83_FR_44090 83 FR 43923 - Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Disapproving a Proposed Rule Change To List and Trade the Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF

83 FR 43923 - Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Disapproving a Proposed Rule Change To List and Trade the Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 167 (August 28, 2018)

Page Range43923-43932
FR Document2018-18578

Federal Register, Volume 83 Issue 167 (Tuesday, August 28, 2018)
[Federal Register Volume 83, Number 167 (Tuesday, August 28, 2018)]
[Notices]
[Pages 43923-43932]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-18578]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83913; File No. SR-CboeBZX-2018-001]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Disapproving a Proposed Rule Change To List and Trade the Shares of the 
GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF

August 22, 2018.

I. Introduction

    On January 5, 2018, Cboe BZX Exchange, Inc. (``BZX'' or 
``Exchange'') 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 GraniteShares Bitcoin ETF (``Long Fund'') and the 
GraniteShares Short Bitcoin ETF (``Short Fund'') (each a ``Fund'' and, 
collectively, ``Funds'') issued by the GraniteShares ETP Trust 
(``Trust'') \3\ under BZX Rule 14.11(f)(4).\4\ The proposed rule change 
was published for comment in the Federal Register on January 18, 
2018.\5\ The comment period for the Notice of Proposed Rule Change 
closed on February 8, 2018.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Trust filed a registration statement with the Commission 
on December 15, 2017. See Registration Statement on Form S-1, dated 
December 15, 2017 (File No. 333-222109) (``Registration 
Statement''). The Registration Statement ``will be effective as of 
the date of any offer and sale pursuant to the Registration 
Statement.'' Notice, infra note 5, 83 FR at 2705 n.7.
    \4\ On August 21, 2018, the Exchange filed Amendment No. 1 to 
the proposal, and on August 22, 2018, the Exchange filed Amendment 
No. 2 to the proposal. As discussed below, however, see Section 
III.E, infra, the Commission views these amendments as untimely. 
Furthermore, even if these amendments had been timely filed, they 
would not alter the Commission's conclusion that the Exchange's 
proposal is not consistent with the Exchange Act. See id.
    \5\ See Securities Exchange Act Release No. 82484 (Jan. 11, 
2018), 83 FR 2704 (Jan. 18, 2018) (``Notice'').
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    On February 22, 2018, pursuant to Section 19(b)(2) of the Exchange 
Act,\6\ 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.\7\ On April 5, 2018, the Commission 
instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 
\8\ to determine whether to approve or disapprove the proposed rule 
change.\9\ The comment period and rebuttal comment period for the Order 
Instituting Proceedings closed on May 1, 2018, and May 15, 2018, 
respectively.\10\ Finally, on June 28, 2018, the Commission extended 
the period for consideration of the proposed rule change to September 
15, 2018.\11\ As of August 21, 2018, the Commission had received 15 
comments on the proposed rule change.\12\
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    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 82759 (Feb. 22, 
2018), 83 FR 8719 (Feb. 28, 2018).
    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ See Securities Exchange Act Release No. 82995 (Apr. 5, 
2018), 83 FR 15425 (Apr. 10, 2018) (``Order Instituting 
Proceedings'').
    \10\ See id. at 15426.
    \11\ See Securities Exchange Act Release No. 83548 (June 28, 
2018), 83 FR 31246 (July 3, 2018).
    \12\ See Letters from Anita Desai (Apr. 6, 2018) (``Desai 
Letter''); Ed Kaleda (Apr. 6, 2018) (``Kaleda Letter''); Don Krohn 
(Apr. 7, 2018) (``Krohn Letter''); Adam Malkin (Apr. 8, 2018) 
(``Malkin Letter''); Shravan Kumar (Apr. 11, 2018) (``Kumar 
Letter''); David Barnwell (Apr. 12, 2018) (``Barnwell Letter''); 
Louise Fitzgerald (Apr. 18, 2018) (``Fitzgerald Letter''); Sharon 
Brown-Hruska, Managing Director, and Trevor Wagener, Consultant, 
NERA Economic Consulting (May 18, 2018) (``NERA Letter''); Alex 
Hales (July 8, 2018) (``Hales Letter''); Anthony C. Otenyi (July 18, 
2018) (``Otenyi Letter''); V.K. Bhat (July 28, 2018) (``Bhat 
Letter''); Sami Santos (Aug. 7, 2018) (``Santos Letter''); Arthur 
Netto (Aug. 9, 2018) (``Netto Letter''); Sam M. Ahn (Aug. 17, 2018) 
(``Ahn Letter''); and William Rhind, CEO, GraniteShares (Aug. 20, 
2018) (``GraniteShares Letter''). All comments on the proposed rule 
change are available on the Commission's website at: https://www.sec.gov/comments/sr-cboebzx-2018-001/cboebzx2018001.htm.
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    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.\13\ 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.\14\
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    \13\ See 15 U.S.C. 78f(b)(5).
    \14\ See infra notes 31-33 and accompanying text.
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(f)(4), which governs the listing and trading of Trust Issued 
Receipts on the Exchange.\15\ Each Fund will be a series of the Trust, 
and the Trust and the Funds will be managed and controlled by 
GraniteShares Advisors LLC (``Sponsor''). Bank of New York Mellon will 
serve as administrator, custodian, and transfer agent for the Funds. 
Foreside Fund Services, LLC will serve as the distributor of the Shares 
(``Distributor''). The Trust will offer Shares of the Funds for sale 
through the Distributor in ``Creation Units'' in transactions with 
``Authorized Participants'' who have entered into agreements with the 
Distributor.\16\
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    \15\ BZX Rule 14.11(f)(4) applies to Trust Issued Receipts that 
invest in ``Financial Instruments.'' The term ``Financial 
Instruments,'' as defined in BZX Rule 14.11(f)(4)(A)(iv), means 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.
    \16\ See Notice, supra note 5, 83 FR at 2707.
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    According to the Exchange, the Long Fund's investment objective 
will be to seek results (before fees and expenses) that, both for a 
single day and over time, correspond to the performance of lead month 
bitcoin futures contracts listed and traded on the Cboe Futures 
Exchange, Inc. (``CFE'') (``Benchmark Futures Contracts''). Conversely, 
the Short Fund's investment objective will be to seek results (before 
fees and expenses) that, on a daily basis, correspond to the inverse (-
1x) of the daily performance of the Benchmark Futures Contracts for a 
single day. Each Fund generally intends to invest substantially all of 
its assets in the Benchmark Futures Contracts and cash and cash 
equivalents (which would be used to collateralize the Benchmark Futures 
Contracts), but may invest in other U.S. exchange listed bitcoin 
futures contracts, as available (together

