[Federal Register Volume 89, Number 171 (Wednesday, September 4, 2024)]
[Notices]
[Pages 72146-72151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-19772]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100862; File No. SR-CBOE-2024-036]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Rule 4.3 to List and Trade 
Options on Ethereum Exchange-Traded Funds

August 28, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 19, 2024, Cboe Exchange, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 4.3. The text of the proposed rule change is provided in 
Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 4.3 regarding the criteria for 
underlying securities. Specifically, the Exchange proposes to amend 
Rule 4.3, Interpretation and Policy .06(a)(4) to allow the Exchange to 
list and trade options on Units \3\ that represent interests in the 
following exchange-traded products: the Fidelity Ethereum Fund (the 
``Fidelity Fund''), the 21Shares Core Ethereum ETF (the ``21Shares 
Fund''), the Invesco Galaxy Ethereum ETF (the ``Invesco Fund''), the 
Franklin Ethereum ETF (the ``Franklin Fund''), the VanEck Ethereum 
Trust (the ``VanEck Fund''), the Grayscale Ethereum Trust (the 
``Grayscale Fund''), the Grayscale Mini Ethereum Trust (the ``Grayscale 
Mini Fund''), the Bitwise Ethereum ETF (the ``Bitwise Fund''), and the 
iShares Ethereum Trust ETF (the ``iShares Fund and, collectively, the 
``Ethereum Funds''), designating them as ``Units'' deemed appropriate 
for options trading on the Exchange. Current Rule 4.3, Interpretation 
and Policy .06 provides that, subject to certain other criteria set 
forth in that Rule, securities deemed appropriate for options trading 
include Units that represent certain types of interests,\4\

[[Page 72147]]

including interests in certain specific trusts that hold financial 
instruments, money market instruments, or precious metals (which are 
deemed commodities).
---------------------------------------------------------------------------

    \3\ Rule 1.1 defines a ``Unit'' (which may also be referred to 
as an exchange-traded fund (``ETF'')) as a share or other security 
traded on a national securities exchange and defined as an NMS stock 
as set forth in Rule 4.3.
    \4\ See Rule 4.3, Interpretation and Policy .06(a), which 
permits options trading on Units that represent (1) interests in 
registered investment companies (or series thereof) organized as 
open-end management investment companies, unit investment trusts or 
similar entities that hold portfolios of securities and/or financial 
instruments including, but not limited to, stock index futures 
contracts, options on futures, options on securities and indexes, 
equity caps, collars and floors, swap agreements, forward contracts, 
repurchase agreements and reverse purchase agreements (the 
``Financial Instruments''), and money market instruments, including, 
but no limited to, U.S. government securities and repurchase 
agreements (the ``Money Market Instruments'') comprising or 
otherwise based on or representing investments in indexes or 
portfolios of securities and/or Financial Instruments and Money 
Market Instruments (or that hold securities in one or more other 
registered investment companies that themselves hold such portfolios 
of securities and/or Financial Instruments and Money Market 
Instruments); (2) interests in a trust or similar entity that holds 
a specified non-U.S. currency deposited with the trust or similar 
entity when aggregated in some specified minimum number may be 
surrendered to the trust by the beneficial owner to receive the 
specified non-U.S. currency and pays the beneficial owner interest 
and other distributions on deposited non-U.S. currency, if any, 
declared and paid by the trust (``Currency Trust Shares''); (3) 
commodity pool interests principally engaged, directly or 
indirectly, in holding and/or managing portfolios or baskets of 
securities, commodity futures contracts, options on commodity 
futures contracts, swaps, forward contracts and/or options on 
physical commodities and/or non-U.S. currency (``Commodity Pool 
Units''); (4) interests in the SPDR Gold Trust, the iShares COMEX 
Gold Trust, the iShares Silver Trust, the Aberdeen Standard Physical 
Silver Trust, the Aberdeen Standard Physical Gold Trust, the 
Aberdeen Standard Physical Palladium Trust, the Aberdeen Standard 
Physical Platinum Trust, the Sprott Physical Gold Trust or the 
Goldman Sachs Physical Gold ETF; or (5) an interest in a registered 
investment company (``Investment Company'') organized as an open-end 
management investment company or similar entity, that invests in a 
portfolio of securities selected by the Investment Company's 
investment adviser consistent with the Investment Company's 
investment objectives and policies, which is issued in a specified 
aggregate minimum number in return for a deposit of a specified 
portfolio of securities and/or a cash amount with a value equal to 
the next determined net asset value (``NAV''), and when aggregated 
in the same specified minimum number, may be redeemed at a holder's 
request, which holder will be paid a specified portfolio of 
securities and/or cash with a value equal to the next determined NAV 
(``Managed Fund Share'').
---------------------------------------------------------------------------

