Value
The net asset value (``NAV'') of the Trust is used by the Trust in
its day-to-day operations to measure the net value of the Trust's
assets. The NAV of the Trust will be equal to the total assets of the
Trust, which will consist of ether and cash, less total liabilities of
the Trust, each determined by the Trustee pursuant to policies
established from time to time by the Trustee or its affiliates as
described herein.
The Sponsor has the exclusive authority to determine the Trust's
NAV, which it has delegated to the Trustee under the Trust Agreement.
The Trustee has delegated to the Trust Administrator the responsibility
to calculate the NAV and the NAV per Share for the Trust, based on a
pricing source selected by the Trustee. In determining the Trust's NAV
per Share, the Trust Administrator will value the ether held by the
Trust based on the index price, unless the Sponsor in its sole
discretion determines that the index is unreliable. The CME CF Ether-
Dollar Reference Rate--New York Variant for the Ether-U.S. Dollar
trading pair (the ``CF Benchmarks Index'') shall constitute the index
(``the ``Index''), unless the CF Benchmarks Index is not available or
the Sponsor in its sole discretion determines that the CF Benchmarks
Index is unreliable and therefore determines not to use the CF
Benchmarks Index as the Index. If the CF Benchmarks Index is not
available or the Sponsor determines, in its sole discretion, that the
CF Benchmarks Index is unreliable, (together a ``Fair Value Event''),
the Trust's holdings may be fair valued on a temporary basis in
accordance with the fair value policies approved by the Trustee. If the
CF Benchmarks Index is not used as the Index price, owners of the
beneficial interests of Shares (the ``Shareholders'') will be notified
in a prospectus supplement or on the Trust's website and, if this index
change is on a permanent basis, a filing with the SEC under Rule 19b-4
of the Act will be required.
A Fair Value Event value determination will be based upon all
available factors that the Sponsor or Trustee deems relevant at the
time of the determination, and may be based on analytical values
determined by the Sponsor or Trustee using third-party valuation
models.
Fair value policies approved by the Trustee will seek to determine
the fair value price that the Trust might reasonably expect to receive
from the current sale of that asset or liability in an arm's-length
transaction on the date on which the asset or liability is being valued
consistent with ``Relevant Transactions''.\13\ In the instance of a
Fair Value Event and pursuant the Sponsor's fair valuation policies and
procedures Volume Weighted Average Prices (``VWAP'') or Volume Weighted
Median Prices (``VWMP'') from another index administrator (``Secondary
Index'') would be utilized. If a Secondary Index is not available or
the Sponsor in its sole discretion determines the Secondary Index is
unreliable the price set by the Trust's principal market as of 4:00
p.m. ET, on the valuation date would be utilized.
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\13\ A ``Relevant Transaction'' is any cryptocurrency versus
U.S. dollar spot trade that occurs during the observation window
between 3:00 p.m. and 4:00 p.m. ET on a ``Constituent Platform'' in
the ETH/USD pair that is reported and disseminated by a Constituent
Platform through its publicly available application programming
interface and observed by the ``Index Administrator'', as such terms
are defined below.
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In the event the principal market price is not available or the
Sponsor in its sole discretion determines the principal market
valuation is unreliable the Sponsor will use its best judgment to
determine a good faith estimate of fair value. The Trustee identifies
and determines the Trust's principal market (or in the absence of a
principal market, the most advantageous market) for ether consistent
with the application of fair value measurement framework in FASB ASC
820-10.\14\ The principal market is the market where the reporting
entity would normally enter into a transaction to sell the asset or
transfer the liability. The principal market must be available to and
be accessible by the reporting entity. The reporting entity is the
Trust.
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\14\ See FASB (Financial Accounting Standards Board) Accounting
standards codification (ASC) 820-10. For financial reporting
purposes only, the Trustee has adopted a valuation policy that
outlines the methodology for valuing the Trust's assets. The policy
also outlines the methodology for determining the principal market
(or in the absence of a principal market, the most advantageous
market) in accordance with FASB ASC 820-10.
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Net Asset Value Calculation and Index
On each Business Day (as defined below), as soon as practicable
after 4:00 p.m. ET, the Trust Administrator evaluates the ether held by
the Trust as reflected by the CF Benchmarks Index and determines the
NAV per Share. For purposes of making these calculations, a Business
Day means any day other than a day when Nasdaq is closed for regular
trading (``Business Day'').
The CF Benchmarks Index employed by the Trust is calculated on each
Business Day by aggregating the notional value of ether trading
activity across major ether spot platforms. The CF Benchmarks Index is
designed based on the IOSCO Principles for Financial Benchmarks. The
administrator of the CF Benchmarks Index is CF Benchmarks Ltd. (the
``Index Administrator''). The CF Benchmarks Index serves as a once-a-
day benchmark rate of the U.S. dollar price of ether (USD/ETH),
calculated as of 4:00 p.m. ET. The CF Benchmarks Index aggregates the
trade flow of several ether platforms, during an observation window
between 3:00 p.m. and 4:00 p.m. ET into the U.S. dollar price of one
ether at 4:00 p.m. ET. Specifically, the CF Benchmarks Index is
calculated based on the ``Relevant Transactions'' of all of its
constituent ether platforms, which are currently: Bitstamp, Coinbase,
Gemini, itBit, Kraken, and LMAX Digital (the ``Constituent
Platforms''), and which may change from time to time.
If the CF Benchmarks Index is not available or the Sponsor
determines, in
[[Page 33418]]
its sole discretion, that the CF Benchmarks Index is unreliable and so
should not be used, the Trust's holdings may be fair valued in
accordance with the policy approved by the Trustee.
The Trust is intended to provide a way for Shareholders to obtain
exposure to ether by investing in the Shares rather than by acquiring,
holding and trading ether directly on a peer-to-peer or other basis or
via a digital asset platform. An investment in Shares of the Trust is
not the same as an investment directly in ether on a peer-to-peer or
other basis or via a digital asset platform.
Intraday Indicative Value
In order to provide updated information relating to the Trust for
use by Shareholders, the Trust intends to publish an intraday
indicative value per Share (``IIV'') using the CME CF Ether-Dollar Real
Time Index. One or more major market data vendors will provide an IIV
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's regular market
session of 9:30 a.m. to 4:00 p.m. ET (the ``Regular Market Session'').
The IIV will be calculated by using the prior day's closing NAV per
Share as a base and updating that value during the Exchange's Regular
Market Session to reflect changes in the value of the Trust's NAV per
Share during the trading day.
The IIV is disseminated during the Exchange's Regular Market
Session should not be viewed as an actual real time update of the NAV
per Share, which will be calculated only once at the end of each
trading day.
The IIV will be widely disseminated on a per Share basis every 15
seconds during the Exchange's Regular Market Session by one or more
major market data vendors. In addition, the IIV will be available
through online information services. All aspects of the Index
Methodology are publicly available at the website of Index Provider, CF
Benchmarks (https://www.cfbenchmarks.com).
Creation and Redemption of Shares
The Trust issues and redeems Baskets \15\ on a continuous basis.
