82 FR 16247 - Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of Shares of the SolidX Bitcoin Trust Under NYSE Arca Equities Rule 8.201
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 62 (April 3, 2017)
Federal Register Volume 82, Issue 62 (April 3, 2017)
| Page Range | 16247-16260 | |
| FR Document | 2017-06441 |
[Federal Register Volume 82, Number 62 (Monday, April 3, 2017)] [Notices] [Pages 16247-16260] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-06441] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80319; File No. SR-NYSEArca-2016-101] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of Shares of the SolidX Bitcoin Trust Under NYSE Arca Equities Rule 8.201 March 28, 2017. NYSE Arca (``Exchange'' or ``NYSE Arca'') has filed a proposed rule change to list and trade shares of the SolidX Bitcoin Trust.\1\ When an exchange makes such a filing,\2\ the Commission must determine whether the proposed rule change is consistent with the statutory provisions, and the rules and regulations, that apply to national securities exchanges.\3\ The Commission must approve the filing if it finds that the proposed rule change is consistent with these legal requirements, and it must disapprove the filing if it does not make such a finding.\4\ --------------------------------------------------------------------------- \1\ The Exchange filed the proposed rule change on July 13, 2016, and the Commission published notice of the proposed rule change in the Federal Register on August 2, 2016. See Exchange Act Release No. 78426 (July 27, 2016), 81 FR 50763 (Aug. 2, 2016) (``Notice''). On September 6, 2016, the Commission designated a longer period within which to act on the proposed rule change. See Exchange Act Release No. 78770 (Sept. 6, 2016), 81 FR 62780 (Sept. 12, 2016). On October 27, 2016, the Commission instituted proceedings under Section 19(b)(2)(B) of the Securities Exchange Act of 1934 (``Exchange Act''), 15 U.S.C. 78s(b)(2)(B), to determine whether to approve or disapprove the proposed rule change. See Exchange Act Release No. 79171 (Oct. 27, 2016), 81 FR 76400 (Nov. 2, 2016) (``Order Instituting Proceedings''). On January 3, 2017, the Commission designated a longer period for Commission action on the proposed rule change. See Exchange Act Release No. 79726 (Jan. 3, 2017), 82 FR 2426 (Jan. 9, 2017) (designating March 30, 2017, as the date by which the Commission must either approve or disapprove the proposed rule change). On February 15, 2017, the Exchange filed Amendment No. 1 to the proposed rule change, amending and replacing the original filing in its entirety, and Amendment No. 1 was published for comment in the Federal Register on March 1, 2017, with a 15-day comment period that ended on March 16, 2017. See Exchange Act Release No. 80099 (Feb. 24, 2017), 82 FR 12253 (Mar. 1, 2017) (``Amendment No. 1''). \2\ Such filings are made under Section 19(b)(1) of the Exchange Act, 15 U.S.C. 78s(b)(1), and Exchange Act Rule 19b-4, 17 CFR 240.19b-4. \3\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 78s(b)(2)(C). \4\ See id. --------------------------------------------------------------------------- As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.\5\ The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (``ETPs'') must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter.\6\ First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated.\7\ --------------------------------------------------------------------------- \5\ 15 U.S.C. 78f(b)(5). \6\ This approach is consistent with standards the Commission has applied to previous commodity-trust ETPs as well as the Commission's recent action disapproving the proposed rule change of Bats BZX Exchange to list and trade shares issued by the Winklevoss Bitcoin Trust. See, e.g., Exchange Act Release No. 80206 (Mar. 10, 2017), 82 FR 14076, 14077 n.6 (Mar. 16, 2017) (``Bats BZX Order''). \7\ As discussed below, infra notes 125-126 and accompanying text, the significant markets relating to the commodity-trust ETPs approved to date have been well-established regulated futures markets for the underlying commodity. --------------------------------------------------------------------------- Based on the record before it, the Commission believes that the significant markets for bitcoin are unregulated. Therefore, as the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs-- agreements that help address concerns about the potential for fraudulent or manipulative acts and practices in this market--the Commission does not find the proposed rule change to be consistent with the Exchange Act. I. Description of the Proposal The Exchange proposes to list and trade shares (``Shares'') of the SolidX Bitcoin Trust (``Trust'') as Commodity-Based Trust Shares under NYSE Arca Equities Rule 8.201.\8\ --------------------------------------------------------------------------- \8\ See NYSE Arca Equities Rule 8.201 (permitting the listing and trading of ``Commodity-Based Trust Shares,'' defined as a security (a) that is issued by a trust that holds a specified commodity deposited with the trust; (b) that is issued by the trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity; and (c) that, when aggregated in the same specified minimum number, may be redeemed at a holder's request by the trust, which will deliver to the redeeming holder the quantity of the underlying commodity). Other national securities exchanges that list and trade shares of commodity-trust ETPs have similar rules. See, e.g., BZX Rule 14.11(e)(4)(C) (permitting the listing and trading of Commodity-Based Trust Shares) and Nasdaq Rule 5711(d) (permitting the listing and trading of Commodity-Based Trust Shares). Commodity-trust ETPs differ from exchange-traded funds (ETFs) in a number of ways, including that they hold as an asset a single commodity, rather than a portfolio of multiple securities, and that they are not regulated under the Investment Company Act of 1940. --------------------------------------------------------------------------- The Trust would hold bitcoins as its primary asset,\9\ along with smaller amounts of cash, and the bitcoins would be in the custody of, and secured by, the Trust's bitcoin custodian, SolidX Management LLC, which would also serve as the sponsor (``Sponsor'') of the Trust.\10\ The Bank of New York Mellon would serve as the Trust's cash custodian and its administrator (``Administrator'').\11\ According to the Exchange, the Sponsor has arranged for insurance coverage to protect investors against loss or theft of the Trust's bitcoins.\12\ --------------------------------------------------------------------------- \9\ According to the Exchange, bitcoin is ``an asset that can be transferred among parties via the Internet, but without the use of a central administrator or clearing agency.'' Amendment No. 1, supra note 1, 82 FR at 12254 n.14. The Exchange also states that ``[t]he Bitcoin Network (i.e., the network of computers running the software protocol underlying bitcoin involved in maintaining the database of bitcoin ownership and facilitating the transfer of bitcoin among parties) and the asset, bitcoin, are intrinsically linked and inseparable.'' Id. at 12255. For the purpose of considering this proposal, this order describes bitcoin as a ``digital asset'' and a ``commodity.'' \10\ See id. at 12254. \11\ See id. \12\ See id. at 12261. --------------------------------------------------------------------------- The investment objective of the Trust would be for the Shares to track the price of bitcoins as measured by the TradeBlock XBX Index (``XBX Index'').\13\ The XBX Index is licensed by the Sponsor from Schvey, Inc., d/b/a TradeBlock, the index sponsor and calculation agent.\14\ As of January 15, [[Page 16248]] 2017, the eligible bitcoin exchanges for inclusion in the XBX Index are Bitfinex, Bitstamp, GDAX (f/k/a Coinbase), itBit, and OKCoin International.\15\ According to the Exchange: --------------------------------------------------------------------------- \13\ See id. at 12255. \14\ See id. at 12257. \15\ See id. at 12258. [T]he XBX represents the value of one bitcoin in U.S. dollars at any point in time and closes as of 4:00 p.m. Eastern time (``E.T.'') each weekday. The intra-day levels of the XBX incorporate the real- time price of bitcoin based on trading activity derived from constituent exchanges throughout each trading day. The closing level of the XBX is calculated using a proprietary methodology utilizing bitcoin trading data from constituent exchanges and is published at or after 4:00 p.m. E.T. each weekday. The XBX is published to two decimal places rounded on the last digit.\16\ --------------------------------------------------------------------------- \16\ Id. at 12257. The Exchange represents that, according to the Sponsor, the XBX Index's price variance weighting decreases the influence on the XBX Index of any particular exchange that diverges from the rest of the data points used by the XBX Index and thereby reduces the possibility of an attempt to manipulate the price of bitcoin as reflected by the XBX Index. See id. at 12259. The Net Asset Value (``NAV'') of the Trust would be calculated each business day by the Administrator, as promptly as practicable after 4:00 p.m. E.T., using the price set for bitcoin by the XBX Index.\17\ The Intraday Indicative Value (``IIV'') of the Trust would be calculated and disseminated by the Sponsor every 15 seconds during the Exchange's regular trading session. The IIV would be calculated by using the prior day's closing NAV per Share as a base and updating that value during the regular trading session on the Exchange to reflect intraday changes in the value of the Trust's bitcoin holdings.\18\ --------------------------------------------------------------------------- \17\ See id. at 12262. If for any reason, and as determined by the Sponsor, the Administrator is unable to value the Trust's bitcoin using the XBX Index price, the Exchange's proposal provides that the Administrator may use other specified criteria to value the holdings of the Trust. Id. at 12261. \18\ See id. at 12265. --------------------------------------------------------------------------- The Trust would issue and redeem the Shares only in baskets of 100,000 Shares and only to authorized participants (``Authorized Participants''), and these transactions would be conducted ``in-kind'' for bitcoin or for cash.\19\ The Exchange states that for creating and redeeming baskets in-kind or for cash, Authorized Participants and market makers would be able to hedge their exposure to bitcoin using non-deliverable forward contracts (``NDFs'') and swap contracts that would create synthetic long or short exposure to bitcoin for hedging.\20\ --------------------------------------------------------------------------- \19\ See id. at 12263. \20\ See id. The Exchange states that the Sponsor expects that NDFs or swaps will be offered by several participants in the bitcoin marketplace, including bitcoin exchanges and bitcoin over-the- counter (``OTC'') market participants, and that the Sponsor itself (operating on a principal basis) also may offer NDFs and swaps in order to provide Authorized Participants and market makers with additional options for hedging their exposure to bitcoin. See id. --------------------------------------------------------------------------- According to the Exchange, the underlying bitcoin marketplace operates 24 hours per day, 365 days per year. The Exchange cites the Trust's registration statement (``Registration Statement'') for the proposition that the majority of bitcoin transactions are executed on public bitcoin exchanges where bitcoins are bought and sold daily for value in U.S. dollar (``USD''), euro, and other government-issued currencies,\21\ and the Exchange states that there are currently 30 bitcoin exchanges across the world.\22\ According to the Exchange, the various bitcoin exchanges are generally available to the public through online web portals, and trading information (including pricing, volume, and pending orders) is available on the exchanges' Web sites, with most of this information publicly available to anyone who visits the Web sites.\23\ --------------------------------------------------------------------------- \21\ See Registration Statement on Form S-1, as amended, dated February 3, 2017 (File No. 333-212479), at 38. \22\ See id. at 12257. According to the Exchange, the Sponsor estimates that, in the global USD-bitcoin market, trading volume in the OTC market averages about half of the trading volume on exchanges. See id. at 12259-60. \23\ See id. at 12256-67. The Exchange represents that, according to the Sponsor, Bitfinex, one of the bitcoin exchanges included in the Trust's underlying XBX Index, does not conduct business in New York or with New York residents and that another XBX Index component bitcoin exchange, OKCoin International, is open only to non-U.S. persons. See also id. at 12258 (acknowledging that certain spot bitcoin exchanges are open only to non-U.S. persons or do not conduct business with New York residents and that, as a result, the Sponsor must conduct some of its bitcoin trading on behalf of the Trust through a wholly-owned subsidiary, SolidX Management Ltd., an exempted limited company organized in the Cayman Islands specifically established to buy and sell bitcoin on behalf of the Trust on these bitcoin exchanges). --------------------------------------------------------------------------- The Exchange states that, according to the Registration Statement, there are currently several U.S.-based regulated entities that facilitate bitcoin trading and that comply with anti-money laundering (``AML'') and know your customer (``KYC'') regulatory requirements: \24\ --------------------------------------------------------------------------- \24\ See id. at 12257. ---------------------------------------------------------------------------GDAX, which is based in California, is a bitcoin exchange that maintains money transmitter licenses in over 30 states, the District of Columbia, and Puerto Rico. GDAX is subject to the regulations enforced by the various state agencies that issued their respective money transmitter licenses to GDAX. In New York, GDAX applied for a BitLicense, a regulatory framework created by the New York Department of Financial Services (``NYSDFS'') that sets forth consumer protection, AML compliance, and cybersecurity rules tailored for digital currency companies operating and transacting business in New York. The NYSDFS granted a BitLicense to GDAX in January 2017.\25\ --------------------------------------------------------------------------- \25\ See id. --------------------------------------------------------------------------- itBit is a bitcoin exchange that was granted a limited- purpose-trust-company charter by the NYSDFS in May 2015. Limited- purpose trusts, according to the NYSDFS, are permitted to undertake certain activities, such as transfer agency, securities clearance, investment management, and custodial services, but without the power to take deposits or make loans.\26\ --------------------------------------------------------------------------- \26\ See id. --------------------------------------------------------------------------- Gemini is a bitcoin exchange that is also regulated by the NYSDFS. In October 2015, the NYSDFS granted Gemini authorization to operate as a limited-purpose trust company.\27\ --------------------------------------------------------------------------- \27\ See id. --------------------------------------------------------------------------- SecondMarket, Inc., d/b/a Genesis Global Trading, is a member firm of the Financial Industry Regulatory Authority (``FINRA'') that makes a market in bitcoin by offering two-sided liquidity.\28\ --------------------------------------------------------------------------- \28\ See id. The Exchange notes that the CFTC has stated that bitcoins and other virtual currencies are encompassed in the definition of ``commodity'' under the Commodity Exchange Act and are thus within the regulatory jurisdiction of the CFTC.\29\ --------------------------------------------------------------------------- \29\ See id. at 12261. The Exchange also cites views expressed by individual CFTC Commissioners for the proposition that derivatives based on bitcoin are subject to oversight by the CFTC, including oversight to prevent market manipulation of the price of bitcoin. Id. --------------------------------------------------------------------------- According to the Exchange, the exchanges with the most significant bitcoin trading by volume--Bitfinex, Bitstamp, BTCC, BTC-e, GDAX, Huobi, itBit, Kraken, LakeBTC, OKCoin Exchange China, and OKCoin International--traded approximately 1.34 billion bitcoins, at USD- converted prices ranging between $199 and $1,203, for a total trade volume of over $784 billion from February 2014 through January 2017. The Sponsor represents that average global daily trading volume during this period was approximately $693 million.\30\ --------------------------------------------------------------------------- \30\ See id. at 12257. --------------------------------------------------------------------------- According to the Exchange, between January 16, 2016, and January 15, 2017 (including weekends and holidays), average daily bitcoin trading on Bitfinex, Bitstamp, GDAX, Gemini, itBit, and OKCoin International totaled approximately 44,000 bitcoins across all of those exchanges at prices that ranged between $371 and $1,161. Of that [[Page 16249]] trading, Bitfinex accounted for 39%, Bitstamp accounted for 13%, GDAX accounted for 14%, Gemini accounted for 4%, itBit accounted for 9%, Kraken accounted for 3%, and OKCoin International accounted for 17% of bitcoins traded.\31\ The Exchange represents that, during the twelve- month period from January 2016 through January 2017, the aggregate trading volume on the five constituent exchanges of the XBX Index as of January 15, 2017--Bitfinex, Bitstamp, GDAX, itBit, and OKCoin International--represented approximately 77% of the entire global USD- denominated bitcoin exchange market.\32\ --------------------------------------------------------------------------- \31\ See id. at 12259. \32\ See id. at 12259-61. The Exchange further notes that, in addition to the five constituent exchanges of the XBX Index as of January 15, 2017, the global USD-denominated bitcoin exchange market also includes BTC-e, Gemini, LakeBTC, and Kraken. The Exchange represents that, although BTC-e is a USD-denominated bitcoin exchange with significant trading volume, BTC-e does not comply with certain of the Sponsor's internal criteria regarding the exchanges on which the Sponsor will trade and that, therefore, the Sponsor will not transact with BTC-e. According to the Exchange, the Sponsor is aware of other smaller USD-denominated bitcoin exchanges, but the trading volume on these exchanges is insignificant, and the Sponsor does not intend to conduct business with these smaller exchanges. See id. at 12259 n.30. The Commission notes that, as of March 20, 2017, the TradeBlock Web site indicated that the XBX Index weighting assigned to the OKCoin International exchange was zero percent. See TradeBlock, https://tradeblock.com/markets/index/ (last visited Mar. 20, 2017). --------------------------------------------------------------------------- According to the Exchange, although each bitcoin exchange has its own market price, it is expected that most bitcoin exchanges' market prices should be relatively consistent with the bitcoin-exchange market average, since market participants can choose the bitcoin exchange on which they buy or sell bitcoin. The Exchange also represents that, according to the Registration Statement, price differentials across bitcoin exchanges enable arbitrage between bitcoin prices on the various exchanges.\33\ As a result, according to the Exchange, the prices on bitcoin exchanges are the most accurate expression of the value of bitcoins. --------------------------------------------------------------------------- \33\ According to the Exchange, the Sponsor represents that, because bitcoin trades on more than 30 exchanges globally on a 24- hour basis, it is difficult for attempted market manipulation on any one exchange to affect the global market price of bitcoin, and that any attempt to manipulate the price would result in an arbitrage opportunity among exchanges, which would typically be acted upon by market participants. See id. at 12259. --------------------------------------------------------------------------- With respect to derivatives on bitcoin, the Exchange states that certain non-U.S.-bitcoin exchanges offer derivative products on bitcoin such as options, swaps, and futures.\34\ The Exchange refers to the Registration Statement and notes that BitMex (based in the Republic of Seychelles), CryptoFacilites (based in the United Kingdom), 796 Exchange (based in China), and OKCoin Exchange China all offer futures contracts settled in bitcoin. The Exchange also states that Coinut (based in Singapore) offers bitcoin binary options and ``vanilla options'' based on the Coinut index; that Nadex (based in Chicago) offers bitcoin binary options denominated in USD using the TeraBit Bitcoin Price Index; and that IGMarkets (based in the United Kingdom), Avatrade (based in the Republic of Ireland), and Plus500 (based in Israel) also offer bitcoin derivative products.\35\ The Exchange also notes the CFTC has approved the registration of TeraExchange LLC as a swap execution facility (``SEF''), where bitcoin swaps and NDFs may be entered into, and the registration of LedgerX provisionally as a SEF.\36\ --------------------------------------------------------------------------- \34\ According to the Exchange, the Sponsor is not aware of any bitcoin derivatives currently trading based on the XBX Index. See id. at 12258. \35\ See id. at 12260. \36\ See id. --------------------------------------------------------------------------- The Exchange asserts that its own surveillance procedures are sufficient to detect and deter manipulation.