[Federal Register Volume 89, Number 172 (Thursday, September 5, 2024)]
[Notices]
[Pages 72524-72535]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-19879]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100877; File No. SR-NYSEARCA-2024-70]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of the COtwo Advisors
Physical European Carbon Allowance Trust Under NYSE Arca Rule 8.201-E
(Commodity-Based Trust Shares)
August 29, 2024.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on August 19, 2024, NYSE Arca, Inc. (``NYSE Arca'' or
``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 self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the COtwo
Advisors Physical European Carbon Allowance Trust under NYSE Arca Rule
8.201-E (Commodity-Based Trust Shares). The proposed rule change is
available on the Exchange's website at www.nyse.com, 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 self-regulatory organization
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 those 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 parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
COtwo Advisors Physical European Carbon Allowance Trust (the
``Trust''), under NYSE Arca Rule 8.201-E, which governs the listing and
trading of Commodity-Based Trust Shares.\4\
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\4\ Commodity-Based Trust Shares are securities issued by a
trust that represent investors' discrete identifiable and undivided
beneficial ownership interest in the commodities deposited into the
trust.
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The Trust was formed as a Delaware statutory trust on January 12,
2023.\5\ The Trust has no fixed termination date. The Trust will not be
registered as an investment company under the Investment Company Act of
1940, as amended,\6\ and is not required to register under such act.
The Trust is not
[[Page 72525]]
a commodity pool for purposes of the Commodity Exchange Act, as
amended.\7\
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\5\ On May 12, 2023, the Trust filed with the Commission a
registration statement on Form S-1, as amended on January 16, 2024
and April 4, 2024 (File No. 333-271910) (the ``Registration
Statement'') under the Securities Act of 1933 (15 U.S.C. 77a) (the
``Securities Act''). The description of the operation of the Trust
herein is based, in part, on 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.
\6\ 15 U.S.C. 80a-1.
\7\ 17 U.S.C. 1.
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The sponsor of the Trust is COtwo Advisors LLC, a Delaware limited
liability company (``Sponsor''). State Street Bank and Trust Company
serves as the Trust's administrator (the ``Administrator'') to perform
various administrative, accounting and recordkeeping functions on
behalf of the Trust. Wilmington Trust serves as trustee of the Trust
(the ``Trustee''). State Street Bank and Trust Company serves as the
Trust's transfer agent (the ``Transfer Agent'') and as custodian of the
Trust's cash, if any (``Cash Custodian'').\8\
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\8\ The Cash Custodian is responsible for holding the Trust's
cash as well as receiving and dispensing cash on behalf of the
Trust. Deposits of cash held by the Cash Custodian will be used in
connection with the purchase of an applicable amount of EUAs for
creations and redemptions of Creation Units and in connection with
the payment of Trust expenses.
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The Exchange represents that the Shares will satisfy the
requirements of NYSE Arca Rule 8.201-E and thereby will qualify for
listing on the Exchange.
Operation of the Trust \9\
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\9\ The description of the operation of the Trust, the Shares,
and the carbon credit industry contained herein are based, in part,
on the Registration Statement. See note 5, supra.
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The investment objective of the Trust will be for the Shares to
reflect the performance of the price of EU Carbon Emission Allowances
for stationary installations (``EUAs''), less the Trust's expenses. The
Trust intends to achieve its objective by investing all of its assets
in EUAs on a non-discretionary basis (i.e., without regard to whether
the value of EUAs is rising or falling over any particular period).
Shares of the Trust will represent units of fractional undivided
beneficial interest in and ownership of the Trust. The Trust's only
ordinary recurring expense will be the Sponsor's annual fee. The Trust
will not hold any assets other than EUAs and cash. The Trust may
purchase or sell EUAs in connection with the creation or redemption of
Creation Units by Authorized Participants, as described below. In
addition to selling EUAs to distribute cash to Authorized Participants
redeeming Shares, the Trust may sell EUAs to pay the Sponsor's annual
fee. All EUAs will be held in the Union Registry (defined below).
The Trust will not invest in futures, options, options on futures,
or swap contracts. The Trust will not hold or trade in commodity
futures contracts, ``commodity interests,'' or any other instruments
regulated by the Commodity Exchange Act.
The Trust is not a proxy for investing in EUAs. Rather, the Shares
are intended to provide a cost-effective means of obtaining investment
exposure through the securities markets that is similar to an
investment in EUAs. Specifically, the Shares are intended to constitute
a simple and cost-efficient means of gaining investment benefits
similar to those of holding EUAs directly, by providing investors an
opportunity to participate in the EUA market through an investment in
the Shares, instead of the traditional means of purchasing and storing
EUAs. Trust shareholders will be exposed to the risks of investing in
EUAs, as well as to additional risks that are unrelated to EUAs. For
example, the public trading price at which an investor buys or sells
Shares during the day from their broker may be different from the value
of the Trust's holdings. Price differences may relate primarily to
supply and demand forces at work in the secondary trading market for
the Trust's Shares that are closely related to, but not identical to,
the same forces influencing the prices of EUAs, cash and cash
equivalents that constitute the Trust's assets. In addition, EUAs will
have to be sold to pay Trust expenses that would not be associated with
an investment in EUAs. Additional risks related to the Trust's
structure, the Sponsor's management of the Trust, and the tax treatment
of an investment in Shares are further in the Registration Statement.
EUAs and the EUA Industry
Description of EU Emissions Trading Scheme
According to the Registration Statement, the European Union
Emissions Trading System (``EU ETS'') is a ``cap and trade'' system
that caps the total volume of greenhouse gas (``GHG'') emissions from
installations and aircraft operators responsible for around 40% of
European Union (``EU'') GHG emissions.\10\ The EU ETS is the largest
cap and trade system in the world and covers more than 11,000 power
stations and industrial plants in 31 countries, and flights between
airports of participating countries. The EU ETS is administered by the
EU Commission, which issues a predefined amount of EUAs through
auctions or free allocation. An EUA represents the right to emit one
metric ton of carbon dioxide equivalent into the atmosphere by
operators of stationary installations (``Covered Entities''). By the
end of April each year, all Covered Entities are required to surrender
EUAs equal to the total volume of actual emissions from their
installation for the last calendar year. EU ETS operators can buy or
sell EUAs to achieve EU ETS compliance.
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\10\ There are two types of EU emissions allowance: (i) general
allowances for stationary installations, or EUA; and (ii) allowances
for the aviation sector (``EUAA''). The Trust will hold EUAs only.
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In 2012, EU ETS operations were centralized into a single EU
registry operated by the EU Commission (the ``Union Registry''), which
covers all countries participating in the EU ETS. According to the
Registration Statement, the Union Registry is an online database that
holds accounts for all entities covered by the EU ETS as well as for
participants (such as the Trust) not covered under the EU ETS. The
Union Registry can be accessed online in a similar manner to online
banking systems. An account must be opened in the Union Registry by a
legal or natural person before being able to participate in the EU ETS
and transact in EUAs. The European Union Transaction Log (``EUTL'')
\11\ checks, records and authorizes all transactions that take place
between accounts in the Union Registry to ensure that transfers are in
accordance with the EU ETS rules. The Union Registry is at all times
responsible for holding the EUAs. All EUAs are held in the Union
Registry.
