[Federal Register Volume 89, Number 206 (Thursday, October 24, 2024)]
[Notices]
[Pages 84960-84972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-24640]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101386; File No. SR-NYSEAMER-2024-49]
Self-Regulatory Organizations; NYSE American LLC; Notice of
Filing of Amendment No. 3 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 3, To Permit the
Listing and Trading of Options on Bitcoin Exchange-Traded Funds
October 18, 2024.
On August 15, 2024, NYSE American LLC (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade options on the Fidelity Wise Origin Bitcoin
Fund (the ``Fidelity Fund''), the ARK21Shares Bitcoin ETF (the ``ARK
21Shares Fund''), the Invesco Galaxy Bitcoin ETF (the ``Invesco
Fund''), the Franklin Bitcoin ETF (the ``Franklin Fund''), the VanEck
Bitcoin Trust (the ``VanEck Fund''), the WisdomTree Bitcoin Fund (the
``WisdomTree Fund''), the Grayscale Bitcoin Trust BTC (the ``Grayscale
Fund''), the Grayscale Bitcoin Mini Trust (the ``Grayscale Mini
Fund''), the Bitwise Bitcoin ETF (the ``Bitwise Fund''), the iShares
Bitcoin Trust ETF (the ``iShares Fund''), and the Valkyrie Bitcoin
Fund.\3\ The proposed rule change was published for comment in the
Federal Register on September 4, 2024.\4\ On September 9, 2024, the
Exchange filed Amendment No. 1 to the proposed rule change, which
replaced and superseded the original proposal in its entirety. On
October 7, the Exchange filed Amendment No. 2 to the proposal, which
replaced and superseded Amendment No. 1 in its entirety. On October 11,
2024, the Exchange filed Amendment No. 3 to the proposal, which
replaces and supersedes Amendment No. 2 in its entirety.\5\ The
Commission received no comments regarding the proposal. The Commission
is publishing this notice to solicit comments on Amendment No. 3 from
interested persons, and is approving the proposed rule change, as
modified by Amendment No. 3, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On January 10, 2024, the Commission approved proposals by
NYSE Arca, Inc., The Nasdaq Stock Market LLC, and Cboe BZX Exchange,
Inc. to list and trade the shares of 11 bitcoin-based commodity-
based trust shares and trust units, including the trusts underlying
the proposed options. See Securities Exchange Act Release No. 99306
(Jan. 10, 2024), 89 FR 3008 (Jan. 17, 2024) (order approving File
Nos. SR-NYSEARCA-2021-90; SR-NYSEARCA-2023-44; SR-NYSEARCA-2023-58;
SR-NASDAQ-2023-016; SR-NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-
CboeBZX-2023-038; SR-CboeBZX-2023-040; SR-CboeBZX-2023-042; SR-
CboeBZX-2023-044; SR-CboeBZX-2023-072) (``Bitcoin ETP Order'').
\4\ See Securities Exchange Act Release No. 100861 (Aug. 28,
2024), 89 FR 71982.
\5\ On September 9, 2024, the Exchange filed Amendment No. 1 to
SR-NYSEAMER-2024-49, which replaced and superseded the original
filing in its entirety and, on October 7, 2024, the Exchange filed
Amendment No. 2 to SR-NYSEAMER-2024-49, which replaced and
superseded in its entirety both Amendment No. 1 and the original
filing. See https://www.sec.gov/comments/sr-nyseamer-2024-49/srnyseamer202449-518495-1491742.pdf and https://www.sec.gov/comments/sr-nyseamer-2024-49/srnyseamer202449-527736-1516262.pdf,
respectively. Amendment No. 3, which supersedes and replaces
Amendment No. 2 in its entirety, modifies the original filing by (1)
including reference to, and reliance on, the ``ISE IBIT Approval
Order,'' as referenced infra; (2) narrowing the scope of the
original filing by (i) eliminating the following bitcoin-related
funds, and any information related thereto: the ARK21Shares Bitcoin
ETF, the Invesco Galaxy Bitcoin ETF, the Franklin Bitcoin ETF, the
VanEck Bitcoin Trust, and the WisdomTree Bitcoin Fund, and (ii)
excluding the (remaining) Bitcoin Fund options from being available
for flexible (``FLEX'') option trading; (3) providing additional
information and analysis of trading data for the Bitcoin Funds in
support of this proposal, including the proposed position limits of
25,000 per side for the options on the Bitcoin Funds; and (4)
supplementing information related to the Exchange's surveillance
program, including the manner in which it would surveil suspicious
trading activity in the underlying Bitcoin Funds and where the
Exchange would obtain information about the bitcoin market.
Amendment No. 3 is available on the Exchange's website at https://www.nyse.com/regulation/rule-filings. A FLEX Option is a customized
options contract that is subject to the rules in Section 15 of the
Exchange's rules. A FLEX Equity Option is an option on a specified
underlying equity security that is subject to the rules in Section
15 of the Exchange's rules. See Exchange Rules 900G(b)(1) and (10).
Except as provided in Exchange Rules 906G(b)(i) and (ii), there are
no position limits for FLEX Equity options. See Exchange Rule
906G(b).
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I. The Exchange's Description of the Proposed Rule Change, as Modified
by Amendment No. 3
The Exchange proposes to amend Rule 915 regarding the criteria for
underlying securities. This Amendment No. 3 supersedes and replaces
Amendment No. 2 to the original filing in its entirety. 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 Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 915 (Criteria for Underlying
Securities). Specifically, the Exchange proposes to amend Rule 915,
Commentary .10 to allow the Exchange to list and trade options on the
following exchange-traded products: the
[[Page 84961]]
Grayscale Bitcoin Trust (BTC) (the ``Grayscale Fund'' or ``GBTC''), the
Grayscale Bitcoin Mini Trust BTC (the ``Grayscale Mini Fund'' or
``BTC''), and the Bitwise Bitcoin ETF (the ``Bitwise Fund'' or ``BITB''
and, collectively, the ``Bitcoin Funds'' or ``Funds'').\6\
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\6\ See proposed Rule 915, Commentary .10(a). On January 11,
2024, GBTC and BITB began trading on NYSE Arca, Inc. (``NYSE
Arca''), the Exchange's affiliated SRO, after the Commission
approved rule changes to list and trade shares of ``Bitcoin-Based
Commodity-Based Trust Shares'' pursuant to Rule 8.201-E(c)(1)
(Commodity-Based Trust Shares), including GBTC and BITB. See
Securities Exchange Act Release No. 99306 (January 10, 2024) (Order
Granting Accelerated Approval of Proposed Rule Changes, as Modified
by Amendments Thereto, to List and Trade Bitcoin-Based Commodity-
Based Trust Shares and Trust Units), 89 FR 3008 (January 17, 2024)
(SR-NYSEARCA-2023-44; SR-NYSEARCA-2021-90).
On July 13, 2024, after receiving approval of the Commission,
BTC began trading on NYSE Arca. See Securities Exchange Act Release
No. 100610 (July 26, 2024) (Order Granting Approval of Proposed Rule
Changes, as Modified by Amendment No. 1, to List and Trade Share of
BTC pursuant to NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares)), 89 FR 62821 (August 1, 2024) (SR-NYSEARCA-2023-45).
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The Exchange notes that this is a competitive filing as the
Commission recently approved a rule proposal by Nasdaq ISE, LLC
(``ISE'') to allow the listing and trading of options on iShares
Bitcoin Trust (or IBIT), which is a trust that holds bitcoin (referred
to herein as the ``ISE IBIT Approval Order'').\7\ As discussed herein,
the Exchange believes, like the recently-approved options on IBIT,
options on the Bitcoin Funds would permit hedging, and allow for more
liquidity, better price efficiency, and less volatility with respect to
the underlying Funds. Further, permitting the listing of such options
would enhance the transparency and efficiency of markets in these and
correlated products.
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\7\ See Securities Exchange Act Release No. 101128 (September
20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03) (Notice
of Filing of Amendment Nos. 4 and 5 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1,
4, and 5, to Permit the Listing and Trading of Options on the
iShares Bitcoin Trust (``IBIT'')) (``ISE IBIT Approval Order'').
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Rule 915 provides that, subject to certain other criteria set forth
in the Rule, securities deemed appropriate for options trading include
Exchange-Traded Fund Shares (or ETFs) as defined in Commentary .06,
that represent certain types of interests \8\ and exchange-traded
products (``ETPs'') structured as trusts that hold precious metals
(which are deemed commodities).\9\ Like ETPs backed by precious metals
(i.e., commodities), the Exchange proposes to allow options trading on
the Bitcoin Funds that hold Bitcoin--which is also deemed a
commodity.\10\
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\8\ See Rule 915, Commentary .06, which permits options trading
on ETFs that are traded on a national securities exchange and are
defined as an ``NMS stock'' in Rule 600(b)(55) of Regulation NMS,
that represent interests in registered investment companies (or
series thereof) organized as open-end management investment
companies, unit investment trusts or similar entities that hold
portfolios of securities and/or financial instruments including, but
not limited to, stock index futures contracts, options on futures,
options on securities and indexes, equity caps, collars and floors,
swap agreements, forward contracts, repurchase agreements and
reverse purchase agreements (the ``Financial Instruments''), and
money market instruments, including, but not limited to, U.S.
government securities and repurchase agreements (the ``Money Market
Instruments'') comprising or otherwise based on or representing
investments in indexes or portfolios of securities and/or Financial
Instruments and Money Market Instruments (or that hold securities in
one or more other registered investment companies that themselves
hold such portfolios of securities and/or Financial Instruments and
Money Market Instruments); interests in a trust or similar entity
that holds a specified non-U.S. currency deposited with the trust or
similar entity when aggregated in some specified minimum number may
be surrendered to the trust by the beneficial owner to receive the
specified non-U.S. currency and pays the beneficial owner interest
and other distributions on deposited non-U.S. currency, if any,
declared and paid by the trust (``Currency Trust Shares'');
commodity pool interests principally engaged, directly or
indirectly, in holding and/or managing portfolios or baskets of
securities, commodity futures contracts, options on commodity
futures contracts, swaps, forward contracts and/or options on
physical commodities and/or non-U.S. currency (``Commodity Pool
Units''); or represents an interest in a registered investment
company (``Investment Company'') organized as an open-end management
investment company or similar entity, that invests in a portfolio of
securities selected by the Investment Company's investment adviser
consistent with the Investment Company's investment objectives and
policies, which is issued in a specified aggregate minimum number in
return for a deposit of a specified portfolio of securities and/or a
cash amount with a value equal to the next determined net asset
value (``NAV''), and when aggregated in the same specified minimum
number, may be redeemed at a holder's request, which holder will be
paid a specified portfolio of securities and/or cash with a value
equal to the next determined NAV (``Managed Fund Share''); provided
that all of the conditions listed in Rules 915 and 916 are met.