[[Page 43924]]

with Benchmark Futures Contracts, collectively, ``Bitcoin Futures 
Contracts'').\17\
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    \17\ See id. at 2705-06. The Bitcoin Futures Contracts include 
the bitcoin futures contracts listed and traded on the Chicago 
Mercantile Exchange, Inc. (``CME''). See id. at 2705.
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    The Exchange represents that no more than 10% of the net assets of 
a Fund in the aggregate invested in Bitcoin Futures Contracts shall 
consist of Bitcoin Futures Contracts whose principal market is neither 
a member of the Intermarket Surveillance Group nor a market with which 
the Exchange does not have a comprehensive surveillance-sharing 
agreement.\18\ Further, according to the Notice, in the event that 
position, price, or accountability limits are reached with respect to 
Bitcoin Futures Contracts, each Fund may invest in U.S. listed swaps on 
bitcoin or the Benchmark Futures Contracts (``Listed Bitcoin Swaps''). 
The Notice also states that, in the event that position, price, or 
accountability limits are reached with respect to Listed Bitcoin Swaps, 
each Fund may invest in over-the-counter swaps on bitcoin or the 
Benchmark Futures Contracts (``OTC Bitcoin Swaps,'' and together with 
Listed Bitcoin Swaps, collectively, ``Bitcoin Swaps'').\19\
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    \18\ See id. at 2709 n.26.
    \19\ See id. at 2706.
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    The Exchange asserts that ``policy concerns related to an 
underlying reference asset and its susceptibility to manipulation are 
mitigated as it relates to bitcoin because the very nature of the 
bitcoin ecosystem makes manipulation of bitcoin difficult.'' \20\ 
According to the Exchange:
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    \20\ Notice, supra note 5, 83 FR at 2706.

