83 FR 43912 - Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a Proposed Rule Change Relating to Listing and Trading of the Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares Under NYSE Arca Rule 8.200-E
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 167 (August 28, 2018)
Federal Register Volume 83, Issue 167 (August 28, 2018)
| Page Range | 43912-43919 | |
| FR Document | 2018-18577 |
[Federal Register Volume 83, Number 167 (Tuesday, August 28, 2018)] [Notices] [Pages 43912-43919] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-18577] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83912; File No. SR-NYSEArca-2018-02] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a Proposed Rule Change Relating to Listing and Trading of the Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares Under NYSE Arca Rule 8.200-E August 22, 2018. I. Introduction On January 4, 2018, NYSE Arca, Inc. (``NYSE Arca'') filed with the Securities and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade the shares (``Shares'') of the following exchange-traded products under NYSE Arca Rule 8.200-E, Commentary .02: Direxion Daily Bitcoin Bear 1X Shares (``1X Bear Fund''), Direxion Daily Bitcoin 1.25X Bull Shares (``1.25X Bull Fund''), Direxion Daily Bitcoin 1.5X Bull Shares (``1.5X Bull Fund''), Direxion Daily Bitcoin 2X Bull Shares (``2X Bull Fund''), and Direxion Daily Bitcoin 2X Bear Shares (``2X Bear Fund'') (each a ``Fund'' and, collectively, the ``Funds''). The proposed rule change was published for comment in the Federal Register on January 24, 2018.\3\ The comment period for the Notice of Proposed Rule Change closed on February 14, 2018. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No. 82532 (Jan 18, 2018), 83 FR 3380 (Jan. 24, 2018) (``Notice''). --------------------------------------------------------------------------- On March 1, 2018, pursuant to Section 19(b)(2) of the Exchange Act,\4\ the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change.\5\ On April 23, 2018, the Commission instituted proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to determine whether to approve or disapprove the proposed rule change.\7\ The comment period and rebuttal comment period for the Order Instituting Proceedings closed on May 18, 2018, and June 1, 2018, respectively. Finally, on July 18, 2018, the Commission extended the period for consideration of the proposed rule change to September 21, 2018.\8\ As of August 21, 2018, the Commission had received six comments on the proposed rule change.\9\ --------------------------------------------------------------------------- \4\ 15 U.S.C. 78s(b)(2). \5\ See Securities Exchange Act Release No. 82795 (Mar. 1, 2018), 83 FR 9768 (Mar. 7, 2018). \6\ 15 U.S.C. 78s(b)(2)(B). \7\ See Securities Exchange Act Release No. 83094 (Apr. 23, 2018), 83 FR 18603 (Apr. 27, 2018) (``Order Instituting Proceedings''). \8\ See Securities Exchange Act Release No. 83661 (July 18, 2018), 83 FR 35040 (July 24, 2018). \9\ See Letters from Steven Williams (May 17, 2018) (``Williams Letter''); Sharon Brown-Hruska, Managing Director, and Trevor Wagener, Consultant, NERA Economic Consulting (May 18, 2018) (``NERA Letter''); John Galt (July 24, 2018) (``Galt Letter''); David (July 30, 2018) (``David Letter''); Sami Santos (Aug. 7, 2018) (``Santos Letter''); and Sam M. Ahn (Aug. 21, 2018) (``Ahn Letter''). All comments on the proposed rule change are available on the Commission's website at: https://www.sec.gov/comments/sr-nysearca-2018-02/nysearca201802.htm. --------------------------------------------------------------------------- This order disapproves the proposed rule change. Although the Commission is disapproving this proposed rule change, the Commission emphasizes that its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment. Rather, the Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission's Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange's rules be designed to prevent fraudulent and manipulative acts and practices.\10\ Among other things, the Exchange has offered no record evidence to demonstrate that bitcoin futures markets are ``markets of significant size.'' That failure is critical because, as explained below, the Exchange has failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, and therefore surveillance-sharing with a regulated market of significant size related to bitcoin is necessary to satisfy the statutory requirement that the Exchange's rules be designed to prevent fraudulent and manipulative acts and practices.\11\ --------------------------------------------------------------------------- \10\ See 15 U.S.C. 78f(b)(5). \11\ See infra notes 32-34 and accompanying text. --------------------------------------------------------------------------- II. Description of the Proposal The Exchange proposes to list and trade the Shares under NYSE Arca Rule 8.200-E, Commentary .02, which [[Page 43913]] governs the listing and trading of Trust Issued Receipts on the Exchange.\12\ Each Fund will be a series of the Direxion Shares ETF Trust II (``Trust''), and the Trust and the Funds will be managed and controlled by Direxion Asset Management, LLC (``Sponsor''). Bank of New York Mellon will be the custodian and transfer agent for the Funds. U.S. Bancorp Fund Services, LLC will serve as the administrator for the Funds, and Foreside Fund Services, LLC will serve as the distributor of the Shares (``Distributor'').\13\ According to the Notice, each Fund will create and redeem Shares in one or more Creation Units (a Creation Unit is a block of 50,000 Shares of a Fund).\14\ --------------------------------------------------------------------------- \12\ See NYSE Arca Rule 8.200-E, Commentary .02. NYSE Arca Rule 8.200-E permits the listing and trading of ``Trust Issued Receipts,'' defined as a security (1) that is issued by a trust which holds specific securities deposited with the trust; (2) that, when aggregated in some specified minimum number, may be surrendered to the trust by the beneficial owner to receive the securities; and (3) that pay beneficial owners dividends and other distributions on the deposited securities, if any are declared and paid to the trustee by an issuer of the deposited securities. Commentary .02 applies to Trust Issued Receipts that invest in any combination of investments, including cash; securities; options on securities and indices; futures contracts; options on futures contracts; forward contracts; equity caps, collars, and floors; and swap agreements. \13\ See Notice, supra note 3, 83 FR at 3381. \14\ See id. at 3384. --------------------------------------------------------------------------- According to the Notice, the Funds will seek to obtain daily short, leveraged long, or leveraged short exposure (before fees and expenses) to the target benchmark, which is the lead-month bitcoin futures contract traded on the Chicago Mercantile Exchange (``CME''), the Cboe Global Markets, Inc. (``CBOE''), or any other U.S. exchange that subsequently trades bitcoin futures contracts (``Bitcoin Futures Contract'').\15\ Specifically, the 1.25X Bull Fund, the 1.5X Bull Fund, and the 2X Bull Fund will seek daily investment results (before fees and expenses) that are 125%, 150%, or 200%, respectively, of the daily return of the target benchmark.\16\ The 1X Bear Fund and the 2X Bear Fund will seek daily inverse investment results (before fees and expenses) that are -100% or -200%, respectively, of the daily return of the target benchmark.\17\ --------------------------------------------------------------------------- \15\ See id. at 3381. Bitcoin Futures Contracts will be cash- settled. According to the Exchange, the ``lead month'' contract is the monthly contract with the earliest expiration date. See id. at 3381 n.6. \16\ See id. at 3382. \17\ See id. --------------------------------------------------------------------------- According to the Notice, the target benchmark's value will be calculated as the last sale price published by CME or CBOE, or any other U.S. exchange that subsequently trades bitcoin futures contracts, on or before 11:00 a.m. E.T. for the Bitcoin Futures Contract and may reflect trades occurring and published by CME, CBOE, or another U.S. exchange that subsequently trades bitcoin futures contracts outside the normal trading session for the Bitcoin Futures Contract.\18\ Each Fund will compute its NAV as of 11:00 a.m. E.T., or such earlier time that the NYSE may close.\19\ --------------------------------------------------------------------------- \18\ See id. at 3381. \19\ See id. at 3383. --------------------------------------------------------------------------- According to the Notice, each Fund, under normal market conditions, will seek to achieve its daily investment objective by investing in the Bitcoin Futures Contract, swaps on the Bitcoin Futures Contract, or listed options on bitcoin or the Bitcoin Futures Contract (collectively, ``Bitcoin Financial Instruments''). The Funds' investments in Bitcoin Financial Instruments will be used to produce economically ``leveraged'' or ``inverse leveraged'' investment results for the Funds.\20\ A Fund may invest in the listed options and swaps described above in a manner consistent with its investment objective in situations where the Sponsor believes that investing in such financial instruments is in the best interests of a Fund. In addition, a Fund may invest in swap contracts referencing the Bitcoin Futures Contract if the market for a specific bitcoin futures contract experiences emergencies or if position, price, or accountability limits (if any) are reached with respect to a specific bitcoin futures contract. Each trading day at the close of the U.S. equity markets, each Fund will position its portfolio to ensure that the Fund's exposure to the target benchmark is consistent with the Fund's investment objective.\21\ The Notice also states: --------------------------------------------------------------------------- \20\ See id. at 3381-82. \21\ See id. at 3382. [U]nlike the futures markets for traditional physical commodities, the market for exchange-traded bitcoin futures contract[s] has limited trading history and operational experience and may be riskier, less liquid, more volatile and more vulnerable to economic, market and industry changes than more established futures markets. The liquidity of the market will depend on, among other things, the adoption of bitcoin and the commercial and speculative interest in the market for the ability to hedge against the price of bitcoin with exchange-traded bitcoin futures contracts.\22\ --------------------------------------------------------------------------- \22\ See id. at 3383. --------------------------------------------------------------------------- The Exchange represents that trading in the Shares of each Fund 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.\23\ The Exchange asserts 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.\24\ --------------------------------------------------------------------------- \23\ See id. at 3385. \24\ See id. --------------------------------------------------------------------------- III. Discussion A. The Applicable Standard for Review The Commission must consider whether the Exchange's proposal is consistent with Exchange Act Section 6(b)(5), which requires, in relevant part, 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.'' \25\ Under 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 [`SRO'] that proposed the rule change.'' \26\ --------------------------------------------------------------------------- \25\ 15 U.S.C. 78f(b)(5). \26\ Rule 700(b)(3), Commission Rules of Practice, 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,\27\ and any failure of an SRO to provide this information 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 applicable rules and regulations.\28\ Moreover, ``unquestioning reliance'' on an SRO's representations in a proposed rule change is not sufficient to justify Commission approval of a proposed rule change.\29\ --------------------------------------------------------------------------- \27\ See id. \28\ See id. \29\ See Susquehanna Int'l Group, LLP v. Securities and Exchange Commission, 866 F.3d 442, 447 (D.C. Cir. 2017). --------------------------------------------------------------------------- B. Preventing Fraudulent and Manipulative Practices 1. Applicable Legal Standard To approve the Exchange's proposal to list the Shares, the Commission must be able to find that the proposal is, consistent with Exchange Act Section 6(b)(5), ``designed to prevent fraudulent [[Page 43914]] and manipulative acts and practices.'' \30\ As the Commission recently explained in an order disapproving a listing proposal for the Winklevoss Bitcoin Trust (``Winklevoss Order''), although surveillance- sharing agreements are not the exclusive means by which an exchange- traded product (``ETP'') listing exchange can meet its obligations under Exchange Act Section 6(b)(5), such agreements are a widely used means for exchanges that list ETPs to meet their obligations, and the Commission has historically recognized their importance.\31\ --------------------------------------------------------------------------- \30\ 15 U.S.C. 78f(b)(5). \31\ Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579, 37580 (Aug. 1, 2018) (SR-BatsBZX-2016-30). --------------------------------------------------------------------------- The Commission has therefore determined that, if the listing exchange for an ETP fails to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, the listing exchange must enter into a surveillance-sharing agreement with a regulated market of significant size because ``[s]uch 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.'' \32\ Accordingly, a surveillance- sharing agreement with a regulated market of significant size is required to ensure that, in compliance with the Exchange Act, the proposal is ``designed to prevent fraudulent and manipulative acts and practices.'' \33\ In this context, the Commission has interpreted the terms ``significant market'' and ``market of significant size'' to include a market (or group of markets) as to which (a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, so that a surveillance-sharing agreement would assist the ETP listing market in detecting and deterring misconduct, and (b) it is unlikely that trading in the ETP would be the predominant influence on prices in that market.\34\ Thus, a surveillance-sharing agreement must be entered into with a ``significant market'' to assist in detecting and deterring manipulation of the ETP, because someone attempting to manipulate the ETP is reasonably likely to also engage in trading activity on that ``significant market.'' --------------------------------------------------------------------------- \32\ Id. (citing Amendment to Rule Filing Requirements for Self- Regulatory Organizations Regarding New Derivative Securities Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 64 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)). \33\ 15 U.S.C. 78f(b)(5). \34\ See Winklevoss Order, supra note 31, 83 FR at 37594. This definition is illustrative and not exclusive. There could be other types of ``significant markets'' and ``markets of significant size,'' but this definition is an example that will provide guidance to market participants. See id. --------------------------------------------------------------------------- Although the Winklevoss Order applied these standards to a commodity-trust ETP based on bitcoin, the Commission believes that these standards are also appropriate for an ETP based on bitcoin futures. When approving the first commodity-futures ETP, the Commission specifically noted that ``[i]nformation sharing agreements with primary markets trading index components underlying a derivative product are an important part of a self-regulatory organization's ability to monitor for trading abuses in derivative products.'' \35\ And the Commission's approval orders for commodity-futures ETPs consistently note the ability of an ETP listing exchange to share surveillance information either through surveillance-sharing agreements or through membership by the listing exchange and the relevant futures exchanges in the Intermarket Surveillance Group.\36\ While the [[Page 43915]] Commission in those orders did not explicitly undertake an analysis of whether the related futures markets were of ``significant size,'' the exchanges proposing commodity-futures ETPs on a single reference asset or benchmark generally made representations regarding the trading volume of the underlying futures markets,\37\ and the Commission was in each of those cases dealing with a large futures market that had been trading for a number of years before an exchange proposed an ETP based on those futures.\38\ And where the Commission has considered a proposed ETP based on futures that had only recently begun trading,\39\ the Commission specifically addressed whether the futures on which the ETP was based--which were futures on an index of well-established commodity futures--were illiquid or susceptible to manipulation.