\9\ See Rule 915, Commentary .10 (permitting the listing and
trading of options on shares of the following trusts: SPDR Gold
Trust, the iShares COMEX Gold Trust the iShares Silver Trust, the
ETFS Gold Trust, and the ETFS Silver Trust, pursuant to Rule 915 and
916).
\10\ See proposed Rule 915, Commentary .10(a) (added to include
the listing and trading of options on shares of GBTC, BTC, and BITB,
pursuant to Rule 915 and 916).
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The Bitcoin Funds are structured as trusts that hold bitcoin. Like
ETFs and ETPs currently deemed appropriate for options trading, the
investment objective of each Bitcoin Fund trust is for its shares to
reflect the performance of Bitcoin (less the expenses of the trust's
operations), offering investors an opportunity to gain exposure to
Bitcoin without the complexities of Bitcoin delivery. Each Bitcoin
Fund's shares represent units of fractional undivided beneficial
interest in the trust, the assets of which consist principally of
Bitcoin and are designed to track Bitcoin or the performance of the
price of Bitcoin and offer access to the Bitcoin market.\11\ The
Bitcoin Funds provide investors with cost-efficient alternatives that
allow a level of participation in the Bitcoin market through the
securities market.
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\11\ The trust may include minimal cash.
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The Exchange believes each Bitcoin Fund satisfies the Exchange's
initial listing standards set forth in Commentary .01 to Rule 915.\12\
The Exchange notes that the Bitcoin Funds also satisfy the listing
standard applied to ETFs traded on the Exchange that they be available
for creation and redemption each business day as set forth in
Commentary .06(a)(ii).\13\
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\12\ Commentary .01 to Rule 915 provides for guidelines to be by
the Exchange when evaluating potential underlying securities for
Exchange option transactions.
\13\ Commentary .06(a)(ii) requires that ETFs must be available
for creation or redemption each business day from or through the
issuer in cash or in kind at a price related to net asset value, and
the issuer must be obligated to issue ETFs in a specified aggregate
number even if some or all of the investment assets required to be
deposited have not been received by the issuer, subject to the
condition that the person obligated to deposit the investments has
undertaken to deliver the investment assets as soon as possible and
such undertaking is secured by the delivery and maintenance of
collateral consisting of cash or cash equivalents satisfactory to
the issuer, as provided in the respective prospectus.
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First, each of the Bitcoin Funds satisfy the criteria and
guidelines set forth in Rule 915(a). Pursuant to Rule 915(a), a
security on which options may be listed and traded on the Exchange must
be duly registered (with the Commission) and be an NMS stock (as
defined in Rule 600 of Regulation NMS under the Act) and be
characterized by a substantial number of outstanding shares that are
widely held and actively traded.\14\ Each of the Bitcoin Funds is an
NMS Stock as defined in Rule 600 of Regulation NMS under the Act.\15\
The Exchange believes each Bitcoin Fund is characterized by a
substantial number of outstanding shares that are widely held and
actively traded.
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\14\ The criteria and guidelines for a security to be considered
widely held and actively traded are set forth in Commentary .01 to
Rule 915, subject to exceptions.
\15\ 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'').
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As of August 30, 2024, the Bitcoin Funds had the following number
of
[[Page 84962]]
shares outstanding (and corresponding market capitalization):
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Shares Market value (8/
Bitcoin fund outstanding 30/2024)
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GBTC................................. 284,570,100 $13,443,091,524
BTC.................................. 366,950,100 1,930,157,526
BITB................................. 68,690,000 2,221,640,670
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As shown above, each of the Bitcoin Funds had significantly more
than 7,000,000 shares outstanding, which is the minimum number of
shares of a corporate stock that the Exchange generally requires to
list options on that stock pursuant to Commentary .01(1) to Rule 915.
The Exchange believes this demonstrates that each Bitcoin Fund is
characterized by a substantial number of outstanding shares.
Further, the below table contains information regarding the number
of beneficial holders of the Bitcoin Funds as of August 14, 2024.
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Beneficial
Bitcoin Fund holders (8/14/
24)
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GBTC.................................................... 464,364
BTC..................................................... 13,403
BITB.................................................... 75,437
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As this table shows, each Bitcoin Fund has significantly more than
2,000 beneficial holders (approximately 232, 7, and 38 times more,
respectively), which is the minimum number of holders the Exchange
generally requires for corporate stock in order to list options on that
stock pursuant to pursuant to [sic] Commentary .01(2) to Rule 915.
Therefore, the Exchange believes the shares of each Bitcoin Fund are
widely held.
In addition, the Exchange believes the shares of each Bitcoin Fund
are actively traded. Further, as of September 30, 2024, the total
trading volume (by shares and notional) for these funds since they
began trading \16\ and the average daily volume (``ADV'') over the 30-
day period of September 1 through September 30, 2024, was as follows:
\17\
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\16\ As noted supra, GBTC and BITB began trading on January 11th
and BTC began trading on July 31st. Thus, the measurement period for
the trading volume (shares/notional) is January 11 through September
20, 2024, for GBTC and BITB (i.e., nine months) and July 31 through
September 20, 2024, for BTC (i.e., two months).
\17\ See FactSet, 9/30/2024, https://www.factset.com/data-attribution.
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Trading volume Trading volume
Bitcoin Fund (shares) (notional $) ADV (shares)
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GBTC................................................... 1,803,567,700 93,472,544,497 3,266,138
BTC.................................................... 335,492,930 1,792,866,521 6,838,546
BITB................................................... 434,815,840 14,433,361,384 1,949,835
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As demonstrated above, even though these Bitcoin Funds have been
trading for less than one year (and in the case of the BTC, less than
two months), the trading volume for each is substantially higher than
2,400,000 shares (between roughly 165 and 700 times that amount), which
is the minimum 12-month volume the Exchange generally requires for a
security in order to list options on that security as set forth in
Commentary .01 to Rule 915. The Exchange believes this data
demonstrates each Bitcoin Fund is characterized by a substantial number
of outstanding shares that are actively traded.
In addition to satisfying the Exchange's initial listing standards,
options on Bitcoin Funds will be subject to the Exchange's continued
listing standards as set forth in Commentary .07 to Rule 916.\18\
Pursuant to Commentary .07 to Rule 916, the Exchange will not open for
trading any additional series of option contracts covering a fund
traded on the Exchange if such fund ceases to be an ``NMS stock'' as
provided for Commentary .01(5) to Rule 915 or the fund is halted from
trading on its primary market.\19\ Additionally, options on funds
traded on the Exchange may be subject to the suspension of opening
transactions as follows: (1) the fund no longer meets the terms of
Commentary .01 to Rule 916; (2) following the initial twelve-month
period beginning upon the commencement of trading of the fund, there
are fewer than 50 record and/or beneficial holders of the fund for 30
or more consecutive trading days; (3) the value of the underlying
commodity is no longer calculated or available; or (4) such other event
occurs or condition exists that in the opinion of the Exchange makes
further dealing on the Exchange inadvisable.
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\18\ The Exchange proposes to amend Commentary .11 to Rule 916
to include the Bitcoin Funds in the list of ETPs deemed ``Exchange-
Traded Fund Shares''--of ETFs [sic]--for purposes of the continued
listing standards set forth in Commentary .07 to Rule 916. See
proposed Commentary .11 to Rule 916. For avoidance of doubt, the
Exchange refers ``funds'' rather than ``ETFs'' to make clear that
the Bitcoin Funds are subject to these continued listing standards.
\19\ See Commentary .07 to Rule 916.
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Options on each Bitcoin Fund will be physically settled contracts
with American-style exercise.\20\ Consistent with Rule 903, which
governs the opening of options series on a specific underlying security
(including ETFs and ETPs), the Exchange will open at least one
expiration month for options on each Bitcoin Fund \21\ at the
commencement of trading on the Exchange and may also list series of
options on Bitcoin Funds for trading on a weekly,\22\ monthly,\23\ or
quarterly \24\ basis. The Exchange may also list long-term equity
option series (``LEAPS'') that expire from twelve to thirty-nine months
from the time they are listed.\25\
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\20\ See Rule 902 (Rights and Obligations of Holders and
Writers), which provides that the rights and obligations of holders
and writers of option contracts of any class of options dealt in on
the Exchange shall be as set forth in the Rules of the Clearing
Corporation. See also OCC Rules, Chapter VIII, which governs
exercise and assignment, and Chapter IX, which governs the discharge
of delivery and payment obligations arising out of the exercise of
physically settled stock option contracts. OCC Rules can be located
at: https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occrules.pdf.
\21\ See Rule 903(c), Commentary .03. The monthly expirations
are subject to certain listing criteria for underlying securities
described within Rule 915. Monthly listings expire the third Friday
of the month. The term ``expiration date'' (unless separately
defined elsewhere in the OCC By-Laws), when used in respect of an
option contract (subject to certain exceptions), means the third
Friday of the expiration month of such option contract, or if such
Friday is a day on which the exchange on which such option is listed
is not open for business, the preceding day on which such exchange
is open for business. See OCC By-Laws Article I, Section 1. Pursuant
to Rule 903(d), additional series of options of the same class may
be opened for trading on the Exchange when the Exchange deems it
necessary to maintain an orderly market, to meet customer demand or
when the market price of the underlying stock moves more than five
strike prices from the initial exercise price or prices. New series
of options on an individual stock may be added until the beginning
of the month in which the options contract will expire. Due to
unusual market conditions, the Exchange, in its discretion, may add
a new series of options on an individual stock until the close of
trading on the business day prior to expiration.
\22\ See Rule 903(h).
\23\ See Rule 903, Commentary .11.