\37\ The Exchange represents that the Exchange or FINRA, on behalf of the Exchange, or both, (a) will communicate as needed regarding trading in the Shares with other markets and other entities that are members of the Intermarket Surveillance Group, and (b) may obtain trading information regarding trading in the Shares from these other markets and other entities. In addition, the Exchange states that it may obtain information regarding trading in the Shares from markets and other entities that are members of the Intermarket Surveillance Group or with which the Exchange has in place a comprehensive surveillance-sharing agreement.\38\ --------------------------------------------------------------------------- \37\ The Exchange represents that its surveillance procedures generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. The Exchange represents that, when such situations are detected, surveillance analysis would follow and investigations would be opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. See id. at 12266 (further representing that trading in the Shares will be subject to the existing trading surveillances administered by the Exchange, as well as cross-market surveillances administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws, and further representing that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange). \38\ See id. at 12266. The Exchange also notes that, pursuant to NYSE Arca Equities Rule 8.201(g), the Exchange is able to obtain information regarding trading in the Shares and the underlying bitcoin or any bitcoin derivative through Exchange-registered market makers, in connection with the market makers' proprietary or customer trades effected on any relevant market. Id. --------------------------------------------------------------------------- According to the Exchange, the Sponsor believes that demand from new investors accessing bitcoin through investment in the Shares will broaden the investor base in bitcoin, which could further reduce the possibility of collusion among market participants to manipulate the bitcoin market.\39\ --------------------------------------------------------------------------- \39\ See id. at 12259. --------------------------------------------------------------------------- Further details regarding the proposal and the Trust can be found in Amendment No. 1 to the proposal,\40\ and in the Registration Statement.\41\ --------------------------------------------------------------------------- \40\ See id. Compared to the initial Notice, see supra note 1, Amendment No. 1 makes the following substantive changes: (1) Identifies Foreside Fund Services, LLC as the order examiner in connection with the creation and redemption of baskets of Shares; (2) identifies SolidX Management LLC as the custodian of the Trust's bitcoin and The Bank of New York Mellon as custodian of the Trust's cash; (3) adds content regarding a recent loss of trading volume on the leading Chinese exchanges and asserts that trading volumes at these Chinese exchanges are now in line with volumes at USD exchanges; (4) notes that, in May 2016, the Gibraltar Financial Services Commission approved the BitcoinETI, which was listed on the Gibraltar Stock Exchange in July 2016 and on Deutsche Boerse Frankfurt in August 2016; (5) adds or changes certain details regarding the first alternative pricing source for the Shares; (6) adds disclosure that the Sponsor (operating on a principal basis) also may offer NDFs and swaps in order to provide Authorized Participants and market makers with additional options for hedging their exposure to bitcoin; (7) deletes text relating to the suspension or rejection of redemption orders; and (8) adds text stating that, to the extent that the Administrator has utilized the cascading set of rules described in ``bitcoin Market Price,'' in Amendment No. 1, the Trust's Web site will note the valuation methodology used and the price per bitcoin resulting from that calculation. \41\ See Registration Statement, supra note 21. --------------------------------------------------------------------------- II. Summary of Comment Letters The comment period for the initial Notice of Proposed Rule Change closed on August 23, 2016, and the comment period for Amendment No. 1 closed March 16, 2017.\42\ As of March 24, the Commission had received 11 comment letters on the proposed rule change.\43\ [[Page 16250]] Commenters address, among other things, investors' interest in bitcoin and their desire to gain access to bitcoin through an ETP; \44\ the state of development of bitcoin as a digital asset; \45\ the inherent value of, and risks of investing in, bitcoin; \46\ the appropriate measures for the Trust to secure its bitcoin holdings against theft or loss; \47\ the creation and redemption processes for the Trust; \48\ the proposed valuation method for the Trust's holdings; \49\ and the legitimacy or other benefits that Commission approval of the proposed ETP might confer upon bitcoin as a digital asset.\50\ Ultimately, however, comments on these topics do not bear on the basis for the Commission's decision to disapprove the proposal. Accordingly, the Commission will summarize and address the comments that relate to the susceptibility of bitcoin or the Shares to fraudulent or manipulative acts and practices, including the need for surveillance-sharing agreements with significant regulated markets for trading in bitcoin or derivatives on bitcoin. --------------------------------------------------------------------------- \42\ The initial comment period for the Order Instituting Proceedings closed on November 23, 2016, and the period for rebuttal comments closed on December 7, 2016. See Order Instituting Proceedings, supra note 1, 81 FR at 76401-02. \43\ See Letters from Daniel H. Gallancy, CFA, SolidX Management LLP (Nov. 23, 2016) (``SolidX Letter''); Thaya B. Knight, Associate Director, Financial Regulation Studies, The Cato Institute (Dec. 1, 2016) (``Cato Letter''); Jerry Brito, Executive Director, Coin Center (Dec. 7, 2016) (``Coin Center Letter''); Joseph Colangelo, President, Consumers' Research (Dec. 7, 2016) (``Consumers' Research Letter''); Denise Krisko, CFA, President and Co-Founder, Vident Investment Advisory, LLC (Dec. 7, 2016) (``Vident Letter''); Balaji Srinivasan, Chief Executive Officer & Cofounder, 21, et al. (Dec. 7, 2016) (``Srinivasan Letter''); Ken I. Maher (Dec. 8, 2016) (``Maher Letter''); Craig M. Lewis, Madison S. Wigginton Professor of Finance, Owen Graduate School of Management, Vanderbilt University (Feb. 13, 2017) (``Lewis Paper''); Douglas M. Yones, Head of Exchange Traded Products, New York Stock Exchange (Feb. 22, 2017) (``NYSE Letter''); Craig M. Lewis, Madison S. Wigginton Professor of Finance, Owen Graduate School of Management, Vanderbilt University (Mar. 3, 2017) (``Lewis Paper II''); Daniel H. Gallancy, CFA, SolidX Management LLP (Mar. 15, 2017) (``SolidX Letter II''). All comments on the proposed rule change are available on the Commission's Web site at: https://www.sec.gov/comments/sr-nysearca-2016-101/nysearca2016101.shtml. \44\ See, e.g., Cato Letter, supra note 43; Coin Center Letter, supra note 43; Vident Letter, supra note 43; Consumers' Research Letter, supra note 43; SolidX Letter, supra note 43; Srinivasan Letter, supra note 43; NYSE Letter, supra note 43; Lewis Paper, supra note 43; SolidX Letter II, supra note 43. \45\ See, e.g., Coin Center Letter, supra note 43; Vident Letter, supra note 43; Lewis Paper, supra note 43. \46\ See, e.g., Vident Letter, supra note 43; Coin Center Letter, supra note 43; SolidX Letter, supra note 43; Maher Letter, supra note 43; Lewis Paper, supra note 43; SolidX Letter II, supra note 43. \47\ See, e.g., Srinivasan Letter, supra note 43; Coin Center Letter, supra note 43; SolidX Letter, supra note 43; Consumers' Research Letter, supra note 43; SolidX Letter II, supra note 43. \48\ See, e.g., SolidX Letter, supra note 43; NYSE Letter, supra note 43; Lewis Paper, supra note 43. \49\ See, e.g., SolidX Letter, supra note 43; NYSE Letter, supra note 43; Lewis Paper, supra note 43; Consumers' Research Letter, supra note 43; SolidX Letter II, supra note 43. \50\ See, e.g., Vident Letter, supra note 43; Coin Center Letter, supra note 43. --------------------------------------------------------------------------- A. Comments Regarding the Worldwide Market for Bitcoin Several commenters note that a significant volume of bitcoin trading occurs in markets outside the United States that are largely unregulated.\51\ One commenter claims that several bitcoin exchanges do not offer the same regulatory safeguards that U.S. consumers have come to expect when they make investments in U.S. securities, and that bitcoin exchanges lack Commission oversight and have lost investor funds.\52\ The Lewis Paper also notes that the Commission does not regulate bitcoin exchanges.\53\ A different commenter expresses concerns that certain bitcoin exchanges that are components of the XBX Index, such as Bitfinex and OKCoin International, are not audited or governed by fair and transparent business practices.\54\ --------------------------------------------------------------------------- \51\ See, e.g., Consumers' Research Letter, supra note 43; Maher Letter, supra note 43. \52\ See Consumers' Research Letter, supra note 43, at 1-2. \53\ See Lewis Paper, supra note 43, at 8. \54\ See Maher Letter, supra note 43. This commenter also disputes some commenters' statements that this ETP would give investors safe exposure to bitcoin by reducing security risk of holding the bitcoins, noting that investors will still bear the many risks of the bitcoin ecosystem itself. See id. --------------------------------------------------------------------------- The Sponsor asserts that the majority of bitcoin transactions are executed on public bitcoin exchanges that typically publish real-time trade data on their respective Web sites and through application programming interfaces. The Sponsor claims that the existence and availability of the numerous pricing sources for bitcoin delivers unmatched price transparency when compared to most other assets.\55\ The Sponsor also asserts that the volume of bitcoin trading, both on- exchange and in the OTC market, is significant and that the bitcoin market is a liquid market. According to the Sponsor, between November 2015 and November 2016, the trading volume on the five constituent exchanges of the XBX Index (Bitfinex, Bitstamp, GDAX, itBit, and OKCoin International) represented the overwhelming majority of the entire USD- denominated bitcoin exchange market, and average daily trade volume on these exchanges during this period was approximately $24 million.\56\ --------------------------------------------------------------------------- \55\ See SolidX Letter, supra note 43, at 12. \56\ See id. at 13. The Sponsor also notes that there are three Chinese yuan-denominated exchanges on which trading volume is significant: BTCC, Huobi, and OKCoin Exchange China. See id. --------------------------------------------------------------------------- The Sponsor acknowledges that a significant portion of bitcoin trading occurs on exchanges outside the United States.\57\ The Sponsor also claims that, while there is a significant volume of bitcoin trading in China, the prices on U.S. and Chinese exchanges tend to conform with minimal variation, in spite of various capital controls in effect in China.\58\ Consequently, for purposes of arbitrage among all the various bitcoin exchanges (including those that trade bitcoin for USD and Chinese yuan), the Sponsor concludes that the tendency for prices to conform supports the conclusion that the exchange market is efficient and is generally resistant to manipulation.\59\ The Sponsor also provides data that, it says, indicate that arbitrage across bitcoin markets helps to keep bitcoin prices aligned and to reduce the likelihood of manipulation and indicate that arbitrage functions within a few seconds to address price discrepancies.\60\ --------------------------------------------------------------------------- \57\ See id. at 5, 13. For example, the Sponsor notes that Bitfinex, a component of the XBX Index, has continued to have the highest volume of trading on any of the USD-denominated bitcoin exchanges. See SolidX Letter, supra note 43, at 6. See also supra notes 31-32 and accompanying text. \58\ See SolidX Letter, supra note 43, at 5. \59\ See id. at 13-14. \60\ See SolidX Letter II, supra note 43, at 5. --------------------------------------------------------------------------- The Sponsor also submits that, as of January 2017, the volume of bitcoin trading on Chinese exchanges has declined to levels similar to those of USD-denominated exchanges that follow AML and KYC procedures applied by their respective jurisdictions.\61\ The Sponsor states that, in light of capital controls that apply in China, the Sponsor views the Chinese markets for bitcoin as separate and distinct from the USD markets.\62\ The Sponsor further asserts that the pricing differences between the XBX Index and the Chinese bitcoin exchanges are analogous to the location-based pricing differences in commodities markets, including the markets for gold, silver, platinum, and palladium-- commodities that are the underlying assets for existing commodity-trust ETPs. --------------------------------------------------------------------------- \61\ See id. at 6. \62\ See id. --------------------------------------------------------------------------- The Sponsor states that, in addition to exchange trading, bitcoin has a robust, global OTC market and states that the parallel existence of an exchange-based and an OTC bitcoin market increases the difficulty of manipulation. Similarly, the Exchange notes that the OTC market for bitcoin as a standalone liquidity pool has greater daily trade volumes than any single bitcoin exchange.\63\ --------------------------------------------------------------------------- \63\ See NYSE Letter, supra note 43, at 2. --------------------------------------------------------------------------- According to the Sponsor, a potential manipulator in the bitcoin marketplace would need to prevent other market participants from taking advantage of potential arbitrage opportunities between the exchanges, which would be further complicated by the high level of price transparency in the bitcoin market.\64\ The Sponsor notes that ``Level- II type'' quotes for bitcoin are [[Page 16251]] freely available from nearly all bitcoin exchanges.\65\ --------------------------------------------------------------------------- \64\ See SolidX Letter, supra note 43, at 7. \65\ See id. Generally, Level-II quotes provide best-price orders and quotes from each market participant on a market. --------------------------------------------------------------------------- The Sponsor also claims that opening and closing prices for common financial instruments are a frequent target for market manipulators and that, because bitcoin trades continuously and never has an opening or closing price, the risk of such manipulation is eliminated.\66\ The Exchange also notes that bitcoin is traded continuously and asserts that this means that price discovery for bitcoin is widespread and continuous.\67\ --------------------------------------------------------------------------- \66\ See id. at 8. \67\ See NYSE Letter, supra note 43, at 2. --------------------------------------------------------------------------- The Sponsor also states that the Trust is materially identical to existing, physically-backed ETPs, which, the Sponsor asserts, have become an important component of the market.\68\ The Sponsor further claims that, as with any ETP, there may be attempts to spread false or misleading information about the Trust, but an attempt to manipulate the price of bitcoin through trading activity would be difficult, and controlling or artificially affecting the market would require a massive amount of capital distributed across numerous exchanges in multiple currencies and jurisdictions around the world.\69\ --------------------------------------------------------------------------- \68\ See SolidX Letter, supra note 43, at 3. \69\ See id. at 7. --------------------------------------------------------------------------- The Lewis Paper claims that the underlying market for bitcoin is inherently resistant to manipulation. This commenter posits that the underlying bitcoin market is not susceptible to manipulation because: (1) Unlike traditional securities, there is no inside information, and therefore bitcoin is not subject to the dissemination of false or misleading information; (2) manipulation through acquisition of a dominant market share is unlikely; (3) each bitcoin market is an independent entity, so demand for liquidity does not necessarily propagate across other exchanges; (4) a substantial OTC market provides additional liquidity and absorption of shocks; (5) compared to equity markets, trading on bitcoin exchanges is slower, and therefore cross-market arbitrage is available to all market participants at the same time; and (6) the market is not subject to ``spoofing'' or other high- frequency-trading tactics.\70\ --------------------------------------------------------------------------- \70\ See Lewis Paper, supra note 43, at 5-9; Lewis Paper II, supra note 43, at 2. The Lewis Paper also raises a number of arguments bearing on the susceptibility to manipulation of the XBX Index and the Shares. See Lewis Paper, supra note 43, at 5-9. Those arguments are discussed below. See infra Sections III.B.3 & III.B.5. --------------------------------------------------------------------------- Specifically with respect to the risk that a market participant might acquire a dominant position, the Lewis Paper notes that one of the risks associated with bitcoin is the possibility that a single investor or a small group acting in collusion could own a dominant share of the available bitcoin, and the Lewis Paper also notes that the Registration Statement states that it is possible, and in fact, reasonably likely, that a small group of early adopters holds a significant proportion of the bitcoin that has been mined.\71\ Since, according to the Lewis Paper, there is no registry showing which individuals or entities own bitcoin, or the quantity they own, it is not possible to know how large individual positions are.\72\ The Lewis Paper asserts that this issue is not unique to bitcoin, as there are no corresponding registries for precious metals.\73\ The Lewis Paper also asserts that a number of factors relevant to the Shares should ameliorate risks associated with possible manipulation due to a dominant market share.\74\ --------------------------------------------------------------------------- \71\ See Lewis Paper, supra note 43, at 6. \72\ Id. \73\ Id. \74\ Id. at 6-7. According to the Lewis Paper, those factors are: (a) That bitcoin held by the Trust will remain available to market participants through redemption of the Shares; (b) that, given the availability of arbitrage activity between the Shares and the underlying bitcoin market, the bitcoins held by the Trust will not represent a meaningful percentage of the bitcoin available for transaction purposes; (c) that a price increase in bitcoin following the introduction of a bitcoin ETP would be the result of increased demand for bitcoin, rather than a sign of price manipulation; (d) that the receive-versus-payment and delivery-versus-payment account arrangements that the Trust has with multiple bitcoin exchanges, the Trust's transparent and rules-based redemption protocol, and the transparency of the Trust's holdings and valuations, as well as of quotations and transactions in the Shares, would reduce the potential for fraud and manipulation in the bitcoin markets; (e) market participants can choose the bitcoin exchanges on which to trade and can arbitrage away price deviations; and (f) trading of the Shares on the Exchange may serve to make the overall bitcoin market more transparent, especially if OTC bitcoin trading shifts to bitcoin exchanges. Id. --------------------------------------------------------------------------- The Sponsor, which commissioned the Lewis Paper, agrees with the paper's reasoning and with the assertion that the underlying bitcoin spot market is not susceptible to manipulation.\75\ The Exchange also agrees with the Lewis Paper's analysis, claiming that trading in the Shares would not be expected to contribute to the manipulation of bitcoin prices and, in fact, may actually reduce the potential for fraud and manipulation.\76\ --------------------------------------------------------------------------- \75\ See SolidX Letter II, supra note 43, at 3-4. \76\ See NYSE Letter, supra note 43, at 5. --------------------------------------------------------------------------- B. Comments Regarding Potential Manipulation of the XBX Index One commenter notes that the XBX Index includes several exchanges that many have expressed concerns about and that are not audited or governed by fair and transparent business practices.\77\ --------------------------------------------------------------------------- \77\ See Maher Letter, supra note 43. --------------------------------------------------------------------------- The Sponsor claims that the XBX Index is resistant to manipulation and responsive to market movements in real time and that it is therefore a superior mechanism--compared to using a single exchange-- for valuing the Trust's bitcoin holdings.\78\ The Sponsor asserts that the XBX Index price closely approximates actual bitcoin transaction prices across the various USD-denominated bitcoin exchanges and that it accurately reflects the fair value of bitcoin for valuation, for accounting purposes, and as a practical matter.\79\ The Sponsor states that the XBX Index's methodology penalizes stale prices because, if an exchange does not have recent trading data, its weighting in the XBX Index is gradually reduced until it is de-weighted entirely.\80\ --------------------------------------------------------------------------- \78\ See SolidX Letter, supra note 43, at 9. \79\ See id. at 8. \80\ See id. at 9. --------------------------------------------------------------------------- The Exchange states that the XBX Index's proprietary methodology helps to protect the calculation of the XBX Index against any undue impact from bitcoin pricing outliers among the various exchanges and from any potential attempts to manipulate the price of bitcoin.