\40\ --------------------------------------------------------------------------- \35\ Securities Exchange Act Release No. 53105 (Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006) (SR-Amex-2005-059). Additionally, the Winklevoss Order discusses the broader history and importance of surveillance-sharing agreements relating to derivative securities products, quoting Commission statements dating from 1990 on. See Winklevoss Order, supra note 31, 83 FR at 37592-94. \36\ See, e.g., Securities Exchange Act Release No. 53105 (Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006) (SR-Amex-2005-059) (approval order noted that Amex's ``Information Sharing Agreement with the NYMEX and the CBOT and [Amex's] Memorandum of Understanding with the LME, along with the Exchange's participation in the ISG, in which the CBOT participates . . . create the basis for the Amex to monitor for fraudulent and manipulative practices in the trading of the Shares''); Securities Exchange Act Release No. 53582 (Mar. 31, 2006), 71 FR 17510, 17518 (Apr. 6, 2006) (SR-Amex-2005-127) (approval order noted that Amex's ``comprehensive surveillance sharing agreements with the NYMEX and ICE Futures . . . create the basis for the Amex to monitor for fraudulent and manipulative practices in the trading of the Units'' and that ``[s]hould the USOF invest in oil derivatives traded on markets such as the Singapore Oil Market, the Exchange represents that it will file a proposed rule change pursuant to Section 19(b) of the [Exchange] Act, seeking Commission approval of [Amex's] surveillance agreement with such market''); Securities Exchange Act Release No. 54013 (June 16, 2006), 71 FR 36372, 36378-79 (June 26, 2006) (NYSE-2006-17) (approval order noted that NYSE's ``comprehensive surveillance sharing agreements with the NYMEX, the Kansas City Board of Trade, ICE Futures, and the LME . . . create the basis for the NYSE to monitor for fraudulent and manipulative trading practices'' and that ``all of the other trading venues on which current Index components and CERFs are traded are members of the ISG''); Securities Exchange Act Release No. 54450 (Sept. 14, 2006), 71 FR 55230, 55236 (Sept. 21, 2006) (SR-Amex-2006-44) (approval order noted that ``CME, where the futures contract for each of the current Index components is traded, is a member of the ISG'' and that in the event of new fund investments in ``foreign currency futures contracts traded on futures exchanges other than CME, [Amex] must have a CSSA with that futures exchange or the futures exchange must be an ISG member''); Securities Exchange Act Release No. 55029 (Dec. 29, 2006), 72 FR 806, 809-10 (Jan. 8, 2007) (SR-Amex-2006-76) (approval order noted that Amex's ``Comprehensive Surveillance Sharing Agreement with the ICE Futures, LME, and NYMEX, . . . and membership in the Intermarket Surveillance Group (`ISG') creates the basis for the Amex to monitor fraudulent and manipulative practices in the trading of the Shares''); Securities Exchange Act Release No. 56880 (Dec. 3, 2007), 72 FR 69259, 69261 (Dec. 7, 2007) (SR-Amex-2006-96) (approval order noted that Amex has ``information sharing agreements with the InterContinental Exchange, the Chicago Mercantile Exchange, and the New York Mercantile Exchange and may obtain market surveillance information from other exchanges, including the Chicago Board of Trade, London Metals Exchange, and the New York Board of Trade through the Intermarket Surveillance Group''); Securities Exchange Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987, 19988 (Apr. 20, 2007) (SR-Amex-2006-112) (approval order noted that Amex ``currently has in place an Information Sharing Agreement with the NYMEX and ICE Futures'' and that if ``USNG invests in Natural Gas Interests traded on other exchanges, the Amex represented that it will seek to enter into Information Sharing arrangements with those particular exchanges''); Securities Exchange Act Release No. 57456 (Mar. 7, 2008), 73 FR 13599, 13601 (Mar. 13, 2008) (NYSEArca-2007-91) (approval order noted that NYSEArca ``can obtain market surveillance information, including customer identity information, with respect to transactions occurring on the NYM, the Kansas City Board of Trade, ICE, and the LME, pursuant to its comprehensive information sharing agreements with each of those exchanges'' and that ``[a]ll of the other trading venues on which current Index components are traded are members of the ISG''); Securities Exchange Act Release No. 57838 (May 20, 2008), 73 FR 30649, 30652, (May 28, 2008) (SR- NYSEArca-2008-09) (approval order noted that NYSEArca ``may obtain information via the ISG from other exchanges who are members or affiliate members of the ISG,'' that NYSEArca ``has an information sharing agreement in place with ICE Futures,'' and that NYSEArca will file a proposed rule change ``if the Fund invests in EUAs . . . that constitute more than 10% of the weight of the Fund where the principal trading market for such component is not a member or affiliate member of the ISG or where the Exchange does not have a comprehensive surveillance sharing agreement with such market''); Securities Exchange Act Release No. 63635 (Jan. 3, 2011), 76 FR 1489, 1491 (Jan. 10, 2011) (NYSEArca-2010-103) (approval order noted that ``with respect to Fund components traded on exchanges, not more than 10% of the weight of such components in the aggregate will consist of components whose principal trading market is not a member of the Intermarket Surveillance Group or is a market with which [NYSEArca] does not have a comprehensive surveillance sharing agreement''); Securities Exchange Act Release No. 66553 (Mar. 9, 2012), 77 FR 15440, 15444 (Mar. 15, 2012) (SR-NYSEArca-2012-04) (approval order noted that NYSEArca ``can obtain market surveillance information, including customer identity information, from ICE [Futures] and CME, which are members of the Intermarket Surveillance Group''); Securities Exchange Act Release No. 67223 (June 20, 2012), 77 FR 38117, 38124 (June 26, 2012) (NYSEAmex-2012-24) (approval order noted [[Page 43916]] that NYSEAmex ``can obtain market surveillance information, including customer identity information, with respect to transactions occurring on exchanges that are members of ISG, including CME, CBOT, COMEX, NYMEX . . . and ICE Futures US,'' that NYSEAmex ``currently has in place a comprehensive surveillance sharing agreement with each of CME, NYMEX, ICE Futures Europe, and KCBOT,'' and that ``while the Fund may invest in futures contracts or options on futures contracts which trade on markets that are not members of ISG or with which [NYSEAmex] does not have in place a comprehensive surveillance sharing agreement, such instruments will never represent more than 10% of the Fund's holdings''); Securities Exchange Act Release No. 73561 (Nov. 7, 2014), 79 FR 68329, 68330 (Nov. 14, 2014) (NYSEArca-2014-102) (approval order noted that ``FINRA may obtain trading information regarding trading in the Shares and Coal Futures from such markets and other entities that are members of ISG or with which [NYSEArca] has in place a comprehensive surveillance sharing agreement'' and that ``CME is a member of the ISG''); Securities Exchange Act Release No. 82390 (Dec. 22, 2017), 82 FR 61625, 61631, 61634 (Dec. 28, 2017) (NYSEArca-2017-107) (approval order noted that NYSEArca ``may obtain information regarding trading in the Shares and Freight Futures from markets and other entities that are members of ISG or with which [NYSEArca] has in place a CSSA'' and that ``not more than 10% of the net assets of the Fund in the aggregate invested in Freight Futures or options on Freight Futures shall consist of derivatives whose principal market is not a member of the ISG or is a market with which [NYSEArca] does not have a CSSA''). \37\ See, e.g., Securities Exchange Act Release No. 62213 (June 3, 2010), 75 FR 32828 (June 9, 2010) (SR-NYSEArca-2010-22) (notice of proposed rule change included NYSE Arca's representations that: (i) Corn futures volume on Chicago Board of Trade (``CBOT'') for 2008 and 2009 (through November 30, 2009) was 59,934,739 contracts and 47,754,866 contracts, respectively, and as of March 16, 2010, CBOT open interest for corn futures was 1,118,103 contracts, and open interest for near month futures was 447,554 contracts; (ii) the corn futures contract price was $18,337.50 ($3.6675 per bushel and 5,000 bushels per contract), and the approximate value of all outstanding contracts was $20.5 billion; (iii) as of March 16, 2010, open interest in corn swaps cleared on CBOT was approximately 2,100 contracts, with an approximate value of $38.5 million; and (iv) the position limits for all months is 22,000 corn contracts, and the total value of contracts if position limits were reached would be approximately $403.5 million (based on the $18,337.50 contract price), Securities Exchange Act Release No. 61954 (Apr. 21, 2010), 75 FR 22663, 22664 n.10 (Apr. 29, 2010)); Securities Exchange Act Release No. 63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR- NYSEArca-2010-101) (notice of proposed rule change included NYSE Arca's representations that: (i) As of June 14, 2010, there was VIX futures contracts open interest on CFE of 88,366 contracts, with a contract price of $25.55 and value of open interest of $2,257,751,300; (ii) total CFE trading volume in 2009 in VIX futures contracts was 1,143,612 contracts, with average daily volume of 4,538 contracts; and (iii) total volume year-to-date (through May 31, 2010) was 1,399,709 contracts, with average daily volume of 13,458 contracts, Securities Exchange Act Release No. 63317 (Nov. 16, 2010), 75 FR 71158, 71159 n.9 (Nov. 22, 2010)); Securities Exchange Act Release No. 63753 (Jan. 21, 2011), 76 FR 4963 (Jan. 27, 2011) (SR-NYSEArca-2010-110) (notice of proposed rule change included NYSE Arca's representations that: (i) Natural gas futures volume on New York Mercantile Exchange (``NYMEX'') for 2009 and 2010 (through October 29, 2010) was 47,864,639 contracts and 52,490,180 contracts, respectively; (ii) as of October 29, 2010, NYMEX open interest for natural gas futures was 794,741 contracts, and open interest for near month futures was 47,313 contracts; (iii) the contract price was $40,380 ($4.038 per MMBtu and 10,000 MMBtu per contract), and the approximate value of all outstanding contracts was $32.1 billion; (iv) the position limits for all months is 12,000 natural gas contracts and the total value of contracts if position limits were reached would be approximately $484.56 million (based on the $40,380 contract price); and (v) as of October 29, 2010, open interest in natural gas swaps cleared on NYMEX was approximately 2,618,092 contracts, with an approximate value of $26.4 billion ($4.038 per MMBtu and 2,500 MMBtu per contract), Securities Exchange Act Release No. 63493 (Dec. 9, 2010), 75 FR 78290, 78291 n.11 (Dec. 15, 2010)); Securities Exchange Act Release No. 63869 (Feb. 8, 2011), 76 FR 8799 (Feb. 15, 2011) (SR-NYSEArca-2010-119) (notice of proposed rule change included NYSE Arca's representations that: (i) WTI crude oil futures volume on NYMEX for 2009 and 2010 (through November 30, 2010) was 137,352,118 contracts and 156,155,620 contracts, respectively; (ii) as of November 30, 2010, NYMEX open interest for WTI crude oil was 1,342,325 contracts, and open interest for near month futures was 323,184 contracts; (iii) the position limits for all months is 20,000 WTI crude oil contracts and the total value of contracts if position limits were reached would be approximately $1.68 billion (based on the $84.11 contract price); and (iv) the contract price was $84,110 ($84.11 USD per barrel and 1,000 barrels per contract), and the approximate value of all outstanding contracts was $112.9 billion, Securities Exchange Act Release No. 63625 (Dec. 30, 2010), 76 FR 807, 808 n.11 (Jan. 6, 2011)); Securities Exchange Act Release No. 65134 (Aug. 15, 2011), 76 FR 52034 (Aug. 19, 2011) (SR-NYSEArca-2011-23) (notice of proposed rule change included NYSE Arca's representations that: (i) As of January 31, 2011, there was VIX futures contracts open interest on CFE of 163,396 contracts with a value of open interest of $3,461,984,900; (ii) total CFE trading volume in 2010 in VIX futures contracts was 4,402,616 contracts, with average daily volume of 17,741 contracts; and (iii) total volume year-to-date (through January 31, 2011) was 779,493 contracts, with average daily volume of 38,975 contracts, Securities Exchange Act Release No. 64470 (May 11, 2011), 76 FR 28493, 28494 n.12 (May 17, 2011)); Securities Exchange Act Release No. 65136 (Aug. 15, 2011), 76 FR 52037 (Aug. 19, 2011) (SR-NYSEArca-2011-24) (notice of proposed rule change included NYSE Arca's representations that: (i) Natural gas futures volume on NYMEX for 2009 and 2010 (through December 31, 2010) was 47,864,639 contracts and 64,350,673 contracts, respectively; (ii) as of December 31, 2010, NYMEX open interest for all natural gas futures was 772,104 contracts, and the approximate value of all outstanding contracts was $35,664,257,310 billion [sic]; (iii) open interest as of December 31, 2010 for the near month contract was 166,757 contracts and the near month contract value was $7,345,645,850 ($4.405 per MMBtu and 10,000 MMBtu per contract); (iv) the position accountability limits for all months is 12,000 natural gas contracts and the total value of contracts if position accountability limits were reached would be approximately $528,600,000 million (based on the $4.405 contract price); and (v) as of December 31, 2010, open interest in natural gas swaps cleared on NYMEX was approximately 1,493,013 contracts, with an approximate value of $16,463,384,003 ($4.411 per MMBtu and 2,500 MMBtu per contract), Securities Exchange Act Release No. 64464 (May 11, 2011), 76 FR 28483, 28484 n.11 (May 17, 2011)); Securities Exchange Act Release No. 65344 (Sept. 15, 2011), 76 FR 58549 (Sept. 21, 2011) (SR-NYSEArca-2011-48) (notice of proposed rule change included NYSE Arca's representations that: (i) Wheat futures volume on CBOT for 2010 and 2011 (through April 29, 2011) was 23,058,783 contracts and 8,860,135 contracts, respectively; (ii) as of April 29, 2011, open interest for wheat futures was 456,851 contracts; (iii) the wheat contract price was $40,062.50 (801.25 cents per bushel and 5,000 bushels per contract), and the approximate value of all outstanding contracts was $18.3 billion; (iv) the position limits for all months was 6,500 wheat contracts and the total value of contracts if position limits were reached would be approximately $260.4 million (based on the $40,062.50 contract price); (v) soybean futures volume on CBOT for 2010 and 2011 (through April 29, 2011) was 36,962,868 contracts and 16,197,385 contracts, respectively; (vi) as of April 29, 2011, open interest for soybean futures was 572,959 contracts; (vii) the soybean contract price was $69,700.00 (1394 cents per bushel and 5,000 bushels per contract), and the approximate value of all outstanding contracts was $39.9 billion; (viii) the position limits for all months is 6,500 soybean contracts and the total value of contracts if position limits were reached would be approximately $453 million (based on the $69,700.00 contract price); (ix) sugar futures volume on ICE Futures for 2010 and 2011 (through April 29, 2011) was 27,848,391 contracts and 9,045,069 contracts, respectively; (x) as of April 29, 2011, open interest for sugar futures was 570,948 contracts; (xi) the sugar contract price was $24,920.00 (22.25 cents per pound and 112,000 pounds per contract), and the approximate value of all outstanding contracts was $14.2 billion; and (xii) the position limits for all months is 15,000 sugar contracts and the total value of contracts if position limits were reached would be approximately $373.8 million (based on the $24,920.00 contract price), Securities Exchange Act Release No. 64967 (July 26, 2011), 76 FR 45885, 45886 n.10, 45888 n.20, 45890 n.24 (Aug. 1, 2011)); Securities Exchange Act Release No. 66553 (Mar. 9, 2012), 77 FR 15440 (Mar. 15, 2012) (SR-NYSEArca-2012-04) (notice of proposed rule change included NYSE Arca's representations that: (i) As of December 30, 2011, open interest in AUD/USD futures contracts traded on CME was $11.56 billion, and AUD/USD futures contracts had an average daily trading volume in 2011 of 123,006 contracts; (ii) as of December 30, 2011, open interest in CAD/USD futures contracts traded on CME was $11.66 billion, and CAD/USD futures contracts had an average daily trading volume in 2011 of 89,667 contracts; (iii) as of December 30, 2011, open interest in CHF/USD futures contracts traded on CME was $4.99 billion, and CHF/ USD futures contracts had an average daily trading volume in 2011 of 40,955 contracts; (iv) futures contracts based on the U.S. Dollar Index (``USDX'') were listed on November 20, 1985, and options