    The geographically diverse and continuous nature of bitcoin 
trading makes it difficult and prohibitively costly to manipulate 
the price of bitcoin and, in many instances, that the bitcoin market 
is generally less susceptible to manipulation than the equity, fixed 
income, and commodity futures markets. There are a number of reasons 
this is the case, including that there is not inside information 
about revenue, earnings, corporate activities, or sources of supply; 
it is generally not possible to disseminate false or misleading 
information about bitcoin in order to manipulate; manipulation of 
the price on any single venue would require manipulation of the 
global bitcoin price in order to be effective; a substantial over-
the-counter market provides liquidity and shock-absorbing capacity; 
bitcoin's 24/7/365 nature provides constant arbitrage opportunities 
across all trading venues; and it is unlikely that any one actor 
could obtain a dominant market share.
    Further, bitcoin is arguably less susceptible to manipulation 
than other commodities that underlie ETPs; there may be inside 
information relating to the supply of the physical commodity such as 
the discovery of new sources of supply or significant disruptions at 
mining facilities that supply the commodity that simply are 
inapplicable as it relates to bitcoin. Further, the Exchange 
believes that the fragmentation across bitcoin exchanges, the 
relatively slow speed of transactions, and the capital necessary to 
maintain a significant presence on each exchange make manipulation 
of bitcoin prices through continuous trading activity unlikely. 
Moreover, the linkage between the bitcoin markets and the presence 
of arbitrageurs in those markets means that the manipulation of the 
price of bitcoin price on any single venue would require 
manipulation of the global bitcoin price in order to be effective. 
Arbitrageurs must have funds distributed across multiple bitcoin 
exchanges in order to take advantage of temporary price 
dislocations, thereby making it unlikely that there will be strong 
concentration of funds on any particular bitcoin exchange. As a 
result, the potential for manipulation on a particular bitcoin 
exchange would require overcoming the liquidity supply of such 
arbitrageurs who are effectively eliminating any cross-market 
pricing differences. For all of these reasons, bitcoin is not 
particularly susceptible to manipulation, especially as compared to 
other approved ETP reference assets.\21\
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    \21\ Id.

    The Notice also asserts that the susceptibility of the underlying 
futures contracts to manipulation is mitigated by the ``significant 
liquidity that the Exchange expects to exist in the market for Bitcoin 
Futures Contracts.'' \22\ The Notice asserts that the market for 
bitcoin futures will be ``sufficiently liquid to support numerous ETPs 
shortly after launch,'' citing ``numerous conversations with market 
participants, issuers, and discussions with personnel of CFE.''\23\
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    \22\ Id.
    \23\ Id. at 2710.
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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.'' \24\ 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.'' \25\
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    \24\ 15 U.S.C. 78f(b)(5).
    \25\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    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,\26\ 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.\27\ 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.\28\
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    \26\ See id.
    \27\ See id.
    \28\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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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 and 
manipulative acts and practices.'' \29\ 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.\30\
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    \29\ 15 U.S.C. 78f(b)(5).
    \30\ 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-2018-30).
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    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.'' \31\

[[Page 43925]]

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.'' \32\ 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.\33\ 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.''
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    \31\ 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), 
63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)).
    \32\ 15 U.S.C. 78f(b)(5).
    \33\ See Winklevoss Order, supra note 30, 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.
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    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.'' \34\ 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.\35\ While the 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