\24\ See Rule 903, Commentary .09.
\25\ See Rule 903, Commentary .03.
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Pursuant to Rule 903, Commentary .05(a), which governs strike
prices of series of options on ETFs, the interval between strike prices
of series of options
[[Page 84963]]
on Bitcoin 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.\26\
Additionally, the Exchange may list series of options pursuant to the
$1 Strike Price Interval Program,\27\ the $0.50 Strike Program,\28\ the
$2.50 Strike Price Program,\29\ and the $5 Strike Program.\30\ Pursuant
to Rule 960NY, where the price of a series of a Bitcoin 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.\31\ Any
and all new series of Bitcoin Fund options that the Exchange lists will
be consistent and comply with the expirations, strike prices, and
minimum increments set forth in Rules 903 and 960NY, as applicable.
Further, the Exchange notes that Rule 462, which governs margin
requirements applicable to the trading of all options on the Exchange,
including options on ETFs and ETPs, will also apply to the trading of
Bitcoin Fund options.
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\26\ The Exchange notes that for options listed pursuant to the
Short Term Option Series Program, the Monthly Options Series
Program, and the Quarterly Options Series Program, Rules 903(h) and
Commentaries .09 and .03 to Rule 903, specifically set forth
intervals between strike prices on Quarterly Options Series, Short
Term Option Series, and Monthly Options Series, respectively.
\27\ See Rule 903, Commentary .06.
\28\ See Rule 903, Commentary .13.
\29\ See Rule 903, Commentary .07(a).
\30\ See Rule 903, Commentary .12.
\31\ If options on a Bitcoin Fund are eligible to participate in
the Penny Interval Program, the minimum increment of $0.01 below
$3.00 and $0.50 above $3.00 would apply. See Rule 960NY(a)(3). See
also Rule 960.1NY (which describes the requirements for the Penny
Interval Program).
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Rule 903G(a)(1) permits the Exchange to authorize for trading a
FLEX option class on any equity security if it may authorize for
trading a non-FLEX option class on that equity security pursuant to
Rule 915.\32\ At this time, the Exchange is not proposing to permit
Bitcoin Fund options to trade as FLEX options.\33\ The Exchange
therefore proposes to modify Rule 903G(a)(1) to specify this exception,
which will add clarity and transparency to Exchange Rules.\34\
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\32\ See Rule 903G(a)(1). See generally Section 15 (Flexible
Exchange (``FLEX'') Options).
\33\ The Exchange will continue ongoing discussions with the
Commission regarding appropriate position limits for the Bitcoin
Funds and plans to submit a separate rule filing that would permit
the Exchange to authorize for trading FLEX options on the Funds
(which filing may propose changes to existing FLEX option position
limits for such options if appropriate).
\34\ See proposed Rule 903G(a)(1) (providing, in relevant part,
that the Exchange may approve and open for trading any FLEX Equity
Options series on any equity security that is eligible for Non-FLEX
Options trading under Rule 915 ``except those set forth in
Commentary .10(a) to Rule 915,'' i.e., the Bitcoin Funds).
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Position and Exercise Limits
Position and exercise limits for options, including options on
Bitcoin Funds, are determined pursuant to Rules 904 and 905,
respectively. Position and exercise limits for options vary according
to the number of outstanding shares and the trading volumes of the
underlying security over the past six months, where the largest in
capitalization and the most frequently traded funds have an option
position and exercise limit of 250,000 contracts (with adjustments for
splits, re-capitalizations, etc.) on the same side of the market; and
smaller capitalization funds have position and exercise limits of
200,000, 75,000, 50,000 or 25,000 contracts (with adjustments for
splits, re-capitalizations, etc.) on the same side of the market.\35\
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\35\ See Commentary .07(a)-(d) to Rule 904. For an option to be
eligible for the 50,000-contract limit, the security underlying the
option must have most recent six-month trading volume of at least
20,000,000 shares, or most recent six-month trading volume of at
least 15,000,000 shares and at least 40,000,000 shares currently
outstanding. For an option to be eligible for the 75,000-contract
limit, the underlying security must have most recent six-month
trading volume of at least 40,000,000 shares, or most recent six-
month trading volume of at least 30,000,000 shares and at least
120,000,000 shares currently outstanding. For an option to be
eligible for the 200,000-contract limit, the underlying security
must have most recent six-month trading volume of at least
80,000,000 shares, or most recent six-month trading volume of at
least 60,000,000 shares and at least 240,000,000 shares currently
outstanding. For an option to be eligible for the 250,000-contract
limit, the security underlying the option must have most recent six-
month trading volume of at least 100,000,000 shares, or most recent
six-month trading volume of at least 75,000,000 shares and at least
300,000,000 shares currently outstanding. The 25,000-contract limit
applies to options on underlying securities that do not qualify for
a higher contract limit. See Commentary .07(e) to Rule 904. In
addition, Commentary .07(f) to Rule 904 establishes higher position
limits for options on certain ETFs.
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Position limits are designed to limit the number of options
contracts traded on the Exchange in an underlying security that an
investor, acting alone or in concert with others directly or
indirectly, may control. The purpose of position limits, which are set
forth in Rule 904, is to address potential manipulative schemes and
adverse market impacts surrounding the use of options, such as
disrupting the market in the security underlying the options. As such,
position limits must balance concerns regarding mitigating potential
manipulation and the cost of inhibiting potential hedging activity that
investors may use for legitimate economic purposes. To achieve this
balance, the Exchange proposes to set the position and exercise limits
for the options on the Bitcoin Funds at 25,000 contracts, a limit which
has already been approved for IBIT, an ETP that (like the Bitcoin
Funds) holds bitcoin.\36\ Capping the position limit at 25,000
contracts, the lowest limit available in options, would address
concerns related to manipulation and protection of investors as this
number is conservative for the Bitcoin Funds and therefore appropriate
given their liquidity. While the Exchange believes that the proposed
25,000-contract position limit is conservative for options on the
Bitcoin Funds, it nonetheless believes that, for the reasons set forth
below, evidence exists to support a much higher position limit.\37\
---------------------------------------------------------------------------
\36\ See proposed Rule 904, Commentary .07(f). See also ISE IBIT
Approval Order, supra note 6. [sic]
\37\ The Exchange may file a subsequent rule change to amend the
position and exercise limit for options on any or all the Bitcoin
Funds based on additional data regarding trading activity, to
continue to balance any concerns regarding manipulation. A higher
position limit would allow institutional investors to utilize
options on the Bitcoin Funds for prudent risk management purposes.
---------------------------------------------------------------------------
As shown in the table below, GBTC, BITB and BTC would easily
qualify for the 250,000-contract position limit available to other ETFs
and ETPs pursuant to the criterion in Rule 904, Commentary .07(a)(i),
which requires that, for the most recent six-month period, trading
volume for the underlying security be at least 100,000,000 shares.\38\
As noted herein, BTC began trading on July 31, 2024, and therefore has
only two months of trading data available as shown below.\39\
---------------------------------------------------------------------------
\38\ Per Commentary .07(a) to Rule 904, to qualify for the
250,000-contract position limit for options, the underlying security
must (i) have trading volume of at least 100,000,000 shares during
the most recent six-month trading period; or (ii) have trading
volume of at least 75,000,000 shares during the most recent six-
month trading period and have at least 300,000,000 shares currently
outstanding.
\39\ See FactSet, 9/30/2024, https://www.factset.com/data-attribution. For avoidance of doubt, the Exchange notes that this
chart depicts the most recent six months of trading data by shares
for GBTC and BITB whereas the earlier chart (that depicts volume by
notional and shares) covered the first nine months of trading. For
BTC, both charts depict the same two-month trading volume by shares.
------------------------------------------------------------------------
Bitcoin Fund Total volume (9/30/2024)
------------------------------------------------------------------------
GBTC...................................... 723,758,100 (6-months)
BTC....................................... 335,492,930 (2-months)
BITB...................................... 263,965,870 (6-months)
------------------------------------------------------------------------
Thus, based on the most-recent trading volume, each Bitcoin Fund
exceeded the requisite minimum of 100,000,000 shares necessary to
qualify for the 250,000-contract position and exercise limits. By
comparison, other options symbols with six-month trading volume less
than GBTC, BITB, and BTC
[[Page 84964]]
are eligible for position and exercise limits of at least 250,000.\40\
---------------------------------------------------------------------------
\40\ See https://www.theocc.com/Market-Data/Market-Data-Reports/Series-and-Trading-Data/Series-Search (including the following
symbols that have a position limit of 250,000: GLD, IAU, SLV, SIVR,
SGOL).
---------------------------------------------------------------------------
With respect to the outstanding shares of each Bitcoin Fund, if a
market participant held the maximum number of contracts possible
pursuant to the proposed position and exercise limits (25,000
contracts), the equivalent shares represented by the proposed position/
exercise limit (2,500,000 shares) would represent the following
approximate percentage of current outstanding shares:
----------------------------------------------------------------------------------------------------------------
Proposed position/
exercise limits Outstanding Percentage of
Bitcoin Fund in equivalent shares (8/30/24) outstanding
shares shares
----------------------------------------------------------------------------------------------------------------
GBTC................................................... 2,500,000 284,570,100 0.9
BTC.................................................... 2,500,000 366,950,100 0.7
BITB................................................... 2,500,000 68,690,000 3.6
----------------------------------------------------------------------------------------------------------------
As this table demonstrates, if a market participant held the
maximum permissible options positions in one of the Bitcoin Fund
options and exercised all of them at the same time, that market
participant would control a small percentage of the outstanding shares
of the underlying Bitcoin Fund. For example, as noted above, a position
limit of 25,000 same side contracts effectively restricts a market
participant from holding positions that could result in the receipt of
no more than 2,500,000 shares of the applicable Bitcoin Fund (if that
market participant exercised all its options). Based on the number of
shares outstanding for each Bitcoin Fund as of August 30, 2024, the
table below sets forth the approximate number of market participants
that could hold the maximum of 25,000 same side positions in each
Bitcoin Fund that would equate to the number of shares outstanding of
that Bitcoin Fund:
------------------------------------------------------------------------
Number of market
Shares participants with
Bitcoin Fund outstanding 25,000 same side
positions
------------------------------------------------------------------------
GBTC.............................. 284,570,100 114
BTC............................... 366,950,100 147
BITB.............................. 68,690,000 27
------------------------------------------------------------------------
This means if 114 market participants had 25,000 same side
positions in options on GBTC, each of them would have to simultaneously
exercise all of those options to create a scenario that may put the
underlying security under stress. Similarly, this means if 147 market
participants had 25,000 same side positions in options on BTC, each of
them would have to simultaneously exercise all of those options to
create a scenario that may put the underlying security under stress.