    The Ethereum Funds are Ethereum-backed commodity ETFs structured as 
trusts. Similar to any Unit currently deemed appropriate for options 
trading under Rule 4.3, Interpretation and Policy .06, the investment 
objective of each Ethereum Fund trust is for its shares to reflect the 
performance of Ethereum (less the expenses of the trust's operations), 
offering investors an opportunity to gain exposure to Ethereum without 
the complexities of Ethereum delivery. As is the case for Units 
currently deemed appropriate for options trading, an Ethereum Fund's 
shares represent units of fractional undivided beneficial interest in 
the trust, the assets of which consist principally of Ethereum and are 
designed to track Ethereum or the performance of the price of Ethereum 
and offer access to the Ethereum market.\5\ The Ethereum Funds provide 
investors with cost-efficient alternatives that allow a level of 
participation in the Ethereum market through the securities market. The 
primary substantive difference between Ethereum Funds and Units 
currently deemed appropriate for options trading are that Units may 
hold securities, certain financial instruments, and specified precious 
metals (which are deemed commodities), while Ethereum Funds hold 
Ethereum (which is also deemed a commodity).
---------------------------------------------------------------------------

    \5\ The trust may include minimal cash.
---------------------------------------------------------------------------

    The Exchange believes the Ethereum Funds satisfy the Exchange's 
initial listing standards for Units on which the Exchange may list 
options. Specifically, the Ethereum Funds satisfy the initial listing 
standards set forth in Rule 4.3, Interpretation and Policy .06(b), as 
is the case for other Units on which the Exchange lists options 
(including trusts that hold commodities). Rule 4.3, Interpretation and 
Policy .06 requires that Units must either (1) meet the criteria and 
standards set forth in Rule 4.3, Interpretation and Policy .01(a),\6\ 
or (2) be available for creation or redemption each business day from 
or through the issuer in cash or in kind at a price related to net 
asset value, and the issuer must be obligated to issue Units in a 
specified aggregate number even if some or all of the investment assets 
required to be deposited have not been received by the issuer, subject 
to the condition that the person obligated to deposit the investments 
has undertaken to deliver the investment assets as soon as possible and 
such undertaking is secured by the delivery and maintenance of 
collateral consisting of cash or cash equivalents satisfactory to the 
issuer, as provided in the respective prospectus. The Ethereum Funds 
satisfy Rule 4.3, Interpretation and Policy .06(b)(2), as they are all 
subject to this creation and redemption process.
---------------------------------------------------------------------------

    \6\ Rule 4.3, Interpretation and Policy .01 provides for 
guidelines to be by the Exchange when evaluating potential 
underlying securities for Exchange option transactions.
---------------------------------------------------------------------------

    While not required by the Rules for purposes of options listings, 
the majority of the Ethereum Funds satisfy the criteria and guidelines 
set forth in Rule 4.3, Interpretation and Policy .01. Pursuant to Rule 
4.3(a), a security (which includes a Unit) on which options may be 
listed and traded on the Exchange must be duly registered (with the 
Commission) and be an NMS stock (as defined in Rule 600 of Regulation 
NMS under the Securities Exchange Act of 1934, as amended (the 
``Act'')), and be characterized by a substantial number of outstanding 
shares that are widely held and actively traded.\7\ Each of the 
Ethereum Funds is an NMS Stock as defined in Rule 600 of Regulation NMS 
under the Act.\8\ The Exchange believes each Ethereum Fund is 
characterized by a substantial number of outstanding shares that are 
widely held and actively traded.
---------------------------------------------------------------------------