\81\ --------------------------------------------------------------------------- \81\ See NYSE Letter, supra note 43, at 2-3. --------------------------------------------------------------------------- The Lewis Paper claims that the following features of the XBX Index's proprietary weighting methodology mitigate manipulation risk: (a) That lower trading volume reduces the weight an exchange is given in the average; (b) that the weight of an exchange is reduced the more a price deviates from the average; and (c) that weights are reduced for stale prices. The Lewis Paper claims that these features significantly increase the amount of capital required to manipulate bitcoin prices enough to affect XBX Index levels.\82\ --------------------------------------------------------------------------- \82\ See Lewis Paper, supra note 43, at 8-9. --------------------------------------------------------------------------- C. Comments on the Derivatives Markets for Bitcoin The Lewis Paper states that one of the key differences between bitcoin and other commodities is the lack of a liquid and transparent derivatives market and that, although there have been nascent attempts to establish derivatives trading in bitcoin, bitcoin derivatives markets are not at this time sufficiently liquid to [[Page 16252]] be useful to Authorized Participants and market makers who would like to use derivatives to hedge exposures.\83\ The Lewis Paper claims that, for physical commodities that are not traded on exchanges, the presence of a liquid derivatives market is a necessary condition, but that, for digital assets like bitcoin, derivatives markets are not necessary because price discovery occurs on the OTC market and exchanges instead.\84\ --------------------------------------------------------------------------- \83\ See id. at 8. \84\ See id. (concluding that, for these assets, derivatives markets are not necessary because the OTC market and exchanges are close substitutes). --------------------------------------------------------------------------- The Sponsor states that it expects that bitcoin NDFs, swaps, or both will be offered by several participants in the bitcoin marketplace, including bitcoin exchanges and bitcoin OTC market participants, and that the Sponsor itself (operating on a principal basis) also may offer NDFs and swaps in order to provide Authorized Participants and market makers with the ability to hedge their exposure to bitcoin.\85\ --------------------------------------------------------------------------- \85\ See SolidX Letter, supra note 43, at 14-15. The Sponsor notes that, while Authorized Participants and market makers will generally want to hedge their exposure to bitcoin in connection with basket creation and redemption orders, not all of them are ready, willing, and able to trade bitcoin, and they will require a mechanism to gain synthetic exposure to bitcoin for their hedging needs when they enter orders to create and redeem shares. Id. According to the Sponsor, Authorized Participants will be able to use NDFs and swap contracts to obtain synthetic long and short exposure to bitcoin for their hedging purposes. Id. --------------------------------------------------------------------------- D. Comments Regarding the Susceptibility of the Shares to Manipulation The Sponsor states that, as a full-fledged ETP in the United States, the Trust will provide investors with an opportunity to invest in bitcoin without being exposed directly to the risks associated with sourcing and holding bitcoin outside the regulated traditional financial markets.\86\ The Sponsor also claims that, because the Shares would be traded on the Exchange, they should not be subject to risks of manipulation beyond those applicable to any publicly listed stock.\87\ In addition, the Sponsor asserts that the dissemination of information on the Trust's Web site--along with quotations for, and last-sale prices of transactions in, the Shares, and the IIV and NAV of the Trust--will help to reduce the ability of market participants to manipulate the bitcoin market or the price of the Shares, and that the Trust's arbitrage mechanism will facilitate the correction of price discrepancies in bitcoin and the Shares.\88\ The Sponsor also asserts that the requirements of Section 6(b)(5) of the Exchange Act apply not to trading in bitcoin, but to trading in the Shares, and asserts that the rules of the Exchange will prevent fraudulent and manipulative acts and practices, and protect investors and the public interest, with respect to the Shares.\89\ Finally, the Sponsor argues that the requirements of Section 6(b)(5) of the Exchange Act do not include any inherent requirement for market surveillance and asserts that the Commission, in 2005, approved the listing and trading of shares of the Euro Currency Trust, even though, according to the Sponsor, exchange surveillance of the underlying foreign exchange markets did not exist.\90\ --------------------------------------------------------------------------- \86\ See SolidX Letter, supra note 43, at 4. For similar claims, see Consumers' Research Letter, supra note 43, at 1-2; Coin Center Letter, supra note 43, at 1-2; NYSE Letter, supra note 43, at 1-2. \87\ See SolidX Letter, supra note 43, at 7. \88\ See Amendment No. 1, supra note 1, 82 FR at 12259. \89\ See SolidX Letter II, supra note 43, at 1-2. \90\ See id. at 3-4. --------------------------------------------------------------------------- The Lewis Paper also argues that several institutional features of the bitcoin trading environment and the Trust make the price of the Shares resistant to manipulation because: (a) The Trust's disclosures, creation and redemption activity, and price dissemination would increase transparency and diminish the risk of manipulation or unfair informational advantage; \91\ (b) bitcoin prices are quoted to eight decimal places, mitigating incentives to move prices a penny up or down because the potential gains would be immaterial; \92\ (c) bitcoin markets trade continuously, and the XBX Index is calculated continuously, and therefore the manipulation of opening and closing prices is not a significant risk; \93\ (d) the listing and delisting criteria for the Shares are expected to help to maintain a minimum level of liquidity and thus minimize the potential for manipulation of Share prices; \94\ and (e) the continuous cash and in-kind creation and redemption of Shares increases the Trust's efficiency because the exchange trading of bitcoin lowers the costs of creating and redeeming Shares, which would tighten the spread between the Share price and the NAV and reduce manipulation risk.\95\ --------------------------------------------------------------------------- \91\ See Lewis Paper, supra note 43, at 7. \92\ See id. at 9. \93\ See id. \94\ See id. \95\ See id. at 10. --------------------------------------------------------------------------- E. Comments Regarding the Protection of Investors and the Public Interest The Sponsor asserts that the structure of the Trust and the proposed rule change by the Exchange will serve the public interest by protecting investors from the risks of investing in bitcoins directly, citing the hacking of bitcoin exchanges, as well as schemes perpetrated upon investors by dishonest individuals.\96\ Several other commenters also raise similar points, arguing that approving the proposed rule change would benefit investor protection.\97\ The Sponsor argues that the risk of investor harm from manipulation in the Shares is hypothetical in nature and unlikely, while the harm to investors from a lack of access to an insured vehicle is overt and likely to continue in the absence of the Commission's approval of the Exchange's proposed rule change.\98\ The Sponsor also asserts that the Trust would provide other benefits to investors--such as limited counterparty risk, the simplicity of holding the Shares, and the lack of minimum investment requirements--and that approving the proposed rule change would enable U.S. exchanges to remain competitive internationally.\99\ Finally, the Sponsor asserts that disapproval of the proposed rule change would be in direct contravention of the goal of Section 6(b)(5) to protect investors and the public interest.\100\ --------------------------------------------------------------------------- \96\ See SolidX Letter II, supra note 43, at 2. \97\ See, e.g., Cato Letter, supra note 43; Srinivasan Letter, supra note 43; Consumers' Research Letter, supra note 43; NYSE Letter, supra note 43. \98\ See SolidX Letter II, supra note 43, at 2. \99\ See SolidX Letter, supra note 43, at 2-4. \100\ See SolidX Letter II, supra note 43, at 2. --------------------------------------------------------------------------- Several commenters assert that the Trust's insurance of its bitcoin holdings would ensure safe access to bitcoin for investors.\101\ The Sponsor notes that, in traditional and regulated systems, custodial and clearing firms mitigate risks and keep assets safe for the benefit of the investing public, but that no such mechanisms currently exist for bitcoin.\102\ The Sponsor claims that insurance is important to investor protection and the public interest because investors cannot be expected to assume the risks associated with the possible loss or theft of the Trust's bitcoins.\103\ The Sponsor acknowledges that Trust investors will expect to assume the market risk associated with their investment (i.e., bitcoin price fluctuations), but claims that it is appropriate to minimize the investors' risks regarding the adequacy of the mechanisms and infrastructure used to secure the Trust's bitcoin holdings, since that is not, and should not be, a typical analysis undertaken by investors [[Page 16253]] in the U.S. securities markets.\104\ The Sponsor also asserts that the Trust's insurance policy and the proposed rule change will serve the public interest in a manner otherwise unavailable and notes that multiple commenters have emphasized the importance of the Trust's insurance policy.\105\ --------------------------------------------------------------------------- \101\ See, e.g., SolidX Letter, supra note 43; Consumers' Research Letter, supra note 43; Lewis Paper, supra note 43; NYSE Letter, supra note 43; SolidX Letter II, supra note 43. \102\ See SolidX Letter, supra note 43, at 11. \103\ See id. \104\ See id.; see also Lewis Paper, supra note 43, at 11. \105\ See SolidX Letter II, supra note 43, at 2. --------------------------------------------------------------------------- The Exchange claims that, as a substitute to the investor safeguards offered by traditional custodians, bitcoin insurance is important for investor protection and the public interest.\106\ One commenter claims that the Trust's insurance coverage is an important, market-based solution that substitutes for a traditional custodial infrastructure and a true transfer-agency function that does not exist in the underlying bitcoin market.\107\ Another commenter claims that the fact that the Trust carries insurance and will be exchange traded will prevent situations where consumers risk losing bitcoins or having them stolen due to a fiduciary's flawed security protocols.\108\ --------------------------------------------------------------------------- \106\ See NYSE Letter, supra note 43, at 4. \107\ See Lewis Paper, supra note 43, at 11. \108\ See Consumers' Research Letter, supra note 43, at 2. --------------------------------------------------------------------------- III. Discussion and Commission Findings A. Overview Under Section 19(b)(2)(C) of the Exchange Act, the Commission must approve the proposed rule change of a self-regulatory organization (``SRO'') if the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the applicable rules and regulations thereunder.\109\ If it is unable to make such a finding, the Commission must disapprove the proposed rule change.\110\ Additionally, under Rule 700(b)(3) of the Commission's Rules of Practice, the ``burden to demonstrate that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder . . . is on the self-regulatory organization that proposed the rule change.'' \111\ --------------------------------------------------------------------------- \109\ 15 U.S.C 78s(b)(2)(C)(i). \110\ 15 U.S.C. 78s(b)(2)(C)(ii). \111\ 17 CFR 201.700(b)(3). The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding. Id. Any failure of an SRO to provide the information elicited by Form 19b-4 may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder that are applicable to the SRO. Id. --------------------------------------------------------------------------- After careful consideration, and for the reasons discussed in greater detail below, the Commission does not believe that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Exchange Act and the applicable rules and regulations thereunder.\112\ Specifically, the Commission does not find that the proposed rule change is consistent with Section 6(b)(5) of the Exchange Act--which requires that the rules of a national securities exchange be designed, among other things, to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest \113\--because the Commission believes that the significant markets for bitcoin are unregulated and that, therefore, the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that helps address concerns about the potential for fraudulent or manipulative acts and practices in the market for the Shares. Accordingly, the Commission disapproves the proposed rule change.\114\ --------------------------------------------------------------------------- \112\ In disapproving the proposed rule change, as modified by Amendment No. 1, the Commission has considered its impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f); see also notes 70-74, 82-84, 91-95, 107, 148-158 & 169-176 and accompanying text. The Commission notes that, according to the Sponsor, the Trust is a means of providing a simple and cost- effective way for investors to gain investment exposure to the performance of the USD price of bitcoin. See SolidX Letter, supra note 43, at 1; see also Lewis Paper, supra note 43, at 3, 11-16 (asserting that a bitcoin-based ETP would enable ordinary investors to construct more efficient and diversified portfolios). The Sponsor also asserts that bitcoin exchanges have been subject to hacking and investor schemes in the past, the losses from which are documented and quantifiable at approximately $2 billion, and that such losses will continue unless investors are able to invest in bitcoin through a regulated and insured product such as the Trust. See SolidX Letter II, supra note 43, at 2. Regarding competition, the Exchange has asserted that approval of the proposed rule change ``will enhance competition among market participants, to the benefit of investors and the marketplace.'' See Amendment No. 1, supra note 1, 82 FR at 12267. The Sponsor claims that the proposed rule change would further advance the goal of helping U.S. exchanges remain competitive in the international marketplace by demonstrating to future sponsors of new products that the Commission remains committed to fostering innovation in the U.S. securities markets. See SolidX Letter, supra note 43, at 3. Finally, regarding the potential effect of the proposed rule change on capital formation, the Exchange asserts that the Sponsor believes that demand from new investors accessing bitcoin through investment in the Shares will broaden the investor base in bitcoin. See Amendment No. 1, supra note 1, 82 FR at 12259. The Commission recognizes that the Exchange and commenters assert these economic benefits and specifically addresses the Sponsor's claims about investor protection from hacking and other risks of bitcoin ownership below. See infra Section III.B.6. The Commission, however, for the reasons discussed throughout this order, must disapprove the proposed rule change because it is not consistent with the Exchange Act. \113\ 15 U.S.C. 78f(b)(5). \114\ The Commission's disposition of the Exchange's proposed rule change is independent of, and serves a fundamentally different purpose than, any Commission actions with respect to the Securities Act of 1933 Registration Statement of the Trust. --------------------------------------------------------------------------- B. Analysis 1. Commodity-Trust ETPs and Surveillance-Sharing Agreements The Exchange proposes to list and trade the Shares under NYSE Arca Equities Rule 8.201, which governs the listing of Commodity-Based Trust Shares.\115\ The proposal is similar to many past proposals to list and trade shares of ETPs holding precious metals.\116\ Accordingly, the Commission analyzes this proposal under the standards that it has applied to previous commodity-trust ETPs--and that it also applied in the recent Bats BZX Order.\117\ --------------------------------------------------------------------------- \115\ The Commission notes that in settled actions the CFTC has designated bitcoin as a commodity and has asserted jurisdiction over the trading of at least certain derivatives on bitcoin, as well as certain leveraged or margined retail transactions in bitcoin. See In re Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29, 2015 WL 5535736 (CFTC Sept. 17, 2015) (Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions (``Coinflip Settlement Order'')), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf. \116\ See, e.g., streetTRACKS Gold Shares, Exchange Act Release No. 50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004- 22) (order approving the listing and trading of shares of commodity- trust ETP holding physical gold bullion). The Commission notes that the Sponsor also views the Trust to be materially identical to other existing commodity-trust ETPs. See SolidX Letter, supra note 43, at 3. \117\ See Bats BZX Order, supra note 6, 82 FR at 14081-87. --------------------------------------------------------------------------- A key consideration for the Commission in determining whether to approve or disapprove a proposal to list and trade shares of a new commodity-trust ETP is the susceptibility of the shares or the underlying asset to manipulation. This consideration flows directly from the requirement in Section 6(b)(5) of the Exchange Act that a national securities exchange's rules must be designed ``to prevent fraudulent and manipulative acts and practices'' and ``to protect investors and the public interest.'' \118\ --------------------------------------------------------------------------- \118\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- Since at least 1990, the Commission has expressed the view that the ability of a national securities exchange to enter into surveillance- sharing agreements ``furthers the protection of investors and the public interest because it will enable the [e]xchange to conduct prompt investigations into [[Page 16254]] possible trading violations and other regulatory improprieties.'' \119\ The Commission has also long held that surveillance-sharing agreements are important in the context of exchange listing of derivative security products, such as equity options.\120\ --------------------------------------------------------------------------- \119\ See Exchange Act Release No. 27877 (Apr. 4, 1990), 55 FR 13344 (Apr. 10, 1990) (SR-NYSE-90-14). \120\ See Exchange Act Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994) (SR-Amex-93-28) (order approving listing of options on American Depositary Receipts). --------------------------------------------------------------------------- With respect to ETPs, when approving in 1995 the listing and trading of one of the first commodity-linked ETPs--a commodity-linked exchange-traded note--on a national securities exchange, the Commission continued to emphasize the importance of surveillance-sharing agreements, noting that the listing exchange had entered into surveillance-sharing agreements with each of the futures markets on which pricing of the ETP would be based and stating that ``[t]hese agreements should help to ensure the availability of information necessary to detect and deter potential manipulations and other trading abuses, thereby making [the commodity-linked notes] less readily susceptible to manipulation.'' \121\ --------------------------------------------------------------------------- \121\ Exchange Act Release No. 35518 (Mar. 21, 1995), 60 FR 15804 (Mar. 27, 1995) (SR-Amex-94-30). See also Exchange Act Release No. 36885 (Feb. 26, 1996), 61 FR 8315 n.17 (Mar. 4, 1996) (SR-Amex- 95-50) (approving the exchange listing and trading of Commodity Indexed Securities and noting that, through the comprehensive surveillance-sharing agreements, the listing exchange was able to obtain market surveillance information for transactions occurring on NYMEX and COMEX and from the London Metal Exchange through the Intermarket Surveillance Group. --------------------------------------------------------------------------- In 1998, in adopting Exchange Act Rule 19b-4(e) \122\ to permit the generic listing and trading of certain new derivative securities products--including ETPs--the Commission again emphasized the importance of the listing exchange's ability to obtain from underlying markets, through surveillance-sharing agreements (called information- sharing agreements in the release), the information necessary to detect and deter manipulative activity. Specifically, in adopting rules governing the generic listing of new derivative securities products, the Commission stated that the Rule 19b-4(e) procedures would ``enable the Commission to continue to effectively protect investors and promote the public interest.'' \123\ The Commission also stressed the importance of these surveillance-sharing agreements comprehensively covering trading in the underlying assets. In the case of a product overlying domestic securities, the Commission said that the exchange listing a derivative securities product should ensure that it was either a common member of the Intermarket Surveillance Group with, or had entered into an information-sharing agreement with, each market trading each underlying security.