Finally, this means if 27 market participants had 25,000 same side
positions in options on BITB, each of them would have to simultaneously
exercise all of those options to create a scenario that may put the
underlying security under stress. The Exchange believes it is highly
unlikely for this to occur; however, even if such event did occur, the
Exchange would not expect any of the Bitcoin Fund to be under stress
because such an event would merely induce the creation of more shares
through the trust's creation and redemption process.
Further, given that the issuer of each Bitcoin Fund may create and
redeem shares that represent an interest in Bitcoin, the Exchange
believes it is relevant to compare the size of a position limit to the
market capitalization of the Bitcoin market. As of August 30, 2024, the
global supply of Bitcoin was 19,747,066, and the price of one Bitcoin
was approximately $59,108.23, which equates to a market capitalization
of approximately $1.167 trillion.\41\ Consider the proposed position
and exercise limit of 25,000 option contracts for each Bitcoin Fund
option. A position and exercise limit of 25,000 same side contracts
effectively restricts a market participant from holding positions that
could result in the receipt of no more than 2,500,000 shares of GBTC,
BTC, or BITB, as applicable (if that market participant exercised all
its options). The following table shows the share price of each Bitcoin
Fund on August 30, 2024, the value of 2,500,000 shares of the Bitcoin
Fund at that price, and the approximate percentage of that value of the
size of the Bitcoin market:
---------------------------------------------------------------------------
\41\ See https://www.blockchain.com/explorer/charts/total-bitcoins.
----------------------------------------------------------------------------------------------------------------
Value of
Aug. 30th share 2,500,000 shares Percentage of
Bitcoin Fund price ($) of bitcoin fund bitcoin market
($)
----------------------------------------------------------------------------------------------------------------
GBTC................................................... 46.75 116,875,000 0.010
BTC.................................................... 5.20 13,000,000 0.001
BITB................................................... 31.95 79,875,000 0.007
----------------------------------------------------------------------------------------------------------------
Therefore, if a market participant with the maximum 25,000 same
side contracts in options on GBTC, BTC, or BITB exercised all positions
at one time, such an event would have no practical impact on the
Bitcoin market.
The Exchange also reviewed the market capitalization of each
Bitcoin Fund relative to the market
[[Page 84965]]
capitalization of the entire bitcoin market, as of August 30, 2024.
----------------------------------------------------------------------------------------------------------------
bitcoin/shares Market value (8/30/ % of total
outstanding 2024) bitcoin market
----------------------------------------------------------------------------------------------------------------
Total Bitcoin Market \42\.......................... 19,747,066 $1,167,214,096,788 100.00
GBTC............................................... 284,570,100 13,443,091,524 1.15
BTC................................................ 366,950,100 1,930,157,526 0.17
BITB............................................... 68,690,000 2,221,640,670 0.19
----------------------------------------------------------------------------------------------------------------
As shown above, the Bitcoin Funds collectively represent
approximately 1.51% of the global supply of Bitcoin (19,747,066). Based
on the $46.75 price of a GBTC share on August 30, 2024, a market
participant could have redeemed one Bitcoin for approximately 1,264
GBTC shares. Another 24,967,146,455 GBTC shares could be created before
the supply of Bitcoin was exhausted. As a result, 9,987 market
participants would have to simultaneously exercise 25,000 same side
positions in GBTC options to receive shares of the GBTC holding the
entire global supply of Bitcoin. Similarly, based on the $5.20 price of
a BTC share on August 30, 2024, a market participant could have
redeemed one Bitcoin for approximately 11,367 BTC shares. Another
224,464,249,382 BTC shares could be created before the supply of
Bitcoin was exhausted. As a result, 89,786 market participants would
have to simultaneously exercise 25,000 same side positions in BTC
options to receive shares of BTC holding the entire global supply of
Bitcoin. Similarly, based on the $31.95 price of a BITB share on August
30, 2024, a market participant could have redeemed one Bitcoin for
approximately 1,850 BITB shares. Another 36,532,522,591 BITB shares
could be created before the supply of Bitcoin was exhausted. As a
result, 14,613 market participants would have to simultaneously
exercise 25,000 same side positions in BITB options to receive shares
of BITB holding the entire global supply of Bitcoin. Unlike the Bitcoin
Funds, the number of shares that corporations may issue is limited.
However, like corporations, which authorize additional shares,
repurchase shares, or split their shares, the Bitcoin Funds may create,
redeem, or split shares in response to demand. While the supply of
Bitcoin is limited to 21,000,000, it is believed that it will take more
than 100 years to fully mine the remaining Bitcoin.\43\ The supply of
Bitcoin is larger than the available supply of most securities.\44\
Given the significant unlikelihood of any of these events ever
occurring, the Exchange does not believe options on the Bitcoin Funds
should be subject to position and exercise limits even lower than those
proposed (which are already equal to the lowest available limit for
equity options in the industry) to protect the supply of Bitcoin.
---------------------------------------------------------------------------
\42\ See id.
\43\ See https://www.blockchain.com/explorer/assets/btc (citing
21 million as the ``total supply'' of bitcoin).
\44\ The market capitalization of Bitcoin would rank in the top
10 among securities. See https://companiesmarketcap.com/usa/largest-companies-in-the-usa-by-market-cap/.
---------------------------------------------------------------------------
The Exchange also believes the proposed limits are appropriate
given position limits for Bitcoin futures. For example, the Chicago
Mercantile Exchange (``CME'') imposes a position limit of 2,000 futures
(for the initial spot month) on its Bitcoin futures contract.\45\ On
August 28, 2024, CME Aug 24 Bitcoin Futures settled at $58,950. A
position of 2,000 CME Bitcoin futures, therefore, would have a notional
value of $589,500,000. The following table shows the share price of
each Bitcoin Fund on August 28, 2024, and the approximate number of
option contracts that equates to that notional value:
---------------------------------------------------------------------------
\45\ See CME Rulebook Chapter 350 (description of CME Bitcoin
Futures) and Chapter 5, Position Limit, Position Accountability and
Reportable Level Table in the Interpretations & Special Notices.
Each CME Bitcoin futures contract is valued at five Bitcoins as
defined by the CME CF Bitcoin Reference Rate (``BRR''). See CME Rule
35001.
------------------------------------------------------------------------
Number of
Bitcoin Fund Aug. 28th option
share price contracts
------------------------------------------------------------------------
GBTC.................................... 46.94 125,585
BTC..................................... 5.23 1,127,151
BITB.................................... 32.08 183,759
------------------------------------------------------------------------
The approximate number of option contracts for each Bitcoin Fund
that equate to the notional value of CME Bitcoin futures is
significantly higher than the proposed limit of 25,000 options contract
for each Bitcoin Fund option. The fact that many options ultimately
expire out-of-the-money and thus are not exercised for shares of the
underlying, while the delta of a Bitcoin Future is 1, further
demonstrates how conservative the proposed limits of 25,000 options
contracts are for the Bitcoin Fund options.
The Exchange notes, unlike options contracts, CME position limits
are calculated on a net futures-equivalent basis by contract and
include contracts that aggregate into one or more base contracts
according to an aggregation ratio(s).\46\ Therefore, if a portfolio
includes positions in options on futures, CME would aggregate those
positions into the underlying futures contracts in accordance with a
table published by CME on a delta equivalent value for the relevant
spot month, subsequent spot month, single month and all month position
limits.\47\ If a position exceeds position limits because of an option
assignment, CME permits market participants to liquidate the excess
position within one business day without being considered in violation
of its rules. Additionally, if at the close of trading, a position that
includes options exceeds position limits for futures contracts, when
evaluated using the delta factors as of that day's close of trading but
does not exceed the limits when evaluated using the previous day's
delta factors, then the position shall not constitute a position limit
violation. Considering CME's position limits on futures for Bitcoin,
the Exchange believes that that the proposed same side position limits
are more than appropriate for the Bitcoin Fund options.
---------------------------------------------------------------------------
\46\ See CME Rulebook Chapter 5, Position Limit, Position
Accountability and Reportable Level Table in the Interpretations &
Special Notices.
\47\ Id.
---------------------------------------------------------------------------
The Exchange believes the available supply of Bitcoin is not
relevant to the determination of position and exercise limits for
options overlying the Bitcoin Funds.\48\ Position and exercise limits
are
[[Page 84966]]
not a tool that should be used to address a potential limited supply of
the underlying of an underlying. Position and exercise limits do not
limit the total number of options that may be held, but rather they
limit the number of positions a single customer may hold or exercise at
one time.\49\ ``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.'' \50\ Position and exercise limit rules are intended ``to
prevent the establishment of options positions that can be used or
might create incentives to manipulate or disrupt the underlying market
so as to benefit the options position. In particular, position and
exercise limits are designed to minimize the potential for mini-
manipulations and for corners or squeezes of the underlying market. In
addition, such limits serve to reduce the possibility for disruption of
the options market itself, especially in illiquid options classes.''
\51\
---------------------------------------------------------------------------
\48\ The Exchange is unaware of any proposed rule change related
to position and exercise limits for any equity option (including
commodity ETF options) for which the Commission required
consideration of whether the available supply of an underlying
(whether it be a corporate stock or an ETF) or the contents of an
ETF (commodity or otherwise) should be considered when an exchange
proposed to establish those limits. See, e.g., Securities Exchange
Act Release No. 57894 May 30, 2008), 73 FR 32061 (June 5, 2008) (SR-
CBOE-2005-11) (approval order in which the Commission stated that
the ``listing and trading of Gold Trust Options will be subject to
the exchanges' rules pertaining to position and exercise limits and
margin''). The Exchange notes when the Commission approved this
filing, the position limits in Rule 9054 were the same as they are
today. For reference, the current position and exercise limits for
options on SPDR Gold Shares ETF (``GLD'') and options on iShares
Silver Trust (``SLV'') are 250,000 contracts, or 10 times that
proposed position and exercise limit for the Bitcoin Fund options.