Baskets are only issued or redeemed in exchange for an amount of cash
determined by the Trustee on each day that Nasdaq is open for regular
trading. No Shares are issued unless the Cash Custodian has allocated
to the Trust's account the corresponding amount of cash. The amount of
cash necessary for the creation of a Basket, or to be received upon
redemption of a Basket, will decrease over the life of the Trust, due
to the payment or accrual of fees and other expenses or liabilities
payable by the Trust. Baskets may be created or redeemed only by
Authorized Participants, who pay BlackRock Investments, LLC (``BRIL''),
an affiliate of the Trustee and a wholly owned subsidiary of BlackRock,
Inc., that has been retained by the Trust to perform certain order
processing, Authorized Participant communications, and related services
in connection with the issuance and redemption of Baskets, a
transaction fee for each order to create or redeem Baskets.
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\15\ Baskets will be offered continuously at the NAV per Share
for 40,000 Shares. Therefore, a Basket of Shares would be valued at
NAV per Share multiplied by the Basket size and the ether required
to be delivered in exchange for a creation of a Basket would equal
the dollar value of the NAV per Share multiplied by the Basket size
for such creations. The Trust may change the number of Shares in a
Basket. Only Authorized Participants may purchase or redeem Baskets.
Shares will be offered to the public from time to time at varying
prices that will reflect the price of ether and the trading price of
the Shares on Nasdaq at the time of the offer.
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The Sponsor will maintain ownership and control of the ether in a
manner consistent with good delivery requirements for spot commodity
transactions.
Overview of the Ethereum Industry
Ethereum is free software that is hosted on computers distributed
throughout the globe. It employs an array of computer code-based logic,
called a protocol, to create a unified understanding of ownership,
commercial activity, and economic logic. This allows users to engage in
commerce without the need to trust any of its participants or
counterparties. Ethereum code creates verifiable and unambiguous rules
that assign clear, strong property rights to create a platform for
unrestrained business formation and free exchange. No single
intermediary or entity operates or controls the Ethereum network
(referred to as ``decentralization''), the transaction validation and
recordkeeping infrastructure of which is collectively maintained by a
disparate user base. The Ethereum network allows people to exchange
tokens of value, or ether (``ETH''), which are recorded on a
distributed public recordkeeping system or ledger known as a blockchain
(the ``Ethereum Blockchain''), and which can be used to pay for goods
and services, including computational power on the Ethereum network, or
converted to fiat currencies, such as the U.S. dollar, at rates
determined on digital asset platforms or in individual peer-to-peer
transactions. Furthermore, by combining the recordkeeping system of the
Ethereum Blockchain with a flexible scripting language that is
programmable and can be used to implement sophisticated logic and
execute a wide variety of instructions, the Ethereum network is
intended to act as a foundational infrastructure layer on top of which
users can build their own custom software programs, as an alternative
to centralized web servers. In theory, anyone can build their own
custom software programs on the Ethereum network. In this way, the
Ethereum network represents a project to expand blockchain deployment
beyond a peer-to-peer private money system into a flexible, distributed
alternative computing infrastructure that is available to all. On the
Ethereum network, ETH is the unit of account that users pay for the
computational resources consumed by running their programs.
Up to now, U.S. retail investors have lacked a U.S. regulated, U.S.
exchange-traded vehicle to gain exposure to ETH. Instead, current
options include: (i) facing the counter-party risk, legal uncertainty,
technical risk, and complexity associated with accessing spot ether or
(ii) over-the-counter ether funds (``OTC ETH Funds'') with high
management fees and potentially volatile premiums and discounts.
Meanwhile, investors in other countries, including Germany, Switzerland
and France, are able to use more traditional exchange listed and traded
products (including exchange-traded funds holding physical ETH) to gain
exposure to ETH. Investors across Europe have access to products which
trade on regulated exchanges and provide exposure to a broad array of
spot crypto assets. U.S. investors, by contrast, are left with fewer
and more risky means of getting ether exposure.\16\
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\16\ The Exchange notes that the list of countries above is not
exhaustive and that securities regulators in a number of additional
countries have either approved or otherwise allowed the listing and
trading of Spot ETH ETPs.
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To this point, the lack of an ETP that holds spot ETH (a ``Spot ETH
ETP'') exposes U.S. investor assets to significant risk because
investors that would otherwise seek cryptoasset exposure through a Spot
ETH ETP are forced to find alternative exposure through generally
riskier means. For example, investors in OTC ETH Funds are not afforded
the benefits and protections of regulated Spot ETH ETPs, resulting in
retail investors suffering losses due to drastic movements in the
premium/discount of OTC ETH Funds. An investor who purchased the
largest
[[Page 33419]]
OTC ETH Fund in January 2021 and held the position at the end of 2022
would have suffered a 30% loss due to the change in the premium/
discount, even if the price of ETH did not change. Many retail
investors likely suffered losses due to this premium/discount in OTC
ETH Fund trading; all such losses could have been avoided if a Spot ETH
ETP had been available. Additionally, many U.S. investors that held
their digital assets in accounts at FTX,\17\ Celsius Network LLC,\18\
BlockFi Inc.\19\ and Voyager Digital Holdings, Inc.\20\ have become
unsecured creditors in the insolvencies of those entities. If a Spot
ETH ETP was available, it is likely that at least a portion of the
billions of dollars tied up in those proceedings would still reside in
the brokerage accounts of U.S. investors, having instead been invested
in a transparent, regulated, and well-understood structure--a Spot ETH
ETP. To this point, approval of a Spot ETH ETP would represent a major
win for the protection of U.S. investors in the cryptoasset space. The
Trust, like all other series of Commodity-Based Trust Shares, is
designed to protect investors against the risk of losses through fraud
and insolvency that arise by holding digital assets, including ETH, on
centralized platforms.
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\17\ See FTX Trading Ltd., et al., Case No. 22-11068.
\18\ See Celsius Network LLC, et al., Case No. 22-10964.
\19\ See BlockFi Inc., Case No. 22-19361.
\20\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
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Applicable Standard
The Commission has historically approved or disapproved exchange
filings to list and trade series of Trust Issued Receipts, including
spot based Commodity-Based Trust Shares, on the basis of whether the
listing exchange has in place a comprehensive surveillance sharing
agreement with a regulated market of significant size related to the
underlying commodity to be held.\21\ Prior orders from the Commission
have pointed out that in every prior approval order for Commodity-Based
Trust Shares, there has been a derivatives market that represents the
regulated market of significant size, generally a Commodity Futures
Trading Commission (``CFTC'') regulated futures market.\22\ Further to
[[Page 33420]]
this point, the Commission's prior orders have noted that the spot
commodities and currency markets for which it has previously approved
spot exchange traded products (``ETPs'') are generally unregulated and
that the Commission relied on the underlying futures market as the
regulated market of significant size that formed the basis for
approving the series of currency and Commodity-Based Trust Shares,
including gold, silver, platinum, palladium, copper, and other
commodities and currencies. The Commission specifically noted in the
Winklevoss Order that the First Gold Approval Order ``was based on an
assumption that the currency market and the spot gold market were
largely unregulated.'' \23\
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\21\ See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently
disapproved by the Commission. See Securities Exchange Act Release
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the
``Winklevoss Order''). Prior orders from the Commission have pointed
out that in every prior approval order for Commodity-Based Trust
Shares, there has been a derivatives market that represents the
regulated market of significant size, generally a Commodity Futures
Trading Commission (the ``CFTC'') regulated futures market. Further
to this point, the Commission's prior orders have noted that the
spot commodities and currency markets for which it has previously
approved spot ETPs are generally unregulated and that the Commission
relied on the underlying futures market as the regulated market of
significant size that formed the basis for approving the series of
Currency and Commodity-Based Trust Shares, including gold, silver,
platinum, palladium, copper, and other commodities and currencies.