\124\ --------------------------------------------------------------------------- \122\ 17 CFR 240.19b-4(e). \123\ Amendment to Rule Filing Requirements for Self-Regulatory Organizations Regarding New Derivative Securities Products, Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952, 70959 (Dec. 22, 1998) (File no. S7-13-98) (``NDSP Adopting Release'') (also noting that ``there should be a comprehensive ISA [information-sharing agreement] that covers trading in the new derivative securities product and its underlying securities in place between the SRO listing or trading a derivative product and the markets trading the securities underlying the new derivative securities product. Such agreements provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.''). \124\ See id. at 70959. The Commission further noted that, ``if a new SRO trades component securities underlying a new derivative securities product and is not a member of the ISG [Intermarket Surveillance Group], the SRO seeking to list and trade such new derivative securities product pursuant to Rule 19b-4(e) should enter into a comprehensive ISA with the non-ISG SRO. Conversely, if a new SRO seeks to list and trade a new derivative securities product pursuant to Rule 19b-4(e) and is not a member of the ISG, such SRO should enter into a comprehensive ISA with each SRO that trades securities underlying the new derivative securities product.'' Id. at 70959 n.99. --------------------------------------------------------------------------- Consistent with these statements, for the commodity-trust ETPs approved to date for listing and trading, there have been in every case well-established, significant, regulated markets for trading futures on the underlying commodity--gold, silver, platinum, palladium, and copper--and the ETP-listing exchange has entered into surveillance- sharing agreements with, or held Intermarket Surveillance Group membership in common with, those markets.\125\ The [[Page 16255]] Commission believes that the need for an exchange listing a commodity- trust ETP to have surveillance-sharing agreements with significant, regulated markets relating to the underlying commodity applies equally to a commodity-trust ETP that is based on bitcoin or another digital asset.\126\ --------------------------------------------------------------------------- \125\ See streetTRACKS Gold Shares, Exchange Act Release No. 50603 (Oct. 28, 2004), 69 FR 64614, 64618 (Nov. 5, 2004) (SR-NYSE- 2004-22) (approval order notes the New York Stock Exchange's representation that ``the most significant gold futures exchanges are the COMEX division of the NYMEX and the Tokyo Commodity Exchange'' and that the New York Stock Exchange has entered into a reciprocal Memorandum of Understanding with the NYMEX (of which COMEX is a division) ``for the sharing of information related to any financial instrument based, in whole or in part, upon an interest in or performance of gold''); iShares COMEX Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751, 3754 (Jan. 26, 2005) (SR-Amex-2004-38) (approval order notes the American Stock Exchange's representation that ``the most significant gold futures exchanges are the COMEX division of the NYMEX and the Tokyo Commodity Exchange'' and that the American Stock Exchange has ``in place an Information Sharing Agreement with the NYMEX for the purpose of providing information in connection with trading in or related to COMEX gold futures contracts''); iShares Silver Trust, Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR 14967, 14968, 14973 (Mar. 24, 2006) (SR-Amex-2005-72) (approval order notes the American Stock Exchange's representation that ``the most significant silver futures exchanges are the COMEX and the Tokyo Commodity Exchange'' and that the American Stock Exchange has ``in place an Information Sharing Agreement with the NYMEX for the purpose of providing information in connection with trading in or related to COMEX silver futures contracts''); ETFS Gold Trust, Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993, 22994-95, 22998 (May 15, 2009) (SR-NYSEArca-2009-40) (accelerated approval order notes NYSE Arca's representation that the COMEX is one of the ``major world gold markets'' and that NYSE Arca ``has an Information Sharing Agreement with NYMEX for the purpose of sharing information in connection with trading in or related to COMEX gold futures contracts''); ETFS Silver Trust, Exchange Act Release No. 59781 (Apr. 17, 2009), 74 FR 18771, 18772, 18776 (Apr. 24, 2009) (SR- NYSEArca-2009-28) (accelerated approval order notes NYSE Arca's representation that ``the most significant silver futures exchanges are the COMEX . . . and the Tokyo Commodity Exchange'' and that NYSE Arca ``has an Information Sharing Agreement with NYMEX for the purpose of sharing information in connection with trading in or related to COMEX silver futures contracts''); ETFS Palladium Trust, Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285- 86, 59291 (Nov. 17, 2009) (SR-NYSEArca-2009-94) (notice of proposed rule change includes NYSE Arca's representation that ``the most significant palladium futures exchanges are the NYMEX and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest exchange in the world for trading precious metals futures and options,'' and that NYSE Arca ``may obtain trading information via the Intermarket Surveillance Group,'' of which NYMEX is a member); ETFS Platinum Trust, Exchange Act Release No. 60970 (Nov. 9, 2006), 74 FR 59319, 59321, 59327 (Nov. 17, 2009) (SR-NYSEArca-2009-95) (notice of proposed rule change includes NYSE Arca's representation that ``the most significant palladium futures exchanges are the NYMEX and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest exchange in the world for trading precious metals futures and options,'' and that NYSE Arca ``may obtain trading information via the Intermarket Surveillance Group,'' of which NYMEX is a member); Sprott Physical Gold Trust, Exchange Act Release No. 61236 (Dec. 23, 2009), 75 FR 170, 171, 174 and n.27 (Jan. 4, 2010) (SR-NYSEArca-2009-113) (notice of proposed rule change includes NYSE Arca's representations that the COMEX is one of the ``major world gold markets,'' that NYSE Arca ``may obtain trading information via the Intermarket Surveillance Group,'' and that NYMEX, of which COMEX is a division, is a member of the Intermarket Surveillance Group); Sprott Physical Silver Trust, Exchange Act Release No. 63043 (Oct. 5, 2010), 75 FR 62615, 62616, 62619 and n.26 (Oct. 12, 2010) (SR-NYSEArca-2010-84) (accelerated approval order notes NYSE Arca's representation that the COMEX is one of the ``major world silver markets,'' that NYSE Arca ``may obtain trading information via the Intermarket Surveillance Group,'' and that NYMEX, of which COMEX is a division, is a member of the Intermarket Surveillance Group); ETFS Precious Metals Basket Trust, Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295, 39298 (July 8, 2010) (SR-NYSEArca-2010-56) (notice of proposed rule change includes NYSE Arca's representation that ``the most significant gold, silver, platinum and palladium futures exchanges are the COMEX and the TOCOM'' and that NYSE Arca ``may obtain trading information via the Intermarket Surveillance Group,'' of which NYMEX (of which COMEX is a division) is a member); ETFS White Metals Basket Trust, Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657, 47660 (Aug. 6, 2010) (SR-NYSEArca- 2010-71) (notice of proposed rule change includes NYSE Arca's representation that ``the most significant silver, platinum and palladium futures exchanges are the COMEX and the TOCOM'' and that NYSE Arca ``may obtain trading information via the Intermarket Surveillance Group,'' of which COMEX is a member); ETFS Asian Gold Trust, Exchange Act Release No. 63267 (Nov. 8, 2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010) (SR-NYSEArca-2010-95) (notice of proposed rule change includes NYSE Arca's representation that ``the most significant gold futures exchanges are the COMEX and the Tokyo Commodity Exchange,'' that ``COMEX is the largest exchange in the world for trading precious metals futures and options,'' and that NYSE Arca ``may obtain trading information via the Intermarket Surveillance Group,'' of which COMEX is a member); Sprott Physical Platinum and Palladium Trust, Exchange Act Release No. 68101 (Oct. 24, 2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012) (SR-NYSEArca- 2012-111) (accelerated approval order notes NYSE Arca's representation that ``[f]utures on platinum and palladium are traded on two major exchanges: The New York Mercantile Exchange . . . and Tokyo Commodities Exchange'' and that NYSE Arca ``may obtain information via ISG [Intermarket Surveillance Group] from other exchanges that are members of ISG or with which [NYSE Arca] has entered into a comprehensive surveillance sharing agreement, including COMEX''); APMEX Physical--1 oz. Gold Redeemable Trust, Exchange Act Release No. 66627 (Mar. 20, 2012), 77 FR 17539, 17547 (Mar. 26, 2012) (SR-NYSEArca-2012-18) (notice of proposed rule change cross-references the proposed rule change to list and trade shares of the ETFS Gold Trust, in which NYSE Arca represented that the COMEX is one of the ``major world gold markets'' and notes that NYSE Arca ``may obtain information via ISG from other exchanges that are members of ISG or with which [NYSE Arca] has entered into a comprehensive surveillance sharing agreement, including COMEX''); JPM XF Physical Copper Trust, Exchange Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468, 75469-72 (Dec. 20, 2012) (SR-NYSEArca-2012- 28) (approval order notes NYSE Arca's representation that a majority of copper derivatives trading occurs on the LME, the COMEX, and the Shanghai Futures Exchange and that NYSE Arca could obtain trading information from other members of the Intermarket Surveillance Group (including from the COMEX) and that it had entered into a comprehensive surveillance-sharing agreement with the LME with respect to trading in copper and copper derivatives); iShares Copper Trust, Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726, 13727-30 (Feb. 28, 2013) (SR-NYSEArca-2012-66) (approval order notes NYSE Arca's representation that the LME is the exchange with the greatest number of open copper futures and options contracts and that NYSE Arca had entered into a comprehensive surveillance-sharing agreement with the LME regarding trading in copper and copper derivatives and could also obtain trading information from other members of the Intermarket Surveillance Group, including the COMEX, which also trades copper futures); First Trust Gold Trust, Exchange Act Release No. 69847 (June 25, 2013), 78 FR 39399, 39400 n.15, 39405 (July 1, 2013) (SR-NYSEArca-2013-61) (notice of proposed rule change notes that FINRA, on behalf of the exchange, can obtain trading information regarding gold futures and options on gold futures from members of the Intermarket Surveillance Group, including the COMEX, and cross-references the proposed rule change to list and trade shares of the ETFS Gold Trust, in which NYSE Arca represented that the COMEX is one of the ``major world gold markets''); Merk Gold Trust, Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369 n.26, 76374 (Dec. 17, 2013) (SR- NYSEArca-2013-137) (notice of proposed rule change notes that the exchange can obtain trading information via the Intermarket Surveillance Group from other members, including the COMEX, and cross-references the proposed rule change to list and trade shares of the ETFS Gold Trust, in which NYSE Arca represented that the COMEX is one of the ``major world gold markets''); Long Dollar Gold Trust, Exchange Act Release No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886 (Dec. 15, 2016) (SR-NYSEArca-2016-84) (accelerated approval order notes NYSE Arca's representation that the most significant gold futures exchange is the COMEX and that the exchange can obtain trading information from other members of the Intermarket Surveillance Group). \126\ See Bats BZX Order, supra note 6, 82 FR at 14087 (disapproving proposed rule change to list a bitcoin-based commodity-trust ETP on the basis that the listing exchange had not, and would not be able to, enter into a surveillance-sharing agreement with significant, regulated markets related to the underlying asset). --------------------------------------------------------------------------- The Sponsor argues that Section 6(b)(5) does not contain any inherent requirement for market surveillance and argues that the Commission, in 2005, approved the listing and trading of an ETP--the Euro Currency Trust--where the underlying market was not surveilled.\127\ The Commission, however, believes that its approval of the Euro Currency Trust is readily distinguishable from its disapproval of the proposed SolidX Bitcoin Trust. --------------------------------------------------------------------------- \127\ See supra note 90 and accompanying text. --------------------------------------------------------------------------- First, the Euro Currency Trust is not a commodity trust, and it is not listed and traded under the Exchange listing standards for commodity-based trusts. Second, the Commission's approval order for the Euro Currency Trust notes that, in addition to a large OTC market in currency derivatives, currency options and futures were traded on regulated markets with the authority to perform surveillance on their members' trading activities, to review positions held by members and large-scale customers, and to monitor the price movements of options and futures markets by comparing them with cash and other derivative markets' prices.\128\ These regulated derivatives markets included the Philadelphia Stock Exchange and the Chicago Mercantile Exchange, which, along with the ETP's listing exchange (the New York Stock Exchange) are members of the Intermarket Surveillance Group. --------------------------------------------------------------------------- \128\ Exchange Act Release No. 52843 (Nov. 28, 2005), 70 FR 72486, 72487 (Dec. 5, 2005) (Order Granting Accelerated Approval of a Proposed Rule Change regarding the Euro Currency Trust). --------------------------------------------------------------------------- Third, the Commission's approval order notes a number of significant facts about the underlying spot market for foreign exchange, including: That the listing exchange had represented that the foreign exchange market is the largest and most liquid financial market in the world and that, as of April 2004, the foreign exchange market experienced average daily turnover of approximately $1.88 trillion; \129\ --------------------------------------------------------------------------- \129\ See id. at 72486. --------------------------------------------------------------------------- That the most significant participants in the spot market are the major international commercial banks that act both as brokers and as dealers; \130\ and --------------------------------------------------------------------------- \130\ See id. at 72487. --------------------------------------------------------------------------- That most trading in the global OTC foreign currency markets is conducted by regulated financial institutions, such as banks and broker dealers.\131\ \131\ See id. --------------------------------------------------------------------------- Thus, significant, regulated markets related to foreign exchange trading exist, and the listing exchange of the Euro Currency Trust belongs to a multilateral surveillance-sharing agreement with those markets. Moreover, many prominent participants in the OTC foreign exchange market are regulated financial institutions. The markets related to foreign exchange therefore bear little resemblance to the markets currently related to bitcoin, which are either unregulated, not of significant size, or both. The rationale behind the Commission's approval of the Euro Currency Trust is therefore consistent with the rationale for the Commission's disapproval of the SolidX Bitcoin Trust. The Commission continues to believe that surveillance-sharing agreements between the exchange listing shares of a commodity-trust ETP and significant, regulated markets related to the underlying asset provide a ``necessary deterrent to manipulation.'' \132\ To the extent there is some question as to the degree to which bitcoin is subject to manipulation, moreover, surveillance-sharing agreements with significant, regulated markets relating to bitcoin would help answer that question and address instances of such manipulation. Therefore, the Commission's analysis of the Exchange's proposal examines whether regulated markets of significant size exist--in either bitcoin or derivatives on bitcoin--with which the Exchange has, or could enter into, a surveillance-sharing agreement. --------------------------------------------------------------------------- \132\ NDSP Adopting Release, supra note 123, 63 FR at 70959. --------------------------------------------------------------------------- 2. The Worldwide Spot Market for Bitcoin The Commission believes--consistent with its conclusion in the Bats BZX Order \133\--that the bulk of bitcoin trading occurs on markets where there [[Page 16256]] is little to no regulation governing trading,\134\ and thus no meaningful governmental market oversight designed to detect and deter fraudulent and manipulative activity.\135\ The Commission also notes that none of the bitcoin spot markets identified by the Exchange or the Sponsor is currently a member of the Intermarket Surveillance Group.\136\ --------------------------------------------------------------------------- \133\ See Bats BZX Order, supra note 6, 82 FR at 14084 & nn.103- 106. \134\ Several commenters discussed the unregulated state of the underlying bitcoin markets. See supra notes 51-54 and accompanying text. The Commission believes that certain restrictions imposed by the Trust to conduct bitcoin transactions reflect the absence of meaningful regulatory oversight and transparency of certain non-U.S. bitcoin markets. For example, the Sponsor notes that Bitfinex, one of the bitcoin exchanges included in the Trust's underlying XBX Index, does not conduct business in New York or with New York residents, and another XBX Index component bitcoin exchange, OKCoin International, is open only to non-U.S. persons. See supra note 23 and accompanying text. See also supra note 61 and accompanying text (noting that, as of January 2017, the volume of bitcoin trading on Chinese exchanges has declined to levels similar to those of USD- denominated exchanges that follow AML and KYC procedures applied by their respective jurisdictions). \135\ See supra notes 51-54 and accompanying text. \136\ See http://www.isgportal.org (listing the current members and affiliate members of the Intermarket Surveillance Group). --------------------------------------------------------------------------- The Commission also believes that the bitcoin markets identified by the Exchange and the Sponsor as subject to certain regulatory requirements--GDAX, itBit, Gemini, and Genesis Global Trading--are not, in fact, regulated markets consistent with the requirements met with respect to previously approved commodity-trust ETPs. While the Exchange notes that GDAX, itBit, and Gemini are subject to consumer protection, KYC compliance, AML compliance, and cybersecurity requirements imposed by the NYSDFS,\137\ the Commission's market oversight of national securities exchanges includes substantial additional requirements, including the requirement to have rules that are ``designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.'' \138\ Moreover, national securities exchanges are subject to Commission oversight of, among other things, their governance, membership qualifications, trading rules, disciplinary procedures, recordkeeping, and fees.\139\ Likewise, Designated Contract Markets that trade futures on commodities underlying other commodity-trust ETPs are registered with and regulated by the CFTC, and they must comply with, among other things, a similarly comprehensive range of regulatory principles and file their rule changes with the CFTC.\140\ Additionally, while the Exchange asserts that Genesis Global Trading is a FINRA member,\141\ the digital currency business of that firm, according to the Genesis Global Trading Web site, is conducted pursuant to a BitLicense issued by the NYSDFS, and only the securities activities of the firm are regulated by FINRA.\142\ --------------------------------------------------------------------------- \137\ See supra notes 24-28 and accompanying text (noting that there are currently several U.S.-based regulated entities that facilitate bitcoin trading and that comply with U.S. AML and KYC regulatory requirements, and that a regulatory framework created by the NYSDFS sets forth consumer protection, AML compliance, and cyber security rules tailored for digital currency companies operating and transacting business in New York). The Commission notes that there is no basis in the record to support a finding that non-U.S. bitcoin exchanges that have not obtained a BitLicense are subject to AML, KYC, consumer protection, or cybersecurity requirements. \138\ 15 U.S.C. 78f(b)(5). \139\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires national securities exchanges to register with the Commission and requires an exchange's registration to be approved by the Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), requires national securities exchanges to file proposed rule changes with the Commission. \140\ See, e.g., Designated Contract Markets (DCMs), U.S. Commodity Futures Trading Commission, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm. \141\ See supra note 28 and accompanying text. \142\ See Frequently Asked Questions, Genesis: A Digital Currency Group Company (FAQ: ``Is Genesis Regulated?''), https://genesistrading.com/frequently-asked-questions/ (last visited Mar. 17, 2017). --------------------------------------------------------------------------- Further, while the Exchange notes that the CFTC has asserted jurisdiction over derivatives on bitcoin,\143\ the Commission does not believe that the record supports a finding that there is currently a regulatory framework in the United States for detecting and deterring manipulation in the bitcoin spot markets. Although the CFTC can bring enforcement actions against manipulative conduct in spot markets for a commodity, spot markets are not required to register with the CFTC unless they offer leveraged, margined, or financed trading to retail customers.