\49\ For example, suppose an option has a position limit of
25,000 option contracts and there are a total of 10 investors
trading that option. If all 10 investors max out their positions,
that would result in 250,000 option contracts outstanding at that
time. However, suppose 10 more investors decide to begin trading
that option and also max out their positions. This would result in
500,000 option contracts outstanding at that time. An increase in
the number of investors could cause an increase in outstanding
options even if position limits remain unchanged.
\50\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
\51\ Id.
---------------------------------------------------------------------------
The Exchange notes that a Registration Statement on Form S-1 was
filed with the Commission for each Bitcoin Fund, each of which
described the supply of Bitcoin as being limited to 21,000,000 (of
which approximately 90% had already been mined), and that the limit
would be reached around the year 2140.\52\ Each Registration Statement
permits an unlimited number of shares of the applicable Bitcoin Fund to
be created. Further, the Commission approved proposed rule changes that
permitted the listing and trading of shares of each Bitcoin Fund, which
approval did not comment on the sufficient supply of Bitcoin or address
whether there was a risk that permitting an unlimited number of shares
for a Bitcoin Fund would impact the supply of Bitcoin.\53\ Therefore,
the Exchange believes the Commission had ample time and opportunity to
consider whether the supply of Bitcoin was sufficient to permit the
creation of unlimited Bitcoin Fund shares, and does not believe
considering this supply with respect to the establishment of position
and exercise limits is appropriate given its lack of relevance to the
purpose of position and exercise limits. However, given the significant
size of the Bitcoin supply, the proposed positions limits are more than
sufficient to protect investors and the market.
---------------------------------------------------------------------------
\52\ See, e.g., GBTC Form S-1 Registration Statement, at p. 17,
https://www.sec.gov/Archives/edgar/data/1588489/000119312517013693/d157414ds1.htm; BTC Form S-1 Registration Statement, at p. 21,
https://www.sec.gov/Archives/edgar/data/2015034/000119312524065444/d785023ds1.htm; and BITB Amendment No 2. to S-1, at p. 47, https://www.sec.gov/Archives/edgar/data/1763415/000199937123000735/bitwise-s1a_120423.htm (``Bitcoin Funds Reg. Stmts.'').
\53\ See Bitcoin ETP Approval Order.
---------------------------------------------------------------------------
Based on the foregoing, the Exchange believes the proposal to list
options on the Bitcoin Funds with positions and exercise limits of
25,000 on the same side, the lowest position limit available in the
options industry, is conservative and appropriate given the market
capitalization, average daily volume, and high number of outstanding
shares for each of the Bitcoin Funds. The proposed position and
exercise limits reasonably and appropriately balance the liquidity
provisioning in the market against the prevention of manipulation. The
Exchange believes these proposed limits are effectively designed to
prevent an individual customer or entity from establishing options
positions that could be used to manipulate the market of the underlying
Bitcoin Funds as well as the Bitcoin market.\54\
---------------------------------------------------------------------------
\54\ See Securities Exchange Act Release No. 39489 (December 24,
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
---------------------------------------------------------------------------
As described herein, options on the Bitcoin Funds will trade in the
same manner as any other ETF or ETP options on the Exchange, except
that the Bitcoin Funds will not be eligible for FLEX option trading.
The Exchange Rules that currently apply to the listing and trading of
options on the Exchange, including, for example, Rules that govern
listing criteria, expiration and exercise prices, minimum increments,
margin requirements, customer accounts and trading halt procedures will
apply to the listing and trading of Bitcoin Funds on the Exchange in
the same manner as they apply to all other ETFs and ETPs that are
listed and traded on the Exchange, including the precious metal-backed
commodity ETPs already deemed appropriate for options trading on the
Exchange pursuant to Commentary .10 to Rule 915. Further, as described
above, Exchange Rules regarding position and exercise limits will
likewise apply to options on the Bitcoin Funds except the that, as
proposed, the position and exercise limits will be set at 25,000 on the
same side.
* * * * *
The Exchange notes that options on Bitcoin Funds would not be
available for trading until The Options Clearing Corporation (``OCC'')
represents to the Exchange that it is fully able to clear and settle
such options. The Exchange has also analyzed its capacity and
represents that it and The Options Price Reporting Authority (``OPRA'')
have the necessary systems capacity to handle the additional traffic
associated with the listing of options on Bitcoin Funds. The Exchange
believes any additional traffic that would be generated from the
trading of options on Bitcoin Funds would be manageable. The Exchange
represents that Exchange members will not have a capacity issue as a
result of this proposed rule change.
The Exchange represents that the same surveillance procedures
applicable to all other options currently listed and traded on the
Exchange will apply to options on Bitcoin Funds, and that it has the
necessary systems capacity to support the new option series. The
Exchange's existing surveillance and reporting safeguards are designed
to deter and detect possible manipulative behavior which might arise
from listing and trading options on ETFs and ETPs, such as (existing)
precious metal-commodity backed ETP options as well as the proposed
options on Bitcoin Funds. The Exchange believes that its surveillance
procedures are adequate to properly monitor the trading of options on
Bitcoin Funds in all trading sessions and to deter and detect
violations of Exchange rules. Specifically, the Exchange's market
surveillance staff will have access to the surveillances conducted by
its affiliate NYSE, Arca Inc. with respect to the Bitcoin Funds and
would review activity in the underlying Funds when conducting
surveillances for market abuse or manipulation in the options on the
Trust. Additionally, the Exchange is a member of the Intermarket
Surveillance Group (``ISG'') under the Intermarket Surveillance Group
Agreement. ISG members work together to coordinate surveillance and
investigative information sharing in the stock, options, and futures
markets. In addition, the Exchange has a Regulatory Services Agreement
with the Financial Industry Regulatory Authority (``FINRA''). Pursuant
to a multi-party 17d-2 joint plan, all options exchanges
[[Page 84967]]
allocate regulatory responsibilities to FINRA to conduct certain
options-related market surveillances.\55\ Further, the Exchange will
implement any new surveillance procedures it deems necessary to
effectively monitor the trading of options on the Bitcoin Funds.
---------------------------------------------------------------------------
\55\ Section 19(g)(1) of the Act, among other things, requires
every SRO registered as a national securities exchange or national
securities association to comply with the Act, the rules and
regulations thereunder, and the SRO's own rules, and, absent
reasonable justification or excuse, enforce compliance by its
members and persons associated with its members. See 15 U.S.C.
78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the Act allows
the Commission to relieve an SRO of certain responsibilities with
respect to members of the SRO who are also members of another SRO.
Specifically, Section 17(d)(1) allows the Commission to relieve an
SRO of its responsibilities to: (i) receive regulatory reports from
such members; (ii) examine such members for compliance with the Act
and the rules and regulations thereunder, and the rules of the SRO;
or (iii) carry out other specified regulatory responsibilities with
respect to such members.
---------------------------------------------------------------------------
The underlying shares of spot bitcoin ETPs, including the Bitcoin
Funds, are also subject to safeguards related to addressing market
abuse and manipulation. As the Commission stated in its order approving
proposals of several exchanges to list and trade shares of spot
bitcoin-based exchange-traded products (``Bitcoin ETP Order''):
Each Exchange has a comprehensive surveillance-sharing agreement
with the CME via their common membership in the Intermarket
Surveillance Group. This facilitates the sharing of information that
is available to the CME through its surveillance of its markets,
including its surveillance of the CME bitcoin futures market.\56\
---------------------------------------------------------------------------
\56\ See Securities Exchange Act Release No. 99306 (January 10,
2024), 89 FR 3008, 3009 (January 17, 2024) (File Nos. SR-NYSEArca-
2021-90; SR-NYSEArca-2023-44; SR-NYSEArca-2023-58; SR-NASDAQ-2023-
016; SR-NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-CboeBZX-2023-038;
SR-CboeBZX-2023-040; SR-CboeBZX-2023-042; SR-CboeBZX-2023-044; and
SR-CboeBZX-2023-072) (Order Granting Accelerated Approval of
Proposed Rule Changes, as Modified by Amendments Thereto, to List
and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust
Units).
The Exchange states that, given the consistently high correlation
between the CME bitcoin futures market and the spot bitcoin market, as
confirmed by the Commission through robust correlation analysis, the
Commission was able to conclude that such surveillance sharing
agreements could reasonably be ``expected to assist in surveilling for
fraudulent and manipulative acts and practices in the specific context
of the [Bitcoin ETPs].'' \57\
---------------------------------------------------------------------------
\57\ See Bitcoin ETP Order, 89 FR at 3010-11.
---------------------------------------------------------------------------
In light of surveillance measures related to both options and
futures as well as the underlying Bitcoin Funds,\58\ the Exchange
believes that existing surveillance procedures are designed to deter
and detect possible manipulative behavior which might potentially arise
from listing and trading the proposed options on the Bitcoin Funds.
---------------------------------------------------------------------------
\58\ See Amendment No. 2 to Proposed Rule Change to List and
Trade Shares of the Grayscale Bitcoin Trust (BTC) under NYSE Arca
Rule 8.201-E (Commodity-Based Trust Shares) (SR-NYSEARCA-2021-90),
filed Jan. 5, 2024, available at https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-358659-884182.pdf ; Amendment No.
2 to Proposed Rule Change to List and Trade Shares of the Bitwise
Bitcoin ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) (SR-NYSEARCA-2023-44), filed Jan. 5, 2024, available at
https://www.sec.gov/comments/sr-nysearca-2023-44/srnysearca202344-358800-884322.pdf; and Notice of Filing of Proposed Rule Change, as
Modified by Amendment No. 1, To List and Trade Shares of the
Grayscale Bitcoin Mini Trust Under NYSE Arca Rule 8.201-E,
Commodity-Based Trust Shares, Securities Exchange Act Release No.
100290 (June 6, 2024), 89 FR 49931 (June 12, 2024) (SR-NYSEARCA-
2024-45).
---------------------------------------------------------------------------
Finally, quotation and last sale information for ETFs is available
via the Consolidated Tape Association (``CTA'') high speed line.