The Commission specifically noted in the Winklevoss Order that the
approval order issued related to the first spot gold ETP ``was based
on an assumption that the currency market and the spot gold market
were largely unregulated.'' See Winklevoss Order at 37592. As such,
the regulated market of significant size test does not require that
the spot ether market be regulated in order for the Commission to
approve this proposal, and precedent makes clear that an underlying
market for a spot commodity or currency being a regulated market
would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to
surveillance sharing agreements with the underlying futures market
in order to determine whether such products were consistent with the
Act.
\22\ See streetTRACKS Gold Shares, Exchange Act Release No.
50603 (Oct. 28, 2004), 69 FR 64614, 64618-19 (Nov. 5, 2004) (SR-
NYSE-2004-22) (the ``First Gold Approval Order''); iShares COMEX
Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR
3749, 3751, 3754-55 (Jan. 26, 2005) (SR-Amex-2004-38); iShares
Silver Trust, Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR
14967, 14968, 14973-74 (Mar. 24, 2006) (SR-Amex-2005-072); ETFS Gold
Trust, Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993,
22994-95, 22998, 23000 (May 15, 2009) (SR-NYSEArca-2009-40); ETFS
Silver Trust, Exchange Act Release No. 59781 (Apr. 17, 2009), 74 FR
18771, 18772, 18775-77 (Apr. 24, 2009) (SR-NYSEArca-2009-28); ETFS
Palladium Trust, Exchange Act Release No. 61220 (Dec. 22, 2009), 74
FR 68895, 68896 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (notice of
proposed rule change included NYSE Arca's representation that
``[t]he most significant palladium futures exchanges are the NYMEX
and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest
exchange in the world for trading precious metals futures and
options,'' and that NYSE Arca ``may obtain trading information via
the Intermarket Surveillance Group,'' of which NYMEX is a member,
Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-
86, 59291 (Nov. 17, 2009)); ETFS Platinum Trust, Exchange Act
Release No. 61219 (Dec. 22, 2009), 74 FR 68886, 68887-88 (Dec. 29,
2009) (SR-NYSEArca-2009-95) (notice of proposed rule change included
NYSE Arca's representation that ``[t]he most significant platinum
futures exchanges are the NYMEX and the Tokyo Commodity Exchange,''
that ``NYMEX is the largest exchange in the world for trading
precious metals futures and options,'' and that NYSE Arca ``may
obtain trading information via the Intermarket Surveillance Group,''
of which NYMEX is a member, Exchange Act Release No. 60970 (Nov. 9,
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009)); Sprott Physical
Gold Trust, Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR
6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-2009-113) (notice of
proposed rule change included NYSE Arca's representation that the
COMEX is one of the ``major world gold markets,'' that NYSE Arca
``may obtain trading information via the Intermarket Surveillance
Group,'' and that NYMEX, of which COMEX is a division, is a member
of the Intermarket Surveillance Group, Exchange Act Release No.
61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 2010)); Sprott
Physical Silver Trust, Exchange Act Release No. 63043 (Oct. 5,
2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) (SR-
NYSEArca-2010-84); ETFS Precious Metals Basket Trust, Exchange Act
Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790 (Aug. 17,
2010) (SR-NYSEArca-2010-56) (notice of proposed rule change included
NYSE Arca's representation that ``the most significant gold, silver,
platinum and palladium futures exchanges are the COMEX and the
TOCOM'' and that NYSE Arca ``may obtain trading information via the
Intermarket Surveillance Group,'' of which COMEX is a member,
Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295,
39298 (July 8, 2010)); ETFS White Metals Basket Trust, Exchange Act
Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 56158 (Sept. 15,
2010) (SR-NYSEArca-2010-71) (notice of proposed rule change included
NYSE Arca's representation that ``the most significant silver,
platinum and palladium futures exchanges are the COMEX and the
TOCOM'' and that NYSE Arca ``may obtain trading information via the
Intermarket Surveillance Group,'' of which COMEX is a member,
Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657,
47660 (Aug. 6, 2010)); ETFS Asian Gold Trust, Exchange Act Release
No. 63464 (Dec. 8, 2010), 75 FR 77926, 77928 (Dec. 14, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change included NYSE
Arca's representation that ``the most significant gold futures
exchanges are the COMEX and the Tokyo Commodity Exchange,'' that
``COMEX is the largest exchange in the world for trading precious
metals futures and options,'' and that NYSE Arca ``may obtain
trading information via the Intermarket Surveillance Group,'' of
which COMEX is a member, Exchange Act Release No. 63267 (Nov. 8,
2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010)); Sprott
Physical Platinum and Palladium Trust, Exchange Act Release No.
68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec. 19, 2012) (SR-
NYSEArca-2012–111) (notice of proposed rule change included
NYSE Arca's representation that ``[f]utures on platinum and
palladium are traded on two major exchanges: The New York Mercantile
Exchange . . . and Tokyo Commodities Exchange'' and that NYSE Arca
``may obtain trading information via the Intermarket Surveillance
Group,'' of which COMEX is a member, Exchange Act Release No. 68101
(Oct. 24, 2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX
Physical--1 oz. Gold Redeemable Trust, Exchange Act Release No.
66930 (May 7, 2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca-
2012-18) (notice of proposed rule change included NYSE Arca's
representation that NYSE Arca ``may obtain trading information via
the Intermarket Surveillance Group,'' of which COMEX is a member,
and that gold futures are traded on COMEX and the Tokyo Commodity
Exchange, with a cross- reference to the proposed rule change to
list and trade shares of the ETFS Gold Trust, in which NYSE Arca
represented that COMEX is one of the ``major world gold markets,''
Exchange Act Release No. 66627 (Mar. 20, 2012), 77 FR 17539, 17542-
43, 17547 (Mar. 26, 2012)); JPM XF Physical Copper Trust, Exchange
Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468, 75469-70, 75472,
75485-86 (Dec. 20, 2012) (SR-NYSEArca-2012-28); iShares Copper
Trust, Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726,
13727, 13729-30, 13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66);
First Trust Gold Trust, Exchange Act Release No. 70195 (Aug. 14,
2013), 78 FR 51239, 51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61)
(notice of proposed rule change included NYSE Arca's representation
that FINRA, on behalf of the exchange, may obtain trading
information regarding gold futures and options on gold futures from
members of the Intermarket Surveillance Group, including COMEX, or
from markets ``with which [NYSE Arca] has in place a comprehensive
surveillance sharing agreement,'' and that gold futures are traded
on COMEX and the Tokyo Commodity Exchange, with a cross-reference to
the proposed rule change to list and trade shares of the ETFS Gold
Trust, in which NYSE Arca represented that COMEX is one of the
``major world gold markets,'' Exchange Act Release No. 69847 (June
25, 2013), 78 FR 39399, 39400, 39405 (July 1, 2013)); Merk Gold
Trust, Exchange Act Release No. 71378 (Jan. 23, 2014), 79 FR 4786,
4786-87 (Jan. 29, 2014) (SR-NYSEArca-2013-137) (notice of proposed
rule change included NYSE Arca's representation that ``COMEX is the
largest gold futures and options exchange'' and that NYSE Arca ``may
obtain trading information via the Intermarket Surveillance Group,''
including with respect to transactions occurring on COMEX pursuant
to CME and NYMEX's membership, or from exchanges ``with which [NYSE
Arca] has in place a comprehensive surveillance sharing agreement,''
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369,
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15,
2016) (SR-NYSEArca-2016-84).