\144\ In all other cases, the CFTC does not set standards for, approve the rules of, examine, or otherwise regulate bitcoin spot markets. --------------------------------------------------------------------------- \143\ See supra note 29 and accompanying text. \144\ Commodity Exchange Act Section 2(c)(2)(D), 7 U.S.C. 2(c)(2)(D). See also Commodity Exchange Act Section 2(c)(2)(A), 7 U.S.C. 2(c)(2)(A) (defining CFTC jurisdiction to specifically cover contracts of sale of a commodity for future delivery (or options on such contracts), or an option on a commodity (other than foreign currency or a security or a group or index of securities), that is executed or traded on an organized exchange). --------------------------------------------------------------------------- While the CFTC has brought settled enforcement actions against bitcoin-related entities, these actions do not demonstrate that a regulatory framework for providing market oversight and deterring market manipulation currently exists for the bitcoin spot market. These actions have involved either (a) the failure of an entity to register with the CFTC before trading derivatives on bitcoin or offering leveraged, margined, or financed bitcoin trading to retail customers,\145\ or (b) the facilitation of wash trades in bitcoin swaps by a SEF registered with the CFTC.\146\ Based on the record, therefore, the Commission does not believe that the worldwide spot bitcoin markets, including the bitcoin exchanges that are constituents of the XBX Index, are regulated markets with which the Exchange has, or could enter into, a surveillance-sharing agreement.\147\ --------------------------------------------------------------------------- \145\ See Coinflip Settlement Order, supra note 115; In re BFXNA Inc., d/b/a Bitfinex, CFTC Docket No. 16-19 (CFTC June 2, 2016) (Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions (``BFXNA Settlement Order'')), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf. \146\ See In re TeraExchange LLC, CFTC Docket No. 15-33, 2015 WL 5658082 (CFTC Sept. 24, 2015) (Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions (``TeraExchange Settlement Order'')), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfteraexchangeorder92415.pdf. \147\ The Exchange does not assert that it has a surveillance- sharing agreement with any bitcoin exchange. --------------------------------------------------------------------------- As noted above, the Lewis Paper asserts that, for several reasons, the underlying market for bitcoin is not susceptible to manipulation,\148\ and the Exchange agrees with this conclusion.\149\ While the Lewis Paper submits that arbitrage across bitcoin markets will help to keep worldwide bitcoin prices aligned with one another, hindering manipulation,\150\ the Commission believes that the Lewis Paper's discussion of the possible sources of manipulation in the underlying bitcoin market is incomplete and does not form a basis to find that bitcoin cannot be manipulated--or to find, by implication, that no surveillance-sharing agreement is necessary between an exchange listing shares of a bitcoin-based ETP and [[Page 16257]] significant markets trading bitcoin or bitcoin derivatives.\151\ --------------------------------------------------------------------------- \148\ See Lewis Paper, supra note 43; see also supra notes 70-74 and accompanying text. \149\ See NYSE Letter, supra note 43, at 5; see also supra note 76 and accompanying text. \150\ See Lewis Paper, supra note 43, at 6-7. \151\ The Sponsor also argues, in its second comment letter, that arbitrage across bitcoin markets helps to keep bitcoin prices aligned and reduces the likelihood of manipulation. See SolidX Letter II, supra note 43, at 5. The Sponsor offers several histograms purporting to show that pricing discrepancies across bitcoin markets are generally arbitraged away within several seconds. Id. These histograms, however, use data from only four bitcoin exchanges, based on the Sponsor's argument that--in light of recently imposed capital controls in China and because Chinese exchanges trade bitcoins only against the Chinese yuan--the Chinese markets for bitcoin are ``separate and distinct'' from the USD market. Id. at 6-7. The Commission, however, believes that the Sponsor's argument that the worldwide markets for trading bitcoins against various government currencies are ``stable, resilient, fair and efficient,'' see SolidX Letter, supra note 43, at 4, is at odds with its argument that there are at least two substantial segments of that market that have recently become ``separate and distinct'' from one another. See SolidX Letter II, supra note 43, at 6-7. Moreover, the Commission does not believe that the charts provided by the Sponsor establish there are two separate and distinct segments of the market. The data describe a limited period, and, while the charts purport to show a price differential between the XBX Index and the bitcoin prices on Chinese exchanges, the charts also appear to show a close correlation between the timing and direction of price movements in the two market ``segments.'' See id. If the market is not segmented, then the histograms (which show that pricing discrepancies across only four bitcoin markets are generally arbitraged away within several seconds) are not enough to establish that the worldwide markets are efficient. If anything, the data provided by the Sponsor show that bitcoin markets are still developing and that the efficiency of arbitrage between bitcoin markets may depend on, among other things, regulatory conditions that can change over time. And, even if the Commission assumed that bitcoin markets were efficient, other manipulation concerns--such as the potential for trading on material non-public information or potential issues arising from concentrated bitcoin holdings--would still be applicable. See infra notes 152-158 and accompanying text. --------------------------------------------------------------------------- For example, while there is no inside information related to the earnings or revenue of bitcoin, there may be material non-public information related to the actions of regulators with respect to bitcoin; regarding order flow, such as plans of market participants to significantly increase or decrease their holdings in bitcoin; regarding new sources of demand, such as new ETPs that would hold bitcoin; or regarding the decision of a bitcoin-based ETP with respect to how it would respond to a ``fork'' in the blockchain, which would create two different, non-interchangeable types of bitcoin.\152\ Additionally, the manipulation of asset prices, as a general matter, can occur simply through trading activity that creates a false impression of supply or demand, whether in the context of a closing auction or in the course of continuous trading, and does not require formal linkages among markets (such as consolidated quotations or routing requirements) or the complex quoting behavior associated with high-frequency trading. Although the Exchange notes that bitcoin trades continuously so that there are no opening or closing prices to manipulate, the Commission believes that continuous trading does not necessarily eliminate manipulation risk.\153\ --------------------------------------------------------------------------- \152\ For example, as described in the Trust's Registration Statement, supra note 21, in the event the bitcoin network undergoes a ``hard fork'' into two blockchains, the Trust would then hold equal amounts of both the original bitcoin and the alternative new bitcoin. As a result, the Sponsor would need to decide whether to continue to hold the original bitcoin, the alternative new bitcoin, or both and would need to decide what action to take with respect to the unselected bitcoin, such as the possible sale of the unselected bitcoin. The Sponsor's decision to continue to hold either the original or alternative new bitcoin would be based on factors such as the market value and liquidity of the original bitcoin versus the alternative new bitcoin. Id. at 14. \153\ See infra notes 164-165. --------------------------------------------------------------------------- While it may or may not be possible to acquire a dominant position in the bitcoin market as a whole, this risk exists, as the Lewis Paper concedes.\154\ And, as the Registration Statement discloses, it is reasonably likely that a small group of early adopters holds a significant proportion of the bitcoins that have been mined.\155\ The Lewis Paper lists a number of features of the Trust that should, the paper claims, ameliorate the risk of manipulation through ownership of a dominant market share,\156\ but these features generally address whether the Trust itself would acquire a dominant market share, or whether other market participants might acquire a dominant share of bitcoin ownership through participation in the underlying bitcoin markets. These features do not address the possible market effect of large bitcoin positions held by early adopters. Additionally, the Lewis Paper asserts that many features of the proposal that purportedly ameliorate the risk of price manipulation through a dominant market share are also factors that were used as a basis for the Commission's approval of a commodity-trust ETP based on copper.\157\ The Commission notes, however, that the listing exchange for that copper-based ETP had entered into a surveillance-sharing agreement with the London Metal Exchange regarding trading in copper and copper futures and that the listing exchange was also a common member of the Intermarket Surveillance Group with the COMEX, which also trades copper futures.\158\ --------------------------------------------------------------------------- \154\ See supra notes 71-74 and accompanying text. \155\ See Registration Statement, supra note 21, at 16. See also Lewis Paper, supra note 43, at 6. The Lewis Paper states that there is ``no compelling evidence'' to suggest that any single investor or group has acquired a dominant position in bitcoin, but its citation of ``media estimates'' regarding the holdings of certain individuals, see Lewis Paper, supra note 43, at 6 & n.7, only demonstrates that the risk of a person or group acquiring a significant proportion of all bitcoins cannot be quantified or dismissed. \156\ See supra note 74. \157\ See Lewis Paper, supra note 43, at 6 n.8. \158\ See Exchange Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468, 75472 (Dec. 20, 2012) (NYSEArca-2012-28) (approval of proposal to list and trade shares of the JPM XF Physical Copper Trust). --------------------------------------------------------------------------- Thus, the Commission does not believe that the record supports a finding that the unique properties of bitcoin and the underlying bitcoin market are so different from the properties of other commodities and commodity futures markets that they justify a significant departure from the standards applied to previous commodity- trust ETPs. 3. The Susceptibility to Manipulation of the XBX Index The Sponsor, the Exchange, and the Lewis Paper all express the view that the XBX Index is resistant to manipulation because of its proprietary weighting methodology and its ability to respond to market movements in real time.\159\ In essence, they claim that the XBX Index's weighting methodology is able to resist the effects of manipulation because it discounts prices from constituent exchanges based on lower volume at that exchange, price deviation from the average on other exchanges, and the staleness of reported prices.\160\ Additionally, the Sponsor and the Lewis Paper note that the XBX Index is not susceptible to a key mechanism of manipulation, opening and closing auctions.\161\ --------------------------------------------------------------------------- \159\ See supra Section II.B. See also supra note 16 (describing the Sponsor's representation that the XBX Index's price variance weighting decreases the influence on the XBX Index of any particular exchange that diverges from the rest of the data points used by the XBX Index and thereby reduces the possibility of an attempt to manipulate the price of bitcoin as reflected by the XBX Index). \160\ See, e.g., Lewis Paper, supra note 43, at 8. \161\ See SolidX Letter, supra note 43, at 8; Lewis Paper, supra note 43, at 9. --------------------------------------------------------------------------- The Commission, however, does not agree that index-based pricing for the Trust's bitcoin assets eliminates the risk of manipulation or the need to monitor that risk through surveillance-sharing agreements. While the XBX Index methodology uses an algorithm to discount prices that deviate from the average, this automatic discounting could attenuate, but not eliminate, the effect of manipulative activity on one of the constituent exchanges--just as it could attenuate, but not eliminate, the effect of bona fide liquidity demand on one of those exchanges. [[Page 16258]] The Lewis Paper asserts that the absence of formal ties between bitcoin exchanges (i.e., the absence of an analog to Regulation NMS in the U.S. equity markets) means that demands for liquidity will not propagate across the worldwide market for bitcoin, limiting the price impact of manipulative behavior in the underlying market.\162\ However, to the extent that market participants view pricing information from one exchange as indications of likely price moves on other exchanges, price moves on the first exchange might be, temporarily at least, reflected on those other exchanges, despite the discounting function of the XBX Index algorithm. And, as material non-public information--such as regulatory information--can exist with respect to bitcoin, use of that information might be possible across multiple component exchanges, affecting the level of the XBX Index without requiring the deployment of large amounts of capital.\163\ --------------------------------------------------------------------------- \162\ Lewis Paper, supra note 43, at 8-9. \163\ The Lewis Paper notes that, since each bitcoin exchange is an independent entity, a liquidity event on one exchange does not necessarily propagate across other exchanges. This, according to the Lewis Paper, makes prices more resilient to liquidity shocks, but also slows down the transmission of fundamental information. See id. at 9. The Commission does not believe that manipulative activity propagates across trading venues solely through demands on liquidity being transferred from one venue to another. For example, regulatory events may simultaneously affect more than one bitcoin exchange, and the dissemination of pricing information from trades on one exchange may affect traders' view of supply and demand on other exchanges. --------------------------------------------------------------------------- The Commission also observes that, while the XBX Index will be calculated continuously, this does not eliminate possible incentives for market participants to manipulate prices at single points in time. The Exchange notes that a closing level of the XBX Index will be calculated and published at or after 4:00 p.m. E.T.,\164\ and that the NAV of the Trust will be set using the XBX Index value as of 4:00 p.m. E.T., so the Commission believes that incentives would exist to manipulate the XBX Index at specific times.\165\ --------------------------------------------------------------------------- \164\ See supra note 16 and accompanying text. \165\ The Lewis Paper argues that, because bitcoin is quoted in prices with eight decimal places, this ``mitigates incentives to move prices a penny up or penny down because the potential gains from moving prices at the eighth decimal point are immaterial.'' Lewis Paper, supra note 43, at 9. But the divisibility of bitcoin itself is not relevant, and even if it were, the incentive to move the price by one hundred-millionth of a bitcoin would increase as the price and volume of traded bitcoin increased. --------------------------------------------------------------------------- Accordingly, the Commission does not believe that the record supports the claim that the unique properties of the XBX Index--or of a commodity-trust ETP based on the XBX Index--are sufficient to isolate the Shares from any manipulative activity in the underlying market or, by extension, to justify a significant departure from the standards applied to previous commodity-trust ETPs. 4. The Market for Derivatives on Bitcoin As noted above,\166\ the commodity-trust ETPs previously approved by the Commission for listing and trading have had--in lieu of significant, regulated spot markets--significant, well-established, and regulated futures markets that were associated with the underlying commodity and with which the listing exchange had entered into a surveillance-sharing agreement. For the reasons discussed further below, the Commission believes that this proposal fails to support a finding that there are significant, regulated derivatives markets related to bitcoin with which the Exchange could enter into a surveillance-sharing agreement. --------------------------------------------------------------------------- \166\ See supra notes 125-126 and accompanying text. --------------------------------------------------------------------------- The Exchange states that the CFTC has approved the registration of TeraExchange as a SEF and has provisionally registered another SEF, LedgerX, and that these are markets where market participants can enter into bitcoin swaps and NDFs.\167\ The Commission observes, however, that there is no evidence in the record that either of these venues transacts significant volume in bitcoin-related derivatives, and the Commission notes that the CFTC has, in fact, brought a settled enforcement action against one of those venues for facilitating prearranged, offsetting ``wash'' transactions and issuing a press release ``to create the impression of actual trading in the Bitcoin swap.'' \168\ --------------------------------------------------------------------------- \167\ See supra notes 34-36 and accompanying text. \168\ See TeraExchange Settlement Order, supra note 146 and accompanying text. --------------------------------------------------------------------------- The Exchange names several non-U.S. bitcoin exchanges that offer derivative products on bitcoin such as options, swaps, and futures. The Commission, however, does not believe that the existence of these markets supports a finding that there are significant, regulated markets for bitcoin derivatives with which the Exchange could enter into a surveillance-sharing agreement. The record does not contain any evidence of the trading volume of these markets, the state of regulation of these markets, or the availability of surveillance- sharing agreements with the regulators of these markets. The Lewis Paper asserts that the existence of bitcoin derivative markets is not a necessary condition for a bitcoin ETP.\169\ The key requirement the Commission is applying here, however, is not that a futures or derivatives market is required for every ETP, but that--when the spot market is unregulated--there must be significant, regulated derivatives markets related to the underlying asset with which the Exchange can enter into a surveillance-sharing agreement. --------------------------------------------------------------------------- \169\ See Lewis Paper, supra note 43, at 8. --------------------------------------------------------------------------- 5. The Susceptibility of the Shares to Manipulation The Exchange represents that its existing surveillance measures, which focus on trading in the Shares, are sufficient to support the proposed rule change. Specifically, the Exchange represents that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to detect and deter violations of Exchange rules and the applicable federal securities laws.\170\ The Exchange further represents that trading of the Shares through the Exchange will be subject to the Exchange's surveillance procedures for derivative products, including Commodity- Based Trust Shares, and that the Exchange may obtain information regarding trading in the Shares through the Intermarket Surveillance Group, from other members of that group, or from markets with which the Exchange has a surveillance-sharing agreement.\171\ The Exchange also notes that, pursuant to its listing standards for Commodity-Based Trust Shares, the Exchange is able to obtain information regarding trading in the Shares and the underlying bitcoin, or any bitcoin derivative, from market makers registered with the Exchange, in connection with the market makers' proprietary or customer trades effected on any relevant market.\172\ --------------------------------------------------------------------------- \170\ See supra note 37 and accompanying text. \171\ See supra note 38 and accompanying text. \172\ See supra note 38. NYSE Arca Equities Rule 8.201(g) provides that a registered market maker in Commodity-Based Trust Shares must file with the Exchange and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives that the market maker may have or over which it may exercise investment discretion and must make available to the Exchange books, records, or other information relating to transactions in the underlying physical commodity, related commodity futures, or options on commodity futures. --------------------------------------------------------------------------- Moreover, as noted earlier, some commenters assert that regulation by the Exchange of activity in the ETP could substitute for a lack of regulation in underlying spot or derivatives markets.\173\ The Sponsor also argues that [[Page 16259]] the Exchange's listing standards will provide strong protection against manipulation of the Shares.