Quotation and last sale information for such securities is also
available from the exchange on which such securities are listed.
Quotation and last sale information for options on Bitcoin Funds will
be available via OPRA and major market data vendors.
The Exchange believes that offering options on Bitcoin Funds will
benefit investors by providing them with an additional, relatively
lower cost investing tool to gain exposure to the price of Bitcoin and
hedging vehicle to meet their investment needs in connection with
Bitcoin-related products and positions. The Exchange expects investors
will transact in options on Bitcoin Funds in the unregulated over-the-
counter (``OTC'') options market,\59\ but may prefer to trade such
options in a listed environment to receive the benefits of trading
listed options, including (1) enhanced efficiency in initiating and
closing out position; (2) increased market transparency; and (3)
heightened contra-party creditworthiness due to the role of OCC as
issuer and guarantor of all listed options. The Exchange believes that
listing Bitcoin Fund options may cause investors to bring this
liquidity to the Exchange, would increase market transparency and
enhance the process of price discovery conducted on the Exchange
through increased order flow. The Exchange notes that the ETPs that
hold precious metal commodities on which the Exchange may already list
and trade options are trusts structured in substantially the same
manner as Bitcoin Funds and essentially offer the same objectives and
benefits to investors, just with respect to different assets. The
Exchange notes that it has not identified any issues with the continued
listing and trading of options on any ETFs or ETPs that hold
commodities (i.e., precious metals) that it currently lists and trades
on the Exchange.
---------------------------------------------------------------------------
\59\ The Exchange understands from customers that investors have
historically transacted in options on ETFs in the OTC options market
if such options were not available for trading in a listed
environment.
---------------------------------------------------------------------------
Finally, the Exchange notes that applicable Exchange rules will
require that customers receive appropriate disclosure before trading
options in Bitcoin Funds.\60\ Further, brokers opening accounts and
recommending options transactions must comply with relevant customer
suitability standards.\61\
---------------------------------------------------------------------------
\60\ See Rules 921(c) and (f), and Commentary .01 to Rule 921
and 481.
\61\ See Rule 923.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposed rule change is consistent
with Section 6(b) of the Act \62\ in general and furthers the
objectives of Section 6(b)(5) of the Act \63\ in particular, in that it
is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------
\62\ 15 U.S.C. 78f(b).
\63\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In particular, the Exchange believes that the proposal to list and
trade options on Bitcoin 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 Bitcoin
Funds will provide investors with an opportunity to realize the
benefits of utilizing options on a Bitcoin Fund, including cost
efficiencies and increased hedging strategies.
The Exchange believes that offering Bitcoin 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 Bitcoin and with Bitcoin-related products and
positions. Additionally, the Exchange's offering of Bitcoin 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
[[Page 84968]]
transparency and enhance the process of price discovery conducted on
the Exchange through increased order flow to the benefit of all
investors. The Exchange also notes that it already lists options on
other commodity-based ETPs,\64\ which, as described above, are trusts
structured in substantially the same manner as Bitcoin Funds and
essentially offer the same objectives and benefits to investors, just
with respect to a different commodity (i.e., Bitcoin rather than
precious metals) and for which the Exchange has not identified any
issues with the continued listing and trading of commodity-backed ETP
options it currently lists for trading.
---------------------------------------------------------------------------
\64\ See Rule 915, Commentary .10.
---------------------------------------------------------------------------
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 Bitcoin
Funds satisfy the initial listing standards and continued listing
standards currently in the Exchange Rules applicable to options on all
ETFs and ETPs, including ETPs that hold other commodities already
deemed appropriate for options trading on the Exchange. Additionally,
as demonstrated above, each Bitcoin Fund is characterized by a
substantial number of shares that are widely held and actively traded.
Bitcoin Fund options will trade in the same manner as any other ETF or
ETP options--the same Exchange Rules that currently govern the listing
and trading of options, including permissible expirations, strike
prices, minimum increments, and margin requirements, will govern the
listing and trading of options on Bitcoin Funds in the same manner.
The Exchange believes the proposed rule change to exclude the
Bitcoin Funds from being eligible for trading as FLEX options is
consistent with the Act, because it will permit the Exchange to
continue to participate in ongoing discussions with the Commission
regarding appropriate position limits for options on these Funds.\65\
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\65\ The Exchange will submit a separate rule filing that would
permit the Exchange to authorize for trading FLEX options on the
Bitcoin Funds (which filing may propose changes to existing FLEX
option position limits for such options if appropriate).
---------------------------------------------------------------------------
The proposed position and exercise limit for options on the Bitcoin
Funds is 25,000 contracts. These position and exercise limits are the
lowest position and exercise limits available in the options industry,
are extremely conservative and more than appropriate given the Bitcoin
Funds' market capitalization, average daily volume, number of
beneficial holders, and high number of outstanding shares.\66\ The
proposed position and exercise limits are consistent with the Act as
they addresses concerns related to manipulation and protection of
investors because the position and exercise limits are extremely
conservative and more than appropriate given the Bitcoin Funds are
actively traded.
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\66\ The Exchange notes that IBIT--which has been approved for
options trading--represents a larger percentage of the bitcoin
market than all three Bitcoin Funds. See ISE IBIT Approval Order,
supra note 6. As noted herein, the Bitcoin Funds collectively
represent approximately 1.51% of the bitcoin market. By comparison,
IBIT options have an approved position limit of 25,000 contracts per
side, which represents 4% of total underlying spot BTC liquidity,
and IBIT is the most liquid spot Bitcoin ETF. See id.
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The Exchange also believes the proposed rule change to Rule
903G(a), to make clear that options on the Bitcoin Funds are not
eligible for FLEX trading, will remove impediments to and perfect the
mechanism of a free and open market and a national market system
because it adds clarity and transparency to Exchange Rules making them
easier to navigate and understand to the benefit of investors and the
public interest.
The Exchange represents that it has the necessary systems capacity
to support the new Bitcoin Fund options. The Exchange believes that its
existing surveillance and reporting safeguards are designed to deter
and detect possible manipulative behavior which might arise from
listing and trading options, including Bitcoin Fund options. The
Exchange's existing surveillance and reporting safeguards are designed
to deter and detect possible manipulative behavior which might arise
from listing and trading options on ETFs and ETPs, such as (existing)
precious metal-commodity backed ETP options as well as the proposed
options on Bitcoin Funds. The Exchange believes that its surveillance
procedures are adequate to properly monitor the trading of options on
Bitcoin Funds in all trading sessions and to deter and detect
violations of Exchange rules. Specifically, the Exchange's market
surveillance staff will have access to the surveillances conducted by
its affiliated NYSE, Arca Inc. with respect to the Bitcoin Funds and
would review activity in the underlying Funds when conducting
surveillances for market abuse or manipulation in the options on the
Trust. Additionally, the Exchange is a member of the ISG under the
Intermarket Surveillance Group Agreement. ISG members work together to
coordinate surveillance and investigative information sharing in the
stock, options, and futures markets. In addition, the Exchange has a
Regulatory Services Agreement with the FINRA and, as noted herein,
pursuant to a multi-party 17d-2 joint plan, all options exchanges
allocate regulatory responsibilities to FINRA to conduct certain
options-related market surveillances. Further, the Exchange will
implement any new surveillance procedures it deems necessary to
effectively monitor the trading of options on the Bitcoin Funds.
The underlying shares of spot bitcoin ETPs, including the Bitcoin
Funds, are also subject to safeguards related to addressing market
abuse and manipulation. As the Commission stated in its order approving
proposals of several exchanges to list and trade shares of spot
bitcoin-based ETPs, ``[e]ach Exchange has a comprehensive surveillance-
sharing agreement with the CME via their common membership in the
Intermarket Surveillance Group. This facilitates the sharing of
information that is available to the CME through its surveillance of
its markets, including its surveillance of the CME bitcoin futures
market.\67\ The Exchange states that, given the consistently high
correlation between the CME bitcoin futures market and the spot bitcoin
market, as confirmed by the Commission through robust correlation
analysis, the Commission was able to conclude that such surveillance
sharing agreements could reasonably be ``expected to assist in
surveilling for fraudulent and manipulative acts and practices in the
specific context of the [Bitcoin ETPs].'' \68\ In light of surveillance
measures related to both options and futures as well as the underlying
Bitcoin Funds,\69\ the
[[Page 84969]]
Exchange believes that existing surveillance procedures are designed to
deter and detect possible manipulative behavior which might potentially
arise from listing and trading the proposed options on the Bitcoin
Funds. Further, the Exchange will implement any new surveillance
procedures it deems necessary to effectively monitor the trading of
options on Bitcoin ETPs.
---------------------------------------------------------------------------
\67\ See Securities Exchange Act Release No. 99306 (January 10,
2024), 89 FR 3008, 3009 (January 17, 2024) (File Nos. SR-NYSEArca-
2021-90; SR-NYSEArca-2023-44; SR-NYSEArca-2023-58; SR-NASDAQ-2023-
016; SR-NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-CboeBZX-2023-038;
SR-CboeBZX-2023-040; SR-CboeBZX-2023-042; SRCboeBZX-2023-044; and
SR-CboeBZX-2023-072) (Order Granting Accelerated Approval of
Proposed Rule Changes, as Modified by Amendments Thereto, to List
and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust
Units).
\68\ See Bitcoin ETP Order, 89 FR at 3010-11.
\69\ See Amendment No. 2 to Proposed Rule Change to List and
Trade Shares of the Grayscale Bitcoin Trust (BTC) under NYSE Arca
Rule 8.201-E (Commodity-Based Trust Shares) (SR-NYSEARCA-2021-90),
filed Jan. 5, 2024, available at https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-358659-884182.pdf; Amendment No. 2
to Proposed Rule Change to List and Trade Shares of the Bitwise
Bitcoin ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) (SR-NYSEARCA-2023-44), filed Jan. 5, 2024, available at
https://www.sec.gov/comments/sr-nysearca-2023-44/srnysearca202344-358800-884322.pdf; and Notice of Filing of Proposed Rule Change, as
Modified by Amendment No. 1, To List and Trade Shares of the
Grayscale Bitcoin Mini Trust Under NYSE Arca Rule 8.201-E,
Commodity-Based Trust Shares, Securities Exchange Act Release No.