    \7\ The criteria and guidelines for a security to be considered 
widely held and actively traded are set forth in Rule 4.3, 
Interpretation and Policy .01, subject to exceptions.
    \8\ An ``NMS stock'' means any NMS security other than an 
option, and an ``NMS security'' means any security or class of 
securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting 
plan (or an effective national market system plan for reporting 
transaction in listed options). See 17 CFR 242.600(b)(64) 
(definition of ``NMS security'') and (65) (definition of ``NMS 
stock'').
---------------------------------------------------------------------------

    As of August 7, 2024, the Ethereum Funds had the following number 
of shares outstanding:

------------------------------------------------------------------------
                                                               Shares
                       Ethereum Fund                         outstanding
------------------------------------------------------------------------
Fidelity Fund.............................................    10,850,000
21Shares Fund.............................................       760,000
Invesco Fund..............................................       468,000
Franklin Fund.............................................     1,500,000
VanEck Fund...............................................     1,725,000
Grayscale Fund............................................   228,468,500
Grayscale Mini Fund.......................................   380,898,500
Bitwise Fund..............................................    12,370,000
iShares Fund..............................................    37,200,000
------------------------------------------------------------------------

    Despite the fact that these Ethereum Funds are in only their third 
week of trading (they began trading on July 23, 2024), five of these 
funds already have more than 7,000,000 shares outstanding, which is the 
minimum number of shares of a corporate stock that the Exchange 
generally requires to list options on that stock pursuant to Rule 4.3, 
Interpretation and Policy .01(a)(1). However, the Exchange believes 
shares outstanding (i.e., free float \9\), while commonly used to 
determine investable capacities of corporate stocks, the figure has 
little utility with respect to ETFs due to the market structure of 
ETFs. Proofing of ETF baskets, in addition to the efficiency of 
creation/redemption mechanisms, decouple concepts of ``floating'' ETF 
shares against the impacts of ETF liquidity to the liquidity of ETF 
constituents. While ETF market-makers may often limit the amount of 
floating ETF shares, primary market mechanisms enable virtually 
limitless capacity to create and redeem ETF shares on a daily 
basis.\10\ As evidenced during their brief time in market, the gross 
value of daily shares created or redeemed for each Ethereum Fund 
approximates its assets under management (``AUM'') as of July 24, 2024, 
which was as follows:
---------------------------------------------------------------------------

    \9\ All outstanding ETF shares are considered free float, as 
there are no restricted ETF shares or shares held by insiders, as is 
the case with respect to corporate stocks.
    \10\ This is the primary reasoning for why the Exchange may list 
options on ETFs as long as they are subject to the creation and 
redemption process and generally do not need to satisfy the criteria 
set forth in Interpretation and Policy .01.

[[Page 72148]]



------------------------------------------------------------------------
                    Ethereum fund                             AUM
------------------------------------------------------------------------
Fidelity Fund........................................          9,481,360
21Shares Fund........................................        148,080,600
Invesco Fund.........................................         37,197,280
Franklin Fund........................................         19,301,340
VanEck Fund..........................................          9,013,556
Grayscale Fund.......................................      8,040,436,000
Grayscale Mini Fund..................................      1,043,203,000
Bitwise Fund.........................................        230,788,700
iShares Fund.........................................        287,328,200
------------------------------------------------------------------------