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\11\ The EUTL is a central transaction log that checks and
records all transactions taking place within the EU ETS. It is run
by the European Commission and provides an easy access to emission
trading data contained in the EUTL. See https://www.eea.europa.eu/data-and-maps/dashboards/emissions-trading-viewer-1.
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Major Holders and Allowance Use Cases
According to the Registration Statement, while there is limited
publicly available data on individuals or individual organizations'
holdings in physical carbon allowances, carbon allowances are primarily
held for three different use cases:
(a) Complying with the EU ETS: Companies that need to surrender
allowances under the EU ETS hold allowances to surrender them annually.
These positions are typically built over time and ultimately
surrendered at time of compliance. Therefore, the largest emitters in
the EU ETS hold a significant amount of allowances, which include
entities such as large utilities with a substantial share of fossil
fuel fired power plants, cement companies, steel producers, chemical
producers, oil and gas majors and airlines.
(b) Providing financial services for hedging purposes or
speculation, such as clearing houses for the European Energy Exchange
or the Intercontinental Exchange, or banks holding allowances for their
clients.
[[Page 72526]]
(c) Trading on and speculating around price moves, using physical
emission allowances. This can take many forms, including ``yield
trades'', which includes holding a physical allowance and selling an
EUA future at a premium to gain the yield in the forward curve; or
outright positions for short term or long term speculation.
In addition to holding physical allowances, there is a liquid
secondary futures and options market that is primarily used for hedging
future emissions or speculating.
Trading Location
According to the Registration Statement, the EU ETS is linked to
small emissions trading systems in Europe (Norway, Switzerland, Iceland
and Liechtenstein), but not to any other major cap and trade markets.
Therefore, allowances handed out in the EU ETS are not transferable to
any registry outside of the EU ETS and cannot be used for compliance in
any other cap and trade market.
There are a number of other trading systems globally, and like the
EU ETS, no allowances of any of these systems can be used in any other
system:
(a) Western Climate Initiative (WCI): The State of California and
the Canadian province Quebec created a linked cap and trade market,
that covers >80% of emissions.
(b) Regional Greenhouse Gas Initiative (RGGI): a group of US east
coast states created a linked market that covers power generators only.
(c) The China National ETS: Technically not a cap and trade scheme
(as the amount of allowances is not fixed but calculated according to
historic production of units).
(d) South Korea ETS: A comprehensive market covering the majority
of Korean emissions.
Pricing of Allowances and Trading Volume
According to the Registration Statement, there are currently two
primary avenues for trading EUAs: a primary market and a secondary
market. The primary market involves participation in a regularly
scheduled auction. The secondary market involves transactions between
buyers and sellers on regulated markets. The contracts offered for
trading are the following (1) instruments with a daily expiry,
including spot EUAs and the Daily EUA Future (as defined below), (2)
futures contracts with various maturities; and (3) options on futures
contracts. There are also over-the-counter transactions, but they
comprise a negligible percentage of transactions.
The spot and futures markets for EUAs have existed since 2005 after
the formal launch of the EU ETS on January 1, 2005. Spot EUA contracts
are traded exclusively on the European Energy Exchange AG
(``EEX''),\12\ and futures contracts and options on futures contracts
are traded on EEX, ICE Endex Markets B.V. (``ICE Endex'') \13\ and
Nasdaq Oslo, although the latter's market share is marginal.
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\12\ EEX is an exchange under the German Exchange Act and a
Regulated Market (``RM''), as defined in the Markets in Financial
Instruments Directive (Directive 2014/65/EC) (``MIFID II''). As a RM
for spot and derivatives transactions, EEX is supervised by the
Saxon State Ministry for Economic Affairs, Labour and Transport (the
``Exchange Supervisory Authority''). The Exchange Supervisory
Authority is in charge of the legal supervision of EEX and of market
supervision of the trading participants according to the German
Exchange Act. The members of EEX are supervised by the Federal
Financial Supervisory Authority (BaFin). All trading participants
are required to comply with the market behavior at the spot and
derivatives markets of all exchange participants is supervised on a
daily basis by the Market Surveillance Office, an independent body
of the exchange according to Section 7 of the German Exchange Act.
See https://www.esma.europa.eu/sites/default/files/EEX_1.pdf. See
also Rules and Regulations at https://www.eex.com/en/markets/trading-ressources/rules-and-regulations.
\13\ ICE Endex is regulated in the Netherlands by the Dutch
Authority for the Financial Markets (``AFM'') as a RM, as defined in
MIFID II, which is implemented in Dutch Act on Financial Supervision
(``DFSA''). The license as a RM is obtained under Section 5:26(1) of
the DFSA, resulting in an authorization by the Minister of Dutch
Ministry of Finance to operate a RM and supervised by the AFM. In
the UK, ICE Endex is a Recognized Overseas Investment Exchange by
the Financial Conduct Authority. See https://www.ice.com/endex/
regulation#:~:text=The%20Dutch%20Authority%20for%20Consumers,energy%2
0industry%20and%20wholesale%20trading. ICE Endex is also recognized
by the CFTC as an authorized Foreign Board of Trade. See https://www.cftc.gov/sites/default/files/idc/groups/public/@otherif/documents/ifdocs/orgiceeregorder170110.pdf.
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According to the Registration Statement, the EUA markets are
generally liquid. The classifications for market participants include
five basic categories--(1) investment firms or credit institutions, (2)
investment funds, (3) other financial institutions, (4) operators with
compliance obligations and (5) commercial undertakings which are non-
financial firms without compliance obligations.\14\ According to the
European Union Transaction Log, there are over 18,773 registry
accounts.\15\ The number of participants in the market have a direct
bearing on the quality of trading. An Oxera report indicates that as
the number of participants trading EUA futures has increased
consistently since January 2017, relative spreads, calculated as the
average quoted spread divided by the closing price, have decreased
significantly--from just under 0.4% in January 2017 to roughly 0.06% in
October 2021.\16\ In a February 2023 publication, Refinitiv estimated
that approximately 9.27 billion EUAs were traded across all markets in
2022, amounting to approximately [euro]751 billion.\17\ Out of the
total EUA market, approximately 487 million EUAs (amounting to
[euro]38.5 billion) were attributable to the EUA primary (auction)
market, 8.45 billion EUAs ([euro]685.3 billion) were attributable to
the EUA secondary market and 335 million EUAs ([euro]27.3 billion) were
attributable to over-the-counter (``OTC'') transactions. In this
context, the secondary market includes (1) the EEX spot EUA market, (2)
the Daily EUA Futures market, (3) the markets for other EUA futures
contracts (together with Daily EUA Futures, ``EUA Futures''), and (4)
options contracts on EUA Futures. Data regarding each of the trading of
each of these instruments is provided below. As of January 2023, the
secondary market had average daily trading volume of [euro]2 billion,
with the majority of the liquidity in the daily futures market as
described in more detail below. EUA auctions are held on a near-daily
basis throughout the year, other than between mid-December to mid-
January, when auctions are paused. Twenty-eight countries (25 EU member
states plus Liechtenstein, Norway, and Iceland) have agreed to use EEX
to conduct their regularly scheduled auctions. Germany and Poland have
opted out of the common auction but also utilize the EEX for auctions.