100290 (June 6, 2024), 89 FR 49931 (June 12, 2024) (SR-NYSEARCA-
2024-45).
---------------------------------------------------------------------------
Finally, the Exchange notes that this proposal will remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, protect investors because
applicable Exchange rules will require that customers receive
appropriate disclosure before trading options in Bitcoin Funds \70\ and
will require that brokers opening accounts and recommending options
transactions comply with relevant customer suitability standards.\71\
---------------------------------------------------------------------------
\70\ See Rule 921(f). See also Rule 921(c), Commentary .01 to
Rule 921, and Rule 481.
\71\ See Rule 923.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
Intramarket Competition: The Exchange does not believe that the
proposed rule change will impose any burden on intramarket competition
that is not necessary or appropriate in furtherance of the purposes of
the Act as Bitcoin Funds would need to satisfy the initial listing
standards set forth in the Exchange Rules in the same manner as any
other ETF before the Exchange could list options on them. Additionally,
Bitcoin Fund options will be equally available to all market
participants who wish to trade such options. The Exchange Rules
currently applicable to the listing and trading of options on ETFs on
the Exchange will apply in the same manner to the listing and trading
of all options on Bitcoin Funds. Also, and as stated above, the
Exchange already lists options on other commodity-based ETPs.\72\
---------------------------------------------------------------------------
\72\ See Rule 915, Commentary .10.
---------------------------------------------------------------------------
Intermarket Competition: The Exchange does not believe that the
proposal to list and trade options on Bitcoin 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 Bitcoin 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. As noted herein, this is a competitive
filing as the Commission recently approved the listing and trading of
options on an ETP that, like the Bitcoin Funds, holds bitcoin.\73\
Additionally, other options exchanges are free to amend their listing
rules, as applicable, to permit them to list and trade options on
Bitcoin Funds. The Exchange notes that listing and trading Bitcoin 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.
---------------------------------------------------------------------------
\73\ See ISE IBIT Approval Order, supra note 6.
---------------------------------------------------------------------------
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 Bitcoin 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 Bitcoin
prices and Bitcoin-related products and positions on a listed options
exchange.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change, as modified by Amendment No. 3, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange,\74\ and, in particular,
the requirements of Section 6 of the Act.\75\ Specifically, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\76\ which requires that an exchange have
rules designed to prevent fraudulent and manipulative acts and
practices, to remove impediments to and perfect the mechanism of a free
and open market, and to protect investors and the public interest.
---------------------------------------------------------------------------
\74\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\75\ 15 U.S.C. 78f.
\76\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Widely Held and Actively Traded
The Exchange's initial listing standards require, among other
things, that the security underlying a listed option be ``characterized
by a substantial number of outstanding shares that are widely held and
actively traded.'' \77\ As described above, the Exchange states that,
as of August 30, 2024, GBTC had 284,570,100 shares outstanding, BTC had
366,950,100 shares outstanding, and BITB had 68,690,000 shares
outstanding.\78\ The Exchange states that, as of August 14, 2024, GBTC
had 464,364 beneficial holders, BTC had 13,403 beneficial holders, and
BITB had 75,437 beneficial holders.\79\ In addition, the Exchange
states that from January 11, 2024, through September 30, 2024, GBTC had
trading volume of 1,803,567,700 shares ($93,472,544,497 notional
volume) and BITB had trading volume of 434,815,840 shares
($14,433,361,384 notional volume).\80\ The Exchange states that from
July 31, 2024, through September 30, 2024, BTC had trading volume of
335,492,930 shares ($1,792,866,521 notional volume).\81\ The Exchange
further states that, for the 30-day period from September 1, 2024,
through September 30, 2024, GBTC had ADV of 3,266,138 shares, BTC had
ADV of 6,838,546 shares, and BITB had ADV of 1,949,835 shares.\82\ In
addition, the Exchange states that, as of August 30, 2024, GBTC had
market capitalization of $13,443,091,524, BTC had market capitalization
of $1,930,157,526, and BITB had market capitalization of
$2,221,640,670.\83\
---------------------------------------------------------------------------
\77\ See Exchange Rule 915(a)(2).
\78\ See Amendment No. 3 at 6.
\79\ See id. at 7.
\80\ See id. at 7.
\81\ See id.
\82\ See id.
\83\ See id. at 6.
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[[Page 84970]]
The Commission has reviewed the Exchange's analysis and publicly
available data regarding the Bitcoin Funds. Based on this review of
information provided by the Exchange and publicly available
information--including information regarding the number of shares
outstanding and the number of beneficial holders for each Bitcoin Fund,
the ADV of each Bitcoin Fund, and the market capitalization of each
Bitcoin Fund--the Commission concludes that it is reasonable for the
Exchange to determine that the Bitcoin Funds satisfy the requirement of
Exchange Rule 915(a)(2) that the security underlying a listed option be
widely held and actively traded.
B. Position and Exercise Limits
Position and exercise limits serve as a regulatory tool designed to
deter manipulative schemes and adverse market impact surrounding the
use of options. Since the inception of standardized options trading,
the options exchanges have had rules limiting the aggregate number of
options contracts that a member or customer may hold or exercise.
Options position and exercise limits are intended to prevent the
establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market to benefit
the options position.\84\ In addition, such limits serve to reduce the
possibility of disruption in the options market itself, especially in
illiquid classes.\85\ As the Commission has previously recognized,
markets with active and deep trading interest, as well as with broad
public ownership, are more difficult to manipulate or disrupt than less
active and deep markets with smaller public floats.\86\ The Commission
also has recognized that position and exercise limits must be
sufficient to prevent investors from disrupting the market for the
underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security.\87\ At the same time, the
Commission has recognized that limits must not be established at levels
that are so low as to discourage participation in the options market by
institutions and other investors with substantial hedging needs or to
prevent specialists and market-makers from adequately meeting their
obligations to maintain a fair and orderly market.\88\
---------------------------------------------------------------------------
\84\ See Securities Exchange Act Release No. 39489 (Dec. 24,
1997), 63 FR 276, 279 (Jan 5. 1998) (order approving File No. SR-
Cboe-97-11) (``Position Limit Order'').
\85\ Id.
\86\ Id.
\87\ See, e.g., Securities Exchange Act Release Nos. 21907 (Mar.
29, 1985), 50 FR 13440, 13441 (Apr. 4, 1985) (order approving File
Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-25, and SR-PSE-85-1);
and 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan. 12, 1999) (order
approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-98-33; and Phlx-
98-36).
\88\ See id.
---------------------------------------------------------------------------
The Exchange proposes a position limit of 25,000 contracts on the
same side of the market for options on each Bitcoin Fund and an
equivalent exercise limit.\89\ In proposing these position and exercise
limits, the Exchange considered, among other things, the ADV,
outstanding shares, and market capitalization of each Bitcoin Fund.\90\
The Exchange states that Exchange Rule 904, Commentary .07(a)(i)
establishes a position limit of 250,000 contracts for options on an
underlying security with six-month trading volume of 100,000,000
shares.\91\ The Exchange states that six-month trading volumes for GBTC
and BITB were, respectively, 723,758,100 shares and 263,965,870 shares,
and that the two-month trading volume for BTC was 335,492,930
shares.\92\ The Exchange further states that the proposed position and
exercise limits are lower than the position and exercise limits for
options other commodity-based ETPs that have lower trading volumes than
the Bitcoin Funds.\93\ In addition, the Exchange states that, as of
August 30, 2024, the number of shares represented by the proposed
position and exercise limits were equal to approximately 0.9% of the
outstanding shares of GBTC, 0.7% of the outstanding shares of BTC, and
3.6% of the outstanding shares of BITB.\94\ The Exchange further states
that the proposed ``position and exercise limits are the lowest
position and exercise limits available in the options industry, are
extremely conservative and more than appropriate given the Bitcoin
Funds' market capitalization, average daily volume, number of
beneficial holders, and high number of outstanding shares.'' \95\
---------------------------------------------------------------------------
\89\ See Amendment No. 3 and proposed Exchange Rule 904,
Commentary .07(f) and Exchange Rule 905(a)(i).
\90\ See Amendment No. 3 at 16.
\91\ See id. at 11.
\92\ See id.
\93\ See id.
\94\ See id. at 11-12.
\95\ Id. at 21.
---------------------------------------------------------------------------
The Exchange also compared the size of the position and exercise
limits to the market capitalization of the Bitcoin market, which,
according to the Exchange, had a market capitalization of approximately
$1.167 trillion as of August 30, 2024.\96\ The Exchange calculated that
with a position limit of 25,000 contracts (2,500,000 shares of the
underlying Bitcoin Fund), as of August 30, 2024, a market participant
could hold a position in shares of GBTC that represented 0.010% of the
bitcoin market, a position in BTC that represented 0.001% of the
bitcoin market, and a position in BITB that represented 0.007% of the
bitcoin market, positions that the Exchange states ``would have no
practical impact on the Bitcoin market.'' \97\
---------------------------------------------------------------------------
\96\ See id. at 12-13.
\97\ Id. at 13.
---------------------------------------------------------------------------
The Exchange states that the proposed position and exercise limits
also are appropriate given position limits for Bitcoin futures.\98\ The
Exchange states that the Chicago Mercantile Exchange (``CME'')
establishes a position limit of 2,000 Bitcoin futures for the spot
month and that, as of August 28, 2024, such a position would have had a
notional value of $589,500,000.\99\ The Exchange states that, as of
that date, 125,585 GBTC options, 1,127,151 BTC options, and 183,759
BITB options would be the equivalent of the $589,500,000 CME bitcoin
futures notional value.\100\ The Exchange states that the option
contract equivalent numbers are significantly higher than the proposed
position and exercise limit of 25,000 contracts.\101\
---------------------------------------------------------------------------
\98\ See id. at 14-15.
\99\ See id. at 14.
\100\ See id.
\101\ See id. at 15.