\23\ See Winklevoss Order at 37592.
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As such, the regulated market of significant size test does not
require that the spot ether market be regulated in order for the
Commission to approve this proposal, and precedent makes clear that an
underlying market for a spot commodity or currency being a regulated
market would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to surveillance
sharing agreements with the underlying futures market in order to
determine whether such products were consistent with the Act. With this
in mind, the CME ether futures (``Ether Futures'') market, as described
below, is the proper market to consider in determining whether there is
a related regulated market of significant size.
Recently, the Commission issued an order granting approval for
proposals to list bitcoin-based commodity trust and bitcoin-based trust
issued receipts (these proposed funds are nearly identical to the
Trust, but proposed to hold bitcoin instead of ether) (``Spot Bitcoin
ETPs'').\24\ In considering the Spot Bitcoin ETPs, the Commission
determined in the Spot Bitcoin ETP Approval Order that the CME Bitcoin
Futures market is a regulated market of significant size.
---------------------------------------------------------------------------
\24\ See Exchange Act Release No. 99306 (January 10, 2024), 89
FR 3008 (January 17, 2024) (Self-Regulatory Organizations; NYSE
Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.;
Order Granting Accelerated Approval of Proposed Rule Changes, as
Modified by Amendments Thereto, To List and Trade Bitcoin-Based
Commodity-Based Trust Shares and Trust Units) (the ``Spot Bitcoin
ETP Approval Order'').
---------------------------------------------------------------------------
Specifically, the Commission stated:
[B]ased on the record before the Commission and the improved
quality of the correlation analysis in the record . . . the
Commission is able to conclude that fraud or manipulation that
impacts prices in spot bitcoin markets would likely similarly impact
CME bitcoin futures prices. And because the CME's surveillance can
assist in detecting those impacts on CME bitcoin futures prices, the
Exchanges' comprehensive surveillance-sharing agreement with the
CME-a U.S. regulated market whose bitcoin futures market is
consistently highly correlated to spot bitcoin, albeit not of
``significant size'' related to spot bitcoin-can be reasonably
expected to assist in surveilling for fraudulent and manipulative
acts and practices in the specific context of the [p]roposals.\25\
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\25\ See the Spot Bitcoin ETP Approval Order at 3011-3012.
The Exchange and Sponsor applaud the Commission for allowing the
launch of ETFs registered under the Investment Company Act of 1940, as
amended (the ``1940 Act'') that provide exposure to ether primarily
through CME Ether Futures. Allowing such products to list and trade is
a productive first step in providing U.S. investors and traders with
transparent, exchange-listed tools for expressing a view on ether.
On October 2, 2023 the SEC approved nine ETH-based ETFs for
trading.\26\ The ETFs hold ETH futures contracts that trade on the CME
and settle using the CME CF Ethereum Reference Rate (``ERR''), which is
priced based on the spot ETH markets Coinbase, Kraken, LMAX, Bitstamp,
Gemini, and itBit, essentially the same spot markets that are included
in the Index that the Trust uses to value its ETH holdings. Given that
the Commission has approved ETFs that offer exposure to ETH futures,
which themselves are priced based on the underlying spot ETH market,
the Sponsor believes that the Commission must also approve ETPs that
offer exposure to spot ETH, like the Trust.
---------------------------------------------------------------------------
\26\ These ETFs included the Bitwise Ethereum Strategy ETF,
Bitwise Bitcoin & Ether Equal Weight Strategy ETF, Hashdex Ether
Strategy ETF, ProShares Ether Strategy ETF, ProShares Bitcoin &
Ether Strategy ETF, ProShares Bitcoin & Ether Equal Weight Strategy
ETF, Valkyrie Bitcoin & Ethereum Strategy ETF, VanEck Ethereum
Strategy ETF, and Volatility Shares Ethereum Strategy ETF
(collectively, the ``ETH Futures ETFs'').
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Based on the foregoing, the Exchange and Sponsor believe that any
objective review of the proposals to list spot ether ETPs, like the
Trust, compared to the Ether Futures ETFs would lead to the conclusion
that any concerns related to preventing fraudulent and manipulative
acts and practices related to spot ether ETPs would apply equally to
the spot markets underlying the futures contracts held by an Ether
Futures ETF. Both the Exchange and Sponsor believe that the CME Ether
Futures market is a regulated market of significant size and that such
manipulation concerns are mitigated, as described extensively below.
After allowing the listing and trading of Ether Futures ETFs that hold
primarily CME Ether Futures, however, the only consistent outcome would
be approving spot ether ETPs on the basis that the CME Ether Futures
market is a regulated market of significant size.
The Sponsor believes that because the CME ETH futures market is
priced based on the underlying spot ETH market, any fraud or
manipulation in the spot market would necessarily affect the price of
ETH futures, thereby affecting the net asset value of an ETP holding
spot ETH or an ETF holding ETH futures, as well as the price investors
pay for such product's shares. Accordingly, either CME surveillance can
detect spot-market fraud that affects both futures ETFs and spot ETPs,
or that surveillance cannot do so for either type of product. Having
approved ETH futures ETFs in part on the basis of such surveillance,
the Commission has clearly determined that CME surveillance can detect
spot-market fraud that would affect spot ETPs, and the Sponsor thus
believes that it must also approve spot ETH ETPs on that basis.
In summary, both the Exchange and the Sponsor believe that this
proposal and the included analysis are sufficient to establish that the
CME ETH Futures market represents a regulated market of significant
size as it relates both to the CME ETH Futures market and to the spot
ETH market and that this proposal should be approved.
CME ETH Futures
CME began offering trading in Ether Futures in February 2021. Each
contract represents 50 ETH and is based on the
[[Page 33421]]
CME CF Ether-Dollar Reference Rate.\27\ The contracts trade and settle
like other cash-settled commodity futures contracts. Most measurable
metrics related to CME ETH Futures have generally trended up since
launch, although some metrics have slowed recently. For example, there
were 78,571 CME ETH Futures contracts traded in September 2023
(approximately $6.3 billion) compared to 163,114 ($11.9 billion) and
130,546 ($21.2 billion) contracts traded in September 2022, and
September 2022 respectively.\28\ The daily correlation between the spot
ETH and the CME ETH Futures is 0.9993 from the period of 10/13/22
through 10/13/23.\29\ The number of large open interest holders \30\
and unique accounts trading CME ETH Futures have both increased, even
in the face of heightened Ether price volatility.
---------------------------------------------------------------------------
\27\ The CME CF Ether-Dollar Reference Rate is based on a
publicly available calculation methodology based on pricing sourced
from several crypto exchanges and trading platforms, including
Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
\28\ Source: Bloomberg, BlackRock calculations. Data as of 10/
18/2023 for period shown (2/8/2021 to 9/30/2023).