Hence, EUA auctions take place exclusively on EEX. These auctions take
place on a regularly scheduled basis; the number of allowances being
auctioned is disclosed on a schedule prior to auction. Prices achieved
in these auctions are published on various publicly-accessible
websites, including the European Commission's primary website.
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\14\ See esma70-445-
38_final_report_on_emission_allowances_and_associated_derivatives.pdf
(europa.eu).
\15\ See https://ec.europa.eu/clima/ets/.
\16\ Carbon trading in the European Union: An economic
assessment of market functioning in 2021, Oxera, p. 42 (February 15,
2022); available at https://www.oxera.com/wp-content/uploads/2022/02/Oxera-EU-carbon-trading-report-3.pdf.
\17\ See ``Review of Carbon Markets in 2022'' (February 2023):
available at https://www.refinitiv.com/content/dam/marketing/en_us/documents/gated/reports/carbon-market-year-in-review-2022.pdf. The
report presents Refinitiv's assessment of the world's major carbon
markets in 2022 and the total EUA market size includes spot,
auctions and futures.
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Below is a discussion of the secondary markets for EUAs and
associated derivatives. The Trust will
[[Page 72527]]
only hold EUAs, and will not hold any of the related derivatives.
Instruments With a Daily Expiry
Instruments with daily expiry include spot EUAs traded on the EEX
and the Daily EUA Future traded on ICE Endex. The Exchange notes that
the settlement and economic outcome for a spot purchase on the EEX and
a same day futures purchase on the ICE Endex are identical (as further
detailed below). In fact, the European Securities Markets Authority
(``ESMA''), in its ``Final Report: Emission Allowances and Associated
Derivatives,'' uses the term ``spot'' EUAs to include both spot EUAs
traded on EEX and the Daily EUA Future traded on ICE Endex.\18\
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\18\ See esma70-445-
38_final_report_on_emission_allowances_and_associated_derivatives.pdf
(europa.eu).
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Spot EUA Market
As noted above, spot EUA contracts are traded exclusively on the
EEX. The current value (spot price) for a EUA is greatly influenced by
a number of factors, including regulatory changes, world events and
general levels of economic activity. The trading hours for spot EUAs on
EEX are 8:00 a.m. to 6:00 p.m. Central European Time (``C.E.T.''), and
trade registrations are possible until 6:45 p.m. C.E.T. Trades
concluded before 4:00 p.m. C.E.T. are settled on the next business day,
or T+1, while trades after 4:00 p.m. C.E.T. are settled on the day
after the first business day, or T+2. In the twelve-month period ended
July 15, 2024, the average daily, monthly and annual trading volumes of
spot EUAs on the EEX was 156, 3,247 and 38,968 round lots of 1000 EUAs,
respectively. Over the same period, spot EUAs traded in the secondary
market on EEX at their highest volume of 5,010 round lots of EUAs on
December 1, 2023, and their lowest volume of 0 EUAs on four different
occasions. The EEX calculates and publishes each trading day an index
(the ``EUA End of Day Index'') reflecting the end of day price of EUAs
traded in the secondary market on EEX.\19\
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\19\ The EUA End of Day Index methodology is available at
https://www.eex.com/fileadmin/EEX/Downloads/Trading/Specifications/Indeces/DE/20211005_Index_Description_v010.pdf.
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Daily EUA Futures
Most liquidity in the secondary market is achieved by trading
futures contracts. These contracts have expiration going out as far as
2030. A single day futures contract on EUAs is exclusively traded on
the ICE Endex (the ``Daily EUA Future''), which settles each day at the
close of trading.\20\ The Daily EUA Future is a deliverable contract
where each person with a position open at cessation of trading is
obliged to make or take physical delivery of EUAs upon the expiration
of the contract at the end of each trading day. Settlement of the Daily
EUA Future does not occur through cash transactions. Each Daily EUA
Future represents one lot of 1,000 EUAs, with each EUA providing an
entitlement to emit one ton of carbon dioxide equivalent gas.
Generally, Daily EUA Futures trade on ICE Endex from approximately 2:00
a.m. Eastern Time (``E.T.'') to approximately 12:00 p.m. E.T. The
settlement price is fixed each business day and is published by the
exchange at approximately 12:15 E.T. Final cash settlement occurs the
first business day following the expiry day. In the twelve-month period
ended July 15, 2024, the average daily, monthly and annual trading
volumes of Daily EUA Futures was approximately 3,688, 76,842 and
922,094, respectively, which represents trading volumes of 3,688,000,
76,842,000 and 922,094,000 EUAs, respectively. Over the same period,
Daily EUA Futures traded at their highest volume of 27,749 on April 17,
2024, representing 27,749,000 EUAs, and their lowest volume of 230 on
August 11, 2023, representing 230,000 EUAs.
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\20\ All references to the ``Daily EUA Future'' refer to the
single day EUA futures contract traded on ICE Endex. NASDAQ Oslo
also offers a single day futures contract on EUAs, but the contract
is not traded.
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Comparison of Spot EUA Market and Daily EUA Futures Market
The daily EUA End of Day Index value can be expected to be
substantially identical to the daily settlement price of the Daily EUA
Future. The comparison below shows a 99.8% correlation between the
movements of the two values over the five years from May 23, 2019
through May 23, 2024.
[GRAPHIC] [TIFF OMITTED] TN05SE24.000
Additionally, the chart below illustrates how closely the Daily EUA
Future, in fact, reflects the EUA spot price during the trading day.
This chart shows the prices in continuous trading of EUAs on the EEX
and the Daily EUA Futures on ICE Endex, in EUR/tCO2 from January 2018
to January 2022. No major differences can be observed, with an average
absolute difference of [euro]0.015 between the daily settlement prices
for EUAs on the EEX and ICE Endex.
[[Page 72528]]
[GRAPHIC] [TIFF OMITTED] TN05SE24.001
(https://www.esma.europa.eu/sites/default/files/library/esma70-445-38_final_report_on_emission_allowances_and_associated_derivatives.pdf
:p37)
Other EUA Futures Contracts
EEX offers monthly EUA futures contracts for the current and next
two months unless a quarterly or December future expires at that
month's maturity date; quarterly futures for the current and next 11
quarters unless a December future expires at that quarter's maturity
date; and yearly, or December, futures for the next 8 years which
mature in December of each respective year. ICE Endex offers up to
seven December futures contracts, nine quarterly futures contracts,
three August futures contracts and two monthly futures contracts.
Nasdaq Oslo offers a quarterly futures contract over a rolling six year
period. There is no material trading volume in EUA Futures on Nasdaq
Oslo.