on the USDX futures contracts began trading on September 3, 1986; (v) as of December 30, 2011, open interest in USDX futures contracts traded on ICE Futures was $5.44 billion, and USDX futures contracts had an average daily trading volume in 2011 of 30,341 contracts; (vi) as of December 30, 2011, open interest in EUR/USD futures contracts traded on CME was $46.12 billion, and EUR/USD futures contracts had an average daily trading volume in 2011 of 336,947 contracts; and (vii) as of December 30, 2011, open interest in JPY/ USD futures contracts traded on CME was $25.75 billion, and JPY/USD futures contracts had an average daily trading volume in 2011 of 113,476 contracts, Securities Exchange Act Release No. 66180 (Jan. 18, 2012), 77 FR 3532, 3534-35 (Jan. 24, 2012)); Securities Exchange Act Release No. 68165 (Nov. 6, 2012), 77 FR 67707 (Nov. 13, 2012) (SR-NYSEArca-2012-102) (notice of proposed rule change included NYSE Arca's representations that: (i) Gold and silver futures contracts traded on Commodity Exchange, Inc. (``COMEX'') are the global benchmark contracts and most liquid futures contracts in the world for each respective commodity; (ii) as of March 15, 2012, open interest in gold futures contracts and silver futures contracts traded on CME was $23.7 billion and $8.5 billion, respectively; (iii) gold futures contracts and silver futures contracts had an average daily trading volume in 2011 of 138,964 contracts and 63,913 contracts, respectively; (iv) CME constitutes the largest regulated foreign exchange marketplace in the world, with over $100 billion in daily liquidity; (v) as of March 15, 2012, open interest in Euro futures contracts and Yen futures contracts traded on CME and, for Dollar futures contracts, on ICE Futures, were $42.7 billion, $20.8 billion, and $4.8 billion, respectively; and (vi) Euro futures contracts, Yen futures contracts, and Dollar futures contracts had an average daily trading volume in 2011 of 325,103, 106,824, and 27,258 contracts, respectively, Securities Exchange Act Release No. 67882 (Sept. 18, 2012), 77 FR 58881, 58883 n.10, 58883 n.14 (Sept. 24, 2012)); Securities Exchange Act Release No. 81686 (Sept. 22, 2017), 82 FR 45643, 45646 (Sept. 29, 2017) (SR-NYSEArca-2017-05) (order approving the listing and trading of the Direxion Daily Crude Oil Bull 3x Shares and Direxion Daily Crude Oil Bear 3x Shares, citing to NYSE Arca's representations that: (i) The oil contract market was of significant size and liquidity, and had average daily volume of 650,000 contracts and daily open interest of 450,000 contracts; (ii) the Sponsor is registered as a commodity pool operator with the CFTC and is a member of the National Futures Association, and (iii) the CFTC has regulatory jurisdiction over the trading of futures contracts traded on U.S. markets); Securities Exchange Act Release No. 82390 (Dec. 22, 2017), 82 FR 61625 (Dec. 28, 2017) (SR-NYSEArca-2017-107) (notice of proposed rule change included NYSE Arca's representations that: (i) Freight futures liquidity has remained relatively constant, in lot terms, over the last five years with approximately 1.1 million lots trading annually; (ii) open interest currently stood at approximately 290,000 lots across all asset classes representing an estimated value of more than $3 billion, and, of such open interest, Capesize contracts accounted for approximately 50%, Panamax for approximately 40%, and Handymax for approximately 10%, Securities Exchange Act Release No. 81681 (Sept. 22, 2017), 82 FR 45342, 45345 (Sept. 28, 2017)). See also Securities Exchange Act Release No. 53582 (Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006) (SR-Amex-2005-127) (notice of proposed rule change included Amex's representations that: (i) WTI light, sweet crude oil contract, listed and traded at NYMEX, trades in units of 42,000 gallons (1,000 barrels), and annual daily contract volume on NYMEX from 2001 through October 2005 was 149,028, 182,718, 181,748, 212,382 and 242,262, respectively; (ii) annual daily contract volume on ICE Futures for Brent crude contracts from 2001 through October 2005 was 74,011, 86,499, 96,767, 102,361 and 120,695 respectively; (iii) annual daily contract volume on NYMEX for heating oil futures from 2001 through October 2005 was 41,710, 42,781, 46,327, 51,745 and 52,334, respectively; (iv) annual daily contract volume on NYMEX for natural gas contracts from 2001 through October 2005 was 47,457, 97,431, 76,148, 70,048 and 77,149, respectively; and (v) annual daily contract volume on NYMEX for gasoline contracts from 2001 through October 2005 was 38,033, 43,919, 44,688, 51,315 and 53,577, respectively, Securities Exchange Act Release No. 53324 (Feb. 16, 2006), 71 FR 9614, 9618 (Feb. 24, 2006)); Securities Exchange Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987 (Apr. 20, 2007) (SR-Amex-2006-112) (notice of proposed rule change included Amex's representations that annual daily contract volume on NYMEX for natural gas contracts from 2001 through October 2006 was 47,457, 97,431, 76,148, 70,048, 76,265, and 102,097, respectively, Securities Exchange Act Release No. 55372 (Feb. 28, 2007), 72 FR 10267, 10268 (Mar. 7, 2007)). \38\ For example, corn futures began trading in 1877, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETP based on corn futures was approved for listing and trading in 2010. See Securities Exchange Act Release No. 62213 (June 3, 2010), 75 FR 32828 (June 9, 2010) (SR-NYSEArca-2010- 22). VIX futures began trading in 2004, see http://cfe.cboe.com/cfe-products/vx-cboe-volatility-index-vix-futures/contract-specifications, and the first ETPs based on VIX futures were approved for listing and trading in 2010. See Securities Exchange Act Release No. 63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR- NYSEArca-2010-10). Natural gas futures began trading in 1990, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETP based on natural gas was approved for listing and trading in 2007. See Securities Exchange Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987 (Apr. 20, 2007) (SR-Amex-2006- 112). Crude oil futures began trading in 1983, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETP based on crude oil futures was approved for listing and trading in 2006. See Securities Exchange Act Release No. 53582 (Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006) (SR-Amex-2005-127). Wheat futures, sugar futures, and soybean futures began trading in 1877, 1914, and 1936, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html and https://www.theice.com/publicdocs/ICE_Sugar_Brochure.pdf, and the first ETPs based on each of these commodity futures were approved for listing and trading in 2011. See Securities Exchange Act Release No. 65344 (Sept. 15, 2011), 76 FR 58549 (Sept. 21, 2011) (SR-NYSEArca-2011- 48). U.S. Dollar Index futures began trading in 1985, https://www.theice.com/publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf, and the first ETPs based on U.S. Dollar Index futures was approved for listing and trading in 2007. See Securities Exchange Act Release No. 55292 (Feb. 14, 2007), 72 FR 8406 (Feb. 26, 2007) (SR-Amex-2006-86). Australian Dollar futures and Euro futures began trading in 1987 and 1999, respectively, and Canadian Dollar futures, Swiss Franc futures, and Yen futures began trading in 2002, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on each of these individual currency futures were approved for listing and trading in 2012. See Securities Exchange Act Release No. 66553 (Mar. 9, 2012), 77 FR 15440 (Mar. 15, 2012) (SR-NYSEArca-2012-04). Silver futures and gold futures began trading in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on each of these commodity futures were approved for listing and trading in 2006. See Securities Exchange Act Release No. 55029 (Dec. 29, 2006), 72 FR 806 (Jan. 8, 2007) (SR- Amex-2006-76). Freight futures have been cleared since 2005, and the first ETP based on freight futures was approved for listing and trading in 2017. See Securities Exchange Act Release No. 82390 (Dec. 22, 2017), 82 FR 61625, 61626 n.6 (Dec. 28, 2017) (SR-NYSEArca-2017- 107) (noting that ``Freight Futures have been cleared since 2005''). \39\ The Exchange filed its proposal less than one month after bitcoin futures began trading on either CME or CBOE. \40\ At issue were futures on an index comprising futures on crude oil, Brent crude oil, natural gas, heating oil, gasoline, gas oil, live cattle, wheat, aluminum, corn, copper, soybeans, lean hogs, gold, sugar, cotton, red wheat, coffee, standard lead, feeder cattle, zinc, primary nickel, cocoa, and silver. See Securities Exchange Act Release No. 53659 (Apr. 17, 2006), 71 FR 21074, 21080 (Apr. 24, 2006) (SR-NYSE-2006-17) (notice of proposed rule change to list shares of iShares GSCI Commodity-Indexed Trust). The Commission concluded that requirements of Exchange Act Section 6(b)(5) had been met because concerns about manipulation would be addressed by the arbitrage relationship between the new index futures and the existing component futures, as well as the ETP listing exchange's comprehensive surveillance-sharing agreements not only with the market for the index futures, but also with the markets for the component futures. See Securities Exchange Act Release No. 54013 (June 16, 2006), 71 FR 36372, 36379 (June 26, 2006) (SR-NYSE-2006- 17) (order approving listing of shares of iShares GSCI Commodity- Indexed Trust). Additionally, the approval order for the ETP noted that, if the volume in any futures contract that was part of the reference index fell below a specified multiple of production of the underlying commodity, that contract's weight in the index would decrease. See id. at 36374. --------------------------------------------------------------------------- Accordingly, the Commission examines below whether the representations by the Exchange, and the comments received from the public, support a finding that the Exchange has entered into a surveillance-sharing agreement with a market of significant size relating to bitcoin, the asset underlying the proposed ETPs, or that alternative means of preventing fraud and manipulation would be sufficient to satisfy the requirement of Exchange Act Section 6(b)(5) that the proposed rule change be designed to prevent fraudulent and manipulative acts and practices. 2. Comments Received One commenter states that the market for bitcoin derivatives other than bitcoin exchange-traded futures appears to be developing and that financial institutions are reportedly moving toward launching bitcoin- related trading desks and other operations. This commenter believes that the proposed offering of both long and short ETPs raises the possibility that market makers in bitcoin-related derivatives could make two-sided markets if interest in the long and short ETPs is similar in magnitude. The commenter further believes that interest outside of the bitcoin ETPs may be sufficient to motivate market makers to maintain [[Page 43917]] bitcoin derivatives desks.\41\ In addition, the commenter suggests that questions about bitcoin derivatives markets can be addressed through market depth analyses, discussions with potential bitcoin derivatives liquidity providers, and analyses of order and trade data across CME and CBOE to determine the plausibility of simultaneous liquidity collapses on both bitcoin future markets.\42\ --------------------------------------------------------------------------- \41\ See NERA Letter, supra note 9, at 2. \42\ See id. --------------------------------------------------------------------------- This commenter states that a commonly cited factor mitigating possible susceptibility to manipulation is the securities exchanges' own surveillance procedures, in addition to the futures exchanges' surveillance procedures and market surveillance and oversight by the Commodity Futures Trading Commission (``CFTC''). This commenter cites statements by the CFTC that it has the legal authority and means to police certain spot markets for fraud and manipulation through ``heightened review'' collaboration with exchanges, that exchanges will provide the CFTC surveillance team with trade settlement data upon request, and that the exchanges will enter into information-sharing agreements with spot market platforms and monitor trading activity on the spot markets. The commenter also states that the Gemini exchange has announced that it would use Nasdaq's market surveillance system to monitor its marketplace.\43\ --------------------------------------------------------------------------- \43\ See id. at 4-5. --------------------------------------------------------------------------- This commenter further asserts that market surveillance is generally a prerequisite to identifying potential market manipulation and discourages market manipulation. The commenter believes that the emergence of institutionalized market surveillance on both futures and spot markets is a positive sign for the long-term future of bitcoin markets.\44\ The commenter suggests that the Commission, in coordination with the CFTC, self-regulatory organizations, bitcoin futures exchanges, and bitcoin spot market platforms, could gather market surveillance data to conduct an independent analysis of trade and settlement patterns and determine whether potentially manipulative trading practices occur on bitcoin spot and futures markets.\45\ --------------------------------------------------------------------------- \44\ See id. at 5. \45\ See id. --------------------------------------------------------------------------- 3. Analysis Unlike previous proposals for bitcoin-based ETPs,\46\ the Exchange does not assert here that bitcoin prices or markets are inherently resistant to manipulation. Instead, the Exchange asserts that its existing surveillance procedures (including its ability to review activity by its members) and its ability to share surveillance information with U.S. futures exchanges are sufficient to meet the requirements of Exchange Act Section 6(b)(5).\47\ One commenter also asserts that the exchange's own surveillance procedures, along with market surveillance and oversight by the CFTC, can mitigate manipulation.\48\ --------------------------------------------------------------------------- \46\ See Winklevoss Order, supra note 31, 83 FR at 37582 (noting exchange argument that ``intrinsic properties of bitcoin and bitcoin markets make manipulation `difficult and prohibitively costly ''); Order Disapproving Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of Shares of the SolidX Bitcoin Trust, Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82 FR 16247, 16251 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (noting that study commissioned by trust sponsor argues that ``the underlying market for bitcoin is inherently resistant to manipulation''). \47\ See Notice, supra note 3, 83 FR at 3385. \48\ See supra notes 43-44 and accompanying text. This commenter also suggests that the Commission--in coordination with the CFTC, SROs, futures markets, and bitcoin spot platforms--could gather market surveillance data to independently analyze whether manipulative practices occur on bitcoin spot and futures platforms. See supra note 45 and accompanying text. As noted above, however, it is the Exchange that bears the burden to demonstrate that its proposal is designed to ``prevent fraudulent and manipulative acts and practices.'' See supra notes 26-29 and accompanying text. --------------------------------------------------------------------------- While the Exchange would, pursuant to its listing rules, be able to obtain certain information regarding trading in the Shares and in the underlying bitcoin or any bitcoin derivative through registered market makers,\49\ this trade information would be limited to the activities of market participants who trade on the Exchange. Furthermore, neither the Exchange's ability to surveil trading in the Shares nor its ability to share surveillance information with other securities exchanges trading the Shares would give the Exchange insight into the activity and identity of market participants who trade in bitcoin futures contracts or other bitcoin derivatives or who trade in the underlying bitcoin spot markets, where a substantial majority of trading, the Commission concluded in the Winklevoss Order, ``occurs on unregulated venues overseas that are relatively new and that, generally, appear to trade only digital assets.'' \50\ Thus, consistent with its determination in the Winklevoss Order,\51\ and with the Commission's previous orders approving commodity-futures ETPs,\52\ the Commission believes that the Exchange must demonstrate that it has in place a surveillance-sharing agreement with a regulated market of significant size related to bitcoin, because ``[s]uch 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.'' \53\ --------------------------------------------------------------------------- \49\ See Notice, supra note 3, at 83 FR 3385 (``The Exchange is also able to obtain information regarding trading in the Shares, futures, the commodity underlying futures or options on futures through ETP [Exchange Trading Permit] Holders, in connection with such ETP Holders' proprietary or customer trades which they effect through ETP Holders on any relevant market.''). \50\ See Winklevoss Order, supra note 31, 83 FR at 37580. \51\ See id. at 37591 (finding that ``traditional means'' of surveillance were not sufficient in the absence of a surveillance- sharing agreement with a regulated market of significant size related to the underlying asset). \52\ See supra note 36 and accompanying text (noting previous commodity-futures ETPs where surveillance sharing in place between ETP listing exchange and underlying futures exchanges). \53\ Winklevoss Order, supra note 31, 83 FR at 37580 (quoting Amendment to Rule Filing Requirements for Self-Regulatory Organizations Regarding New Derivative Securities Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)). --------------------------------------------------------------------------- The Exchange represents that it is able to share surveillance information with CME and CBOE, which are bitcoin futures markets regulated by the CFTC, through membership in the Intermarket Surveillance Group.