\29\ Source: S&P Ethereum Index, S&P CME Ether Futures Index
(Spot).
\30\ A large open interest holder in CME ETH Futures is an
entity that holds at least 25 contracts, which is the equivalent of
1250 ether. At a price of approximately $1,867 per ether on 7/31/
2023, more than 59 firms had outstanding positions of greater than
$2.3 million in CME ETH Futures.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN29AP24.000
[GRAPHIC] [TIFF OMITTED] TN29AP24.001
[[Page 33422]]
BILLING CODE 8011-01-C
Preventing Fraudulent and Manipulative Practices
In order for any proposed rule change from an exchange to be
approved, the Commission must determine that, among other things, the
proposal is consistent with the requirements of section 6(b)(5) of the
Act, specifically including: (i) the requirement that a national
securities exchange's rules are designed to prevent fraudulent and
manipulative acts and practices; \31\ and (ii) the requirement that an
exchange proposal be designed, in general, to protect investors and the
public interest. The Exchange believes that this proposal is consistent
with the requirements of section 6(b)(5) of the Act and that this
filing sufficiently demonstrates that the CME ETH Futures market
represents a regulated market of significant size and that, on the
whole, the manipulation concerns previously articulated by the
Commission are sufficiently mitigated to the point that they are
outweighed by quantifiable investor protection issues that would be
resolved by approving this proposal.
---------------------------------------------------------------------------
\31\ The Exchange believes that ETH is resistant to price
manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of ETH trading render it difficult and
prohibitively costly to manipulate the price of ETH. The
fragmentation across ETH platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of ETH prices
through continuous trading activity challenging. To the extent that
there are ETH platforms engaged in or allowing wash trading or other
activity intended to manipulate the price of ETH on other markets,
such pricing does not normally impact prices on other exchange
because participants will generally ignore markets with quotes that
they deem non-executable. Moreover, the linkage between the ETH
markets and the presence of arbitrageurs in those markets means that
the manipulation of the price of ETH price on any single venue would
require manipulation of the global ETH price in order to be
effective. Arbitrageurs must have funds distributed across multiple
trading platforms in order to take advantage of temporary price
dislocations, thereby making it unlikely that there will be strong
concentration of funds on any particular ETH platform or Over-the
Counter platform (``OTC platform''). As a result, the potential for
manipulation on a trading platform would require overcoming the
liquidity supply of such arbitrageurs who are effectively
eliminating any cross-market pricing differences.
---------------------------------------------------------------------------
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance sharing
agreement in place \32\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\33\ The only remaining
issue to be addressed is whether the ETH Futures market constitutes a
market of significant size, which both the Exchange and the Sponsor
believe that it does. The terms ``significant market'' and ``market of
significant size'' include a market (or group of markets) as to which:
(a) there is a reasonable likelihood that a person attempting to
manipulate the ETP would also have to trade on that market to
manipulate the ETP, so that a surveillance sharing agreement would
assist the listing exchange in detecting and deterring misconduct; and
(b) it is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\34\
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\32\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance- sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in the ISG
constitutes such a surveillance sharing agreement. See Securities
Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595
(March 3, 2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix
Disapproval'').
\33\ For a list of the current members and affiliate members of
ISG, see https://www.isgportal.com/.
\34\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------
The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance sharing agreement.\35\
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\35\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
---------------------------------------------------------------------------
The significant market test requires that there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to manipulate the ETP, so that a
surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct. In light of the similarly high
correlation between spot ETH/CME Ether Futures and spot bitcoin/CME
Bitcoin Futures, applying the same rationale that the Commission
applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order
\36\ also indicates that this test is satisfied for this proposal. As
noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded
that: . . . fraud or manipulation that impacts prices in spot bitcoin
markets would likely similarly impact CME bitcoin futures prices. And
because the CME's surveillance can assist in detecting those impacts on
CME bitcoin futures prices, the Exchanges' comprehensive surveillance-
sharing agreement with the CME . . . can be reasonably expected to
assist in surveilling for fraudulent and manipulative acts and
practices in the specific context of the [p]roposals.\37\ The
assumptions from this statement are also true for CME Ether Futures.
CME Ether Futures pricing is based on pricing from spot ether markets.
The statement from the Spot Bitcoin ETP Approval Order that the
surveillance-sharing agreement with the CME ``can be reasonably
expected to assist in surveilling for fraudulent and manipulative acts
and practices in the specific context of the [p]roposals'' makes clear
that the Commission believes that CME's surveillance can capture the
effects of trading on the relevant spot markets on the pricing of CME
Bitcoin Futures. This same logic would extend to CME Ether Futures
markets where CME's surveillance would be able to capture the effects
of trading on the relevant spot markets on the pricing of CME Ether
Futures.
---------------------------------------------------------------------------
\36\ See Exchange Act Release No. 99306 (January 10, 2024), 89
FR 3008 (January 17, 2024) (Self-Regulatory Organizations; NYSE
Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.;
Order Granting Accelerated Approval of Proposed Rule Changes, as
Modified by Amendments Thereto, To List and Trade Bitcoin-Based
Commodity-Based Trust Shares and Trust Units) (the ``Spot Bitcoin
ETP Approval Order'').
\37\ See the Spot Bitcoin ETP Approval Order at 3011-3012.
---------------------------------------------------------------------------
(A) Predominant Influence on Prices in Spot and ETH Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the CME ETH Futures
market or spot market for a number of reasons. First,
[[Page 33423]]
because the Trust would not hold CME ETH Futures contracts, the only
way that it could be the predominant force on prices in that market is
through the spot markets that CME ETH Futures contracts use for
pricing.\38\ The Sponsor notes that ETH total 24-hour spot trading
volume has averaged $9.1B over the year ending October 16, 2023,\39\
with approximately $1.7B occurring on venues whose trades are included
in the sponsor's benchmark.\40\ The Sponsor expects that the Trust
would represent a very small percentage of this daily trading volume in
the spot ETH market even in its most aggressive projections for the
Trust's assets and, thus, the Trust would not have an impact on the
spot market and therefore could not be the predominant force on prices
in the CME ETH Futures market. Second, much like the CME Bitcoin
Futures market, the CME ETH Futures market has progressed and matured
significantly. As the court found in the Grayscale Order ``Because the
spot market is deeper and more liquid than the futures market,
manipulation should be more difficult, not less.'' The Exchange and
sponsor agree with this sentiment and believe it applies equally to the
spot ETH and CME ETH Futures markets.
---------------------------------------------------------------------------
\38\ This logic is reflected by the court in the Grayscale Order
at 17-18. Specifically, the court found that ``Because Grayscale
owns no futures contracts, trading in Grayscale can affect the
futures market only through the spot market . . . But Grayscale
holds just 3.4 percent of outstanding bitcoin, and the Commission
did not suggest Grayscale can dominate the price of bitcoin.''
\39\ Source: CoinGecko.
\40\ Source: CoinGecko, The Block, and BlackRock calculations.
---------------------------------------------------------------------------
(B) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
As noted in the Surveillance section, the surveillance program
includes real-time patterns for price and volume movements and post-
trade surveillance patterns (e.g., spoofing, marking the close,
pinging, phishing). In addition to the Exchange's existing
surveillance, a new pattern will be added to surveil for significant
deviation in the Commodity-Based Trust Shares' price from the
underlying asset's price. The Exchange will use the trade data from an
external vendor that consolidates the real-time data from multiple
ether platforms.