In each market, the predominant futures contracts traded were those
expiring in December 2024 and December 2025. For the twelve-month
period ended July 24, 2024, the average daily trading volumes and
annual volumes of the EUA Futures expiring in December 2024 and
December 2025 were as follows:
July 24, 2023 Through July 24, 2024
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ICE Endex EEX
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Average daily Total trading Average daily Total trading
trading volume volume (each trading volume volume (each
(each contract contract (each contract contract
represents 1,000 represents 1,000 represents 1,000 represents 1,000
EUAs) EUAs) EUAs) EUAs)
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December 2024 EUA Future............ 31,989 4,900,021 952 244,574
December 2025 EUA Future............ 3,463 500,792 195 50,164
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Options on EUA Futures Contracts
Options on EUA futures contracts are also traded on EEX and ICE
Endex for the December futures contracts. These options contracts are
only traded in de minimis amounts. For example, on July 24, 2024, there
was no trading of options contracts on EUA Futures on either the EEX or
ICE Endex.
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous Commodity-Based Trust Shares,
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 and that this filing
sufficiently demonstrates that ICE Endex is a regulated market of
significant size for trading EUAs and that any manipulation concerns
are sufficiently mitigated to the point that they are outweighed by
investor protection issues that would be resolved by approving this
proposal.
Designed To Prevent Fraudulent and Manipulative Acts and Practices
The Exchange believes that the proposal is designed to prevent
fraudulent and manipulative acts and practices and to protect investors
and the public interest, consistent with Section 6(b)(5) of the Act
because (1) the Exchange has entered into a comprehensive surveillance-
sharing agreement (``CSSA'') with a regulated market of ``significant
size'' and (2) there are sufficient ``other means to prevent fraudulent
and manipulative acts and practices.''
Comprehensive Surveillance-Sharing Agreement
The Commission has explained that a proposal could satisfy the
requirements
[[Page 72529]]
of the Act in the first instance by demonstrating that the listing
exchange has entered into a CSSA with a regulated ``market of
significant size'' relating to the underlying assets.\21\ With respect
to the Trust, the underlying assets are EUAs. The relevant analysis,
therefore, is whether the Exchange has a CSSA with a regulated market
of significant size related to EUAs. The Commission has further stated
that ``[c]onsistent with the discussion of `significant market' . . . ,
the Commission has not previously, and does not now, require that [a]
listing exchange be able to enter into a surveillance-sharing agreement
with each regulated spot or derivatives market relating to an
underlying asset, provided that the market or markets with which there
is such an agreement constitute a `significant market.' '' \22\
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\21\ See Securities Exchange Act Release No. 88284 (February 26,
2020), 85 FR 12595 (March 3, 2020) (SR-NYSEArca-2019-39) (Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1,
to Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares) and
to List and Trade Shares of the United States Bitcoin and Treasury
Investment Trust Under NYSE Arca Rule 8.201-E).
\22\ See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018) (Order Setting Aside Action by
Delegated Authority and Disapproving a Proposed Rule Change, as
Modified by Amendments No. 1 and 2, to List and Trade Shares of the
Winklevoss Bitcoin Trust) (the ``Winklevoss Order'').
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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 the underlying assets 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.\23\ Comprehensive surveillance-sharing agreements ``provide
a necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a manipulation
if it were to occur.'' \24\ 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.\25\
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\23\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998),
63 FR 70952, 70959 (Dec. 22, 1998).
\24\ Id. See also Winklevoss Order, 83 FR at 37594.
\25\ See Winklevoss Order, 83 FR at 37592-93 (discussing Letter
from Brandon Becker, Director, Division of Market Regulation,
Commission, to Gerard D. O'Connell, Chairman, Intermarket
Surveillance Group (June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm).
---------------------------------------------------------------------------
The ICE Endex Futures Market Is a Regulated Market
As discussed more below, ICE Endex is subject to the EU regulatory
framework for EUA contracts and EUA derivatives. The EU regulatory
framework includes the Markets in Financial Instruments Directive and
Regulation (``MiFID II'' and ``MiFIR''), the Market Abuse Regulation
(``MAR'') and the European Market Infrastructure Regulation (``EMIR'').
MiFID II and MiFIR together is a framework governing investment firms,
trading venues, data reporting service providers and non-EU investment
firms that provide investment services in the EU. The MAR prohibits
insider dealing, unlawful disclosure of inside information and market
manipulation and provides broad powers to the national competent
authorities (``NCAs'') for detection and prosecution of violations.
EMIR regulates OTC derivatives transactions, central counterparties and
trade repositories.
The ICE Endex Futures Market Is a Market of Significant Size
In the Winklevoss Order, the Commission stated that the term
``significant market'' or ``market of significant size'' includes a
market (or group of markets) as to which (1) there is a reasonable
likelihood that a person attempting to manipulate the Trust would also
have to trade on that market to successfully manipulate the Trust, so
that a surveillance-sharing agreement would assist in detecting and
deterring misconduct, and (2) it is unlikely that trading in the Trust
would be the predominant influence on prices in that market.\26\ The
Commission explained that this definition is illustrative and not
exclusive, and that there could be other types of ``significant
markets'' and ``markets of significant size.'' \27\
---------------------------------------------------------------------------
\26\ See Winklevoss Order, 83 FR at 37594.
\27\ Id.
---------------------------------------------------------------------------
Any Manipulator Would Have To Trade on ICE Endex
The first prong of the analysis addresses whether the surveillance-
sharing agreement on which the fund's listing exchange proposes to rely
would assist in detecting and deterring fraudulent or manipulative
misconduct related to the assets held by the fund. In the present
proposal, the Trust's only non-cash holdings will be EUAs. The
predominant market for trading EUA instruments with daily expiry is the
ICE Endex Daily EUA Futures market, with de minimis secondary market
trading taking place on EEX or over-the-counter. The EEX's primary role
in the EUA ecosystem is to serve as the venue for the daily auctions of
EUAs.
The regulated market of significant size test does not require that
the spot EUA 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, if the ICE Endex Daily
EUA Futures market is not viewed as the market for spot EUAs, the ICE
Endex EUA Futures market more broadly is an appropriate market to
consider in determining whether there is a related regulated market of
significant size.
ICE Endex is the only market for trading Daily EUA Futures and, as
noted above, for the twelve-months ended July 15, 2024, the average
daily trading volume of Daily EUA Futures on the ICE Endex was 3,688
contracts, representing 3,688,000 EUAs, whereas the average daily
trading volume on the EEX was 156 round lots, representing 156,000
EUAs. Therefore, over that one year period, approximately 96% of all
secondary market trading of EUA spot instruments with daily expiry
occurred on the ICE Endex (which, as described above, includes spot
EUAs and Daily EUA Futures). With respect to all EUA based derivatives,
ICE Endex accounts for approximately 85% of the EUA trading volume and
EEX accounts for approximately 15%.\28\
---------------------------------------------------------------------------
\28\ See esma70-445-
38_final_report_on_emission_allowances_and_associated_derivatives.pdf
(europa.eu).