\54\ Nonetheless, the Commission must disapprove the proposal, because there is no evidence in the record demonstrating that CME's and CBOE's bitcoin futures markets are markets of significant size. --------------------------------------------------------------------------- \54\ See https://www.isgportal.org/isgPortal/public/members.htm (listing the current members and affiliate members of the Intermarket Surveillance Group). --------------------------------------------------------------------------- The Order Instituting Proceedings sought comment on whether the CME and CBOE bitcoin futures markets are markets of significant size,\55\ but the Exchange has not responded to any of the questions in the Order Instituting Proceedings, and the only analysis of the underlying futures markets the Exchange has provided in its proposed rule change are the generic statements that the market for bitcoin futures contracts ``has limited trading history and operational experience'' and that the liquidity of these markets will depend on the adoption of bitcoin and interest in the market for these futures.\56\ Thus, there is no basis in the record on which the Commission can conclude that the bitcoin futures markets are markets of significant size. Publicly available data show that the median daily notional trading volume, from inception through August 10, 2018, has been 14,185 bitcoins on CME and 5,184 [[Page 43918]] bitcoins on CBOE, and that the median daily notional value of open interest on CME and CBOE during the same period has been 10,145 bitcoins and 5,601 bitcoins, respectively.\57\ But while these futures contract figures are readily available, meaningful analysis of the size of the CME or CBOE markets relative to the underlying bitcoin spot market is challenging, because reliable data about the spot market, including its overall size, are unavailable.\58\ --------------------------------------------------------------------------- \55\ See Order Instituting Proceedings, supra note 7, 83 FR at 18605. \56\ Notice, supra note 3, 83 FR at 3383; see also supra note 22 and accompanying text. \57\ These volume figures were calculated by Commission staff using data published by CME and CBOE on their websites. \58\ See Winklevoss Order, supra note 31, 83 FR at 37601. --------------------------------------------------------------------------- The Commission also notes that in recent testimony CFTC Chairman Giancarlo characterized the volume of the bitcoin futures markets as ``quite small.'' \59\ Additionally, the President and COO of CBOE recently acknowledged in a letter to the Commission staff that ``the current bitcoin futures trading volumes on Cboe Futures Exchange and CME may not currently be sufficient to support ETPs seeking 100% long or short exposure to bitcoin.'' \60\ These statements reinforce the Commission's conclusion that there is insufficient evidence to determine that the CME and CBOE bitcoin futures markets are markets of significant size. --------------------------------------------------------------------------- \59\ CFTC Chairman Giancarlo testified: ``It is important to put the new Bitcoin futures market in perspective. It is quite small with open interest at the CME of 6,695 bitcoin and at Cboe Futures Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2, 2018). At a price of approximately $7,700 per Bitcoin, this represents a notional amount of about $94 million. In comparison, the notional amount of the open interest in CME's WTI crude oil futures was more than one thousand times greater, about $170 billion (2,600,000 contracts) as of Feb[.] 2, 2018 and the notional amount represented by the open interest of Comex gold futures was about $74 billion (549,000 contracts).'' See Written Testimony of J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission, Before the Senate Banking Committee at text accompanying nn. 14-15 (Feb. 6, 2018). See also Winklevoss Order, supra note 31, 83 FR at 37601 (citing Giancarlo testimony). \60\ Letter from Chris Concannon, President and COO, Cboe Global Markets, to Dalia Blass, Director, Division of Investment Management, Commission, at 5 (Mar. 23, 2018), available at https://www.sec.gov/divisions/investment/cboe-global-markets-innovation-cryptocurrency.pdf. --------------------------------------------------------------------------- Furthermore, according to the Notice, under normal market conditions, each Fund intends to obtain exposure to its target benchmark by investing in the Bitcoin Futures Contract as well as other Bitcoin Financial Instruments, which could be options on bitcoin or the Bitcoin Futures Contract and swaps on the Bitcoin Futures Contract.\61\ The Funds' investments in Bitcoin Financial Instruments are used to produce economically ``leveraged'' or ``inverse leveraged'' investment results for the Funds.\62\ The Notice does not establish any limit on the Funds' holdings of these other bitcoin-related derivatives; it provides no analysis of the size and liquidity of markets for those derivatives; \63\ and it does not discuss whether the Exchange has the ability to share surveillance information with the markets for these derivatives. Thus, as to what might be a substantial proportion of the Funds' portfolios, the Commission is unable to conclude that surveillance-sharing will be available, that the related markets are regulated, or that the related markets are of significant size. --------------------------------------------------------------------------- \61\ See Notice, supra note 3, 83 FR at 3381; see also supra note 20 and accompanying text. \62\ See Notice, supra note 3, 83 FR at 3381-82. \63\ The Commission also notes that the Exchange did not answer questions in the Order Instituting Proceedings regarding whether, with respect to the Funds that seek leveraged or leveraged-inverse returns, ``trading of the Shares, hedging activity, or creation and redemption activity [would] affect the daily volume, volatility, or liquidity of the underlying Bitcoin Financial Instruments or of the spot bitcoin market any differently than a non-leveraged bitcoin futures exchange-traded product would.'' Order Instituting Proceedings, supra note 7, 83 FR at 18605. --------------------------------------------------------------------------- While one commenter suggests that the market for bitcoin derivatives other than exchange-traded futures appears to be developing--and that the offering of long and short bitcoin ETPs ``raises the possibility that market makers in Bitcoin derivatives could make two-sided markets if interest in both the long and short ETFs is similar in magnitude'' \64\--these speculative statements do not provide a basis for the Commission to conclude that the non- exchange-traded bitcoin derivatives market is now, or may eventually be, of significant size. --------------------------------------------------------------------------- \64\ See supra notes 41-42 and accompanying text. --------------------------------------------------------------------------- The Commission therefore concludes that Exchange has not demonstrated that it has entered into a surveillance-sharing agreement with a regulated market of significant size related to bitcoin, or that, given the current absence of such an agreement, the exchange's own surveillance procedures described above would, by themselves, be sufficient to satisfy the requirement of Exchange Act Section 6(b)(5) that an exchange's rules be designed to prevent fraudulent and manipulative acts and practices.\65\ While CME and CBOE are regulated markets for bitcoin derivatives, there is no basis in the record for the Commission to conclude that these markets are of significant size. Additionally, because bitcoin futures have been trading on CME and CBOE only since December 2017, the Commission has no basis on which to predict how these markets may grow or develop over time, or whether or when they may reach significant size. --------------------------------------------------------------------------- \65\ See 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- Although the Exchange has not demonstrated that a regulated bitcoin futures market of significant size currently exists, the Commission is not suggesting that the development of such a market would automatically require approval of a proposed rule change seeking to list and trade shares of an ETP holding bitcoins as an asset. The Commission would need to analyze the facts and circumstances of any particular proposal and examine whether any unique features of a bitcoin futures market would warrant further analysis before approval. C. Protecting Investors and the Public Interest 1. Comments Received One commenter asserts that approval of the proposed ETPs would provide greater security in the cryptocurrency market, such as greater liquidity, transparency, and safe custody of assets.\66\ Another commenter asserts that promoting the adoption of bitcoin will allow ``paradigms within the cryptocurrency ecosystem,'' such as initial coin offerings, to ``break up the stranglehold cartels have on accruing and owning capital, as the funding model becomes democratized.'' \67\ --------------------------------------------------------------------------- \66\ See Santos Letter, supra note 9. \67\ See David Letter, supra note 9. --------------------------------------------------------------------------- One commenter suggests that the Commission could address some of its concerns about the proposed ETPs by working with self-regulatory organizations, and in particular FINRA, to create bitcoin and cryptocurrency-related asset suitability requirements. In addition, this commenter suggests that targeted disclosure requirements could make investors aware of volatility, discourage retail investors from investing more than a small portion of their portfolio in cryptocurrency-related assets, and present historical scenarios to retail investors to demonstrate how an instrument such as a particular bitcoin ETP would have performed over time. This commenter believes that suitability requirements are less prescriptive than an effective ban on a class of product and that they could balance the Commission's interest in protecting retail investors against its interest in allowing cryptocurrency-related asset markets to continue to develop in regulated markets where the Commission can observe their performance closely.\68\ --------------------------------------------------------------------------- \68\ See NERA Letter, supra note 9, at 5-6. --------------------------------------------------------------------------- [[Page 43919]] 2. Analysis The Exchange asserts that approval of the proposal would enhance competition among market participants, to the benefit of investors.\69\ One commenter asserts that approval of the proposal will provide greater security, transparency, and liquidity, as well as safe custody, for investors in cryptocurrencies.\70\ And one commenter suggests that the Commission should seek to protect investors through disclosure requirements or suitability standards, rather than disapproving a bitcoin-ETP proposal.\71\ --------------------------------------------------------------------------- \69\ See Notice, supra note 3, 83 FR at 3387. \70\ See supra note 66 and accompanying text. \71\ See supra note 68 and accompanying text. The Commission also notes that the Exchange did not respond to questions in the Order Instituting Proceedings seeking comment on how the Funds' striking NAV as of 11:00 a.m. E.T. (five hours before the close of the regular trading session) would affect arbitrage, and what the potential effect on investors would be if the arbitrage mechanism were impaired. See Order Instituting Proceedings, supra note 7, 83 FR at 18605. --------------------------------------------------------------------------- The Commission acknowledges that, compared to trading in unregulated bitcoin spot markets, trading a bitcoin-based ETP on a national securities exchange may provide some additional protection to investors, but the Commission must consider this potential benefit in the broader context of whether the proposal meets each of the applicable requirements of the Exchange Act. Pursuant to Section 19(b)(2) of the Exchange Act, the Commission must disapprove a proposed rule change filed by a national securities exchange if it does not find 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. Thus, even if a proposed rule change would provide certain benefits to investors and the markets, the proposed rule change may still fail to meet other requirements under the Exchange Act. For the reasons discussed above, the Exchange has not met its burden of demonstrating an adequate basis in the record for the Commission to find that the proposal is consistent with Exchange Act Section 6(b)(5), and, accordingly, the Commission must disapprove the proposal. D. Other Comments Comment letters also addressed the intrinsic value of bitcoin \72\; the desire of individuals to invest in a bitcoin-based ETP \73\; the ways in which approval of the proposal would increase investor confidence \74\; the ways in which promoting the adoption of bitcoin and other cryptocurrencies would ease inter-generational tension and wealth inequality and foster the confidence of younger generations in the economic system \75\; the Commission's process for granting Exchange Act exemptive relief in connection with ETP approval \76\; and the potential impact of Commission approval of the proposed ETPs on the price of bitcoin.\77\ Ultimately, however, additional discussion of these tangential topics is unnecessary, as they do not bear on the basis for the Commission's decision to disapprove the proposal. --------------------------------------------------------------------------- \72\ See Ahn Letter, supra note 9. \73\ See Galt Letter, supra note 9; Santos Letter, supra note 9. \74\ See David Letter, supra note 9; Santos Letter, supra note 9. \75\ See David Letter, supra note 9. \76\ See Williams Letter, supra note 9, at 1. \77\ See Santos Letter, supra note 9. --------------------------------------------------------------------------- E. Basis for Disapproval The record before the Commission does not provide a basis for the Commission to conclude that the Exchange has met its burden under the Exchange Act and the Commission's Rules of Practice to demonstrate that its proposed rule change is consistent with Exchange Act Section 6(b)(5).\78\ --------------------------------------------------------------------------- \78\ In disapproving the proposed rule change, the Commission has considered its impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). See also supra note 67 and accompanying text. --------------------------------------------------------------------------- IV. Conclusion For the reasons set forth above, the Commission does not find, pursuant to Section 19(b)(2) of the Exchange Act, that the proposed rule change 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, that proposed rule change SR-NYSEArca-2018-02 is disapproved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\79\ --------------------------------------------------------------------------- \79\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Brent J. Fields, Secretary. [FR Doc. 2018-18577 Filed 8-27-18; 8:45 am] BILLING CODE 8011-01-P
![43912 Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices
collection of withdrawal liability. SECURITIES AND EXCHANGE rule change.7 The comment period and
Information provided to PBGC would be COMMISSION rebuttal comment period for the Order
confidential to the extent provided in Instituting Proceedings closed on May
the Freedom of Information Act and the [Release No. 34–83912; File No. SR– 18, 2018, and June 1, 2018, respectively.