    As a result, the Exchange believes this demonstrates that each 
Ethereum Fund is characterized by a substantial number of outstanding 
shares. Given how recently Ethereum Funds began trading, the Exchange 
does not have access to the number of beneficial holders of Ethereum 
Funds at this time. However, given the significant trading volumes the 
Ethereum Funds, the Exchange believes it is reasonable to expect that 
shares of all of the Ethereum Funds are characterized by a substantial 
number of outstanding shares that are widely held.
    The Exchange also believes each Ethereum Fund is characterized by a 
substantial number of outstanding shares that are actively traded. As 
of August 7, 2024, the total trading volume (by shares and notional) 
for each fund since they began trading on July 23, 2024 and the average 
daily volume (``ADV'') over the five-day period of August 2 through 
August 7, 2024 for each Ethereum Fund was as follows:

----------------------------------------------------------------------------------------------------------------
                                                             Trading volume    Trading volume
                       Ethereum fund                            (shares)        (notional $)      ADV  (shares)
----------------------------------------------------------------------------------------------------------------
Fidelity Fund.............................................        32,751,647  1,023,590,893.88      1,279,085.00
21Shares Fund.............................................         2,995,673     46,584,597.69        183,032.80
Invesco Fund..............................................         2,398,977     75,800,517.49        116,423.80
Franklin Fund.............................................         3,726,018     89,987,417.90        114,194.60
VanEck Fund...............................................         5,557,411    247,424,935.45        288,519.00
Grayscale Fund............................................       221,839,519  5,934,238,584.03      7,429,260.00
Grayscale Mini Fund.......................................       387,753,619  1,117,121,565.01     24,800,550.00
Bitwise Fund..............................................        27,454,355    638,820,845.28        806,202.19
iShares Fund..............................................       124,839,230  2,896,601,784.35      6,720,303.00
----------------------------------------------------------------------------------------------------------------

    As demonstrated above, despite the fact that Ethereum Funds have 
been trading for fewer than three weeks, the trading volume for each 
except one Ethereum Fund is higher (and several significantly higher) 
than 2,400,000 shares (and that one is only 1,023 shares below that 
number), which is the minimum 12-month volume the Exchange generally 
requires for a security in order to list options on that security as 
set forth in Rule 4.3, Interpretation and Policy .01. Additionally, 
from July 23 (the first day the Ethereum Funds began trading) through 
August 7, 2024, the ADV for each Ethereum Fund is in the top 25% of all 
ETFs that are currently trading. The Exchange believes this data 
demonstrates each Ethereum Fund is characterized by a substantial 
number of outstanding shares that are actively traded.
    Options on Ethereum Funds will be subject to the Exchange's 
continued listing standards set forth in Rule 4.4, Interpretation and 
Policy .06 for Units deemed appropriate for options trading pursuant to 
Rule 4.3, Interpretation and Policy .06. Specifically, Rule 4.4, 
Interpretation and Policy .06 provides that Units that were initially 
approved for options trading pursuant to Rule 4.3, Interpretation and 
Policy .06 shall be deemed not to meet the requirements for continued 
approval, and the Exchange shall not open for trading any additional 
series of option contracts of the class covering that such Units, if 
the Units cease to be an NMS stock or the Units are halted from trading 
in their primary market. Additionally, options on Units may be subject 
to the suspension of opening transactions in any of the following 
circumstances: (1) in the case of options covering Units approved for 
trading under Rule 4.3, Interpretation and Policy .06(b)(1), in 
accordance with the terms of paragraphs (a), (b), and (c) of Rule 4.4, 
Interpretation and Policy .01; (2) in the case of options covering 
Units approved for trading under Rule 4.3 Interpretation and Policy 
.06(b)(2) (as is the case for the Ethereum Funds), following the 
initial twelve-month period beginning upon the commencement of trading 
in the Units on a national securities exchange and are defined as an 
NMS stock, there are fewer than 50 record and/or beneficial holders of 
such Units for 30 or more consecutive trading days; (3) the value of 
the index or portfolio of securities, non-U.S. currency, or portfolio 
of commodities including commodity futures contracts, options on 
commodity futures contracts, swaps, forward contracts and/or options on 
physical commodities and/or financial instruments and money market 
instruments on which the Units are based is no longer calculated or 
available; or (4) such other event shall occur or condition exist that 
in the opinion of the Exchange makes further dealing in such options on 
the Exchange inadvisable.
    Options on each Ethereum Fund will be physically settled contracts 
with American-style exercise.\11\ Consistent with current Rule 4.5, 
which governs the opening of options series on a specific underlying 
security (including Units), the Exchange will open at least one 
expiration month for options on each Ethereum Fund \12\ at the