---------------------------------------------------------------------------
Given the size of the ICE Endex futures markets, especially the
Daily EUA Futures market, the Sponsor believes such markets meet the
Commission's definition of ``significant market'' because there is a
reasonable likelihood that a person attempting to manipulate the Trust
would also have to
[[Page 72530]]
trade on that market to successfully manipulate the Trust, since
arbitrage between the derivative and spot markets would tend to counter
an attempt to manipulate the spot market alone. Arbitrageurs have
access to both the EEX and ICE Endex and any attempt to manipulate one
market that causes a difference between the EUA spot price and the
Daily EUA Futures price will quickly be exploited, thus maintaining the
correlation between EEX and ICE Endex. Therefore, any attempt to
manipulate the spot EUA market alone would be impossible because
arbitrage would correct any movements in the spot market to bring the
prices of spot EUAs back in line with the settlement price of the Daily
EUA Future. Therefore, any person attempting to manipulate the Trust
Shares would also have to trade in the EUA Futures market to manipulate
the spot and futures markets in tandem.\29\
---------------------------------------------------------------------------
\29\ The Commission has granted several prior proposals to list
and trade shares of physical commodity-based exchange-traded
products, noting in every case that there was at least one regulated
market of significant size for trading futures in the underlying
commodity--whether gold, silver, platinum, palladium or copper--and
the product's listing exchange has entered into surveillance-sharing
agreements with, or held Intermarket Surveillance Group (``ISG'')
membership in common with, that market. See Securities Exchange Act
Release Nos. 61220 (December 22, 2009), 74 FR 68895, 68896 (December
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; 61219 (December 22, 2009), 74
FR 68886, 68887-88 (December 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;
62692 (August 11, 2010), 75 FR 50789, 50790 (August 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; 62875
(September 9, 2010), 75 FR 56156, 56158 (September 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; 63464 (December 8,
2010), 75 FR 77926, 77928 (December 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; 68430 (December
13, 2012), 77 FR 75239, 75240-41 (December 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; 71378 (January 23, 2014), 79 FR 4786, 4786-87 (January
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.'').
---------------------------------------------------------------------------
The Trust Is Unlikely To Be the Predominant Influence on Price
It is unlikely that trading in the Trust Shares would be the
predominant influence on Daily EUA Futures prices traded on ICE Endex
for a number of reasons, including the significant volume in and size
of the EUA daily expiry market (meaning the Daily EUA Futures market,
in effect). The total EUA market size is approximately [euro]751
billion with approximately [euro]64.1 billion of that attributable to
the Daily EUA Futures market. The daily average trading volume for EUAs
across the secondary market is approximately [euro]2 billion, with
approximately [euro]264.8 million attributable to trading in the Daily
EUA Futures market. The Trust has not yet launched and cannot predict
its future inflows; however, given the size of the Daily EUA Futures
market and the EUA market, as a whole, the Sponsor does not anticipate
that the Trust will have available capital to buy and sell EUAs in an
amount that would move the EUA market or that investors would be able
to trade Trust Shares at such a volume as to influence Daily EUA
Futures prices on ICE Endex. Additionally, the trading hours for the
ICE Endex (i.e., EUA Futures market) are approximately 2:00 a.m. E.T.
to approximately 12:00 p.m. E.T. The majority of this time period (7.5
hours) is outside of the Trust's trading hours of 9:30 a.m. E.T. to
4:00 p.m. E.T. As such, it is unlikely that trading in the Trust's
Shares would be the primary influencer of the EUA Futures prices traded
on ICE Endex, because the ICE Endex is actively traded for 7.5 hours
during which the Trust Shares cannot be traded.
Other Means To Prevent Fraudulent and Manipulative Acts and Practices
In addition to Exchange's CSSA with ICE Endex, there are other
mechanisms in place to deter and detect misconduct across both the EUA
spot and derivatives markets. Both EEX and ICE Endex are subject to the
EU regulatory framework for EUA contracts and EUA derivatives. The EU
regulatory framework includes the Markets in Financial Instruments
Directive and Regulation (``MiFID II'' and ``MiFIR''), the Market Abuse
Regulation (``MAR'') and the European Market Infrastructure Regulation
(``EMIR'').\30\ MiFID II and MiFIR together is a framework governing
investment firms, trading venues, data reporting service providers and
non-EU investment firms that provide investment services in the EU.\31\
The MAR prohibits insider dealing, unlawful disclosure of inside
information and market manipulation and provides broad powers to the
national competent authorities (``NCAs'') for detection and prosecution
of violations.\32\ EMIR regulates OTC derivatives transactions, central
counterparties and trade repositories.\33\ ESMA is the EU's overall
financial markets regulator that has supervisory authority over the
NCAs.\34\ Under the EU regulatory framework, there are three lines of
defense against market abuse.\35\ At the firm level (first line), firms
are required to have systems and procedures in place to ensure that
abusive trading is detected and reported to NCAs. At the market
operator, investment firm and trading venue level (second line), these
entities are required to identify and report suspicious transactions
and maintain policies and procedures to prevent market abuse.
Additionally, exchanges such as EEX and ICE Endex are required to
report information to the relevant authorities on a daily basis. At the
NCA level (third line), NCAs have market surveillance systems in place
to monitor markets and
[[Page 72531]]
identify and investigate suspicious transactions. NCAs have broad
enforcement power and cooperate with each other and ESMA to obtain the
information needed for optimal surveillance and in order to prosecute
violations.\36\ Exchanges (such as EEX and ICE Endex) and governmental
authorities share information and communicate frequently regarding
monitoring activities.\37\
---------------------------------------------------------------------------
\30\ Carbon trading in the European Union: An economic
assessment of market functioning in 2021, Oxera, p. 26 (February 15,
2022); available at https://www.oxera.com/wp-content/uploads/2022/02/Oxera-EU-carbon-trading-report-3.pdf.
\31\ MiFID II Overview, Practical Law Financial Services.
\32\ See esma70-445-
38_final_report_on_emission_allowances_and_associated_derivatives.pdf
(europa.eu).
\33\ Carbon trading in the European Union: An economic
assessment of market functioning in 2021, Oxera, p. 61 (February 15,
2022); available at https://www.oxera.com/wp-content/uploads/2022/02/Oxera-EU-carbon-trading-report-3.pdf.
\34\ https://www.esma.europa.eu/about-esma.
\35\ See esma70-445-
38_final_report_on_emission_allowances_and_associated_derivatives.pdf
(europa.eu).
\36\ Id.
\37\ Carbon trading in the European Union: An economic
assessment of market functioning in 2021, Oxera, p. 26-27 (February
15, 2022); available at https://www.oxera.com/wp-content/uploads/2022/02/Oxera-EU-carbon-trading-report-3.pdf.
---------------------------------------------------------------------------
While the Exchange is not a participant in the EU regulatory
framework, the Exchange believes that the EU's robust oversight and
monitoring regime, in addition to the Exchange's CSSA with ICE Endex
which would allow for the sharing of information and thus provide
sufficient means to prevent fraudulent and manipulative acts and
practices.