Privacy Act. NYSEArca–2018–02] Finally, on July 18, 2018, the
Commission extended the period for
On June 21, 2018, PBGC published (at Self-Regulatory Organizations; NYSE consideration of the proposed rule
83 FR 28871) a notice of its intent to Arca, Inc.; Order Disapproving a change to September 21, 2018.8 As of
request OMB approval of the survey of Proposed Rule Change Relating to August 21, 2018, the Commission had
multiemployer pension plan withdrawal Listing and Trading of the Direxion received six comments on the proposed
liability information described above. Daily Bitcoin Bear 1X Shares, Direxion rule change.9
No comments were received on the Daily Bitcoin 1.25X Bull Shares, This order disapproves the proposed
proposed submission of information Direxion Daily Bitcoin 1.5X Bull rule change. Although the Commission
collection. Shares, Direxion Daily Bitcoin 2X Bull is disapproving this proposed rule
PBGC is requesting that OMB approve Shares, and Direxion Daily Bitcoin 2X change, the Commission emphasizes
PBGC’s use of this survey for three Bear Shares Under NYSE Arca Rule that its disapproval does not rest on an
8.200–E evaluation of whether bitcoin, or
years. An agency may not conduct or
sponsor, and a person is not required to blockchain technology more generally,
August 22, 2018.
has utility or value as an innovation or
respond to, a collection of information
I. Introduction an investment. Rather, the Commission
unless it displays a currently valid OMB is disapproving this proposed rule
control number. On January 4, 2018, NYSE Arca, Inc.
change because, as discussed below, the
The survey initially would be sent to (‘‘NYSE Arca’’) filed with the Securities
Exchange has not met its burden under
and Exchange Commission
approximately 65 plans.4 PBGC the Exchange Act and the Commission’s
(‘‘Commission’’), pursuant to Section
estimates that each survey would Rules of Practice to demonstrate that its
19(b)(1) of the Securities Exchange Act
require approximately 20 hours to proposal is consistent with the
of 1934 (‘‘Exchange Act’’) 1 and Rule
complete by a combination of pension requirements of the Exchange Act
19b–4 thereunder,2 a proposed rule
fund office staff (50%) and outside Section 6(b)(5), in particular the
change to list and trade the shares requirement that a national securities
professionals (attorneys and actuaries) (‘‘Shares’’) of the following exchange-
(50%). PBGC estimates a total hour exchange’s rules be designed to prevent
traded products under NYSE Arca Rule fraudulent and manipulative acts and
burden of 650 hours (based on pension 8.200–E, Commentary .02: Direxion
fund office time). The estimated dollar practices.10 Among other things, the
Daily Bitcoin Bear 1X Shares (‘‘1X Bear
equivalent of this hour burden, based on Exchange has offered no record
Fund’’), Direxion Daily Bitcoin 1.25X
an assumed hourly rate of $75 for evidence to demonstrate that bitcoin
Bull Shares (‘‘1.25X Bull Fund’’),
futures markets are ‘‘markets of
administrative, clerical, and supervisory Direxion Daily Bitcoin 1.5X Bull Shares
significant size.’’ That failure is critical
time is $48,750. PBGC estimates a total (‘‘1.5X Bull Fund’’), Direxion Daily
because, as explained below, the
cost burden for the withdrawal liability Bitcoin 2X Bull Shares (‘‘2X Bull
Exchange has failed to establish that
survey of $260,000 (based on 650 Fund’’), and Direxion Daily Bitcoin 2X
other means to prevent fraudulent and
attorney and actuary hours assuming an Bear Shares (‘‘2X Bear Fund’’) (each a
manipulative acts and practices will be
average hourly rate of $400). PBGC ‘‘Fund’’ and, collectively, the ‘‘Funds’’).
sufficient, and therefore surveillance-
further estimates that the average The proposed rule change was
sharing with a regulated market of
burden will be 10 hours of pension fund published for comment in the Federal
significant size related to bitcoin is
office staff time and $4,000 per plan. Register on January 24, 2018.3 The
necessary to satisfy the statutory
After the survey is sent initially, PBGC comment period for the Notice of requirement that the Exchange’s rules be
expects to send the survey to fewer than Proposed Rule Change closed on designed to prevent fraudulent and
10 newly terminated and insolvent February 14, 2018. manipulative acts and practices.11
plans per year. On March 1, 2018, pursuant to
Section 19(b)(2) of the Exchange Act,4 II. Description of the Proposal
Issued in Washington, DC. the Commission designated a longer The Exchange proposes to list and
Hilary Duke, period within which to approve the trade the Shares under NYSE Arca Rule
Assistant General Counsel for Regulatory proposed rule change, disapprove the 8.200–E, Commentary .02, which
Affairs, Pension Benefit Guaranty proposed rule change, or institute
Corporation. proceedings to determine whether to 7 See Securities Exchange Act Release No. 83094
[FR Doc. 2018–18593 Filed 8–27–18; 8:45 am] approve or disapprove the proposed (Apr. 23, 2018), 83 FR 18603 (Apr. 27, 2018)
rule change.5 On April 23, 2018, the (‘‘Order Instituting Proceedings’’).
BILLING CODE 7709–02–P 8 See Securities Exchange Act Release No. 83661
Commission instituted proceedings
(July 18, 2018), 83 FR 35040 (July 24, 2018).
under Section 19(b)(2)(B) of the 9 See Letters from Steven Williams (May 17, 2018)
Exchange Act 6 to determine whether to (‘‘Williams Letter’’); Sharon Brown-Hruska,
approve or disapprove the proposed Managing Director, and Trevor Wagener,
Consultant, NERA Economic Consulting (May 18,
1 15
2018) (‘‘NERA Letter’’); John Galt (July 24, 2018)
U.S.C. 78s(b)(1).
daltland on DSKBBV9HB2PROD with NOTICES
4 As
(‘‘Galt Letter’’); David (July 30, 2018) (‘‘David
of September 30, 2017, there were 68 2 17 CFR 240.19b–4. Letter’’); Sami Santos (Aug. 7, 2018) (‘‘Santos
terminated plans not yet receiving financial 3 See Securities Exchange Act Release No. 82532
Letter’’); and Sam M. Ahn (Aug. 21, 2018) (‘‘Ahn
assistance and 72 insolvent plans that received (Jan 18, 2018), 83 FR 3380 (Jan. 24, 2018) Letter’’). All comments on the proposed rule change
financial assistance from PBGC. See PBGC FY 2017 (‘‘Notice’’). are available on the Commission’s website at:
Annual Report, page 94 at https://www.pbgc.gov/ 4 15 U.S.C. 78s(b)(2). https://www.sec.gov/comments/sr-nysearca-2018-
sites/default/files/pbgc-annual-report-2017.pdf. 5 See Securities Exchange Act Release No. 82795 02/nysearca201802.htm.
Approximately 65 of the plans have 500 or more (Mar. 1, 2018), 83 FR 9768 (Mar. 7, 2018). 10 See 15 U.S.C. 78f(b)(5).
participants. 6 15 U.S.C. 78s(b)(2)(B). 11 See infra notes 32–34 and accompanying text.
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![Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices 43913
governs the listing and trading of Trust contracts, on or before 11:00 a.m. E.T. behalf of the Exchange, which are
Issued Receipts on the Exchange.12 Each for the Bitcoin Futures Contract and designed to detect violations of
Fund will be a series of the Direxion may reflect trades occurring and Exchange rules and applicable federal
Shares ETF Trust II (‘‘Trust’’), and the published by CME, CBOE, or another securities laws.23 The Exchange asserts
Trust and the Funds will be managed U.S. exchange that subsequently trades that these procedures are adequate to
and controlled by Direxion Asset bitcoin futures contracts outside the properly monitor Exchange trading of
Management, LLC (‘‘Sponsor’’). Bank of normal trading session for the Bitcoin the Shares in all trading sessions and to
New York Mellon will be the custodian Futures Contract.18 Each Fund will deter and detect violations of Exchange
and transfer agent for the Funds. U.S. compute its NAV as of 11:00 a.m. E.T., rules and federal securities laws
Bancorp Fund Services, LLC will serve or such earlier time that the NYSE may applicable to trading on the Exchange.24
as the administrator for the Funds, and close.19
Foreside Fund Services, LLC will serve According to the Notice, each Fund, III. Discussion
as the distributor of the Shares under normal market conditions, will A. The Applicable Standard for Review
(‘‘Distributor’’).13 According to the seek to achieve its daily investment
Notice, each Fund will create and objective by investing in the Bitcoin The Commission must consider
redeem Shares in one or more Creation Futures Contract, swaps on the Bitcoin whether the Exchange’s proposal is
Units (a Creation Unit is a block of Futures Contract, or listed options on consistent with Exchange Act Section
50,000 Shares of a Fund).14 bitcoin or the Bitcoin Futures Contract 6(b)(5), which requires, in relevant part,
According to the Notice, the Funds (collectively, ‘‘Bitcoin Financial that the rules of a national securities
will seek to obtain daily short, leveraged Instruments’’). The Funds’ investments exchange be designed ‘‘to prevent
long, or leveraged short exposure (before in Bitcoin Financial Instruments will be fraudulent and manipulative acts and
fees and expenses) to the target used to produce economically practices’’ and ‘‘to protect investors and
benchmark, which is the lead-month ‘‘leveraged’’ or ‘‘inverse leveraged’’ the public interest.’’ 25 Under the
bitcoin futures contract traded on the investment results for the Funds.20 A Commission’s Rules of Practice, the
Chicago Mercantile Exchange (‘‘CME’’), Fund may invest in the listed options ‘‘burden to demonstrate that a proposed
the Cboe Global Markets, Inc. (‘‘CBOE’’), and swaps described above in a manner rule change is consistent with the
or any other U.S. exchange that consistent with its investment objective Exchange Act and the rules and
subsequently trades bitcoin futures in situations where the Sponsor believes regulations issued thereunder . . . is on
contracts (‘‘Bitcoin Futures Contract’’).15 that investing in such financial the self-regulatory organization [‘SRO’]
Specifically, the 1.25X Bull Fund, the instruments is in the best interests of a that proposed the rule change.’’ 26
1.5X Bull Fund, and the 2X Bull Fund Fund. In addition, a Fund may invest in The description of a proposed rule
will seek daily investment results swap contracts referencing the Bitcoin change, its purpose and operation, its
(before fees and expenses) that are Futures Contract if the market for a effect, and a legal analysis of its
125%, 150%, or 200%, respectively, of specific bitcoin futures contract consistency with applicable
the daily return of the target experiences emergencies or if position, requirements must all be sufficiently
benchmark.16 The 1X Bear Fund and the price, or accountability limits (if any) detailed and specific to support an
2X Bear Fund will seek daily inverse are reached with respect to a specific affirmative Commission finding,27 and
investment results (before fees and bitcoin futures contract. Each trading any failure of an SRO to provide this
expenses) that are ¥100% or ¥200%, day at the close of the U.S. equity information may result in the
respectively, of the daily return of the markets, each Fund will position its Commission not having a sufficient
target benchmark.17 portfolio to ensure that the Fund’s basis to make an affirmative finding that
According to the Notice, the target exposure to the target benchmark is a proposed rule change is consistent
benchmark’s value will be calculated as consistent with the Fund’s investment with the Exchange Act and the
the last sale price published by CME or objective.21 The Notice also states: applicable rules and regulations.28
CBOE, or any other U.S. exchange that Moreover, ‘‘unquestioning reliance’’ on
[U]nlike the futures markets for traditional
subsequently trades bitcoin futures physical commodities, the market for an SRO’s representations in a proposed
exchange-traded bitcoin futures contract[s] rule change is not sufficient to justify
12 See NYSE Arca Rule 8.200–E, Commentary .02.
has limited trading history and operational Commission approval of a proposed rule
NYSE Arca Rule 8.200–E permits the listing and experience and may be riskier, less liquid, change.29
trading of ‘‘Trust Issued Receipts,’’ defined as a more volatile and more vulnerable to
security (1) that is issued by a trust which holds B. Preventing Fraudulent and
specific securities deposited with the trust; (2) that,
economic, market and industry changes than
more established futures markets. The Manipulative Practices
when aggregated in some specified minimum
number, may be surrendered to the trust by the liquidity of the market will depend on,
among other things, the adoption of bitcoin
1. Applicable Legal Standard
beneficial owner to receive the securities; and (3)
that pay beneficial owners dividends and other and the commercial and speculative interest To approve the Exchange’s proposal
distributions on the deposited securities, if any are in the market for the ability to hedge against to list the Shares, the Commission must
declared and paid to the trustee by an issuer of the the price of bitcoin with exchange-traded
deposited securities. Commentary .02 applies to bitcoin futures contracts.22
be able to find that the proposal is,
Trust Issued Receipts that invest in any
The Exchange represents that trading consistent with Exchange Act Section
combination of investments, including cash; 6(b)(5), ‘‘designed to prevent fraudulent
securities; options on securities and indices; futures in the Shares of each Fund will be
contracts; options on futures contracts; forward subject to the existing trading
23 See id. at 3385.
contracts; equity caps, collars, and floors; and swap surveillances administered by the
agreements. 24 See id.