\174\ --------------------------------------------------------------------------- \173\ See supra notes 86-87 and accompanying text. \174\ See SolidX Letter II, supra note 43, at 2-3. --------------------------------------------------------------------------- The Commission notes the Exchange's proposed surveillance procedures regarding the Shares, and the views expressed by the Lewis Paper and the Sponsor regarding the Trust's disclosures and information dissemination procedures. The Commission, however, views these procedures as necessary, but not sufficient, in light of the discussion above noting that the Exchange has not entered into, and would currently be unable to enter into, surveillance-sharing agreements with significant, regulated markets for trading either bitcoin itself or derivatives on bitcoin.\175\ In addition, while the Exchange would, pursuant to its listing rules, be able to obtain certain information regarding trading in the Shares and the underlying bitcoin or any bitcoin derivative through Exchange-registered market makers,\176\ the Commission observes that this trade information would be limited to the activities of its members that are market makers. Moreover, the Commission does not accept the premise that regulation of trading in the Shares is a sufficient and acceptable substitute for regulation in the spot or derivatives markets related to the underlying asset. Absent the ability to detect and deter manipulation of the Shares--through surveillance sharing with significant, regulated markets related to the underlying asset--the Commission does not believe that a national securities exchange can meet its Exchange Act obligations when listing shares of a commodity-trust ETP. --------------------------------------------------------------------------- \175\ See supra Sections III.B.2 & III.B.4. \176\ See supra note 172 and accompanying text. --------------------------------------------------------------------------- 6. The Protection of Investors and the Public Interest The Sponsor argues that approval of the proposed rule change is consistent with the protection of investors because investors are currently being harmed by the inability to invest in an insured bitcoin vehicle and need to be protected from ``ongoing losses related to hacking, errors and other operational hazards associated with direct bitcoin ownership.'' \177\ The Sponsor concludes that Section 6(b)(5) of the Exchange Act compels approval of the Exchange's proposal, so that investors may invest in the Trust and thereby be protected from these risks.\178\ In essence, the Sponsor asserts that it is the risky nature of direct investment in the underlying bitcoin (including lack of insurance coverage) and the unregulated markets on which bitcoin trades that compel approval of the proposed rule change. The Sponsor offers no limiting principle to this argument, under which, by logical extension, the Commission would be required to approve the listing and trading of any ETP that arguably presented marginally less risk to investors than a direct investment in the underlying asset. --------------------------------------------------------------------------- \177\ SolidX Letter II, supra note 43, at 2. \178\ See supra note 39 and accompanying text. --------------------------------------------------------------------------- The Commission disagrees with this reading of the Exchange Act. Pursuant to Section 19(b)(2) of the Exchange Act, the Commission must approve a proposed rule change filed by a national securities exchange if it finds that the proposed rule change is consistent with the applicable requirements of the Exchange Act--including the requirement under Section 6(b)(5) that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices-- and it must disapprove the filing if it does not make such a finding.\179\ Thus, even if a proposed rule change purports to protect investors from a particular type of investment risk--such as the susceptibility of an asset to loss or theft--the proposed rule change may still fail to meet other requirements under the Exchange Act.\180\ --------------------------------------------------------------------------- \179\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 78s(b)(2)(C). \180\ The Commission notes that the insurance policy for the Trust's bitcoin holdings, as described by the Exchange and the Sponsor, see Amendment No. 1, supra note 1, 82 FR at 12261; SolidX Letter, supra note 43, at 2, 5, 11-12, covers theft and loss of the bitcoin holdings, but does not insure against the risk of loss resulting from fraudulent or manipulative acts and practices with respect to the underlying bitcoins or the Shares. --------------------------------------------------------------------------- As explained above, the Commission has consistently, for commodity- trust ETPs, required that the listing exchange have surveillance- sharing agreements with significant, regulated markets related to the underlying asset. That requirement has not been met here. Therefore, the Commission--even if, for the sake of argument, it agreed that investment in the Trust might present fewer risks to investors than direct investments in bitcoin--would be unable to find that the proposed rule change is consistent with the statutory standard. C. Basis for Disapproval The Commission has, in past approvals of commodity-trust ETPs, emphasized the importance of surveillance-sharing agreements between the national securities exchange listing and trading the ETP, and significant markets relating to the underlying asset.\181\ Such agreements, which are a necessary tool to enable the ETP-listing exchange to detect and deter manipulative conduct, enable the exchange to meet its obligation under Section 6(b)(5) of the Exchange Act to have rules that are designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.\182\ --------------------------------------------------------------------------- \181\ See supra notes 125-126 and accompanying text. The Commission has also emphasized this requirement in the context of disapproving a proposal to list and trade shares of a commodity- trust ETP. See Bats BZX Order, supra note 6, 82 FR at 14087. \182\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- As described above, the Exchange has not entered into a surveillance-sharing agreement with a significant, regulated, bitcoin- related market. The Commission also does not believe, as discussed above, that the proposal supports a finding that the significant markets for bitcoin or derivatives on bitcoin are regulated markets with which the Exchange can enter into such an agreement. Therefore, as the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs, the Commission does not find the proposed rule change to be consistent with the Exchange Act and, accordingly, disapproves the proposed rule change. The Commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin- related markets of significant size may develop. Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act. IV. Conclusion For the reasons set forth above, the Commission does not find that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, with Section 6(b)(5) of the Exchange Act. It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,\183\ that the proposed rule change (SR-NYSEArca-2016- 101), as modified by Amendment No. 1, be, and it hereby is, disapproved. --------------------------------------------------------------------------- \183\ 15 U.S.C. 78s(b)(2). [[Page 16260]] --------------------------------------------------------------------------- For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\184\ --------------------------------------------------------------------------- \184\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-06441 Filed 3-31-17; 8:45 am] BILLING CODE 8011-01-P
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10:00 a.m. and 3:00 p.m. Copies of such makes such a filing,2 the Commission rule change to be consistent with the
filing also will be available for must determine whether the proposed Exchange Act.
inspection and copying at the principal rule change is consistent with the
I. Description of the Proposal
office of FINRA. All comments received statutory provisions, and the rules and
will be posted without change; the regulations, that apply to national The Exchange proposes to list and
Commission does not edit personal securities exchanges.3 The Commission trade shares (‘‘Shares’’) of the SolidX
identifying information from must approve the filing if it finds that Bitcoin Trust (‘‘Trust’’) as Commodity-
submissions. You should submit only the proposed rule change is consistent Based Trust Shares under NYSE Arca
information that you wish to make with these legal requirements, and it Equities Rule 8.201.8
available publicly. must disapprove the filing if it does not The Trust would hold bitcoins as its
All submissions should refer to File make such a finding.4 primary asset,9 along with smaller
Number SR–FINRA–2017–008 and amounts of cash, and the bitcoins would
As discussed further below, the
should be submitted on or before April be in the custody of, and secured by, the
Commission is disapproving this
24, 2017. Trust’s bitcoin custodian, SolidX
proposed rule change because it does
For the Commission, by the Division of not find the proposal to be consistent Management LLC, which would also
Trading and Markets, pursuant to delegated with Section 6(b)(5) of the Exchange serve as the sponsor (‘‘Sponsor’’) of the
authority.15
Act, which requires, among other Trust.10 The Bank of New York Mellon
Eduardo A. Aleman, things, that the rules of a national would serve as the Trust’s cash
Assistant Secretary. securities exchange be designed to custodian and its administrator
[FR Doc. 2017–06442 Filed 3–31–17; 8:45 am] prevent fraudulent and manipulative (‘‘Administrator’’).11 According to the
BILLING CODE 8011–01–P acts and practices and to protect Exchange, the Sponsor has arranged for
investors and the public interest.5 The insurance coverage to protect investors
Commission believes that, in order to against loss or theft of the Trust’s
SECURITIES AND EXCHANGE meet this standard, an exchange that bitcoins.12
COMMISSION lists and trades shares of commodity- The investment objective of the Trust
trust exchange-traded products (‘‘ETPs’’) would be for the Shares to track the
[Release No. 34–80319; File No. SR–
NYSEArca–2016–101] must, in addition to other applicable price of bitcoins as measured by the
requirements, satisfy two requirements TradeBlock XBX Index (‘‘XBX
Self-Regulatory Organizations; NYSE that are dispositive in this matter.6 First, Index’’).13 The XBX Index is licensed by
Arca, Inc.; Order Disapproving a the exchange must have surveillance- the Sponsor from Schvey, Inc., d/b/a
Proposed Rule Change, as Modified by sharing agreements with significant TradeBlock, the index sponsor and
Amendment No. 1, Relating to the markets for trading the underlying calculation agent.14 As of January 15,
Listing and Trading of Shares of the commodity or derivatives on that
SolidX Bitcoin Trust Under NYSE Arca commodity. And second, those markets
8 See NYSE Arca Equities Rule 8.201 (permitting
Equities Rule 8.201 the listing and trading of ‘‘Commodity-Based Trust
must be regulated.7 Shares,’’ defined as a security (a) that is issued by
March 28, 2017. Based on the record before it, the a trust that holds a specified commodity deposited
with the trust; (b) that is issued by the trust in a
NYSE Arca (‘‘Exchange’’ or ‘‘NYSE Commission believes that the significant specified aggregate minimum number in return for
Arca’’) has filed a proposed rule change markets for bitcoin are unregulated. a deposit of a quantity of the underlying
to list and trade shares of the SolidX Therefore, as the Exchange has not commodity; and (c) that, when aggregated in the
Bitcoin Trust.1 When an exchange entered into, and would currently be same specified minimum number, may be
redeemed at a holder’s request by the trust, which
unable to enter into, the type of will deliver to the redeeming holder the quantity of
15 17 CFR 200.30–3(a)(12). surveillance-sharing agreement that has the underlying commodity). Other national
1 The Exchange filed the proposed rule change on been in place with respect to all securities exchanges that list and trade shares of
July 13, 2016, and the Commission published notice commodity-trust ETPs have similar rules. See, e.g.,
of the proposed rule change in the Federal Register
previously approved commodity-trust
BZX Rule 14.11(e)(4)(C) (permitting the listing and
on August 2, 2016. See Exchange Act Release No. ETPs—agreements that help address trading of Commodity-Based Trust Shares) and
78426 (July 27, 2016), 81 FR 50763 (Aug. 2, 2016) concerns about the potential for Nasdaq Rule 5711(d) (permitting the listing and
(‘‘Notice’’). On September 6, 2016, the Commission fraudulent or manipulative acts and trading of Commodity-Based Trust Shares).
designated a longer period within which to act on Commodity-trust ETPs differ from exchange-traded
the proposed rule change. See Exchange Act
practices in this market—the
funds (ETFs) in a number of ways, including that
Release No. 78770 (Sept. 6, 2016), 81 FR 62780 Commission does not find the proposed they hold as an asset a single commodity, rather
(Sept. 12, 2016). On October 27, 2016, the than a portfolio of multiple securities, and that they
Commission instituted proceedings under Section 2 Such filings are made under Section 19(b)(1) of are not regulated under the Investment Company
19(b)(2)(B) of the Securities Exchange Act of 1934 the Exchange Act, 15 U.S.C. 78s(b)(1), and Act of 1940.
(‘‘Exchange Act’’), 15 U.S.C. 78s(b)(2)(B), to Exchange Act Rule 19b–4, 17 CFR 240.19b–4. 9 According to the Exchange, bitcoin is ‘‘an asset
determine whether to approve or disapprove the 3 See Exchange Act Section 19(b)(2)(C), 15 U.S.C. that can be transferred among parties via the
proposed rule change. See Exchange Act Release Internet, but without the use of a central
78s(b)(2)(C).
No. 79171 (Oct. 27, 2016), 81 FR 76400 (Nov. 2, 4 See id. administrator or clearing agency.’’ Amendment No.
2016) (‘‘Order Instituting Proceedings’’). On January 1, supra note 1, 82 FR at 12254 n.14. The Exchange
5 15 U.S.C. 78f(b)(5).
3, 2017, the Commission designated a longer period also states that ‘‘[t]he Bitcoin Network (i.e., the
6 This approach is consistent with standards the
for Commission action on the proposed rule change. network of computers running the software protocol
See Exchange Act Release No. 79726 (Jan. 3, 2017), Commission has applied to previous commodity-
underlying bitcoin involved in maintaining the
82 FR 2426 (Jan. 9, 2017) (designating March 30, trust ETPs as well as the Commission’s recent
database of bitcoin ownership and facilitating the
2017, as the date by which the Commission must action disapproving the proposed rule change of
transfer of bitcoin among parties) and the asset,
either approve or disapprove the proposed rule Bats BZX Exchange to list and trade shares issued
mstockstill on DSK3G9T082PROD with NOTICES
bitcoin, are intrinsically linked and inseparable.’’
change). On February 15, 2017, the Exchange filed by the Winklevoss Bitcoin Trust. See, e.g., Exchange
Id. at 12255. For the purpose of considering this
Amendment No. 1 to the proposed rule change, Act Release No. 80206 (Mar. 10, 2017), 82 FR
proposal, this order describes bitcoin as a ‘‘digital
amending and replacing the original filing in its 14076, 14077 n.6 (Mar. 16, 2017) (‘‘Bats BZX
asset’’ and a ‘‘commodity.’’
entirety, and Amendment No. 1 was published for Order’’). 10 See id. at 12254.
comment in the Federal Register on March 1, 2017, 7 As discussed below, infra notes 125–126 and
11 See id.
with a 15-day comment period that ended on March accompanying text, the significant markets relating
12 See id. at 12261.
16, 2017. See Exchange Act Release No. 80099 (Feb. to the commodity-trust ETPs approved to date have
13 See id. at 12255.
24, 2017), 82 FR 12253 (Mar. 1, 2017) been well-established regulated futures markets for
(‘‘Amendment No. 1’’). the underlying commodity. 14 See id. at 12257.
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![16248 Federal Register / Vol. 82, No. 62 / Monday, April 3, 2017 / Notices
2017, the eligible bitcoin exchanges for According to the Exchange, the forth consumer protection, AML
inclusion in the XBX Index are Bitfinex, underlying bitcoin marketplace operates compliance, and cybersecurity rules
Bitstamp, GDAX (f/k/a Coinbase), itBit, 24 hours per day, 365 days per year. The tailored for digital currency companies
and OKCoin International.15 According Exchange cites the Trust’s registration operating and transacting business in
to the Exchange: statement (‘‘Registration Statement’’) for New York. The NYSDFS granted a
[T]he XBX represents the value of one the proposition that the majority of BitLicense to GDAX in January 2017.25
bitcoin in U.S. dollars at any point in time bitcoin transactions are executed on • itBit is a bitcoin exchange that was
and closes as of 4:00 p.m. Eastern time public bitcoin exchanges where bitcoins granted a limited-purpose-trust-
(‘‘E.T.’’) each weekday. The intra-day levels are bought and sold daily for value in company charter by the NYSDFS in May
of the XBX incorporate the real-time price of U.S. dollar (‘‘USD’’), euro, and other 2015. Limited-purpose trusts, according
bitcoin based on trading activity derived government-issued currencies,21 and the to the NYSDFS, are permitted to
from constituent exchanges throughout each undertake certain activities, such as
trading day. The closing level of the XBX is
Exchange states that there are currently
calculated using a proprietary methodology 30 bitcoin exchanges across the world.22 transfer agency, securities clearance,
utilizing bitcoin trading data from According to the Exchange, the various investment management, and custodial
constituent exchanges and is published at or bitcoin exchanges are generally services, but without the power to take
after 4:00 p.m. E.T. each weekday. The XBX available to the public through online deposits or make loans.26
is published to two decimal places rounded web portals, and trading information • Gemini is a bitcoin exchange that is
on the last digit.16 (including pricing, volume, and pending also regulated by the NYSDFS. In
The Net Asset Value (‘‘NAV’’) of the orders) is available on the exchanges’ October 2015, the NYSDFS granted
Trust would be calculated each business Web sites, with most of this information Gemini authorization to operate as a
day by the Administrator, as promptly publicly available to anyone who visits limited-purpose trust company.27
as practicable after 4:00 p.m. E.T., using the Web sites.23 • SecondMarket, Inc., d/b/a Genesis
the price set for bitcoin by the XBX The Exchange states that, according to Global Trading, is a member firm of the
Index.17 The Intraday Indicative Value the Registration Statement, there are Financial Industry Regulatory Authority
(‘‘IIV’’) of the Trust would be calculated currently several U.S.-based regulated (‘‘FINRA’’) that makes a market in
and disseminated by the Sponsor every entities that facilitate bitcoin trading bitcoin by offering two-sided
15 seconds during the Exchange’s and that comply with anti-money liquidity.28
regular trading session. The IIV would laundering (‘‘AML’’) and know your The Exchange notes that the CFTC has
be calculated by using the prior day’s customer (‘‘KYC’’) regulatory stated that bitcoins and other virtual
closing NAV per Share as a base and requirements: 24 currencies are encompassed in the
updating that value during the regular • GDAX, which is based in California, definition of ‘‘commodity’’ under the
trading session on the Exchange to is a bitcoin exchange that maintains Commodity Exchange Act and are thus
reflect intraday changes in the value of money transmitter licenses in over 30 within the regulatory jurisdiction of the
the Trust’s bitcoin holdings.18 states, the District of Columbia, and CFTC.29
The Trust would issue and redeem Puerto Rico. GDAX is subject to the According to the Exchange, the
the Shares only in baskets of 100,000 regulations enforced by the various state exchanges with the most significant
Shares and only to authorized agencies that issued their respective bitcoin trading by volume—Bitfinex,
participants (‘‘Authorized money transmitter licenses to GDAX. In Bitstamp, BTCC, BTC-e, GDAX, Huobi,
Participants’’), and these transactions New York, GDAX applied for a itBit, Kraken, LakeBTC, OKCoin
would be conducted ‘‘in-kind’’ for BitLicense, a regulatory framework Exchange China, and OKCoin
bitcoin or for cash.19 The Exchange created by the New York Department of International—traded approximately
states that for creating and redeeming Financial Services (‘‘NYSDFS’’) that sets 1.34 billion bitcoins, at USD-converted
baskets in-kind or for cash, Authorized prices ranging between $199 and
Participants and market makers would Sponsor itself (operating on a principal basis) also $1,203, for a total trade volume of over
may offer NDFs and swaps in order to provide $784 billion from February 2014
be able to hedge their exposure to Authorized Participants and market makers with
bitcoin using non-deliverable forward additional options for hedging their exposure to
through January 2017. The Sponsor
contracts (‘‘NDFs’’) and swap contracts bitcoin. See id. represents that average global daily
that would create synthetic long or short 21 See Registration Statement on Form S–1, as trading volume during this period was
exposure to bitcoin for hedging.20 amended, dated February 3, 2017 (File No. 333– approximately $693 million.30
212479), at 38. According to the Exchange, between
22 See id. at 12257. According to the Exchange,
15 See id. at 12258. the Sponsor estimates that, in the global USD-
January 16, 2016, and January 15, 2017
16 Id. at 12257. The Exchange represents that, bitcoin market, trading volume in the OTC market (including weekends and holidays),
according to the Sponsor, the XBX Index’s price averages about half of the trading volume on average daily bitcoin trading on
variance weighting decreases the influence on the exchanges. See id. at 12259–60.