Designed To Protect Investors and the Public Interest
The Exchange believes that the proposal is designed to protect
investors and the public interest. The Exchange believes that the
concerns related to the prevention of fraudulent and manipulative acts
and practices have been sufficiently addressed for this proposal to be
consistent with the Act and, to the extent that the Commission
disagrees with that assertion, such concerns are now 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 to access EUAs
in a regulated and transparent exchange-traded vehicle that would act
to limit risk and benefit U.S. investors by: (i) reducing premium and
discount volatility as compared to OTC investment vehicles; (ii)
increasing competitive pressure on management fees resulting in fee
compression/reductions; (iii) reducing risks and costs as compared to
those associated with investing in EUAs; and (iv) providing an
alternative to maintaining custody of EUAs.
Creation and Redemption of Shares
According to the Registration Statement, the Trust will create and
redeem Shares on a continuous basis in one or more Creation Units. A
Creation Unit equals a block of 50,000 Shares, which amount may be
revised from time-to-time. The Trust will issue Shares in Creation
Units to certain authorized participants (``Authorized Participants'')
on an ongoing basis. Each Authorized Participant must be a registered
broker-dealer or other securities market participant such as a bank or
other financial institution which is not required to register as a
broker-dealer to engage in securities transactions, a participant in
The Depository Trust Company (``DTC'') and have entered into an
agreement with the Sponsor and the Transfer Agent (the ``Participant
Agreement'').
Creation Units may be created or redeemed only by Authorized
Participants. The creation and redemption of Creation Units is made in
exchange for the delivery to the Trust or the distribution by the Trust
of the amount of EUAs, or the amount of cash sufficient to purchase the
amount of EUAs, represented by the Creation Units being created or
redeemed. The amount of EUAs or cash required to be delivered to the
Trust in connection with any creation, or paid out upon redemption, is
based on the combined net asset value of the number of Shares included
in the Creation Units being created or redeemed as determined on the
day the order to create or redeem Creation Units is properly received
and accepted. Orders must be placed by 11:00 a.m. New York time. The
day on which the Administrator receives a valid purchase or redemption
order is the order date. Creation Units may only be issued or redeemed
on a day that the Exchange is open for regular trading.
For a cash creation, an Authorized Participant will deliver the
cash to the Trust's account at the Cash Custodian, which the Sponsor
will then use to purchase EUAs from a third party selected by the
Sponsor who (1) is not an Authorized Participant and (2) will not be
acting as an agent, nor at the discretion, of the Authorized
Participant with respect to the delivery of EUAs to the Trust (such
third party, a ``Liquidity Provider''). For a cash redemption, the
Sponsor shall arrange for the EUAs represented by the Creation Units to
be sold to a Liquidity Provider selected by the Sponsor and the cash
proceeds distributed from the Trust's account at the Cash Custodian to
the Authorized Participant in exchange for its Shares. In the case of
``in-kind'' creation or redemption orders for Shares, an Authorized
Participant may deliver or direct the delivery of EUAs by third
parties, or take delivery or direct the taking of delivery of EUAs by
third parties.
For cash creations, an Authorized Participant who places a purchase
order is responsible for arranging for the delivery to the Trust's
account with the Cash Custodian of the required cash deposit by 2:00
p.m. New York time on the first business day following the purchase
order date. The Liquidity Provider delivers EUAs to the Trust's Union
Registry account in exchange for the cash purchase price. Upon
settlement of the EUA purchase from the Liquidity Provider into the
Trust's Union Registry account, the Trust instructs the Transfer Agent
to release the Shares to the Authorized Participant, and the Transfer
Agent directs DTC to credit the number of Shares ordered to the
applicable DTC account, by close of business on the purchase settlement
date.
For in-kind creation orders, an Authorized Participant who places a
purchase order is responsible for arranging for the delivery to the
Trust's Union Registry account the required EUA deposit by 2:00 p.m.
New York time on the first business day following the order date. Upon
receipt of the EUA deposit amount in the Trust's Union Registry
account, the Union Registry will notify the Sponsor that the EUAs have
been deposited. Upon receipt of confirmation from the Union Registry
that the EUA deposit amount has been received, the Administrator will
direct DTC to credit the number of Shares created to the Authorized
Participant's DTC account.
According to the Registration Statement, the redemption
distribution due from the Trust will be delivered once the
Administrator notifies the Sponsor that the Authorized Participant has
delivered the Shares to be redeemed to the Trust's DTC account. The
redemption distribution will be delivered to the Authorized Participant
on the first business day following the order date.
For cash redemptions, on the redemption settlement date, the
Liquidity Provider delivers cash to the Trust's account with the Cash
Custodian in exchange for the redemption EUAs amount. Upon settlement
of the EUA sale by the Trust to the Liquidity Provider and the receipt
of the Liquidity Provider's cash in the Trust's Cash Custodian account,
the Trust instructs the Transfer Agent to deliver the Authorized
Participant's Shares to be redeemed back to the Trust, in exchange for
which the Trust instructs the Cash Custodian to transfer the requisite
to the Authorized Participant's designated bank account and the
redemption order is settled.
For in-kind redemptions, once the Administrator notifies the
Sponsor that the Shares have been received in the Trust's DTC account,
the Sponsor instructs the Union Registry to transfer
[[Page 72532]]
the redemption EUA amount from the Trust's Union Registry account to
the Union Registry account of the Authorized Participant or its agent.
The Sponsor is the only entity that may initiate a withdrawal of
EUAs from the Trust's Union Registry account, and the only accounts
that may receive EUAs from the Trust's Union Registry account are the
Union Registry accounts of the Authorized Participants and Liquidity
Providers, their agents or the Sponsor.
Net Asset Value (``NAV'')
The Trust's NAV is calculated by taking the current market value of
its total assets, less any liabilities of the Trust, and dividing that
total by the total number of outstanding Shares.
The Administrator will calculate the NAV of the Trust once each
Exchange trading day. The NAV for a normal trading day will be released
after the end of the Core Trading Session, which is typically 4 p.m.
New York time. The NAV for the Trust's Shares will be disseminated
daily to all market participants at the same time. The Administrator
will use the settlement price for the Daily EUA Futures established by
ICE Endex to calculate the NAV. The Administrator also converts the
value of Euro denominated assets into US Dollar equivalent using
published foreign currency exchange prices by an independent pricing
vendor. Third parties supplying quotations or market data may include,
without limitation, dealers in the relevant markets, end-users of the
relevant product, information vendors, brokers and other sources of
market information.
Indicative Fund Value (``IFV'')
In order to provide updated information relating to the Trust for
use by investors and market professionals, an updated IFV will be made
available through on-line information services throughout the Exchange
Core Trading Session (normally 9:30 a.m. to 4:00 p.m. E.T.) on each
trading day. The IFV will be calculated by using the prior day's
closing NAV per Share of the Trust as a base and updating that value
throughout the trading day to reflect changes in the most recently
reported mid-point of the bid-ask spread of the Daily EUA Future. The
IFV disseminated during NYSE Arca Core Trading Session hours should not
be viewed as an actual real time update of the NAV, because the NAV
will be calculated only once at the end of each trading day based upon
the relevant end of day values of the Trust's investments. Although the
IFV will be disseminated throughout the Core Trading Session, the
customary trading hours for EUAs are 2 a.m. to 12 p.m. Eastern Time.