[[Page 43926]]

underlying futures markets,\36\ and the

[[Page 43927]]

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.\37\ And where the Commission 
has considered a proposed ETP based on futures that had only recently 
begun trading,\38\ 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.\39\
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    \34\ 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 30, 83 FR at 37592-94.
    \35\ 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 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'').
    \36\ 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)).
    \37\ 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'').
    \38\ The Exchange filed its proposal less than one month after 
bitcoin futures began trading on either CME or CFE.
    \39\ 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 asserts that data on a week's activity on the Gemini 
exchange, which provides a critical input for the CFE bitcoin futures, 
show substantial quantities of bitcoin are bought and sold all at once. 
The commenter believes that this behavior does not appear to be the 
result of natural trading and in the long run would prevent true price 
discovery.\40\
---------------------------------------------------------------------------

    \40\ See Malkin Letter, supra note 12, at 1-2.
---------------------------------------------------------------------------

    One commenter states that commencing an ETP without allowing the 
market to adjust to the cash-settled futures products would be akin to 
``putting the cart before the horse'' and seems to be an attempt to 
appease institutional investors.\41\
---------------------------------------------------------------------------

    \41\ See Desai Letter, supra note 12, at 1.
---------------------------------------------------------------------------

    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 bitcoin derivatives desks.\42\ 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 CFE to determine the plausibility of 
simultaneous liquidity collapses on both bitcoin future markets.\43\
---------------------------------------------------------------------------

    \42\ See NERA Letter, supra note 12, at 2.
    \43\ See id.
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    Six commenters assert that there is manipulation in the bitcoin 
market.\44\ One commenter states that it is widely known in the 
cryptocurrency

[[Page 43928]]

community that volatility in the bitcoin market is the result of 
manipulation through the coordinated use of high-frequency trading 
across multiple exchanges.\45\ Another commenter asserts that it is 
common knowledge that the bitcoin market is being manipulated and 
asserts that BitConnect, which was recently shut down and had promised 
risk-free annual returns of up to 120%, is an example of Ponzi and 
multi-level marketing schemes that are too common. This commenter 
argues that the Commission should not send the wrong signal to bitcoin 
manipulators--who, the commenter asserts, currently operate with 
impunity--by approving a bitcoin ETP.\46\
---------------------------------------------------------------------------

    \44\ See Desai Letter, supra note 12, at 1; Fitzgerald Letter, 
supra note 12, at 1; Kumar Letter, supra note 12; Krohn Letter, 
supra note 12; Barnwell Letter, supra note 12, at 2; Bhat Letter, 
supra note 12.
    \45\ See Barnwell Letter, supra note 12, at 2.
    \46\ See Kumar Letter, supra note 12.
---------------------------------------------------------------------------

    One commenter asserts that, in an unregulated market, a small 
minority can manipulate the price of bitcoin and other ``altcoins'' and 
that bitcoin and other cryptocurrencies are freely manipulated by 
players who hold a disproportionate amount of cryptocurrencies or 
access to fiat currencies. This commenter cites data showing that 4.11% 
of bitcoin addresses own 96.53% of all the bitcoin in circulation, that 
the top four addresses control 3.13% of all bitcoin currently in 
distribution (worth over $4 billion), and that 115 individuals control 
bitcoin worth over $24 billion.\47\
---------------------------------------------------------------------------

    \47\ See Fitzgerald Letter, supra note 12, at 1-2.
---------------------------------------------------------------------------

    One commenter asserts that widespread pump-and-dump schemes 
organized through the messaging platform ``Telegram'' are evidence of 
manipulation.\48\ This commenter further cites an inquiry by then-New 
York Attorney General Eric Schneiderman into cryptocurrency exchanges 
and the use of trading ``bots'' on those exchanges to manipulate the 
market, and asserts that such activity can drive prices above fair 
market value by over 300%. The commenter notes the Kraken exchange's 
refusal to cooperate with this inquiry and believes that this refusal 
should pose serious questions for investors and the Commission about 
the Kraken exchange's operations, particularly after the Kraken 
exchange recently exited the Japanese market due to regulatory 
requirements.\49\
---------------------------------------------------------------------------