Exchange, as well as cross-market
daltland on DSKBBV9HB2PROD with NOTICES
13 See Notice, supra note 3, 83 FR at 3381. 25 15 U.S.C. 78f(b)(5).
14 See id. at 3384.
surveillances administered by FINRA on 26 Rule 700(b)(3), Commission Rules of Practice,
15 See id. at 3381. Bitcoin Futures Contracts will 17 CFR 201.700(b)(3).
18 See id. at 3381.
be cash-settled. According to the Exchange, the 27 See id.
19 See id. at 3383.
‘‘lead month’’ contract is the monthly contract with 28 See id.
the earliest expiration date. See id. at 3381 n.6. 20 See id. at 3381–82. 29 See Susquehanna Int’l Group, LLP v. Securities
16 See id. at 3382. 21 See id. at 3382.
and Exchange Commission, 866 F.3d 442, 447 (D.C.
17 See id. 22 See id. at 3383. Cir. 2017).
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![43914 Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices
and manipulative acts and practices.’’ 30 agreement must be entered into with a
As the Commission recently explained ‘‘significant market’’ to assist in the ISG’’); Securities Exchange Act Release No.
54450 (Sept. 14, 2006), 71 FR 55230, 55236 (Sept.
in an order disapproving a listing detecting and deterring manipulation of 21, 2006) (SR–Amex–2006–44) (approval order
proposal for the Winklevoss Bitcoin the ETP, because someone attempting to noted that ‘‘CME, where the futures contract for
Trust (‘‘Winklevoss Order’’), although manipulate the ETP is reasonably likely each of the current Index components is traded, is
surveillance-sharing agreements are not to also engage in trading activity on that a member of the ISG’’ and that in the event of new
‘‘significant market.’’ fund investments in ‘‘foreign currency futures
the exclusive means by which an contracts traded on futures exchanges other than
exchange-traded product (‘‘ETP’’) listing Although the Winklevoss Order CME, [Amex] must have a CSSA with that futures
exchange can meet its obligations under applied these standards to a commodity- exchange or the futures exchange must be an ISG
Exchange Act Section 6(b)(5), such trust ETP based on bitcoin, the member’’); Securities Exchange Act Release No.
Commission believes that these 55029 (Dec. 29, 2006), 72 FR 806, 809–10 (Jan. 8,
agreements are a widely used means for 2007) (SR–Amex–2006–76) (approval order noted
exchanges that list ETPs to meet their standards are also appropriate for an that Amex’s ‘‘Comprehensive Surveillance Sharing
obligations, and the Commission has ETP based on bitcoin futures. When Agreement with the ICE Futures, LME, and
historically recognized their approving the first commodity-futures NYMEX, . . . and membership in the Intermarket
ETP, the Commission specifically noted Surveillance Group (‘ISG’) creates the basis for the
importance.31 Amex to monitor fraudulent and manipulative
that ‘‘[i]nformation sharing agreements
The Commission has therefore with primary markets trading index
practices in the trading of the Shares’’); Securities
determined that, if the listing exchange Exchange Act Release No. 56880 (Dec. 3, 2007), 72
components underlying a derivative FR 69259, 69261 (Dec. 7, 2007) (SR–Amex–2006–
for an ETP fails to establish that other product are an important part of a self- 96) (approval order noted that Amex has
means to prevent fraudulent and regulatory organization’s ability to ‘‘information sharing agreements with the
manipulative acts and practices will be monitor for trading abuses in derivative
InterContinental Exchange, the Chicago Mercantile
sufficient, the listing exchange must Exchange, and the New York Mercantile Exchange
products.’’ 35 And the Commission’s and may obtain market surveillance information
enter into a surveillance-sharing approval orders for commodity-futures from other exchanges, including the Chicago Board
agreement with a regulated market of ETPs consistently note the ability of an of Trade, London Metals Exchange, and the New
significant size because ‘‘[s]uch ETP listing exchange to share York Board of Trade through the Intermarket
agreements provide a necessary Surveillance Group’’); Securities Exchange Act
surveillance information either through Release No. 55632 (Apr. 13, 2007), 72 FR 19987,
deterrent to manipulation because they surveillance-sharing agreements or 19988 (Apr. 20, 2007) (SR–Amex–2006–112)
facilitate the availability of information through membership by the listing (approval order noted that Amex ‘‘currently has in
needed to fully investigate a exchange and the relevant futures place an Information Sharing Agreement with the
manipulation if it were to occur.’’ 32 NYMEX and ICE Futures’’ and that if ‘‘USNG
exchanges in the Intermarket invests in Natural Gas Interests traded on other
Accordingly, a surveillance-sharing Surveillance Group.36 While the exchanges, the Amex represented that it will seek
agreement with a regulated market of to enter into Information Sharing arrangements with
significant size is required to ensure definition is an example that will provide guidance those particular exchanges’’); Securities Exchange
that, in compliance with the Exchange to market participants. See id. Act Release No. 57456 (Mar. 7, 2008), 73 FR 13599,
Act, the proposal is ‘‘designed to 35 Securities Exchange Act Release No. 53105 13601 (Mar. 13, 2008) (NYSEArca–2007–91)
(Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006) (approval order noted that NYSEArca ‘‘can obtain
prevent fraudulent and manipulative market surveillance information, including
(SR–Amex–2005–059). Additionally, the
acts and practices.’’ 33 In this context, Winklevoss Order discusses the broader history and customer identity information, with respect to
the Commission has interpreted the importance of surveillance-sharing agreements transactions occurring on the NYM, the Kansas City
terms ‘‘significant market’’ and ‘‘market relating to derivative securities products, quoting Board of Trade, ICE, and the LME, pursuant to its
Commission statements dating from 1990 on. See comprehensive information sharing agreements
of significant size’’ to include a market with each of those exchanges’’ and that ‘‘[a]ll of the
Winklevoss Order, supra note 31, 83 FR at 37592–
(or group of markets) as to which (a) 94. other trading venues on which current Index
there is a reasonable likelihood that a 36 See, e.g., Securities Exchange Act Release No. components are traded are members of the ISG’’);
person attempting to manipulate the 53105 (Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19, Securities Exchange Act Release No. 57838 (May
20, 2008), 73 FR 30649, 30652, (May 28, 2008) (SR–
ETP would also have to trade on that 2006) (SR–Amex–2005–059) (approval order noted
NYSEArca–2008–09) (approval order noted that
market to successfully manipulate the that Amex’s ‘‘Information Sharing Agreement with
the NYMEX and the CBOT and [Amex’s] NYSEArca ‘‘may obtain information via the ISG
ETP, so that a surveillance-sharing Memorandum of Understanding with the LME, from other exchanges who are members or affiliate
agreement would assist the ETP listing along with the Exchange’s participation in the ISG, members of the ISG,’’ that NYSEArca ‘‘has an
information sharing agreement in place with ICE
market in detecting and deterring in which the CBOT participates . . . create the
basis for the Amex to monitor for fraudulent and Futures,’’ and that NYSEArca will file a proposed
misconduct, and (b) it is unlikely that rule change ‘‘if the Fund invests in EUAs . . . that
manipulative practices in the trading of the
trading in the ETP would be the Shares’’); Securities Exchange Act Release No. constitute more than 10% of the weight of the Fund
predominant influence on prices in that 53582 (Mar. 31, 2006), 71 FR 17510, 17518 (Apr. where the principal trading market for such
market.34 Thus, a surveillance-sharing 6, 2006) (SR–Amex–2005–127) (approval order component is not a member or affiliate member of
noted that Amex’s ‘‘comprehensive surveillance the ISG or where the Exchange does not have a
sharing agreements with the NYMEX and ICE comprehensive surveillance sharing agreement with
30 15 U.S.C. 78f(b)(5).
Futures . . . create the basis for the Amex to such market’’); Securities Exchange Act Release No.
31 Order Setting Aside Action by Delegated monitor for fraudulent and manipulative practices 63635 (Jan. 3, 2011), 76 FR 1489, 1491 (Jan. 10,
Authority and Disapproving a Proposed Rule in the trading of the Units’’ and that ‘‘[s]hould the 2011) (NYSEArca–2010–103) (approval order noted
Change, as Modified by Amendments No. 1 and 2, USOF invest in oil derivatives traded on markets that ‘‘with respect to Fund components traded on
To List and Trade Shares of the Winklevoss Bitcoin such as the Singapore Oil Market, the Exchange exchanges, not more than 10% of the weight of such
Trust, Securities Exchange Act Release No. 83723 represents that it will file a proposed rule change components in the aggregate will consist of
(July 26, 2018), 83 FR 37579, 37580 (Aug. 1, 2018) pursuant to Section 19(b) of the [Exchange] Act, components whose principal trading market is not
(SR–BatsBZX–2016–30). seeking Commission approval of [Amex’s] a member of the Intermarket Surveillance Group or
32 Id. (citing Amendment to Rule Filing
surveillance agreement with such market’’); is a market with which [NYSEArca] does not have
Requirements for Self-Regulatory Organizations Securities Exchange Act Release No. 54013 (June a comprehensive surveillance sharing agreement’’);
daltland on DSKBBV9HB2PROD with NOTICES
Regarding New Derivative Securities Products, 16, 2006), 71 FR 36372, 36378–79 (June 26, 2006) Securities Exchange Act Release No. 66553 (Mar. 9,
Securities Exchange Act Release No. 40761 (Dec. 8, (NYSE–2006–17) (approval order noted that NYSE’s 2012), 77 FR 15440, 15444 (Mar. 15, 2012) (SR–
1998), 64 FR 70952, 70954, 70959 (Dec. 22, 1998) ‘‘comprehensive surveillance sharing agreements NYSEArca–2012–04) (approval order noted that
(File No. S7–13–98)). with the NYMEX, the Kansas City Board of Trade, NYSEArca ‘‘can obtain market surveillance
33 15 U.S.C. 78f(b)(5).
ICE Futures, and the LME . . . create the basis for information, including customer identity
34 See Winklevoss Order, supra note 31, 83 FR at the NYSE to monitor for fraudulent and information, from ICE [Futures] and CME, which
37594. This definition is illustrative and not manipulative trading practices’’ and that ‘‘all of the are members of the Intermarket Surveillance
exclusive. There could be other types of ‘‘significant other trading venues on which current Index Group’’); Securities Exchange Act Release No.