[[Page 72149]]

commencement of trading on the Exchange and may also list series of 
options on a Ethereum Fund for trading on a weekly,\13\ monthly,\14\ or 
quarterly \15\ basis. The Exchange may also list long-term equity 
option series (``LEAPS'') that expire from 12 to 180 months from the 
time they are listed.\16\
---------------------------------------------------------------------------

    \11\ See Rule 4.2, which provides that the rights and 
obligations of holders and writers are set forth in the Rules of the 
Options Clearing Corporation (``OCC''); and Equity Options Product 
Specifications January 3, 2024), available at Equity Options 
Specifications (cboe.com); see also OCC Rules, Chapters VIII (which 
governs exercise and assignment) and Chapter IX (which governs the 
discharge of delivery and payment obligations arising out of the 
exercise of physically settled stock option contracts).
    \12\ See Rule 4.5(b). The monthly expirations are subject to 
certain listing criteria for underlying securities described within 
Rule 4.3. Monthly listings expire the third Friday of the month. The 
term ``expiration date'' (unless separately defined elsewhere in the 
OCC By-Laws), when used in respect of an option contract (subject to 
certain exceptions), means the third Friday of the expiration month 
of such option contract, or if such Friday is a day on which the 
exchange on which such option is listed is not open for business, 
the preceding day on which such exchange is open for business. See 
OCC By-Laws Article I, Section 1. Pursuant to Rule 4.5(c), 
additional series of options of the same class may be opened for 
trading on the Exchange when the Exchange deems it necessary to 
maintain an orderly market, to meet customer demand or when the 
market price of the underlying stock moves more than five strike 
prices from the initial exercise price or prices. New series of 
options on an individual stock may be added until the beginning of 
the month in which the options contract will expire. Due to unusual 
market conditions, the Exchange, in its discretion, may add a new 
series of options on an individual stock until the close of trading 
on the business day prior to expiration.
    \13\ See Rule 4.5(d).
    \14\ See Rule 4.5(g).
    \15\ See Rule 4.5(e).
    \16\ See Rule 4.5(f).
---------------------------------------------------------------------------

    Pursuant to Rule 4.5, Interpretation and Policy .07, which governs 
strike prices of series of options on Units, the interval of strikes 
prices for series of options Ethereum Funds will be $1 or greater when 
the strike price is $200 or less and $5 or greater where the strike 
price is over $200.\17\ Additionally, the Exchange may list series of 
options pursuant to the $1 Strike Price Interval Program,\18\ the $0.50 
Strike Program,\19\ the $2.50 Strike Price Program,\20\ and the $5 
Strike Program.\21\ Pursuant to Rule 5.4, where the price of a series 
of a Ethereum Fund option is less than $3.00, the minimum increment 
will be $0.05, and where the price is $3.00 or higher, the minimum 
increment will be $0.10.\22\ Any and all new series of Ethereum Fund 
options that the Exchange lists will be consistent and comply with the 
expirations, strike prices, and minimum increments set forth in Rules 
4.5 and 5.4, as applicable.
---------------------------------------------------------------------------

    \17\ The Exchange notes that for options listed pursuant to the 
Short Term Option Series Program, the Monthly Options Series 
Program, and the Quarterly Options Series Program, Rules 4.5(d), 
(e), and (g) specifically sets forth intervals between strike prices 
on Quarterly Options Series, Short Term Option Series, and Monthly 
Options Series, respectively.
    \18\ See Rule 4.5, Interpretation and Policy .01(a).
    \19\ See Rule 4.5, Interpretation and Policy .01(b).
    \20\ See Rule 4.5, Interpretation and Policy .04.
    \21\ See Rule 4.5, Interpretation and Policy .01(f).
    \22\ If options on a Ethereum Fund are eligible to participate 
in the Penny Interval Program, the minimum increment will be $0.01 
for series with a price below $3.00 and $0.05 for series with a 
price at or above $3.00. See 5.4(d) (which describes the 
requirements for the Penny Interval Program).
---------------------------------------------------------------------------