Trading of Shares on the Exchange will be subject to the Exchange's
surveillance program for derivative products, as well as cross-market
surveillances administered by Financial Industry Regulatory Authority
(``FINRA''), on behalf of the Exchange pursuant to a regulatory
services agreement, which are also designed to detect violations of
Exchange rules and applicable federal securities laws. The Exchange is
responsible for FINRA's performance under this regulatory services
agreement.
The Exchange will require the Trust to represent to the Exchange
that it will advise the Exchange of any failure by the Trust to comply
with the continued listing requirements, and, pursuant to its
obligations under section 19(g)(1) of the Exchange Act, the Exchange
will surveil for compliance with the continued listing requirements. If
the Trust is not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under the
Nasdaq 5800 Series. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees.
The Exchange will communicate as needed regarding trading in the
Shares with other markets and other entities that are members of the
ISG, and the Exchange may obtain trading information regarding trading
in the Shares from such markets and other entities.
Spot and Proxy Exposure to Ether
Exposure to ether through an ETP also presents certain advantages
for retail investors compared to buying spot ether directly. The most
notable advantage from the Sponsor's perspective is the elimination of
the need for an individual retail investor to either manage their own
private keys or to hold ether through a cryptocurrency exchange that
lacks sufficient protections. Typically, retail exchanges hold most, if
not all, retail investors' ether in ``hot'' (internet connected)
storage and do not make any commitments to indemnify retail investors
or to observe any particular cybersecurity standard. Meanwhile, a
retail investor holding spot ether directly in a self-hosted wallet may
suffer from inexperience in private key management (e.g., insufficient
password protection, lost key, etc.), which point of failure could
cause them to lose some or all of their ether holdings. Thus, with
respect to custody of the Trust's ether assets, the Trust presents
advantages from an investment protection standpoint for retail
investors compared to owning spot ether directly or via a digital asset
exchange.
Availability of Information
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) the prior Business
Day's NAV per Share; (b) the prior Business Day's Nasdaq official
closing price; (c) calculation of the premium or discount of such
Nasdaq official closing price against such NAV per Share; (d) data in
chart form displaying the frequency distribution of discounts and
premiums of the Official Closing Price against the NAV, within
appropriate ranges for each of the four previous calendar quarters (or
for the life of the Trust, if shorter); (e) the prospectus; and (f)
other applicable quantitative information. The NAV per Share for the
Trust will be calculated by the Trust Administrator once a day and will
be disseminated daily to all market participants at the same time.
Quotation and last sale information regarding the Shares will be
disseminated through the facilities of the relevant securities
information processor. Also, an estimated value that reflects an
estimated IIV will be disseminated. For more information on the IIV,
including the calculation methodology, see ``Intraday Indicative
Value'' above.
The IIV disseminated during the Exchange's Regular Market Session
should not be viewed as an actual real time update of the NAV per
Share, which will be calculated only once at the end of each trading
day. The IIV will be widely disseminated on a per Share basis every 15
seconds during the Exchange's Regular Market Session by one or more
major market data vendors. In addition, the IIV will be available
through online information services.
Quotation and last sale information for ether is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters, as well as CF Benchmarks. Information relating
to trading, including price and volume information, in ether is
available from major market data vendors and from the platforms on
which ether are traded. Depth of book information is also available
from ether platforms. The normal trading hours for ether platforms are
24 hours per day, 365 days per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will
[[Page 33424]]
be published daily in the financial section of newspapers.
Initial and Continued Listing
The Shares will be subject to Nasdaq Rule 5711(d)(vi), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange will obtain a representation
that the Trust's NAV per Share will be calculated daily and will be
made available to all market participants at the same time. A minimum
of 80,000 Commodity-Based Trust Shares, or the equivalent of 2 Baskets,
will be required to be outstanding at the time of commencement of
trading on the Exchange. Upon termination of the Trust, the Shares will
be removed from listing. The Delaware Trustee, will be a trust company
having substantial capital and surplus and the experience and
facilities for handling corporate trust business, as required under
Nasdaq Rule 5711(d)(vi)(D) and no change will be made to the Delaware
Trustee without prior notice to and approval of the Exchange.
As required in Nasdaq Rule 5711(d)(viii), the Exchange notes that
any registered market maker (``Market Maker'') in the Shares must file
with the Exchange, in a manner prescribed by the Exchange, and keep
current a list identifying all accounts for trading the underlying
commodity, related futures or options on futures, or any other related
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker in
the Shares shall trade in the underlying commodity, related futures or
options on futures, or any other related derivatives, in an account in
which a registered Market Maker, directly or indirectly, controls
trading activities, or has a direct interest in the profits or losses
thereof, which has not been reported to the Exchange as required by
Nasdaq Rule 5711(d). In addition to the existing obligations under
Exchange rules regarding the production of books and records, the
registered Market Maker in the Shares shall make available to the
Exchange such books, records or other information pertaining to
transactions by such entity or any limited partner, officer or approved
person thereof, registered or non-registered employee affiliated with
such entity for its or their own accounts in the underlying commodity,
related futures or options on futures, or any other related
derivatives, as may be requested by the Exchange.
The Exchange is able to obtain information regarding trading in the
Shares and the underlying ether, Ether Futures contracts, options on
Ether Futures, or any other ether derivative through members acting as
registered Market Makers, in connection with their proprietary or
customer trades.
As a general matter, the Exchange has regulatory jurisdiction over
its members, and their associated persons. The Exchange also has
regulatory jurisdiction over any person or entity controlling a member,
as well as a subsidiary or affiliate of a member that is in the
securities business. A subsidiary or affiliate of a member organization
that does business only in commodities would not be subject to Exchange
jurisdiction, but the Exchange could obtain information regarding the
activities of such subsidiary or affiliate through surveillance sharing
agreements with regulatory organizations of which such subsidiary or
affiliate is a member.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. The Exchange will
allow trading in the Shares from 4:00 a.m. to 8:00 p.m. (ET). The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. The Shares of the Trust will conform to
the initial and continued listing criteria set forth in Nasdaq Rule
5711(d).
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in Nasdaq Rules 4120 and 4121, including
without limitation the conditions specified in Nasdaq Rule 4120(a)(9)
and (10) and the trading pauses under Nasdaq Rules 4120(a)(11) and
(12).
Trading may be halted because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable. These may include: (1) the extent to which trading is not
occurring in the ether underlying the Shares; or (2) whether other
unusual conditions or circumstances detrimental to the maintenance of a
fair and orderly market are present.
If the IIV or the value of the Index is not being disseminated as
required, the Exchange may halt trading during the day in which the
interruption to the dissemination of the IIV or the value of the Index
occurs. If the interruption to the dissemination of the IIV or the
value of the Index persists past the trading day in which it occurred,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption.