    \48\ See id. at 2.
    \49\ See id.
---------------------------------------------------------------------------

    One 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.\50\
---------------------------------------------------------------------------

    \50\ See NERA Letter, supra note 12, 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.\51\ 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.\52\
---------------------------------------------------------------------------

    \51\ See id. at 5.
    \52\ See id.
---------------------------------------------------------------------------

    A commenter asserts that bitcoin ETPs should be structured in such 
a way that the funds own bitcoin directly, because this commenter 
believes that cryptocurrency ETPs that are based on futures or other 
derivatives would invite manipulation of prices. A bitcoin ETP that 
holds the underlying cryptocurrency directly, this commenter states, 
would be simpler, more transparent, and less subject to complex and 
destabilizing trading strategies.\53\
---------------------------------------------------------------------------

    \53\ See Krohn Letter, supra note 12.
---------------------------------------------------------------------------

    The Sponsor asserts that the operation of, and risks posed by, an 
ETP that seeks to track the performance of a bitcoin futures contract, 
are relatively straightforward and similar to the operation and risks 
involved with many existing commodity-futures-based ETPs, and that the 
Commission has not raised concerns about the risk of market 
manipulation in the underlying commodity markets, even when the risk is 
disclosed in the offering document for a commodity-futures-based ETP, 
or when the production of the underlying commodity is dominated by 
relatively few players operating under a common organization.\54\ The 
Sponsor also asserts that CFE and CME surveil their markets to ensure 
that they are free from manipulation, other price distortion, or 
disorderly trading or expiration of futures contracts and that it is 
not necessary for the Exchange to enter into surveillance-sharing 
agreements with the underlying bitcoin spot markets.\55\ The Sponsor 
states that investors should only consider the price of the Bitcoin 
Futures Contracts, rather than the price of bitcoin itself,\56\ but 
also concedes that, to the extent price manipulation is possible in the 
underlying market and affects the price of the futures contracts, the 
NAV of the Funds would be affected as well.\57\
---------------------------------------------------------------------------

    \54\ See GraniteShares Letter, supra note 12, at 1-2. The 
Commission notes that the Sponsor did not submit its comment letter 
until 97 days after the close of the comment period under the Order 
Instituting Proceedings.
    \55\ See id. at 2 & n.2, 6.
    \56\ See id. at 8.
    \57\ See id. at 6, 8.
---------------------------------------------------------------------------

    The Sponsor asserts that CFE and CME have specific and well-
established trading and clearing rules to maintain an orderly and 
continuous market for bitcoin futures contracts that is supported by 
market makers providing continuous two-sided markets throughout the 
day.\58\ The Sponsor concedes that bitcoin futures contracts have 
limited operating histories, but asserts that the market infrastructure 
for these contracts is at least as advanced as that underlying the 
futures contracts used by a previously approved ETP that invests in 
freight futures contracts, noting that bitcoin futures trade with an 
electronic order book, while freight futures trade by voice orders, and 
asserting that the daily dollar volume in bitcoin futures contracts 
over a two-month period exceeds that of freight futures contracts.\59\ 
The Sponsor asserts that CFE and CME are significant markets based on 
the existing market as well as the trading infrastructure.\60\ The 
Sponsor further concedes that, if the Funds hit position limits in 
Bitcoin Futures Contracts, this would potentially affect the trading 
and liquidity of the Shares, but asserts that this risk is disclosed to 
investors in the Registration Statement, that other commodity-futures-
based ETPs face similar risks, and that interest from investors in the 
Shares would support

[[Page 43929]]

development of the bitcoin futures market.\61\
---------------------------------------------------------------------------