    Ethereum Fund options will trade in the same manner as any other 
Unit options on the Exchange. The Exchange Rules that currently apply 
to the listing and trading of all Unit options on the Exchange, 
including, for example, Rules that govern listing criteria, expiration 
and exercise prices, minimum increments, position and exercise limits, 
margin requirements, customer accounts and trading halt procedures will 
apply to the listing and trading of Ethereum Funds on the Exchange in 
the same manner as they apply to other options on all other Units that 
are listed and traded on the Exchange, including the precious-metal 
backed commodity Units already deemed appropriate for options trading 
on the Exchange pursuant to current Rule 4.3, Interpretation and Policy 
.06(a)(4).
    Position and exercise limits for options on Units, including 
options on Ethereum Funds, are determined pursuant to Rules 8.30 and 
8.42, respectively. Position and exercise limits for Unit options vary 
according to the number of outstanding shares and the trading volumes 
of the underlying Unit over the past six months, where the largest in 
capitalization and the most frequently traded Units have an option 
position and exercise limit of 250,000 contracts (with adjustments for 
splits, re-capitalizations, etc.) on the same side of the market; and 
smaller capitalization Units have position and exercise limits of 
200,000, 75,000, 50,000 or 25,000 contracts (with adjustments for 
splits, re-capitalizations, etc.) on the same side of the market.\23\ 
The Exchange further notes that Rule 10.3, which governs margin 
requirements applicable to the trading of all options on the Exchange, 
including options on Units, will also apply to the trading of Ethereum 
Fund options.
---------------------------------------------------------------------------

    \23\ As Ethereum Funds do not currently trade, options on 
Ethereum Funds would be subject to the 25,000 option contract limit.
---------------------------------------------------------------------------

    The Exchange represents that the same surveillance procedures 
applicable to all other options on Units currently listed and traded on 
the Exchange will apply to options on Ethereum Funds, and that it has 
the necessary systems capacity to support the new option series. The 
Exchange believes that its existing surveillance and reporting 
safeguards are designed to deter and detect possible manipulative 
behavior which might potentially arise from listing and trading Unit 
options, including precious metal-commodity backed Unit options, as 
proposed. Also, the Exchange may obtain information from CME Group 
Inc.'s designated contract markets that are members of the Intermarket 
Surveillance Group related to any financial instrument that is based, 
in whole or in part, upon an interest in or performance of Ethereum, as 
applicable.
    The Exchange has also analyzed its capacity and represents that it 
believes the Exchange and OPRA have the necessary systems capacity to 
handle the additional traffic associated with the listing of new series 
that may result from the introduction of options on Ethereum Funds up 
to the number of expirations currently permissible under the Rules. 
Because the proposal is limited to Units on a single commodity, the 
Exchange believes any additional traffic that may be generated from the 
introduction of Ethereum Fund options will be manageable.
    The Exchange believes that offering options on Ethereum Funds will 
benefit investors by providing them with an additional, relatively 
lower cost investing tool to gain exposure to the price of Ethereum and 
hedging vehicle to meet their investment needs in connection with 
Ethereum -related products and positions. The Exchange expects 
investors will transact in options on Ethereum Funds in the unregulated 
over-the-counter (``OTC'') options market (if the Commission approves 
Ethereum Funds for exchange-trading),\24\ but may prefer to trade such 
options in a listed environment to receive the benefits of trading 
listing options, including (1) enhanced efficiency in initiating and 
closing out position; (2) increased market transparency; and (3) 
heightened contra-party creditworthiness due to the role of OCC as 
issuer and guarantor of all listed options. The Exchange believes that 
listing Ethereum Fund options may cause investors to bring this 
liquidity to the Exchange, would increase market transparency and 
enhance the process of price discovery conducted on the Exchange 
through increased order flow. The Units that hold financial 
instruments, money market instruments, or precious metal commodities on 
which the Exchange may already list and trade options are trusts 
structured in substantially the same manner as Ethereum Funds and 
essentially offer the same objectives and benefits to investors, just 
with respect to different assets. The Exchange notes that it has not 
identified any issues with the continued listing and trading of any