During the gap in time at the end of each trading day during which the
Shares are traded on the Exchange, but real-time trading prices for
EUAs are not available, the IFV will be calculated based on the end of
day price of EUAs immediately preceding the trading session.
The IFV will be disseminated on a per Share basis every 15 seconds
during regular NYSE Arca Core Trading Session.
Availability of Information
The NAV for the Trust's Shares will be disseminated daily to all
market participants at the same time. The intraday, closing prices, and
settlement prices for EUAs will be readily available from the
applicable futures exchange websites, automated quotation systems,
published or other public sources, or major market data vendors. The
IFV per Share for the Shares will be disseminated by one or more major
market data vendors on at least a 15 second delayed basis as required
by NYSE Arca Rule 8.201-E(e)(2)(v).
Complete real-time data for EUAs and Daily EUA Futures is available
by subscription through on-line information services. Quotation and
last-sale information regarding the Shares will be disseminated through
the facilities of the Consolidated Tape Association. The IFV will be
available through on-line information services. The trading prices for
EUAs and Daily EUA Futures will be disseminated by on-line subscription
services or by one or more major market data vendors during the NYSE
Arca Core Trading Session of 9:30 a.m. to 4:00 p.m. E.T.
EEX also provides on its website, on a daily basis, transaction
volumes and transaction prices for the EUA spot market. ICE Endex
provides on its website, on a daily basis, transaction volumes,
transaction prices, daily settlement prices and historical settlement
prices for Daily EUA Futures that were traded outside of block trades
by EUA futures brokers. In addition, transaction volumes, transaction
prices, daily settlement prices and historical settlement prices for
Daily EUA Futures traded in block trades by futures brokers are
available on a daily basis through a subscription service to ICE Endex.
However, ICE Endex provides the daily settlement price change of the
Daily EUA Future on its website.
In addition, the Trust's website (www.cotwoadvisors.com) will
contain the following information, on a per Share basis, for the Trust:
(a) the prior business day's end of day closing NAV; (b) the Official
Closing Price \38\ or the midpoint of the national best bid and the
national best offer (``NBBO'') as of the time the NAV is calculated
(``Bid-Ask Price''); (c) calculation of the premium or discount of the
Official Closing Price against the NAV expressed as a percentage of
such NAV; (d) the prospectus; and (e) other applicable quantitative
information. The Trust will also provide website disclosure of its EUA
holdings before 9:30 a.m. E.T. on each trading day.
---------------------------------------------------------------------------
\38\ The term ``Official Closing Price'' is defined in NYSE Arca
Rule 1.1(ll) as the reference price to determine the closing price
in a security for purposes of Rule 7-E Equities Trading, and the
procedures for determining the Official Closing Price are set forth
in that rule.
---------------------------------------------------------------------------
The Trust's website will be publicly available prior to the public
offering of Shares and accessible at no charge. The website disclosure
of the Trust's daily holdings will occur at the same time as the
disclosure by the Trust of the daily holdings to Authorized
Participants so that all market participants are provided daily
holdings information at the same time. Therefore, the same holdings
information will be provided on the public website as well as in
electronic files provided to Authorized Participants. Accordingly, each
investor will have access to the current daily holdings of the Trust
through the Trust's website. In addition, 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.
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. Trading in the Shares
on the Exchange will occur in accordance with NYSE Arca Rule 7.34-E
(Early, Core, and Late Trading Sessions). The Exchange has appropriate
rules to facilitate transactions in the Shares during all trading
sessions. As provided in NYSE Arca Rule 7.6-E, the minimum price
variation (``MPV'') for quoting and entry of orders in equity
securities traded on the NYSE Arca Marketplace is $0.01, with the
exception of securities that are priced less than $1.00, for which the
MPV for order entry is $0.0001.
[[Page 72533]]
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain
restrictions on Equity Trading Permit (``ETP'') Holders acting as
registered Market Makers in Commodity-Based Trust Shares to facilitate
surveillance. The Exchange represents that, for initial and continued
listing, the Trust will be in compliance with Rule 10A-3 \39\ under the
Act, as provided by NYSE Arca Rule 5.3-E. A minimum of 50,000 Shares
will be outstanding at the commencement of trading on the Exchange.
---------------------------------------------------------------------------
\39\ With respect to the application of Rule 10A-3 (17 CFR
240.10A-3) under the Act, the Trust relies on the exemption
contained in Rule 10A-3(c)(7).
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As a general matter, the Exchange has regulatory jurisdiction over
its ETP Holders and their associated persons, which include any person
or entity controlling an ETP Holder. To the extent the Exchange may be
found to lack jurisdiction over a subsidiary or affiliate of an ETP
Holder that does business only in commodities or futures contracts, 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 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. Trading on the Exchange in the Shares 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 conditions in the underlying carbon
credit market have caused disruptions and/or lack of trading, or (2)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present. In addition,
trading in Shares will be subject to trading halts caused by
extraordinary market volatility pursuant to the Exchange's ``circuit
breaker'' rule.\40\
---------------------------------------------------------------------------
\40\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------
The Exchange may halt trading during the day in which an
interruption occurs to the dissemination of the IFV, as described
above. If the interruption to the dissemination of the IFV persists
past the trading day in which it occurs, 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
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 is available to all market participants.
Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances administered by the Exchange, as
well as cross-market surveillances administered by the Financial
Industry Regulatory Authority Inc. (``FINRA''), on behalf of the
Exchange, which are designed to detect violations of Exchange rules and
applicable federal securities laws.\41\ The Exchange represents that
these procedures are adequate to properly monitor Exchange trading of
the Shares in all trading sessions and to deter and detect violations
of Exchange rules and federal securities laws applicable to trading on
the Exchange.
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\41\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange has entered into a CSSA with ICE Endex. Pursuant to
the CSSA, the Exchange will communicate as needed regarding trading in
the Shares and Daily EUA Futures with ICE Endex, and the Exchange may
obtain trading information regarding trading in the Shares and Daily
EUA Futures from ICE Endex.
The Exchange represents that all EUAs held by the Trust will be
held and maintained in the Union Registry and that the Trust will not
invest in futures, options, options on futures, or swap contracts. It
is possible that EUAs and Daily EUA Futures may become listed on other
exchanges that are members of ISG \42\ or with which the Exchange has
in place a comprehensive surveillance sharing agreement.
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\42\ For a list of the current members of ISG, see
www.isgportal.org.