markets’’ and ‘‘markets of significant size,’’ but this components and CERFs are traded are members of 67223 (June 20, 2012), 77 FR 38117, 38124 (June 26,
2012) (NYSEAmex–2012–24) (approval order noted
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![Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices 43915
Commission in those orders did not
explicitly undertake an analysis of 13,458 contracts, Securities Exchange Act Release was approximately 1,493,013 contracts, with an
No. 63317 (Nov. 16, 2010), 75 FR 71158, 71159 n.9 approximate value of $16,463,384,003 ($4.411 per
whether the related futures markets (Nov. 22, 2010)); Securities Exchange Act Release MMBtu and 2,500 MMBtu per contract), Securities
were of ‘‘significant size,’’ the exchanges No. 63753 (Jan. 21, 2011), 76 FR 4963 (Jan. 27, Exchange Act Release No. 64464 (May 11, 2011), 76
proposing commodity-futures ETPs on a 2011) (SR–NYSEArca–2010–110) (notice of FR 28483, 28484 n.11 (May 17, 2011)); Securities
single reference asset or benchmark proposed rule change included NYSE Arca’s Exchange Act Release No. 65344 (Sept. 15, 2011),
generally made representations representations that: (i) Natural gas futures volume 76 FR 58549 (Sept. 21, 2011) (SR–NYSEArca–2011–
on New York Mercantile Exchange (‘‘NYMEX’’) for 48) (notice of proposed rule change included NYSE
regarding the trading volume of the 2009 and 2010 (through October 29, 2010) was Arca’s representations that: (i) Wheat futures
underlying futures markets,37 and the 47,864,639 contracts and 52,490,180 contracts, volume on CBOT for 2010 and 2011 (through April
respectively; (ii) as of October 29, 2010, NYMEX 29, 2011) was 23,058,783 contracts and 8,860,135
that NYSEAmex ‘‘can obtain market surveillance open interest for natural gas futures was 794,741 contracts, respectively; (ii) as of April 29, 2011,
information, including customer identity contracts, and open interest for near month futures open interest for wheat futures was 456,851
information, with respect to transactions occurring was 47,313 contracts; (iii) the contract price was contracts; (iii) the wheat contract price was
on exchanges that are members of ISG, including $40,380 ($4.038 per MMBtu and 10,000 MMBtu per $40,062.50 (801.25 cents per bushel and 5,000
CME, CBOT, COMEX, NYMEX . . . and ICE contract), and the approximate value of all bushels per contract), and the approximate value of
Futures US,’’ that NYSEAmex ‘‘currently has in outstanding contracts was $32.1 billion; (iv) the all outstanding contracts was $18.3 billion; (iv) the
place a comprehensive surveillance sharing position limits for all months is 12,000 natural gas position limits for all months was 6,500 wheat
agreement with each of CME, NYMEX, ICE Futures contracts and the total value of contracts if position contracts and the total value of contracts if position
Europe, and KCBOT,’’ and that ‘‘while the Fund limits were reached would be approximately limits were reached would be approximately $260.4
may invest in futures contracts or options on $484.56 million (based on the $40,380 contract million (based on the $40,062.50 contract price); (v)
futures contracts which trade on markets that are price); and (v) as of October 29, 2010, open interest soybean futures volume on CBOT for 2010 and 2011
not members of ISG or with which [NYSEAmex] in natural gas swaps cleared on NYMEX was (through April 29, 2011) was 36,962,868 contracts
does not have in place a comprehensive approximately 2,618,092 contracts, with an and 16,197,385 contracts, respectively; (vi) as of
surveillance sharing agreement, such instruments approximate value of $26.4 billion ($4.038 per April 29, 2011, open interest for soybean futures
will never represent more than 10% of the Fund’s MMBtu and 2,500 MMBtu per contract), Securities was 572,959 contracts; (vii) the soybean contract
holdings’’); Securities Exchange Act Release No. Exchange Act Release No. 63493 (Dec. 9, 2010), 75 price was $69,700.00 (1394 cents per bushel and
73561 (Nov. 7, 2014), 79 FR 68329, 68330 (Nov. 14, FR 78290, 78291 n.11 (Dec. 15, 2010)); Securities 5,000 bushels per contract), and the approximate
2014) (NYSEArca–2014–102) (approval order noted Exchange Act Release No. 63869 (Feb. 8, 2011), 76 value of all outstanding contracts was $39.9 billion;
that ‘‘FINRA may obtain trading information FR 8799 (Feb. 15, 2011) (SR–NYSEArca–2010–119) (viii) the position limits for all months is 6,500
regarding trading in the Shares and Coal Futures (notice of proposed rule change included NYSE soybean contracts and the total value of contracts
from such markets and other entities that are Arca’s representations that: (i) WTI crude oil futures if position limits were reached would be
members of ISG or with which [NYSEArca] has in volume on NYMEX for 2009 and 2010 (through approximately $453 million (based on the
place a comprehensive surveillance sharing November 30, 2010) was 137,352,118 contracts and $69,700.00 contract price); (ix) sugar futures volume
agreement’’ and that ‘‘CME is a member of the 156,155,620 contracts, respectively; (ii) as of on ICE Futures for 2010 and 2011 (through April
ISG’’); Securities Exchange Act Release No. 82390 November 30, 2010, NYMEX open interest for WTI 29, 2011) was 27,848,391 contracts and 9,045,069
(Dec. 22, 2017), 82 FR 61625, 61631, 61634 (Dec. crude oil was 1,342,325 contracts, and open interest contracts, respectively; (x) as of April 29, 2011,
28, 2017) (NYSEArca–2017–107) (approval order for near month futures was 323,184 contracts; (iii) open interest for sugar futures was 570,948
noted that NYSEArca ‘‘may obtain information
the position limits for all months is 20,000 WTI contracts; (xi) the sugar contract price was
regarding trading in the Shares and Freight Futures
crude oil contracts and the total value of contracts $24,920.00 (22.25 cents per pound and 112,000
from markets and other entities that are members
if position limits were reached would be pounds per contract), and the approximate value of
of ISG or with which [NYSEArca] has in place a
approximately $1.68 billion (based on the $84.11 all outstanding contracts was $14.2 billion; and (xii)
CSSA’’ and that ‘‘not more than 10% of the net
assets of the Fund in the aggregate invested in contract price); and (iv) the contract price was the position limits for all months is 15,000 sugar
Freight Futures or options on Freight Futures shall $84,110 ($84.11 USD per barrel and 1,000 barrels contracts and the total value of contracts if position
consist of derivatives whose principal market is not per contract), and the approximate value of all limits were reached would be approximately $373.8
a member of the ISG or is a market with which outstanding contracts was $112.9 billion, Securities million (based on the $24,920.00 contract price),
[NYSEArca] does not have a CSSA’’). Exchange Act Release No. 63625 (Dec. 30, 2010), 76 Securities Exchange Act Release No. 64967 (July 26,
37 See, e.g., Securities Exchange Act Release No. FR 807, 808 n.11 (Jan. 6, 2011)); Securities 2011), 76 FR 45885, 45886 n.10, 45888 n.20, 45890
62213 (June 3, 2010), 75 FR 32828 (June 9, 2010) Exchange Act Release No. 65134 (Aug. 15, 2011), n.24 (Aug. 1, 2011)); Securities Exchange Act
(SR–NYSEArca–2010–22) (notice of proposed rule 76 FR 52034 (Aug. 19, 2011) (SR–NYSEArca–2011– Release No. 66553 (Mar. 9, 2012), 77 FR 15440
change included NYSE Arca’s representations that: 23) (notice of proposed rule change included NYSE (Mar. 15, 2012) (SR–NYSEArca–2012–04) (notice of
(i) Corn futures volume on Chicago Board of Trade Arca’s representations that: (i) As of January 31, proposed rule change included NYSE Arca’s
(‘‘CBOT’’) for 2008 and 2009 (through November 30, 2011, there was VIX futures contracts open interest representations that: (i) As of December 30, 2011,
2009) was 59,934,739 contracts and 47,754,866 on CFE of 163,396 contracts with a value of open open interest in AUD/USD futures contracts traded
contracts, respectively, and as of March 16, 2010, interest of $3,461,984,900; (ii) total CFE trading on CME was $11.56 billion, and AUD/USD futures
CBOT open interest for corn futures was 1,118,103 volume in 2010 in VIX futures contracts was contracts had an average daily trading volume in
contracts, and open interest for near month futures 4,402,616 contracts, with average daily volume of 2011 of 123,006 contracts; (ii) as of December 30,
was 447,554 contracts; (ii) the corn futures contract 17,741 contracts; and (iii) total volume year-to-date 2011, open interest in CAD/USD futures contracts
price was $18,337.50 ($3.6675 per bushel and 5,000 (through January 31, 2011) was 779,493 contracts, traded on CME was $11.66 billion, and CAD/USD
bushels per contract), and the approximate value of with average daily volume of 38,975 contracts, futures contracts had an average daily trading
all outstanding contracts was $20.5 billion; (iii) as Securities Exchange Act Release No. 64470 (May volume in 2011 of 89,667 contracts; (iii) as of
of March 16, 2010, open interest in corn swaps 11, 2011), 76 FR 28493, 28494 n.12 (May 17, 2011)); December 30, 2011, open interest in CHF/USD
cleared on CBOT was approximately 2,100 Securities Exchange Act Release No. 65136 (Aug. futures contracts traded on CME was $4.99 billion,
contracts, with an approximate value of $38.5 15, 2011), 76 FR 52037 (Aug. 19, 2011) (SR– and CHF/USD futures contracts had an average
million; and (iv) the position limits for all months NYSEArca–2011–24) (notice of proposed rule daily trading volume in 2011 of 40,955 contracts;
is 22,000 corn contracts, and the total value of change included NYSE Arca’s representations that: (iv) futures contracts based on the U.S. Dollar Index
contracts if position limits were reached would be (i) Natural gas futures volume on NYMEX for 2009 (‘‘USDX’’) were listed on November 20, 1985, and
approximately $403.5 million (based on the and 2010 (through December 31, 2010) was options on the USDX futures contracts began
$18,337.50 contract price), Securities Exchange Act 47,864,639 contracts and 64,350,673 contracts, trading on September 3, 1986; (v) as of December
Release No. 61954 (Apr. 21, 2010), 75 FR 22663, respectively; (ii) as of December 31, 2010, NYMEX 30, 2011, open interest in USDX futures contracts
22664 n.10 (Apr. 29, 2010)); Securities Exchange open interest for all natural gas futures was 772,104 traded on ICE Futures was $5.44 billion, and USDX
Act Release No. 63610 (Dec. 27, 2010), 76 FR 199 contracts, and the approximate value of all futures contracts had an average daily trading
(Jan. 3, 2011) (SR–NYSEArca–2010–101) (notice of outstanding contracts was $35,664,257,310 billion volume in 2011 of 30,341 contracts; (vi) as of
proposed rule change included NYSE Arca’s [sic]; (iii) open interest as of December 31, 2010 for December 30, 2011, open interest in EUR/USD
daltland on DSKBBV9HB2PROD with NOTICES
representations that: (i) As of June 14, 2010, there the near month contract was 166,757 contracts and futures contracts traded on CME was $46.12 billion,
was VIX futures contracts open interest on CFE of the near month contract value was $7,345,645,850 and EUR/USD futures contracts had an average
88,366 contracts, with a contract price of $25.55 ($4.405 per MMBtu and 10,000 MMBtu per daily trading volume in 2011 of 336,947 contracts;
and value of open interest of $2,257,751,300; (ii) contract); (iv) the position accountability limits for and (vii) as of December 30, 2011, open interest in
total CFE trading volume in 2009 in VIX futures all months is 12,000 natural gas contracts and the JPY/USD futures contracts traded on CME was
contracts was 1,143,612 contracts, with average total value of contracts if position accountability $25.75 billion, and JPY/USD futures contracts had
daily volume of 4,538 contracts; and (iii) total limits were reached would be approximately an average daily trading volume in 2011 of 113,476
volume year-to-date (through May 31, 2010) was $528,600,000 million (based on the $4.405 contract contracts, Securities Exchange Act Release No.
1,399,709 contracts, with average daily volume of price); and (v) as of December 31, 2010, open 66180 (Jan. 18, 2012), 77 FR 3532, 3534–35 (Jan. 24,
interest in natural gas swaps cleared on NYMEX Continued
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bitcoin derivatives desks.41 In addition, assert here that bitcoin prices or markets in the Winklevoss Order,51 and with the
the commenter suggests that questions are inherently resistant to manipulation. Commission’s previous orders
about bitcoin derivatives markets can be Instead, the Exchange asserts that its approving commodity-futures ETPs,52
addressed through market depth existing surveillance procedures the Commission believes that the
analyses, discussions with potential (including its ability to review activity Exchange must demonstrate that it has
bitcoin derivatives liquidity providers, by its members) and its ability to share in place a surveillance-sharing
and analyses of order and trade data surveillance information with U.S. agreement with a regulated market of
across CME and CBOE to determine the futures exchanges are sufficient to meet significant size related to bitcoin,
plausibility of simultaneous liquidity the requirements of Exchange Act because ‘‘[s]uch agreements provide a
collapses on both bitcoin future Section 6(b)(5).47 One commenter also necessary deterrent to manipulation
markets.42 asserts that the exchange’s own because they facilitate the availability of
This commenter states that a surveillance procedures, along with information needed to fully investigate
commonly cited factor mitigating market surveillance and oversight by the a manipulation if it were to occur.’’ 53
possible susceptibility to manipulation CFTC, can mitigate manipulation.48 The Exchange represents that it is able
is the securities exchanges’ own to share surveillance information with
While the Exchange would, pursuant
surveillance procedures, in addition to CME and CBOE, which are bitcoin
to its listing rules, be able to obtain
the futures exchanges’ surveillance futures markets regulated by the CFTC,
certain information regarding trading in
procedures and market surveillance and through membership in the Intermarket
the Shares and in the underlying bitcoin
oversight by the Commodity Futures Surveillance Group.54 Nonetheless, the
Trading Commission (‘‘CFTC’’). This or any bitcoin derivative through Commission must disapprove the
commenter cites statements by the registered market makers,49 this trade proposal, because there is no evidence
CFTC that it has the legal authority and information would be limited to the in the record demonstrating that CME’s
means to police certain spot markets for activities of market participants who and CBOE’s bitcoin futures markets are
fraud and manipulation through trade on the Exchange. Furthermore, markets of significant size.
‘‘heightened review’’ collaboration with neither the Exchange’s ability to surveil The Order Instituting Proceedings
exchanges, that exchanges will provide trading in the Shares nor its ability to sought comment on whether the CME
the CFTC surveillance team with trade share surveillance information with and CBOE bitcoin futures markets are
settlement data upon request, and that other securities exchanges trading the markets of significant size,55 but the
the exchanges will enter into Shares would give the Exchange insight Exchange has not responded to any of
information-sharing agreements with into the activity and identity of market the questions in the Order Instituting
spot market platforms and monitor participants who trade in bitcoin futures Proceedings, and the only analysis of
trading activity on the spot markets. The contracts or other bitcoin derivatives or the underlying futures markets the
commenter also states that the Gemini who trade in the underlying bitcoin spot Exchange has provided in its proposed
exchange has announced that it would markets, where a substantial majority of rule change are the generic statements
use Nasdaq’s market surveillance trading, the Commission concluded in that the market for bitcoin futures
system to monitor its marketplace.43 the Winklevoss Order, ‘‘occurs on contracts ‘‘has limited trading history
This commenter further asserts that unregulated venues overseas that are and operational experience’’ and that
market surveillance is generally a relatively new and that, generally, the liquidity of these markets will
prerequisite to identifying potential appear to trade only digital assets.’’ 50 depend on the adoption of bitcoin and
market manipulation and discourages Thus, consistent with its determination interest in the market for these futures.56
market manipulation. The commenter Thus, there is no basis in the record on
believes that the emergence of manipulation ‘difficult and prohibitively costly ’’); which the Commission can conclude
institutionalized market surveillance on Order Disapproving Proposed Rule Change, as that the bitcoin futures markets are
Modified by Amendment No. 1, Relating to the
both futures and spot markets is a Listing and Trading of Shares of the SolidX Bitcoin
markets of significant size. Publicly
positive sign for the long-term future of Trust, Securities Exchange Act Release No. 80319 available data show that the median
bitcoin markets.44 The commenter (Mar. 28, 2017), 82 FR 16247, 16251 (Apr. 3, 2017) daily notional trading volume, from
suggests that the Commission, in (SR–NYSEArca–2016–101) (noting that study inception through August 10, 2018, has
commissioned by trust sponsor argues that ‘‘the
coordination with the CFTC, self- underlying market for bitcoin is inherently resistant
been 14,185 bitcoins on CME and 5,184
regulatory organizations, bitcoin futures to manipulation’’).
exchanges, and bitcoin spot market 47 See Notice, supra note 3, 83 FR at 3385. 51 See id. at 37591 (finding that ‘‘traditional
platforms, could gather market 48 See supra notes 43–44 and accompanying text. means’’ of surveillance were not sufficient in the
This commenter also suggests that the absence of a surveillance-sharing agreement with a
surveillance data to conduct an regulated market of significant size related to the
Commission—in coordination with the CFTC,
independent analysis of trade and SROs, futures markets, and bitcoin spot platforms— underlying asset).
settlement patterns and determine could gather market surveillance data to
52 See supra note 36 and accompanying text
whether potentially manipulative independently analyze whether manipulative (noting previous commodity-futures ETPs where
practices occur on bitcoin spot and futures surveillance sharing in place between ETP listing
trading practices occur on bitcoin spot exchange and underlying futures exchanges).
platforms. See supra note 45 and accompanying
and futures markets.45 text. As noted above, however, it is the Exchange 53 Winklevoss Order, supra note 31, 83 FR at
that bears the burden to demonstrate that its 37580 (quoting Amendment to Rule Filing
3. Analysis Requirements for Self-Regulatory Organizations
proposal is designed to ‘‘prevent fraudulent and
Unlike previous proposals for bitcoin- manipulative acts and practices.’’ See supra notes Regarding New Derivative Securities Products,
based ETPs,46 the Exchange does not 26–29 and accompanying text. Securities Exchange Act Release No. 40761 (Dec. 8,
49 See Notice, supra note 3, at 83 FR 3385 (‘‘The 1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998)
(File No. S7–13–98)).
daltland on DSKBBV9HB2PROD with NOTICES
41 See Exchange is also able to obtain information
NERA Letter, supra note 9, at 2. 54 See https://www.isgportal.org/isgPortal/public/
42 See
regarding trading in the Shares, futures, the
id. commodity underlying futures or options on futures members.htm (listing the current members and
43 See id. at 4–5.
through ETP [Exchange Trading Permit] Holders, in affiliate members of the Intermarket Surveillance
44 See id. at 5. Group).
connection with such ETP Holders’ proprietary or
45 See id. customer trades which they effect through ETP 55 See Order Instituting Proceedings, supra note 7,
46 See Winklevoss Order, supra note 31, 83 FR at Holders on any relevant market.’’). 83 FR at 18605.
37582 (noting exchange argument that ‘‘intrinsic 50 See Winklevoss Order, supra note 31, 83 FR at 56 Notice, supra note 3, 83 FR at 3383; see also
properties of bitcoin and bitcoin markets make 37580. supra note 22 and accompanying text.