XBX Index of any particular exchange that diverges
Bitfinex, Bitstamp, GDAX, Gemini, itBit,
23 See id. at 12256–67. The Exchange represents
from the rest of the data points used by the XBX and OKCoin International totaled
that, according to the Sponsor, Bitfinex, one of the
Index and thereby reduces the possibility of an bitcoin exchanges included in the Trust’s approximately 44,000 bitcoins across all
attempt to manipulate the price of bitcoin as underlying XBX Index, does not conduct business of those exchanges at prices that ranged
reflected by the XBX Index. See id. at 12259.
17 See id. at 12262. If for any reason, and as
in New York or with New York residents and that between $371 and $1,161. Of that
another XBX Index component bitcoin exchange,
determined by the Sponsor, the Administrator is OKCoin International, is open only to non-U.S. 25 See id.
unable to value the Trust’s bitcoin using the XBX persons. See also id. at 12258 (acknowledging that 26 See id.
Index price, the Exchange’s proposal provides that certain spot bitcoin exchanges are open only to non-
mstockstill on DSK3G9T082PROD with NOTICES
the Administrator may use other specified criteria U.S. persons or do not conduct business with New
27 See id.
to value the holdings of the Trust. Id. at 12261. York residents and that, as a result, the Sponsor 28 See id.
18 See id. at 12265. 29 See id. at 12261. The Exchange also cites views
must conduct some of its bitcoin trading on behalf
19 See id. at 12263. of the Trust through a wholly-owned subsidiary, expressed by individual CFTC Commissioners for
20 See id. The Exchange states that the Sponsor SolidX Management Ltd., an exempted limited the proposition that derivatives based on bitcoin are
expects that NDFs or swaps will be offered by company organized in the Cayman Islands subject to oversight by the CFTC, including
several participants in the bitcoin marketplace, specifically established to buy and sell bitcoin on oversight to prevent market manipulation of the
including bitcoin exchanges and bitcoin over-the- behalf of the Trust on these bitcoin exchanges). price of bitcoin. Id.
counter (‘‘OTC’’) market participants, and that the 24 See id. at 12257. 30 See id. at 12257.
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![Federal Register / Vol. 82, No. 62 / Monday, April 3, 2017 / Notices 16253
in the U.S. securities markets.104 The After careful consideration, and for Commission disapproves the proposed
Sponsor also asserts that the Trust’s the reasons discussed in greater detail rule change.114
insurance policy and the proposed rule below, the Commission does not believe
B. Analysis
change will serve the public interest in that the proposed rule change, as
a manner otherwise unavailable and modified by Amendment No. 1, is 1. Commodity-Trust ETPs and
notes that multiple commenters have consistent with the requirements of the Surveillance-Sharing Agreements
emphasized the importance of the Exchange Act and the applicable rules The Exchange proposes to list and
Trust’s insurance policy.105 and regulations thereunder.112 trade the Shares under NYSE Arca
The Exchange claims that, as a Specifically, the Commission does not Equities Rule 8.201, which governs the
substitute to the investor safeguards find that the proposed rule change is listing of Commodity-Based Trust
offered by traditional custodians, consistent with Section 6(b)(5) of the
Shares.115 The proposal is similar to
bitcoin insurance is important for Exchange Act—which requires that the
many past proposals to list and trade
investor protection and the public rules of a national securities exchange
shares of ETPs holding precious
interest.106 One commenter claims that be designed, among other things, to
metals.116 Accordingly, the Commission
the Trust’s insurance coverage is an prevent fraudulent and manipulative
analyzes this proposal under the
important, market-based solution that acts and practices and to protect
standards that it has applied to previous
substitutes for a traditional custodial investors and the public interest 113—
commodity-trust ETPs—and that it also
infrastructure and a true transfer-agency because the Commission believes that
applied in the recent Bats BZX Order.117
function that does not exist in the the significant markets for bitcoin are
A key consideration for the
underlying bitcoin market.107 Another unregulated and that, therefore, the
Commission in determining whether to
commenter claims that the fact that the Exchange has not entered into, and
approve or disapprove a proposal to list
Trust carries insurance and will be would currently be unable to enter into,
and trade shares of a new commodity-
exchange traded will prevent situations the type of surveillance-sharing
trust ETP is the susceptibility of the
where consumers risk losing bitcoins or agreement that helps address concerns
shares or the underlying asset to
having them stolen due to a fiduciary’s about the potential for fraudulent or
manipulation. This consideration flows
flawed security protocols.108 manipulative acts and practices in the
market for the Shares. Accordingly, the directly from the requirement in Section
III. Discussion and Commission 6(b)(5) of the Exchange Act that a
Findings 112 In disapproving the proposed rule change, as national securities exchange’s rules
modified by Amendment No. 1, the Commission must be designed ‘‘to prevent fraudulent
A. Overview has considered its impact on efficiency, and manipulative acts and practices’’
competition, and capital formation. See 15 U.S.C. and ‘‘to protect investors and the public
Under Section 19(b)(2)(C) of the 78c(f); see also notes 70–74, 82–84, 91–95, 107,
Exchange Act, the Commission must 148–158 & 169–176 and accompanying text. The interest.’’ 118
approve the proposed rule change of a Commission notes that, according to the Sponsor, Since at least 1990, the Commission
self-regulatory organization (‘‘SRO’’) if the Trust is a means of providing a simple and cost- has expressed the view that the ability
effective way for investors to gain investment of a national securities exchange to
the Commission finds that the proposed exposure to the performance of the USD price of
rule change is consistent with the bitcoin. See SolidX Letter, supra note 43, at 1; see enter into surveillance-sharing
requirements of the Exchange Act and also Lewis Paper, supra note 43, at 3, 11–16 agreements ‘‘furthers the protection of
the applicable rules and regulations (asserting that a bitcoin-based ETP would enable investors and the public interest
ordinary investors to construct more efficient and
thereunder.109 If it is unable to make diversified portfolios). The Sponsor also asserts that
because it will enable the [e]xchange to
such a finding, the Commission must bitcoin exchanges have been subject to hacking and conduct prompt investigations into
disapprove the proposed rule change.110 investor schemes in the past, the losses from which
are documented and quantifiable at approximately 114 The Commission’s disposition of the
Additionally, under Rule 700(b)(3) of $2 billion, and that such losses will continue unless Exchange’s proposed rule change is independent of,
the Commission’s Rules of Practice, the investors are able to invest in bitcoin through a and serves a fundamentally different purpose than,
‘‘burden to demonstrate that a proposed regulated and insured product such as the Trust. any Commission actions with respect to the
rule change is consistent with the See SolidX Letter II, supra note 43, at 2. Regarding Securities Act of 1933 Registration Statement of the
competition, the Exchange has asserted that Trust.
Exchange Act and the rules and approval of the proposed rule change ‘‘will enhance 115 The Commission notes that in settled actions
regulations issued thereunder . . . is on competition among market participants, to the the CFTC has designated bitcoin as a commodity
the self-regulatory organization that benefit of investors and the marketplace.’’ See and has asserted jurisdiction over the trading of at
proposed the rule change.’’ 111 Amendment No. 1, supra note 1, 82 FR at 12267.
least certain derivatives on bitcoin, as well as
The Sponsor claims that the proposed rule change
certain leveraged or margined retail transactions in
would further advance the goal of helping U.S.
104 See id.; see also Lewis Paper, supra note 43, bitcoin. See In re Coinflip, Inc., d/b/a Derivabit, and
exchanges remain competitive in the international
Francisco Riordan, CFTC Docket No. 15–29, 2015
at 11. marketplace by demonstrating to future sponsors of
WL 5535736 (CFTC Sept. 17, 2015) (Order
105 See SolidX Letter II, supra note 43, at 2. new products that the Commission remains
Instituting Proceedings Pursuant to Sections 6(c)
106 See NYSE Letter, supra note 43, at 4. committed to fostering innovation in the U.S.
and 6(d) of the Commodity Exchange Act, Making
107 See Lewis Paper, supra note 43, at 11. securities markets. See SolidX Letter, supra note 43,
Findings and Imposing Remedial Sanctions
108 See Consumers’ Research Letter, supra note
at 3. Finally, regarding the potential effect of the
(‘‘Coinflip Settlement Order’’)), available at http://
proposed rule change on capital formation, the
43, at 2. Exchange asserts that the Sponsor believes that www.cftc.gov/idc/groups/public/@
109 15 U.S.C 78s(b)(2)(C)(i).
demand from new investors accessing bitcoin lrenforcementactions/documents/legalpleading/
110 15 U.S.C. 78s(b)(2)(C)(ii).
through investment in the Shares will broaden the enfcoinfliprorder09172015.pdf.
111 17 CFR 201.700(b)(3). The description of a 116 See, e.g., streetTRACKS Gold Shares,
investor base in bitcoin. See Amendment No. 1,
proposed rule change, its purpose and operation, its supra note 1, 82 FR at 12259. The Commission Exchange Act Release No. 50603 (Oct. 28, 2004), 69
effect, and a legal analysis of its consistency with recognizes that the Exchange and commenters FR 64614 (Nov. 5, 2004) (SR–NYSE–2004–22)
mstockstill on DSK3G9T082PROD with NOTICES
applicable requirements must all be sufficiently assert these economic benefits and specifically (order approving the listing and trading of shares
detailed and specific to support an affirmative addresses the Sponsor’s claims about investor of commodity-trust ETP holding physical gold
Commission finding. Id. Any failure of an SRO to protection from hacking and other risks of bitcoin bullion). The Commission notes that the Sponsor
provide the information elicited by Form 19b–4 ownership below. See infra Section III.B.6. The also views the Trust to be materially identical to
may result in the Commission not having a Commission, however, for the reasons discussed other existing commodity-trust ETPs. See SolidX
sufficient basis to make an affirmative finding that throughout this order, must disapprove the Letter, supra note 43, at 3.
proposed rule change because it is not consistent 117 See Bats BZX Order, supra note 6, 82 FR at
a proposed rule change is consistent with the
Exchange Act and the rules and regulations issued with the Exchange Act. 14081–87.
thereunder that are applicable to the SRO. Id. 113 15 U.S.C. 78f(b)(5). 118 15 U.S.C. 78f(b)(5).
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![16254 Federal Register / Vol. 82, No. 62 / Monday, April 3, 2017 / Notices
possible trading violations and other The Commission also stressed the
regulatory improprieties.’’ 119 The importance of these surveillance-sharing silver futures exchanges are the COMEX and the
Tokyo Commodity Exchange’’ and that the
Commission has also long held that agreements comprehensively covering American Stock Exchange has ‘‘in place an
surveillance-sharing agreements are trading in the underlying assets. In the Information Sharing Agreement with the NYMEX
important in the context of exchange case of a product overlying domestic for the purpose of providing information in
listing of derivative security products, securities, the Commission said that the connection with trading in or related to COMEX
exchange listing a derivative securities silver futures contracts’’); ETFS Gold Trust,
such as equity options.120
Exchange Act Release No. 59895 (May 8, 2009), 74
With respect to ETPs, when approving product should ensure that it was either FR 22993, 22994–95, 22998 (May 15, 2009) (SR–
in 1995 the listing and trading of one of a common member of the Intermarket NYSEArca–2009–40) (accelerated approval order
the first commodity-linked ETPs—a Surveillance Group with, or had entered notes NYSE Arca’s representation that the COMEX
commodity-linked exchange-traded into an information-sharing agreement is one of the ‘‘major world gold markets’’ and that
NYSE Arca ‘‘has an Information Sharing Agreement
note—on a national securities exchange, with, each market trading each with NYMEX for the purpose of sharing information
the Commission continued to underlying security.124 in connection with trading in or related to COMEX
emphasize the importance of Consistent with these statements, for gold futures contracts’’); ETFS Silver Trust,
surveillance-sharing agreements, noting the commodity-trust ETPs approved to Exchange Act Release No. 59781 (Apr. 17, 2009), 74
date for listing and trading, there have FR 18771, 18772, 18776 (Apr. 24, 2009) (SR–
that the listing exchange had entered NYSEArca–2009–28) (accelerated approval order
into surveillance-sharing agreements been in every case well-established, notes NYSE Arca’s representation that ‘‘the most
with each of the futures markets on significant, regulated markets for trading significant silver futures exchanges are the COMEX
which pricing of the ETP would be futures on the underlying commodity— . . . and the Tokyo Commodity Exchange’’ and that
based and stating that ‘‘[t]hese gold, silver, platinum, palladium, and NYSE Arca ‘‘has an Information Sharing Agreement
copper—and the ETP-listing exchange with NYMEX for the purpose of sharing information
agreements should help to ensure the in connection with trading in or related to COMEX
availability of information necessary to has entered into surveillance-sharing silver futures contracts’’); ETFS Palladium Trust,
detect and deter potential agreements with, or held Intermarket Exchange Act Release No. 60971 (Nov. 9, 2009), 74
manipulations and other trading abuses, Surveillance Group membership in FR 59283, 59285–86, 59291 (Nov. 17, 2009) (SR–
common with, those markets.125 The NYSEArca–2009–94) (notice of proposed rule
thereby making [the commodity-linked change includes NYSE Arca’s representation that
notes] less readily susceptible to ‘‘the most significant palladium futures exchanges
manipulation.’’ 121 be a comprehensive ISA [information-sharing are the NYMEX and the Tokyo Commodity
agreement] that covers trading in the new derivative Exchange,’’ that ‘‘NYMEX is the largest exchange in
In 1998, in adopting Exchange Act securities product and its underlying securities in the world for trading precious metals futures and
Rule 19b–4(e) 122 to permit the generic place between the SRO listing or trading a options,’’ and that NYSE Arca ‘‘may obtain trading
listing and trading of certain new derivative product and the markets trading the information via the Intermarket Surveillance
derivative securities products— securities underlying the new derivative securities
Group,’’ of which NYMEX is a member); ETFS
product. Such agreements provide a necessary
including ETPs—the Commission again deterrent to manipulation because they facilitate the
Platinum Trust, Exchange Act Release No. 60970
emphasized the importance of the (Nov. 9, 2006), 74 FR 59319, 59321, 59327 (Nov. 17,
availability of information needed to fully
2009) (SR–NYSEArca-2009–95) (notice of proposed
listing exchange’s ability to obtain from investigate a manipulation if it were to occur.’’).
124 See id. at 70959. The Commission further
rule change includes NYSE Arca’s representation
underlying markets, through that ‘‘the most significant palladium futures
noted that, ‘‘if a new SRO trades component
surveillance-sharing agreements (called securities underlying a new derivative securities
exchanges are the NYMEX and the Tokyo
information-sharing agreements in the Commodity Exchange,’’ that ‘‘NYMEX is the largest
product and is not a member of the ISG [Intermarket
exchange in the world for trading precious metals
release), the information necessary to Surveillance Group], the SRO seeking to list and
futures and options,’’ and that NYSE Arca ‘‘may
detect and deter manipulative activity. trade such new derivative securities product
pursuant to Rule 19b–4(e) should enter into a obtain trading information via the Intermarket
Specifically, in adopting rules governing comprehensive ISA with the non-ISG SRO. Surveillance Group,’’ of which NYMEX is a
the generic listing of new derivative Conversely, if a new SRO seeks to list and trade a member); Sprott Physical Gold Trust, Exchange Act
new derivative securities product pursuant to Rule Release No. 61236 (Dec. 23, 2009), 75 FR 170, 171,
securities products, the Commission 174 and n.27 (Jan. 4, 2010) (SR–NYSEArca-2009–
19b–4(e) and is not a member of the ISG, such SRO
stated that the Rule 19b–4(e) procedures should enter into a comprehensive ISA with each 113) (notice of proposed rule change includes NYSE
would ‘‘enable the Commission to SRO that trades securities underlying the new Arca’s representations that the COMEX is one of the
continue to effectively protect investors derivative securities product.’’ Id. at 70959 n.99. ‘‘major world gold markets,’’ that NYSE Arca ‘‘may
obtain trading information via the Intermarket
and promote the public interest.’’ 123 125 See streetTRACKS Gold Shares, Exchange Act
Surveillance Group,’’ and that NYMEX, of which
Release No. 50603 (Oct. 28, 2004), 69 FR 64614,
64618 (Nov. 5, 2004) (SR–NYSE–2004–22) COMEX is a division, is a member of the
119 See Exchange Act Release No. 27877 (Apr. 4,
(approval order notes the New York Stock Intermarket Surveillance Group); Sprott Physical
1990), 55 FR 13344 (Apr. 10, 1990) (SR–NYSE–90– Silver Trust, Exchange Act Release No. 63043 (Oct.
Exchange’s representation that ‘‘the most significant
14). 5, 2010), 75 FR 62615, 62616, 62619 and n.26 (Oct.