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Additionally, the Exchange is able to obtain information regarding
trading in the Shares in connection with ETP Holders' proprietary or
customer trades which they effect through ETP Holders on any relevant
market. Additionally, under NYSE Arca Rule 8.201-E(g), an ETP Holder
acting as a registered Market Maker in the Shares is required to
provide the Exchange with information relating to its accounts for
trading in any underlying commodity, related futures or options on
futures, or any other related derivatives. Commentary .04 of NYSE Arca
Rule 11.3-E requires an ETP Holder acting as a registered Market Maker,
and its affiliates, in the Shares to establish, maintain and enforce
written policies and procedures reasonably designed to prevent the
misuse of any material nonpublic information with respect to such
products, any components of the related products, any physical asset or
commodity underlying the product, applicable currencies, underlying
indexes, related futures or options on futures, and any related
derivative instruments (including the Shares). As a general matter, the
Exchange has regulatory jurisdiction over its ETP Holders and their
associated persons, which include any person or entity controlling an
ETP Holder. To the extent the Exchange may be found to lack
jurisdiction over a subsidiary or affiliate of an ETP Holder that does
business only in commodities or futures contracts and that subsidiary
or affiliate is a member of another regulatory organization, the
Exchange could obtain information regarding the activities of such
subsidiary or affiliate through a surveillance sharing agreement with
that regulatory organization.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolio or reference assets, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange listing rules specified in this rule filing
shall constitute continued listing requirements for listing the Shares
on the Exchange.
The Trust has represented 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 Act, the Exchange will monitor 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 NYSE Arca Rule 5.5-E(m).
[[Page 72534]]
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders in an Information Bulletin of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Bulletin will discuss the following: (1) the procedures for
purchases and redemptions of Shares in Creation Units (including noting
that Shares are not individually redeemable); (2) NYSE Arca Rule 9.2-
E(a), which imposes a duty of due diligence on its ETP Holders to learn
the essential facts relating to every customer prior to trading the
Shares; (3) how information regarding the IFV is disseminated; (4) the
requirement that ETP Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; (5) the possibility that trading spreads
and the premium or discount on the Shares may widen as a result of
reduced liquidity of EUAs during the Core and Late Trading Sessions;
and (6) trading information. For example, the Information Bulletin will
advise ETP Holders, prior to the commencement of trading, of the
prospectus delivery requirements applicable to the Trust. The Exchange
notes that investors purchasing Shares directly from the Trust will
receive a prospectus. ETP Holders purchasing Shares from the Trust for
resale to investors will deliver a prospectus to such investors.
In addition, the Information Bulletin will reference that the Trust
is subject to various fees and expenses as will be described in the
Registration Statement. The Information Bulletin will also reference
the fact that last sale information regarding EUAs is subject to
regulation by EEX and ICE Endex, that the Commission and the CFTC do
not have jurisdiction over the trading of EUAs as a commodity, and that
jurisdiction over the trading of EUAs is held by the relevant competent
authority of the individual EU member states in which the trading takes
place, namely the Bundesanstalt f[uuml]r Finanzdienstleistungsaufsicht
(BaFIN) in Germany and the Autoriteit Financi[euml]le Markten (AFM) in
the Netherlands.\43\ The Information Bulletin will also discuss any
relief, if granted, by the Commission or the staff from any rules under
the Act.
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\43\ Article 22 of Regulation (EU) No. 596/2014 on market abuse
(market abuse regulation) (``MAR'') requires each EU member state to
designate a single administrative competent authority to ensure that
the provisions of MAR are applied on its territory. Commission
Regulation 596/2014, 2014 O.J. (L 173) 42. For a list of the
competent authorities for each EU Member State. See https://www.esma.europa.eu/sites/default/files/mar.pdf.
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The Information Bulletin will also disclose the trading hours of
the Shares and that the NAV for the Shares will be calculated after
4:00 p.m. E.T. each trading day. The Information Bulletin will disclose
that information about the Shares will be publicly available on the
Trust's website.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \44\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\44\ 15 U.S.C. 78f(b)(5).
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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 and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Rule 8.201-E.
Further, the Exchange has demonstrated that the proposed rule change
satisfies Section 6(b)(5) of the Act by showing that the ICE Endex is a
regulated market of significant size that shares surveillance with the
Exchange. The Exchange has in place surveillance procedures that are
adequate to properly monitor trading in the Shares in all trading
sessions and to deter and detect violations of Exchange rules and
applicable federal securities laws. The Exchange may obtain information
regarding trading in the Shares and Daily EUA Futures from ICE Endex
with which the Exchange has entered into a CSSA. Also, pursuant to NYSE
Arca Rule 8.201-E(g), the Exchange is able to obtain information
regarding trading in the Shares and the underlying commodity through
ETP Holders acting as registered Market Makers, in connection with such
ETP Holders' proprietary trades which they effect on any relevant
market. The Exchange represents that all EUAs held by the Trust will be
held and maintained in the Union Registry and that the Trust will not
invest in futures, options, options on futures, or swap contracts. The
Exchange further represents that ICE Endex is the principal market for
EUAs in which the Trust may invest, and that the Exchange can monitor
those EUAs through its CSSA with ICE Endex.\45\
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\45\ See the discussion in the ``Surveillance'' section, supra.
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The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that there is a considerable amount of information on EUAs and Daily
EUA Futures available on public websites and through professional and
subscription services. The trading prices for EUAs will be disseminated
by on-line subscription services or by one or more major market data
vendors during the NYSE Arca Core Trading Session. EEX also provides on
its website, on a daily basis, transaction volumes and transaction
prices for the EUA spot market. Additionally, ICE Endex provides on its
website, on a daily basis, transaction volumes, transaction prices,
daily settlement prices and historical settlement prices for Daily EUA
Futures that were traded outside of block trades by EUA futures
brokers. In addition, transaction volumes, transaction prices, daily
settlement prices and historical settlement prices for Daily EUA
Futures traded in block trades by futures brokers are available on a
daily basis through a subscription service to ICE Endex. ICE Endex also
provides the daily settlement price change of the Daily EUA Future on
its website.
In addition, the Trust's website (www.cotwoadvisors.com) will
provide pricing information for EUAs and the Shares. Market prices for
the Shares will be available from a variety of sources including
brokerage firms, information websites and other information service
providers. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the Consolidated Tape
Association. The NAV of the Trust will be published on each day that
the NYSE Arca is open for regular trading and will be posted on the
Trust's website. The IFV relating to the Shares will be widely
disseminated by one or more major market data vendors at least once
every 15 seconds as required by NYSE Arca Rule 8.201-E(e)(2)(v). The
Trust's website will also provide its prospectus and other relevant
quantitative information regarding the Shares. The Trust will also
provide website disclosure of its EUA holdings before 9:30 a.m. E.T. on
each trading day. In addition, 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.
[[Page 72535]]
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares and may obtain information
regarding trading in the Shares, EUAs and Daily EUA Futures from ICE
Endex pursuant to the CSSA between the Exchange and ICE Endex. In
addition, as noted above, investors will have ready access to
information regarding the Trust's NAV, IFV, and quotation and last sale
information for the Shares.
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 believes the
proposed rule change will enhance competition by accommodating Exchange
trading of an additional exchange-traded product, and the first such
product relating to physical carbon credits, which will enhance
competition among market participants, 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 solicited or received with respect to 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 self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the 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-NYSEARCA-2024-70 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-NYSEARCA-2024-70. 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-NYSEARCA-2024-70 and should
be submitted on or before September 26, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-19879 Filed 9-4-24; 8:45 am]
BILLING CODE 8011-01-P