---------------------------------------------------------------------------
In addition, the Exchange states that, based on the number of
shares outstanding for each Bitcoin Fund as of August 30, 2024, and
with a position limit of 25,000 option contracts, 114 market
participants, each with a same side position of 25,000 contracts, would
have to exercise all of their GBTC options to place the GBTC shares
under stress; 147 market participants, each with a same side position
of 25,000 contracts, would have to exercise all of their BTC options to
place the BTC shares under stress; and 27 market participants, each
with a same side position of 25,000 contracts, would have to exercise
all of their BITB options to place the BITB shares under stress.\102\
The Exchange states that the proposed position and exercise limits
``are extremely conservative and more than appropriate given the
Bitcoin Funds' market capitalization, average daily volume, number of
beneficial holders, and high number of outstanding shares.'' \103\ The
Exchange states that the proposed position and exercise limits
[[Page 84971]]
reasonably and appropriately balance the liquidity provisioning in the
market against the prevention of manipulation.\104\ The Exchange
further states that the proposed limits are effectively designed to
prevent an individual customer or entity from establishing options
positions that could be used to manipulate the market of the underlying
Bitcoin Funds as well as the Bitcoin market.\105\
---------------------------------------------------------------------------
\102\ See id. at 12.
\103\ Id. at 21.
\104\ See id. at 16-17.
\105\ See id. at 17 (citing the Position Limit Order supra note
84.
---------------------------------------------------------------------------
The Commission finds that the proposed position and exercise limits
are consistent with the Act, and in particular, with the requirements
in Section 6(b)(5) that the rules of a national securities exchange
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest. As discussed above, the
Commission has recognized that position and exercise limits must be
sufficient to prevent investors from disrupting the market for the
underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security.\106\ In addition, the
Commission has stated previously that rules regarding position and
exercise limits are intended to prevent the establishment of options
positions that can be used or might create incentives to manipulate or
disrupt the underlying market so as to benefit the options
position.\107\ Based on its review of the data and analysis provided by
the Exchange, the Commission concludes that the proposed position and
exercise limits satisfy these objectives. Specifically, the Commission
has considered and reviewed the Exchange's analysis that, as of August
30, 2024, the proposed position and exercise limits of 25,000 contracts
represented approximately 0.9% of the outstanding shares of GBTC, 0.7%
of the outstanding shares of BTC, and 3.6% of the outstanding shares of
BITB.\108\ The Commission also has considered and reviewed the
Exchange's statement that with a position limit of 25,000 contracts,
114 market participants, each with a same side position of 25,000
contracts, would have to exercise all of their GBTC options to place
the GBTC shares under stress; 147 market participants, each with a same
side position of 25,000 contracts, would have to exercise all of their
BTC options to place the BTC shares under stress; and 27 market
participants, each with a same side position of 25,000 contracts, would
have to exercise all of their BITB options to place the BITB shares
under stress.\109\ Based on the Commission's review of this information
and analysis, the Commission concludes that the proposed position and
exercise limits are designed to prevent investors from disrupting the
market for the underlying securities by acquiring and exercising a
number of options contracts disproportionate to the deliverable supply
and average trading volume of the underlying security, and to prevent
the establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market so as to
benefit the options position.
---------------------------------------------------------------------------
\106\ See supra note 73 and accompanying text.
\107\ See Securities Exchange Act Release No. 57352 (Feb.19,
2008), 73 FR 10076, 10080 (Feb. 25, 2008) (order approving File No.
SR-Cboe-2008-07).
\108\ See Amendment No. 3 at 11-12.
\109\ See id. at 12.
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The proposal excludes the Bitcoin Fund options from FLEX
trading.\110\ Excluding Bitcoin Fund options from FLEX trading will
allow the Commission to consider the listing of FLEX options on the
Bitcoin Funds in the context of any separate proposal to list such
options.
---------------------------------------------------------------------------
\110\ See proposed Exchange Rule 903G(a)(1). The Exchange states
that excluding Bitcoin Fund options from FLEX trading will allow the
Exchange to continue to participate in ongoing discussions with the
Commission regarding appropriate position limits for options on the
Bitcoin Funds. See Amendment No. 3 at 21.
---------------------------------------------------------------------------
C. Surveillance
As described more fully above, the Exchange states that the same
surveillance procedures applicable to all other options currently
listed and traded on the Exchange will apply to options on the Bitcoin
Funds.\111\ The Exchange states that its market surveillance staff
would have access to the surveillances conducted by its affiliate, NYSE
Arca, Inc. with respect to the Bitcoin Funds and would review activity
in the underlying Bitcoin Funds when conducting surveillance for market
abuse or manipulations in options on the Bitcoin Funds.\112\
Additionally, the Exchange states that it is a member of the
Intermarket Surveillance Group (``ISG'') under the Intermarket
Surveillance Group Agreement, and that ISG members work together to
coordinate surveillance and investigative information sharing in the
stock, options, and futures markets.\113\ CME also is a member of ISG.
In approving the Bitcoin ETPs, the Commission concluded that:
---------------------------------------------------------------------------
\111\ See id. at 17.
\112\ See Amendment No. 3 at 17.
\113\ See id.
fraud or manipulation that impacts prices in spot bitcoin markets
would likely similarly impact CME bitcoin futures prices. And
because the CME's surveillance can assist in detecting those impacts
on CME bitcoin futures prices, the Exchanges' comprehensive
surveillance-sharing agreement with the CME--a U.S. regulated market
whose bitcoin futures market is highly correlated to spot bitcoin--
can reasonably be expected to assist in surveilling for fraudulent
and manipulative acts and practices in the specific context of [the
Bitcoin ETPs].\114\
---------------------------------------------------------------------------
\114\ See Bitcoin ETP Order, 89 FR at 3010-11.
Together, these surveillance procedures should allow the Exchange
to investigate suspected manipulations or other trading abuses in
options on the Bitcoin Funds.
D. Retail Customers
The Exchange states that applicable Exchange rules will require
that customers receive appropriate disclosure before trading options in
Bitcoin Funds.\115\ Further, the Exchange states that brokers opening
accounts and recommending options transactions must comply with
relevant customer suitability standards.\116\
---------------------------------------------------------------------------
\115\ See Amendment No. 3 at 19; Exchange Rules 921(c), (f), and
Commentary .01 to Exchange Rule 921; and Exchange Rule 481.
\116\ See Amendment No. 3 at 19 and Exchange Rule 923.
---------------------------------------------------------------------------
Existing rules governing broker-dealer conduct when dealing with
retail customers will apply to the proposed Bitcoin Fund options. For
example, the Exchange's rules require its members to ``exercise due
diligence to learn the essential facts as to the customer and his
investment objectives and financial situation.'' \117\ In fulfilling
this obligation, the member must consider, among other things, a
customer's investment objectives; employment status; estimated annual
income; estimated net worth; and investment experience and
knowledge.\118\ Further, FINRA's heightened suitability requirements
for options trading accounts require that a person recommending an
opening position in any option contract have ``a reasonable basis for
believing, at the time of making the recommendation, that the customer
has such knowledge and experience in financial matters that he may
reasonably be expected to be capable of evaluating the risks of the
recommended transaction, and is financially able to bear the risks of
the recommended position in the option contract.'' \119\
---------------------------------------------------------------------------
\117\ See Exchange Rule 921(c).
\118\ See Exchange Rule 921, Commentary .01.
\119\ See FINRA Rule 2360(b)(19).
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[[Page 84972]]
IV. Solicitation of Comments on Amendment No. 3 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 3 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-NYSEAMER-2024-49 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-NYSEAMER-2024-49. 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-NYSEAMER-2024-49 and should
be submitted on or before November 14, 2024.
V. Accelerated Approval of Amendment No. 3
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, for approving Amendment No. 3 prior to the 30th day after the
date of publication of notice of Amendment No. 3 in the Federal
Register. As described more fully above, Amendment No. 3 narrows the
scope of the proposal to provide for the listing of options on GBTC,
BTC, and BITB; provides additional information and analysis of trading
data for the Bitcoin Funds in support of the proposal, including the
proposed position and exercise limits of 25,000 contracts; provides
additional information related to the Exchange's surveillance program,
including the manner in which the Exchange would surveil suspicious
trading activity in the underlying Bitcoin Funds and where the Exchange
would obtain information about the bitcoin market; and provides that
the Exchange will not list FLEX options on the Bitcoin Funds. Amendment
No. 3 provides data and analysis supporting the proposed position and
exercise limits and states, among other things, that the proposed
position and exercise limits would represent approximately 0.9% of the
outstanding shares of GBTC, 0.7% of the outstanding shares of BTC, and
3.6% of the outstanding shares of BITB.\120\ The Commission concludes
that proposed position and exercise limits are designed to minimize the
potential for manipulations or disruptions of the underlying
market.\121\ Amendment No. 3 also describes in greater detail the
surveillance procedures that will apply to the proposed Bitcoin Fund
options. The additional information regarding these procedures assists
the Commission in evaluating the proposal and determining that the
proposal is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange, as discussed
above. In addition, Amendment No. 3 revises the proposal to exclude
Bitcoin Fund options from FLEX trading. Excluding Bitcoin Fund options
from FLEX trading will allow the Commission to consider the listing of
FLEX options on the Bitcoin Funds in the context of any separate
proposal to list such options. Accordingly, the Commission finds good
cause, pursuant to Section 19(b)(2) of the Act,\122\ to approve the
proposed rule change, as modified by Amendment No. 3 on an accelerated
basis.
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\120\ See Amendment No. 3 at 11-12.
\121\ The Commission recognizes that position limits should not
be established at levels that are so low as to discourage
participation in the options market by institutions and other
investors with substantial hedging needs or to prevent specialists
and market makers from adequately meeting their obligations to
maintain a fair and orderly market. See, e.g., Securities Exchange
Act Release Nos. 21907 (Mar. 29, 1985), 50 FR 13440 (Apr. 4, 1985)
(order approving File Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-
25, and SR-PSE-85-1); 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan.
12, 1999) (order approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-
98-33; and Phlx-98-36). The Commission finds that the proposed
position and exercise limits are consistent with these objectives.
\122\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change, as modified by Amendment No. 3, is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, the requirements of Section 6(b)(5) of the Act.\123\
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\123\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\124\ that the proposed rule change (SR-NYSEAMER-2024-49), as
modified by Amendment No. 3, is approved.
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\124\ 15 U.S.C. 78s(b)(2)
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\125\
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\125\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-24640 Filed 10-23-24; 8:45 am]
BILLING CODE 8011-01-P