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![43918 Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices
bitcoins on CBOE, and that the median leveraged’’ investment results for the develop over time, or whether or when
daily notional value of open interest on Funds.62 The Notice does not establish they may reach significant size.
CME and CBOE during the same period any limit on the Funds’ holdings of Although the Exchange has not
has been 10,145 bitcoins and 5,601 these other bitcoin-related derivatives; it demonstrated that a regulated bitcoin
bitcoins, respectively.57 But while these provides no analysis of the size and futures market of significant size
futures contract figures are readily liquidity of markets for those currently exists, the Commission is not
available, meaningful analysis of the derivatives; 63 and it does not discuss
suggesting that the development of such
size of the CME or CBOE markets whether the Exchange has the ability to
a market would automatically require
relative to the underlying bitcoin spot share surveillance information with the
approval of a proposed rule change
market is challenging, because reliable markets for these derivatives. Thus, as
data about the spot market, including its to what might be a substantial seeking to list and trade shares of an
overall size, are unavailable.58 proportion of the Funds’ portfolios, the ETP holding bitcoins as an asset. The
The Commission also notes that in Commission is unable to conclude that Commission would need to analyze the
recent testimony CFTC Chairman surveillance-sharing will be available, facts and circumstances of any
Giancarlo characterized the volume of that the related markets are regulated, or particular proposal and examine
the bitcoin futures markets as ‘‘quite that the related markets are of whether any unique features of a bitcoin
small.’’ 59 Additionally, the President significant size. futures market would warrant further
and COO of CBOE recently While one commenter suggests that analysis before approval.
acknowledged in a letter to the the market for bitcoin derivatives other C. Protecting Investors and the Public
Commission staff that ‘‘the current than exchange-traded futures appears to Interest
bitcoin futures trading volumes on Cboe be developing—and that the offering of
Futures Exchange and CME may not long and short bitcoin ETPs ‘‘raises the 1. Comments Received
currently be sufficient to support ETPs possibility that market makers in
seeking 100% long or short exposure to Bitcoin derivatives could make two- One commenter asserts that approval
bitcoin.’’ 60 These statements reinforce sided markets if interest in both the long of the proposed ETPs would provide
the Commission’s conclusion that there and short ETFs is similar in greater security in the cryptocurrency
is insufficient evidence to determine magnitude’’ 64—these speculative market, such as greater liquidity,
that the CME and CBOE bitcoin futures statements do not provide a basis for the transparency, and safe custody of
markets are markets of significant size. Commission to conclude that the non- assets.66 Another commenter asserts
Furthermore, according to the Notice, exchange-traded bitcoin derivatives that promoting the adoption of bitcoin
under normal market conditions, each market is now, or may eventually be, of will allow ‘‘paradigms within the
Fund intends to obtain exposure to its significant size. cryptocurrency ecosystem,’’ such as
target benchmark by investing in the The Commission therefore concludes initial coin offerings, to ‘‘break up the
Bitcoin Futures Contract as well as other that Exchange has not demonstrated that stranglehold cartels have on accruing
Bitcoin Financial Instruments, which it has entered into a surveillance- and owning capital, as the funding
could be options on bitcoin or the sharing agreement with a regulated model becomes democratized.’’ 67
Bitcoin Futures Contract and swaps on market of significant size related to One commenter suggests that the
the Bitcoin Futures Contract.61 The bitcoin, or that, given the current
Funds’ investments in Bitcoin Financial Commission could address some of its
absence of such an agreement, the concerns about the proposed ETPs by
Instruments are used to produce exchange’s own surveillance procedures
economically ‘‘leveraged’’ or ‘‘inverse working with self-regulatory
described above would, by themselves, organizations, and in particular FINRA,
be sufficient to satisfy the requirement to create bitcoin and cryptocurrency-
57 These volume figures were calculated by
Commission staff using data published by CME and
of Exchange Act Section 6(b)(5) that an related asset suitability requirements. In
CBOE on their websites. exchange’s rules be designed to prevent addition, this commenter suggests that
58 See Winklevoss Order, supra note 31, 83 FR at fraudulent and manipulative acts and targeted disclosure requirements could
37601. practices.65 While CME and CBOE are make investors aware of volatility,
59 CFTC Chairman Giancarlo testified: ‘‘It is
regulated markets for bitcoin discourage retail investors from
important to put the new Bitcoin futures market in
perspective. It is quite small with open interest at
derivatives, there is no basis in the investing more than a small portion of
the CME of 6,695 bitcoin and at Cboe Futures record for the Commission to conclude their portfolio in cryptocurrency-related
Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2, that these markets are of significant size. assets, and present historical scenarios
2018). At a price of approximately $7,700 per Additionally, because bitcoin futures
Bitcoin, this represents a notional amount of about to retail investors to demonstrate how
$94 million. In comparison, the notional amount of have been trading on CME and CBOE an instrument such as a particular
the open interest in CME’s WTI crude oil futures only since December 2017, the bitcoin ETP would have performed over
was more than one thousand times greater, about Commission has no basis on which to time. This commenter believes that
$170 billion (2,600,000 contracts) as of Feb[.] 2, predict how these markets may grow or
2018 and the notional amount represented by the suitability requirements are less
open interest of Comex gold futures was about $74 prescriptive than an effective ban on a
62 See Notice, supra note 3, 83 FR at 3381–82.
billion (549,000 contracts).’’ See Written Testimony
of J. Christopher Giancarlo, Chairman, Commodity 63 The Commission also notes that the Exchange
class of product and that they could
Futures Trading Commission, Before the Senate did not answer questions in the Order Instituting balance the Commission’s interest in
Banking Committee at text accompanying nn. 14– Proceedings regarding whether, with respect to the protecting retail investors against its
15 (Feb. 6, 2018). See also Winklevoss Order, supra Funds that seek leveraged or leveraged-inverse interest in allowing cryptocurrency-
note 31, 83 FR at 37601 (citing Giancarlo returns, ‘‘trading of the Shares, hedging activity, or
related asset markets to continue to
daltland on DSKBBV9HB2PROD with NOTICES
testimony). creation and redemption activity [would] affect the
60 Letter from Chris Concannon, President and daily volume, volatility, or liquidity of the develop in regulated markets where the
COO, Cboe Global Markets, to Dalia Blass, Director, underlying Bitcoin Financial Instruments or of the Commission can observe their
Division of Investment Management, Commission, spot bitcoin market any differently than a non- performance closely.68
at 5 (Mar. 23, 2018), available at https:// leveraged bitcoin futures exchange-traded product
www.sec.gov/divisions/investment/cboe-global- would.’’ Order Instituting Proceedings, supra note
7, 83 FR at 18605. 66 See Santos Letter, supra note 9.
markets-innovation-cryptocurrency.pdf.
61 See Notice, supra note 3, 83 FR at 3381; see 64 See supra notes 41–42 and accompanying text. 67 See David Letter, supra note 9.
also supra note 20 and accompanying text. 65 See 15 U.S.C. 78f(b)(5). 68 See NERA Letter, supra note 9, at 5–6.
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2. Analysis ETP 73; the ways in which approval of SECURITIES AND EXCHANGE
The Exchange asserts that approval of the proposal would increase investor COMMISSION
the proposal would enhance confidence 74; the ways in which [Release No. 34–83898; File No. SR–
competition among market participants, promoting the adoption of bitcoin and NYSEAMER–2018–41]
to the benefit of investors.69 One other cryptocurrencies would ease inter-
commenter asserts that approval of the generational tension and wealth Self-Regulatory Organizations; NYSE
proposal will provide greater security, inequality and foster the confidence of American LLC; Notice of Filing and
transparency, and liquidity, as well as younger generations in the economic Immediate Effectiveness of Proposed
safe custody, for investors in system 75; the Commission’s process for Rule Change To Amend Rule 7.31E
cryptocurrencies.70 And one commenter granting Exchange Act exemptive relief Relating to Reserve Orders and Re-
suggests that the Commission should in connection with ETP approval 76; and Name an Order Type
seek to protect investors through the potential impact of Commission August 22, 2018.
disclosure requirements or suitability approval of the proposed ETPs on the Pursuant to Section 19(b)(1) 1 of the
standards, rather than disapproving a price of bitcoin.77 Ultimately, however, Securities Exchange Act of 1934
bitcoin-ETP proposal.71 additional discussion of these tangential (‘‘Act’’) 2 and Rule 19b–4 thereunder,3
The Commission acknowledges that, topics is unnecessary, as they do not notice is hereby given that on August
compared to trading in unregulated bear on the basis for the Commission’s 10, 2018, NYSE American LLC
bitcoin spot markets, trading a bitcoin- decision to disapprove the proposal. (‘‘Exchange’’ or ‘‘NYSE American’’) filed
based ETP on a national securities with the Securities and Exchange
exchange may provide some additional E. Basis for Disapproval Commission (‘‘Commission’’) the
protection to investors, but the proposed rule change as described in
Commission must consider this The record before the Commission
does not provide a basis for the Items I, II, and III below, which Items
potential benefit in the broader context have been prepared by the self-
of whether the proposal meets each of Commission to conclude that the
regulatory organization. The
the applicable requirements of the Exchange has met its burden under the
Commission is publishing this notice to
Exchange Act. Pursuant to Section Exchange Act and the Commission’s
solicit comments on the proposed rule
19(b)(2) of the Exchange Act, the Rules of Practice to demonstrate that its change from interested persons.
Commission must disapprove a proposed rule change is consistent with
proposed rule change filed by a national Exchange Act Section 6(b)(5).78 I. Self-Regulatory Organization’s
securities exchange if it does not find Statement of the Terms of Substance of
IV. Conclusion the Proposed Rule Change
that the proposed rule change is
consistent with the applicable For the reasons set forth above, the The Exchange proposes to amend
requirements of the Exchange Act— Commission does not find, pursuant to Rule 7.31E relating to Reserve Orders
including the requirement under Section 19(b)(2) of the Exchange Act, and re-name an order type. The
Section 6(b)(5) that the rules of a that the proposed rule change is proposed rule change is available on the
national securities exchange be consistent with the requirements of the Exchange’s website at www.nyse.com, at
designed to prevent fraudulent and Exchange Act and the rules and the principal office of the Exchange, and
manipulative acts and practices. regulations thereunder applicable to a at the Commission’s Public Reference
Thus, even if a proposed rule change Room.
national securities exchange, and in
would provide certain benefits to
particular, with Section 6(b)(5) of the II. Self-Regulatory Organization’s
investors and the markets, the proposed
Exchange Act. Statement of the Purpose of, and
rule change may still fail to meet other
It is therefore ordered, pursuant to Statutory Basis for, the Proposed Rule
requirements under the Exchange Act.
Section 19(b)(2) of the Exchange Act, Change
For the reasons discussed above, the
Exchange has not met its burden of that proposed rule change SR– In its filing with the Commission, the
demonstrating an adequate basis in the NYSEArca–2018–02 is disapproved. self-regulatory organization included
record for the Commission to find that statements concerning the purpose of,
For the Commission, by the Division of
the proposal is consistent with and basis for, the proposed rule change
Trading and Markets, pursuant to delegated
Exchange Act Section 6(b)(5), and, and discussed any comments it received
authority.79
accordingly, the Commission must on the proposed rule change. The text
Brent J. Fields, of those statements may be examined at
disapprove the proposal.
Secretary. the places specified in Item IV below.
D. Other Comments [FR Doc. 2018–18577 Filed 8–27–18; 8:45 am] The Exchange has prepared summaries,
Comment letters also addressed the BILLING CODE 8011–01–P set forth in sections A, B, and C below,
intrinsic value of bitcoin 72; the desire of of the most significant parts of such
individuals to invest in a bitcoin-based statements.
73 See Galt Letter, supra note 9; Santos Letter,
supra note 9. A. Self-Regulatory Organization’s
69 See Notice, supra note 3, 83 FR at 3387.
70 See supra note 66 and accompanying text.
74 See David Letter, supra note 9; Santos Letter, Statement of the Purpose of, and the
71 See supra note 68 and accompanying text. The supra note 9. Statutory Basis for, the Proposed Rule
Commission also notes that the Exchange did not 75 See David Letter, supra note 9. Change
daltland on DSKBBV9HB2PROD with NOTICES
respond to questions in the Order Instituting 76 See Williams Letter, supra note 9, at 1.
Proceedings seeking comment on how the Funds’ 77 See Santos Letter, supra note 9.
1. Purpose
striking NAV as of 11:00 a.m. E.T. (five hours before 78 In disapproving the proposed rule change, the The Exchange proposes to amend its
the close of the regular trading session) would affect
arbitrage, and what the potential effect on investors Commission has considered its impact on Cash Equities Pillar Platform Rule 7.31E
would be if the arbitrage mechanism were impaired. efficiency, competition, and capital formation. See
See Order Instituting Proceedings, supra note 7, 83 15 U.S.C. 78c(f). See also supra note 67 and 1 15 U.S.C. 78s(b)(1).
FR at 18605. accompanying text. 2 15 U.S.C. 78a.
72 See Ahn Letter, supra note 9. 79 17 CFR 200.30–3(a)(12). 3 17 CFR 240.19b–4.
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Document Created: 2018-08-28 00:22:15
Document Modified: 2018-08-28 00:22:15
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 83 FR 43912 |
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