In addition, if the Exchange becomes aware that the NAV per Share
with respect to the Shares is not disseminated to all market
participants at the same time, it will halt trading in the Shares until
such time as the NAV per Share is available to all market participants.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. The surveillance
program includes real-time patterns for price and volume movements and
post-trade surveillance patterns (e.g., spoofing, marking the close,
pinging, phishing). In addition to the Exchange's existing
surveillance, a new pattern will be added to surveil for significant
deviation in the Commodity-Based Trust Shares' price from the
underlying asset's price. The Exchange will use the trade data from an
external vendor that consolidates the real-time data from multiple
ether platforms. Trading of Shares on the Exchange will be subject to
the Exchange's surveillance program for derivative products, as well as
cross-market surveillance administered by FINRA, on behalf of the
Exchange pursuant to a regulatory services agreement, which are also
designed to detect violations of Exchange rules and applicable federal
securities laws. The Exchange is responsible for FINRA's performance
under this regulatory services agreement. The Exchange will require the
Trust to represent to the Exchange that it will advise the Exchange of
any failure by the Trust to comply with the continued listing
requirements, and, pursuant to its obligations under section 19(g)(1)
of the Exchange Act, the Exchange will surveil for compliance with the
continued listing requirements. If the Trust is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under the Nasdaq 5800 Series. In addition, the
Exchange also has a general policy prohibiting the distribution of
material, non-public information by its employees.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares with other
markets and other entities that are members of the ISG, and the
Exchange or FINRA, on
[[Page 33425]]
behalf of the Exchange, or both, may obtain trading information
regarding trading in the Shares from such markets and other entities.
The Exchange also may obtain information regarding trading in the
Shares and listed bitcoin derivatives via the ISG, from other exchanges
who are members or affiliates of the ISG, or with which the Exchange
has entered into a comprehensive surveillance sharing agreement.
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an information circular (``Information Circular'') of the
special characteristics and risks associated with trading the Shares.
Specifically, the Information Circular will discuss the following: (1)
the procedures for creations and redemptions of Shares in Baskets (and
that Shares are not individually redeemable); (2) Section 10 of Nasdaq
General Rule 9, which imposes suitability obligations on Nasdaq members
with respect to recommending transactions in the Shares to customers;
(3) how information regarding the IIV is disseminated; (4) the risks
involved in trading the Shares during the pre-market and post-market
sessions when an updated IIV will not be calculated or publicly
disseminated; (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (6) trading information. The
Information Circular will also discuss any exemptive, no action and
interpretive relief granted by the Commission from any rules under the
Act.
The Information Circular will also reference the fact that there is
no regulated source of last sale information regarding ether, that the
Commission has no jurisdiction over the trading of ether as a
commodity, and that the CFTC has regulatory jurisdiction over the
trading of ETH Futures contracts and options on ETH Futures contracts.
Additionally, the Information Circular will reference that the
Trust is subject to various fees and expenses described in the
Registration Statement. The Information Circular will also disclose the
trading hours of the Shares. The Information Circular will disclose
that information about the Shares will be publicly available on the
Trust's website.
2. Statutory Basis
The Exchange believes that the proposal is consistent with section
6(b) of the Act \41\ in general and section 6(b)(5) of the Act \42\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78f.
\42\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has approved numerous series of Trust Issued
Receipts,\43\ including Commodity-Based Trust Shares,\44\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices; and
(ii) the requirement that an exchange proposal be designed, in general,
to protect investors and the public interest. The Exchange believes
that this proposal is consistent with the requirements of section
6(b)(5) of the Act because this filing sufficiently demonstrates that
the CME ETH Futures market represents a regulated market of significant
size and that, on the whole, the manipulation concerns previously
articulated by the Commission are sufficiently mitigated to the point
that they are outweighed by quantifiable investor protection issues
that would be resolved by approving this proposal.
---------------------------------------------------------------------------
\43\ See Exchange Rule 5720.
\44\ Commodity-Based Trust Shares, as described in Exchange Rule
5711(d), are a type of Trust Issued Receipt.
---------------------------------------------------------------------------
Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order for a proposal to list and trade a series of Commodity-
Based Trust Shares to be deemed consistent with the Act, the Commission
requires that an exchange demonstrate that there is a comprehensive
surveillance-sharing agreement in place with a regulated market of
significant size. Both the Exchange and CME are members of ISG.\45\ As
such, the only remaining issue to be addressed is whether the ETH
Futures market constitutes a market of significant size, which the
Exchange believes that it does. The terms ``significant market'' and
``market of significant size'' include a market (or group of markets)
as to which: (a) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to manipulate the ETP, so that a surveillance-sharing agreement
would assist the listing exchange in detecting and deterring
misconduct; and (b) it is unlikely that trading in the ETP would be the
predominant influence on prices in that market.\46\
---------------------------------------------------------------------------
\45\ For a list of the current members and affiliate members of
ISG, see https://www.isgportal.com/.
\46\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------
The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\47\
---------------------------------------------------------------------------
\47\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a ``cannot be
manipulated'' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.
Id. at 37582.
---------------------------------------------------------------------------
The significant market test requires that there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to manipulate the ETP, so that a
surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct. In light of the similarly high
correlation between spot ETH/CME Ether Futures and spot bitcoin/CME
Bitcoin Futures, applying the same rationale that the Commission
applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order
\48\ also indicates that this test is satisfied for this proposal. As
noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded
that: . . . fraud or manipulation that impacts prices in spot bitcoin
markets would likely similarly impact CME bitcoin futures prices. And
because the CME's surveillance can assist in detecting those impacts on
CME bitcoin futures prices, the Exchanges' comprehensive surveillance-
sharing agreement with the CME . . . can be reasonably expected to
assist in
[[Page 33426]]
surveilling for fraudulent and manipulative acts and practices in the
specific context of the [p]roposals.\49\ The assumptions from this
statement are also true for CME Ether Futures. CME Ether Futures
pricing is based on pricing from spot ether markets. The statement from
the Spot Bitcoin ETP Approval Order that the surveillance-sharing
agreement with the CME ``can be reasonably expected to assist in
surveilling for fraudulent and manipulative acts and practices in the
specific context of the [p]roposals'' makes clear that the Commission
believes that CME's surveillance can capture the effects of trading on
the relevant spot markets on the pricing of CME Bitcoin Futures. This
same logic would extend to CME Ether Futures markets where CME's
surveillance would be able to capture the effects of trading on the
relevant spot markets on the pricing of CME Ether Futures.
---------------------------------------------------------------------------
\48\ See Exchange Act Release No. 99306 (January 10, 2024), 89
FR 3008 (January 17, 2024) (Self-Regulatory Organizations; NYSE
Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.;
Order Granting Accelerated Approval of Proposed Rule Changes, as
Modified by Amendments Thereto, To List and Trade Bitcoin-Based
Commodity-Based Trust Shares and Trust Units) (the ``Spot Bitcoin
ETP Approval Order'').
\49\ See the Spot Bitcoin ETP Approval Order at 3011-3012.