120 See Exchange Act Release No. 33555 (Jan. 31,
gold futures exchanges are the COMEX division of
the NYMEX and the Tokyo Commodity Exchange’’ 12, 2010) (SR–NYSEArca-2010–84) (accelerated
1994), 59 FR 5619, 5621 (Feb. 7, 1994) (SR–Amex– and that the New York Stock Exchange has entered approval order notes NYSE Arca’s representation
93–28) (order approving listing of options on into a reciprocal Memorandum of Understanding that the COMEX is one of the ‘‘major world silver
American Depositary Receipts). with the NYMEX (of which COMEX is a division) markets,’’ that NYSE Arca ‘‘may obtain trading
121 Exchange Act Release No. 35518 (Mar. 21, information via the Intermarket Surveillance
‘‘for the sharing of information related to any
1995), 60 FR 15804 (Mar. 27, 1995) (SR–Amex–94– financial instrument based, in whole or in part, Group,’’ and that NYMEX, of which COMEX is a
30). See also Exchange Act Release No. 36885 (Feb. upon an interest in or performance of gold’’); division, is a member of the Intermarket
26, 1996), 61 FR 8315 n.17 (Mar. 4, 1996) (SR– iShares COMEX Gold Trust, Exchange Act Release Surveillance Group); ETFS Precious Metals Basket
Amex–95–50) (approving the exchange listing and No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751, 3754 Trust, Exchange Act Release No. 62402 (Jun. 29,
trading of Commodity Indexed Securities and (Jan. 26, 2005) (SR–Amex–2004–38) (approval order 2010), 75 FR 39292, 39295, 39298 (July 8, 2010)
noting that, through the comprehensive notes the American Stock Exchange’s (SR–NYSEArca–2010–56) (notice of proposed rule
surveillance-sharing agreements, the listing representation that ‘‘the most significant gold change includes NYSE Arca’s representation that
exchange was able to obtain market surveillance futures exchanges are the COMEX division of the ‘‘the most significant gold, silver, platinum and
information for transactions occurring on NYMEX NYMEX and the Tokyo Commodity Exchange’’ and palladium futures exchanges are the COMEX and
mstockstill on DSK3G9T082PROD with NOTICES
and COMEX and from the London Metal Exchange that the American Stock Exchange has ‘‘in place an the TOCOM’’ and that NYSE Arca ‘‘may obtain
through the Intermarket Surveillance Group. Information Sharing Agreement with the NYMEX trading information via the Intermarket
122 17 CFR 240.19b–4(e).
for the purpose of providing information in Surveillance Group,’’ of which NYMEX (of which
123 Amendment to Rule Filing Requirements for connection with trading in or related to COMEX COMEX is a division) is a member); ETFS White
Self-Regulatory Organizations Regarding New gold futures contracts’’); iShares Silver Trust, Metals Basket Trust, Exchange Act Release No.
Derivative Securities Products, Exchange Act Exchange Act Release No. 53521 (Mar. 20, 2006), 71 62620 (July 30, 2010), 75 FR 47655, 47657, 47660
Release No. 40761 (Dec. 8, 1998), 63 FR 70952, FR 14967, 14968, 14973 (Mar. 24, 2006) (SR–Amex– (Aug. 6, 2010) (SR–NYSEArca–2010–71) (notice of
70959 (Dec. 22, 1998) (File no. S7–13–98) (‘‘NDSP 2005–72) (approval order notes the American Stock proposed rule change includes NYSE Arca’s
Adopting Release’’) (also noting that ‘‘there should Exchange’s representation that ‘‘the most significant representation that ‘‘the most significant silver,
platinum and palladium futures exchanges are the
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![Federal Register / Vol. 82, No. 62 / Monday, April 3, 2017 / Notices 16255
Commission believes that the need for market is the largest and most liquid
COMEX and the TOCOM’’ and that NYSE Arca an exchange listing a commodity-trust financial market in the world and that,
‘‘may obtain trading information via the Intermarket
Surveillance Group,’’ of which COMEX is a
ETP to have surveillance-sharing as of April 2004, the foreign exchange
member); ETFS Asian Gold Trust, Exchange Act agreements with significant, regulated market experienced average daily
Release No. 63267 (Nov. 8, 2010), 75 FR 69494, markets relating to the underlying turnover of approximately $1.88
69496, 69500–01 (Nov. 12, 2010) (SR–NYSEArca– commodity applies equally to a trillion; 129
2010–95) (notice of proposed rule change includes commodity-trust ETP that is based on • That the most significant
NYSE Arca’s representation that ‘‘the most
significant gold futures exchanges are the COMEX bitcoin or another digital asset.126 participants in the spot market are the
and the Tokyo Commodity Exchange,’’ that The Sponsor argues that Section major international commercial banks
‘‘COMEX is the largest exchange in the world for 6(b)(5) does not contain any inherent that act both as brokers and as
trading precious metals futures and options,’’ and requirement for market surveillance and dealers; 130 and
that NYSE Arca ‘‘may obtain trading information
via the Intermarket Surveillance Group,’’ of which
argues that the Commission, in 2005, • That most trading in the global OTC
COMEX is a member); Sprott Physical Platinum and approved the listing and trading of an foreign currency markets is conducted
Palladium Trust, Exchange Act Release No. 68101 ETP—the Euro Currency Trust—where by regulated financial institutions, such
(Oct. 24, 2012), 77 FR 65732, 65733, 65739 (Oct. 30, the underlying market was not as banks and broker dealers.131
2012) (SR–NYSEArca-2012–111) (accelerated surveilled.127 The Commission,
approval order notes NYSE Arca’s representation
Thus, significant, regulated markets
that ‘‘[f]utures on platinum and palladium are
however, believes that its approval of related to foreign exchange trading exist,
traded on two major exchanges: The New York the Euro Currency Trust is readily and the listing exchange of the Euro
Mercantile Exchange . . . and Tokyo Commodities distinguishable from its disapproval of Currency Trust belongs to a multilateral
Exchange’’ and that NYSE Arca ‘‘may obtain the proposed SolidX Bitcoin Trust. surveillance-sharing agreement with
information via ISG [Intermarket Surveillance First, the Euro Currency Trust is not
Group] from other exchanges that are members of those markets. Moreover, many
ISG or with which [NYSE Arca] has entered into a
a commodity trust, and it is not listed prominent participants in the OTC
comprehensive surveillance sharing agreement, and traded under the Exchange listing foreign exchange market are regulated
including COMEX’’); APMEX Physical—1 oz. Gold standards for commodity-based trusts. financial institutions. The markets
Redeemable Trust, Exchange Act Release No. 66627 Second, the Commission’s approval
(Mar. 20, 2012), 77 FR 17539, 17547 (Mar. 26, 2012) related to foreign exchange therefore
order for the Euro Currency Trust notes bear little resemblance to the markets
(SR–NYSEArca–2012–18) (notice of proposed rule
change cross-references the proposed rule change to that, in addition to a large OTC market currently related to bitcoin, which are
list and trade shares of the ETFS Gold Trust, in in currency derivatives, currency either unregulated, not of significant
which NYSE Arca represented that the COMEX is options and futures were traded on size, or both. The rationale behind the
one of the ‘‘major world gold markets’’ and notes regulated markets with the authority to
that NYSE Arca ‘‘may obtain information via ISG Commission’s approval of the Euro
from other exchanges that are members of ISG or
perform surveillance on their members’ Currency Trust is therefore consistent
with which [NYSE Arca] has entered into a trading activities, to review positions with the rationale for the Commission’s
comprehensive surveillance sharing agreement, held by members and large-scale
including COMEX’’); JPM XF Physical Copper
disapproval of the SolidX Bitcoin Trust.
customers, and to monitor the price
Trust, Exchange Act Release No. 68440 (Dec. 14, The Commission continues to believe
movements of options and futures
2012), 77 FR 75468, 75469–72 (Dec. 20, 2012) (SR– that surveillance-sharing agreements
NYSEArca–2012–28) (approval order notes NYSE markets by comparing them with cash
between the exchange listing shares of
Arca’s representation that a majority of copper and other derivative markets’ prices.128
a commodity-trust ETP and significant,
derivatives trading occurs on the LME, the COMEX, These regulated derivatives markets
and the Shanghai Futures Exchange and that NYSE regulated markets related to the
included the Philadelphia Stock
Arca could obtain trading information from other underlying asset provide a ‘‘necessary
Exchange and the Chicago Mercantile
members of the Intermarket Surveillance Group deterrent to manipulation.’’ 132 To the
(including from the COMEX) and that it had entered Exchange, which, along with the ETP’s
extent there is some question as to the
into a comprehensive surveillance-sharing listing exchange (the New York Stock
agreement with the LME with respect to trading in Exchange) are members of the degree to which bitcoin is subject to
copper and copper derivatives); iShares Copper Intermarket Surveillance Group. manipulation, moreover, surveillance-
Trust, Exchange Act Release No. 68973 (Feb. 22,
Third, the Commission’s approval sharing agreements with significant,
2013), 78 FR 13726, 13727–30 (Feb. 28, 2013) (SR– regulated markets relating to bitcoin
NYSEArca–2012–66) (approval order notes NYSE order notes a number of significant facts
Arca’s representation that the LME is the exchange about the underlying spot market for would help answer that question and
with the greatest number of open copper futures foreign exchange, including: address instances of such manipulation.
and options contracts and that NYSE Arca had • That the listing exchange had Therefore, the Commission’s analysis of
entered into a comprehensive surveillance-sharing the Exchange’s proposal examines
agreement with the LME regarding trading in represented that the foreign exchange
copper and copper derivatives and could also
whether regulated markets of significant
obtain trading information from other members of NYSE Arca represented that the COMEX is one of size exist—in either bitcoin or
the Intermarket Surveillance Group, including the the ‘‘major world gold markets’’); Long Dollar Gold derivatives on bitcoin—with which the
COMEX, which also trades copper futures); First Trust, Exchange Act Release No. 79518 (Dec. 9, Exchange has, or could enter into, a
Trust Gold Trust, Exchange Act Release No. 69847 2016), 81 FR 90876, 90881, 90886 (Dec. 15, 2016)
(June 25, 2013), 78 FR 39399, 39400 n.15, 39405 (SR–NYSEArca–2016–84) (accelerated approval surveillance-sharing agreement.
(July 1, 2013) (SR–NYSEArca–2013–61) (notice of order notes NYSE Arca’s representation that the
most significant gold futures exchange is the
2. The Worldwide Spot Market for
proposed rule change notes that FINRA, on behalf
of the exchange, can obtain trading information COMEX and that the exchange can obtain trading Bitcoin
regarding gold futures and options on gold futures information from other members of the Intermarket
Surveillance Group).
The Commission believes—consistent
from members of the Intermarket Surveillance
Group, including the COMEX, and cross-references 126 See Bats BZX Order, supra note 6, 82 FR at with its conclusion in the Bats BZX
the proposed rule change to list and trade shares of 14087 (disapproving proposed rule change to list a Order 133—that the bulk of bitcoin
the ETFS Gold Trust, in which NYSE Arca bitcoin-based commodity-trust ETP on the basis trading occurs on markets where there
mstockstill on DSK3G9T082PROD with NOTICES
represented that the COMEX is one of the ‘‘major that the listing exchange had not, and would not be
world gold markets’’); Merk Gold Trust, Exchange able to, enter into a surveillance-sharing agreement 129 See id. at 72486.
Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, with significant, regulated markets related to the 130 See
underlying asset). id. at 72487.
76369 n.26, 76374 (Dec. 17, 2013) (SR–NYSEArca–
127 See supra note 90 and accompanying text. 131 See id.
2013–137) (notice of proposed rule change notes
132 NDSP Adopting Release, supra note 123, 63
that the exchange can obtain trading information 128 Exchange Act Release No. 52843 (Nov. 28,
via the Intermarket Surveillance Group from other 2005), 70 FR 72486, 72487 (Dec. 5, 2005) (Order FR at 70959.
members, including the COMEX, and cross- Granting Accelerated Approval of a Proposed Rule 133 See Bats BZX Order, supra note 6, 82 FR at
references the proposed rule change to list and Change regarding the Euro Currency Trust). 14084 & nn.103–106.
trade shares of the ETFS Gold Trust, in which
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![16260 Federal Register / Vol. 82, No. 62 / Monday, April 3, 2017 / Notices
For the Commission, by the Division of Programs must buy-in or sell-out of dictates all of the terms of the stock loan
Trading and Markets, pursuant to delegated stock loan positions in the event of not governed by OCC’s By-Laws and
authority.184 another Hedge or Market Loan Clearing Rules (e.g., Mark-to-Market percentage
Eduardo A. Aleman, Member suspension (as applicable); (5) and rounding preferences). In addition,
Assistant Secretary. provide OCC with the authority to re-matched counterparties that do not
[FR Doc. 2017–06441 Filed 3–31–17; 8:45 am] withdraw from a Clearing Member’s have an existing securities lending
BILLING CODE 8011–01–P account the value of any difference relationship would need to make
between the price reported by a Clearing operational changes in order to make
Member instructed to execute a buy-in deliveries to their new counterparty in
SECURITIES AND EXCHANGE or sell-out of loaned stock as a result of the event of a termination or buy-in to
COMMISSION another Clearing Member suspension close out the loan.
[Release No. 34–80323; File No. SR–OCC–
and the price that OCC determines to be OCC carefully considered this
2017–802] reasonable; and (6) allow OCC to close member feedback in the development of
out the Matched-Book Positions of its proposal, and in order to mitigate
Self-Regulatory Organizations; The suspended Hedge Clearing Members these concerns, the proposed re-
Options Clearing Corporation; Notice through the termination by offset and matching in suspension rules would
of Filing of Advance Notice ‘‘re-matching’’ of such positions without require OCC to make reasonable efforts
Concerning Enhancements to OCC’s requiring the transfer of securities to re-match Hedge Clearing Members
Stock Loan Programs against the payment of settlement prices that maintain between them current
as currently required under OCC’s rules. executed MSLAs. Specifically, under
March 28, 2017. All terms with initial capitalization the proposed changes, OCC would use
Pursuant to Section 806(e)(1) of Title not defined herein have the same a matching algorithm to re-match stock
VIII of the Dodd-Frank Wall Street meaning as set forth in OCC’s By-Laws loan and stock borrow positions in order
Reform and Consumer Protection Act, and Rules.3 of priority based on the largest available
entitled Payment, Clearing and stock borrow or stock loan positions, as
Settlement Supervision Act of 2010 II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the applicable, for the selected Eligible
(‘‘Payment, Clearing and Settlement Stock for which a MSLA exists between
Supervision Act’’) 1 and Rule 19b– Advance Notice
the Borrowing and Lending Clearing
4(n)(1)(i) under the Securities Exchange In its filing with the Commission, Members to ensure that members with
Act of 1934 (‘‘Act’’),2 notice is hereby OCC included statements concerning existing securities lending relationships
given that on February 28, 2017, The the purpose of and basis for the advance are re-matched to the greatest extent
Options Clearing Corporation (‘‘OCC’’) notice and discussed any comments it possible. Even in light of these
filed with the Securities and Exchange received on the advance notice. The text concerns, however, Clearing Members
Commission (‘‘Commission’’) an of these statements may be examined at generally agreed that it is preferable to
advance notice as described in Items I the places specified in Item IV below. maintain a stock loan with another
and II below, which Items have been OCC has prepared summaries, set forth counterparty rather than attempting to
prepared by OCC. The Commission is in sections A and B below, of the most close out stock loan positions in the
publishing this notice to solicit significant aspects of these statements. event of a Hedge Clearing Member
comments on the advance notice from (A) Clearing Agency’s Statement on suspension as in many cases (and
interested persons. Comments on the Advance Notice particularly in stressed market
I. Clearing Agency’s Statement of the Received From Members, Participants or conditions) it could be difficult for the
Terms of Substance of the Advance Others borrower to return the securities to the
Notice Written comments were not and are lender since the securities would likely
not intended to be solicited with respect be being used for other purposes.
This advance notice concerns a
number of proposed enhancements to to the proposed changes and none have (B) Advance Notices Filed Pursuant to
OCC’s Stock Loan/Hedge Program been received. OCC has, however, Section 806(e) of the Payment, Clearing,
(‘‘Hedge Program’’) and Market Loan discussed the re-matching in suspension and Settlement Supervision Act
Program (collectively, the ‘‘Stock Loan proposal with its Clearing Members at
Purpose of the Proposed Change
Programs’’). The proposed changes numerous member outreach forums and
would, among other things: (1) Require meetings. While members were OCC proposes a number of
Clearing Members to have robust generally supportive of the proposal, amendments to its By-Laws and Rules
processes in place to reconcile open some members did raise concerns over designed to enhance the overall
interest in the Stock Loan Programs at the possibility of being re-matched with resilience of its Stock Loan/Hedge
least once per stock loan business day; a counterparty with which the Clearing Program (‘‘Hedge Program’’) and Market
(2) provide further clarity and certainty Member does not have an existing Loan Program (collectively, the ‘‘Stock
regarding the formal record of stock loan securities lending relationship. For Loan Programs’’). Specifically, the
positions being guaranteed by OCC at example, some Clearing Members noted proposed changes would improve risk
any given time (‘‘golden copy’’ rules); that they could be re-matched with management in the Stock Loan
(3) further clarify that stock loan counterparties with which they do not Programs by, among other things: (1)
positions at OCC are not terminated have an existing Master Securities Requiring Clearing Members to have
robust processes in place to reconcile
mstockstill on DSK3G9T082PROD with NOTICES
until the records of OCC reflect the Lending Agreement (‘‘MSLA’’),4 which
termination of such stock loan; (4) open interest in the Stock Loan
provide a specific timeframe in which 3 OCC’s By-Laws and Rules can be found on Programs at least once per stock loan
Clearing Members in the Stock Loan OCC’s public Web site: http://optionsclearing.com/ business day; (2) providing further
about/publications/bylaws.jsp. clarity and certainty regarding the
4 Commission Staff received OCC’s consent to
184 17CFR 200.30–3(a)(12). insert ‘‘Master Securities Lending Agreement’’
formal record of stock loan positions
1 12 U.S.C. 5465(e)(1). before the acronym ‘‘MSLA’’ pursuant to a being guaranteed by OCC at any given
2 17 CFR 240.19b–4(n)(1)(i). telephone conversation on March [6], 2017. time (‘‘golden copy’’ rules); (3) further
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Document Created: 2017-04-01 09:36:18
Document Modified: 2017-04-01 09:36:18
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
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| Section | Notices | |
| FR Citation | 82 FR 16247 |
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