[[Page 72150]]

Unit options, including Units that hold commodities (i.e., precious 
metals) that it currently lists and trades on the Exchange.
---------------------------------------------------------------------------

    \24\ The Exchange understands from customers that investors have 
historically transacted in options on Units in the OTC options 
market if such options were not available for trading in a listed 
environment.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\25\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \26\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \27\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes that the proposal to list and 
trade options on Ethereum Funds will remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general, protect investors because offering options on Ethereum 
Funds will provide investors with an opportunity to realize the 
benefits of utilizing options on a Ethereum Fund, including cost 
efficiencies and increased hedging strategies. The Exchange believes 
that offering Ethereum Fund options will benefit investors by providing 
them with a relatively lower-cost risk management tool, which will 
allow them to manage their positions and associated risk in their 
portfolios more easily in connection with exposure to the price of 
Ethereum and with Ethereum-related products and positions. 
Additionally, the Exchange's offering of Ethereum Fund options will 
provide investors with the ability to transact in such options in a 
listed market environment as opposed to in the unregulated OTC options 
market, which would increase market transparency and enhance the 
process of price discovery conducted on the Exchange through increased 
order flow to the benefit of all investors. The Exchange also notes 
that it already lists options on other commodity-based Units,\28\ 
which, as described above, are trusts structured in substantially the 
same manner as Ethereum Funds and essentially offer the same objectives 
and benefits to investors, just with respect to a different commodity 
(i.e., Ethereum rather than precious metals) and for which the Exchange 
has not identified any issues with the continued listing and trading of 
commodity-backed Unit options it currently lists for trading.
---------------------------------------------------------------------------

    \28\ See Rule 4.3, Interpretation and Policy .06(a)(4).
---------------------------------------------------------------------------

    The Exchange also believes the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, because it is consistent with current 
Exchange Rules previously filed with the Commission. Options on 
Ethereum Funds satisfy the initial listing standards and continued 
listing standards currently in the Exchange Rules applicable to options 
on all Units, including Units that hold other commodities already 
deemed appropriate for options trading on the Exchange. Additionally, 
as demonstrated above, each Ethereum Fund is characterized by a 
substantial number of shares that are widely held and actively traded. 
Ethereum Fund options will trade in the same manner as any other Unit 
options--the same Exchange Rules that currently govern the listing and 
trading of all Unit options, including permissible expirations, strike 
prices and minimum increments, and applicable position and exercise 
limits and margin requirements, will govern the listing and trading of 
options on Ethereum Funds in the same manner.
    The Exchange believes the proposed position and exercise limits for 
the Ethereum Fund options are consistent with the Exchange Act, will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, protect investors 
and the public interest, because these position and exercise limits are 
designed to address potential manipulative schemes and adverse market 
impacts surrounding the use of options, such as disrupting the market 
in the security underlying the options. The proposed position and 
exercise limits are the same limits that apply to other ETF options, 
including other commodity ETF options. The Exchange believes proposed 
position and exercise limits balance the liquidity provisioning in the 
market against the prevention of manipulation, as they currently do for 
other equity options (including commodity ETF options). The Exchange 
believes the available supply in the markets of Ethereum is not 
relevant when establishing position limits for options on the Ethereum 
Funds, as what is held by an ETF has historically not been a relevant 
factor considered by the Commission when it has considered rule filings 
to list options on ETFS, including commodity ETFs. The Commission has 
previously stated:

    Since the inception of standardized options trading, the options 
exchanges have had rules imposing limits on the aggregate number of 
options contracts that a member or customer could hold or exercise. 
These rules are intended to prevent the establishment of options 
positions that can be used or might create incentives to manipulate 
or disrupt the underlying market so as to benefit the options 
position. In particular, position and exercise limits are designed 
to minimize the potential for mini-manipulations and for corners or 
squeezes of the underlying market. In addition, such limits serve to 
reduce the possibility for disruption of the options market itself, 
especially in illiquid options classes.\29\
---------------------------------------------------------------------------

    \29\ See Securities Exchange Act Release No. 39489 (December 24, 
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).