---------------------------------------------------------------------------
(a) Predominant Influence on Prices in Spot and ETH Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in CME ETH Futures market
or spot market for a number of reasons. First, because the Trust would
not hold CME ETH Futures contracts, the only way that it could be the
predominant force on prices in that market is through the spot markets
that CME ETH Futures contracts use for pricing.\50\ The Sponsor notes
that ETH total 24-hour spot trading volume has averaged $9.1B over the
year ending October 16, 2023,\51\ with approximately $1.7B occurring on
venues whose trades are included in the sponsor's benchmark.\52\ The
Sponsor expects that the Trust would represent a very small percentage
of this daily trading volume in the spot ETH market even in its most
aggressive projections for the Trust's assets and, thus, the Trust
would not have an impact on the spot market and therefore could not be
the predominant force on prices in the CME ETH Futures market. Second,
much like the CME Bitcoin Futures market, the CME ETH Futures market
has progressed and matured significantly. As the court found in the
Grayscale Order ``Because the spot market is deeper and more liquid
than the futures market, manipulation should be more difficult, not
less.'' The Exchange and sponsor agree with this sentiment and believe
it applies equally to the spot ETH and CME ETH Futures markets.
---------------------------------------------------------------------------
\50\ This logic is reflected by the court in the Grayscale Order
at 17-18. Specifically, the court found that ``Because Grayscale
owns no futures contracts, trading in Grayscale can affect the
futures market only through the spot market . . . But Grayscale
holds just 3.4 percent of outstanding bitcoin, and the Commission
did not suggest Grayscale can dominate the price of bitcoin.''
\51\ Source: CoinGecko.
\52\ Source: CoinGecko, The Block, and BlackRock calculations.
---------------------------------------------------------------------------
(b) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
As noted in the Surveillance section, the surveillance program
includes real-time patterns for price and volume movements and post-
trade surveillance patterns (e.g., spoofing, marking the close,
pinging, phishing). In addition to the Exchange's existing
surveillance, a new pattern will be added to surveil for significant
deviation in the Commodity-Based Trust Shares' price from the
underlying asset's price. The Exchange will use the trade data from an
external vendor that consolidates the real-time data from multiple
ether platforms.
Trading of Shares on the Exchange will be subject to the Exchange's
surveillance program for derivative products, as well as cross-market
surveillances administered by Financial Industry Regulatory Authority
(``FINRA''), on behalf of the Exchange pursuant to a regulatory
services agreement, which are also designed to detect violations of
Exchange rules and applicable federal securities laws. The Exchange is
responsible for FINRA's performance under this regulatory services
agreement.
The Exchange will require the Trust to represent to the Exchange
that it will advise the Exchange of any failure by the Trust to comply
with the continued listing requirements, and, pursuant to its
obligations under section 19(g)(1) of the Exchange Act, the Exchange
will surveil for compliance with the continued listing requirements. If
the Trust is not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under the
Nasdaq 5800 Series. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees.
The Exchange will communicate as needed regarding trading in the
Shares with other markets and other entities that are members of the
ISG, and the Exchange may obtain trading information regarding trading
in the Shares from such markets and other entities.
Designed To Protect Investors and the Public Interest
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ETH through OTC ETH Funds is greater than $5
billion. With that growth, so too has grown the quantifiable investor
protection issues to U.S. investors through premium/discount volatility
and management fees for OTC ETH Funds. The Exchange believes that, as
described above, the concerns related to the prevention of fraudulent
and manipulative acts and practices have been sufficiently addressed to
be consistent with the Act and, to the extent that the Commission
disagrees with that assertion, such concerns are now at the very least
outweighed by investor protection concerns. As such, the Exchange
believes that approving this proposal (and comparable proposals)
provides the Commission with the opportunity to allow U.S. investors
with access to ETH in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii) reducing management fees through
meaningful competition; (iii) reducing risks and costs associated with
investing in ETH Futures ETFs and operating companies that are
imperfect proxies for ETH exposure; and (iv) providing an alternative
to custodying spot ETH.
Commodity-Based Trust Shares--Nasdaq Rule 5711(d)
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed on the Exchange pursuant to the initial and
continued listing criteria in Nasdaq Rule 5711(d). The Exchange
believes that its surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange during all trading
sessions and to deter and detect violations of Exchange rules and the
applicable federal securities laws. Trading of the Shares through the
Exchange will be subject to the Exchange's surveillance procedures for
derivative products, including Commodity-Based Trust Shares. The issuer
has represented to the Exchange that it will advise the Exchange of any
failure by the Trust or the Shares to comply with the continued listing
requirements, and, pursuant to its obligations under section 19(g)(1)
of the
[[Page 33427]]
Exchange Act, the Exchange will surveil for compliance with the
continued listing requirements. If the Trust or the Shares are not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under the Nasdaq 5800 Series. The
Exchange may obtain information regarding trading in the Shares and
listed ETH derivatives via the ISG, from other exchanges who are
members or affiliates of the ISG, or with which the Exchange has
entered into a comprehensive surveillance sharing agreement.
Availability of Information
The Exchange also believes that the proposal promotes market
transparency in that a large amount of information is currently
available about ETH and will be available regarding the Trust and the
Shares. In addition to the price transparency of the CF Benchmarks
Index, the Trust will provide information regarding the Trust's ETH
holdings as well as additional data regarding the Trust.
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) the prior Business
Day's NAV per Share; (b) the prior Business Day's Nasdaq official
closing price; (c) calculation of the premium or discount of such
Nasdaq official closing Price against such NAV per Share; (d) data in
chart form displaying the frequency distribution of discounts and
premiums of the Nasdaq official closing price against the NAV per
Share, within appropriate ranges for each of the four previous calendar
quarters (or for the life of the Trust, if shorter); (e) the
prospectus; and (f) other applicable quantitative information. The NAV
per Share for the Trust will be calculated by the Trust Administrator
once a day and will be disseminated daily to all market participants at
the same time. Quotation and last sale information regarding the Shares
will be disseminated through the facilities of the relevant securities
information processor. Also, an estimated value that reflects an
estimated IIV will be disseminated. For more information on the IIV,
including the calculation methodology, see ``Intraday Indicative
Value'' above.
The IIV disseminated during the Exchange's Regular Market Session
should not be viewed as an actual real time update of the NAV per
Share, which will be calculated only once at the end of each trading
day. The IIV will be widely disseminated on a per Share basis every 15
seconds during the Exchange's Regular Market Session by one or more
major market data vendors. In addition, the IIV will be available
through online information services.
Quotation and last sale information for ether is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters, as well as CF Benchmarks. Information relating
to trading, including price and volume information, in ETH is available
from major market data vendors and from the exchanges on which ETH is
traded. Depth of book information is also available from ETH exchanges.
The normal trading hours for ETH exchanges are 24 hours per day, 365
days per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers.
In sum, the Exchange believes that this proposal is consistent with
the requirements of section 6(b)(5) of the Act, that this filing
sufficiently demonstrates that the e CME ETH Futures market represents
a regulated market of significant size, and that on the whole the
manipulation concerns previously articulated by the Commission are
sufficiently mitigated to the point that they are outweighed by
investor protection issues that would be resolved by approving this
proposal.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of section 6(b)(5) of the
Act.
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 purpose of the Act. The Exchange notes that the
proposed rule change rather will facilitate the listing and trading of
additional exchange-traded product that will enhance competition among
both market participants and listing venues, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-NASDAQ-2023-045 on the subject line.
Paper Comments
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-NASDAQ-2023-045. 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 (https://www.sec.gov/rules/sro.shtml). 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-NASDAQ-2023-045 and should
be submitted on or before May 20, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
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\53\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-09064 Filed 4-26-24; 8:45 am]
BILLING CODE 8011-01-P