As the Commission itself notes, the position limits are ``intended to 
prevent the establishment of options positions that can be used . . . 
to manipulate or disrupt the underlying market'' (emphasis added). When 
the Commission previously approved Rules to list options on other 
commodity ETFs, the Commission did not require consideration of whether 
the available supply of those commodities should be considered when the 
Exchange established those position limits.\30\ The Exchange notes that 
position limits in the Exchange's Rules at that time were the same as 
they are today as set forth in Rule 8.30 (and as proposed to be 
applicable to options on the Ethereum Funds).
---------------------------------------------------------------------------

    \30\ See, e.g., Securities Exchange Act Release No. 57894 (May 
30, 2008), 73 FR 32061 (June 5, 2008) (SR-CBOE-2005-11) (approval 
order in which the Commission stated that the ``listing and trading 
of Gold Trust Options will be subject to the exchanges' rules 
pertaining to position and exercise limits and margin'').
---------------------------------------------------------------------------

    The Exchange represents that it has the necessary systems capacity 
to support the new Ethereum Fund options. The Exchange believes that 
its existing surveillance and reporting safeguards are designed to 
deter and detect possible manipulative behavior which might arise from 
listing and trading Unit options, including Ethereum Fund options.

[[Page 72151]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act as Ethereum Funds would need to 
satisfy the initial listing standards set forth in the Exchange Rules 
in the same manner as any other Unit before the Exchange could list 
options on them. Additionally, Ethereum Fund options will be equally 
available to all market participants who wish to trade such options. 
The Exchange Rules currently applicable to the listing and trading of 
options on Units on the Exchange will apply in the same manner to the 
listing and trading of all options on Ethereum Funds. Also, and as 
stated above, the Exchange already lists options on other commodity-
based Units.\31\
---------------------------------------------------------------------------

    \31\ See Rule 4.3, Interpretation and Policy .06(a)(4).
---------------------------------------------------------------------------

    The Exchange does not believe that the proposal to list and trade 
options on Ethereum Funds will impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. To the extent that the advent of Ethereum Fund 
options trading on the Exchange may make the Exchange a more attractive 
marketplace to market participants at other exchanges, such market 
participants are free to elect to become market participants on the 
Exchange. Additionally, other options exchanges are free to amend their 
listing rules, as applicable, to permit them to list and trade options 
on Ethereum Funds. The Exchange notes that listing and trading Ethereum 
Fund options on the Exchange will subject such options to transparent 
exchange-based rules as well as price discovery and liquidity, as 
opposed to alternatively trading such options in the OTC market.
    The Exchange believes that the proposed rule change may relieve any 
burden on, or otherwise promote, competition as it is designed to 
increase competition for order flow on the Exchange in a manner that is 
beneficial to investors by providing them with a lower-cost option to 
hedge their investment portfolios. The Exchange notes that it operates 
in a highly competitive market in which market participants can readily 
direct order flow to competing venues that offer similar products. 
Ultimately, the Exchange believes that offering Ethereum Fund options 
for trading on the Exchange will promote competition by providing 
investors with an additional, relatively low-cost means to hedge their 
portfolios and meet their investment needs in connection with Ethereum 
prices and Ethereum-related products and positions on a listed options 
exchange.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. by order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-CBOE-2024-036 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-CBOE-2024-036. 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-CBOE-2024-036 and should be 
submitted on or before September 25, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-19772 Filed 9-3-24; 8:45 am]
BILLING CODE 8011-01-P