    \58\ See id. at 2-3, 8-9.
    \59\ See id. at 3.
    \60\ See id. at 8-9.
    \61\ See id. at 7.
---------------------------------------------------------------------------

3. Analysis
    The Exchange asserts that the price of bitcoin is inherently 
resistant to manipulation,\62\ offering, in summary fashion, a list of 
arguments that are exactly the same as arguments that it or commenters 
already raised with respect to previous proposals for bitcoin-based 
ETPs.\63\ The Commission comprehensively addressed each of these 
arguments in the Winklevoss Order, finding in each case that the 
Exchange had failed to carry its burden to demonstrate that the 
argument was correct,\64\ and finding overall that the Exchange ``ha[d] 
not demonstrated that the structure of the spot market for bitcoin is 
uniquely resistant to manipulation.'' \65\ Given that the Exchange has 
merely repeated these arguments, providing no elaboration or support, 
the Commission would have no basis--other than ``unquestioning 
reliance'' on the Exchange's representations--on which to come to a 
different conclusion here.\66\
---------------------------------------------------------------------------

    \62\ See supra notes 20-21 and accompanying text.
    \63\ See Winklevoss Order, supra note 30, 83 FR at 37582-84 
(Section III.B.1(a) of the order).
    \64\ See id. at 37584-87 (Section III.B.1(b) of the order).
    \65\ See id. at 37584.
    \66\ See supra note 28 and accompanying text (discussing the 
holding of Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission). Additionally, the Trust's Registration Statement 
acknowledges that bitcoin spot markets have been the subject of 
fraud and security breaches, that the ``nature of the assets held at 
Bitcoin Exchanges make them appealing targets for hackers,'' and 
that the bitcoin spot markets' exposure to ``fraud and security 
breaches . . . could have a negative impact on the Bitcoin Futures 
Contracts in which the Funds invest.'' See Registration Statement, 
supra note 3, at 9.
---------------------------------------------------------------------------

    The Sponsor concedes that manipulation of the underlying bitcoin 
markets may affect the value of the Shares,\67\ but argues that the 
risk of manipulation has been disclosed to investors and that the 
Commission has not raised similar concerns in connection with 
previously approved commodity-futures ETPs, even when the risk of 
manipulation has been disclosed to investors or when the underlying 
commodity market was controlled by relatively few players.\68\ But the 
Commission, as it stated in the Winklevoss Order, is not applying a 
``cannot be manipulated'' standard to ETPs.\69\ Rather, the Commission 
has held that--absent a showing that the underlying assets for an ETP 
are inherently resistant to manipulation, or that other means of 
surveillance will suffice--a listing exchange must demonstrate that it 
has entered into a surveillance-sharing agreement with a regulated 
market of significant size relating to the underlying asset.\70\
---------------------------------------------------------------------------

    \67\ See supra note 57 and accompanying text.
    \68\ See supra note 54 and accompanying text.
    \69\ See Winklevoss Order, supra note 30, 83 FR at 37582.
    \70\ See id. The Sponsor argues that it is not necessary for the 
Exchange to enter into a surveillance-sharing agreement with an 
underlying bitcoin trading venue, but the Commission has not 
asserted that such a surveillance-sharing agreement is necessary. 
Instead, the Commission has held in the Winklevoss Order ``that--
when the spot market is unregulated--the requirement of preventing 
fraudulent and manipulative acts may possibly be satisfied by 
showing that the ETP listing market has entered into a surveillance-
sharing agreement with a regulated market of significant size in 
derivatives related to the underlying asset.'' Id. at 37600 
(emphasis added).
---------------------------------------------------------------------------

    The Exchange asserts that its existing surveillance procedures 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).\71\ One commenter also asserts that the exchange's own 
surveillance procedures, along with market surveillance and oversight 
by the CFTC, can mitigate manipulation.\72\
---------------------------------------------------------------------------

    \71\ See Notice, supra note 5, 83 FR at 2709.
    \72\ See supra notes 50-51 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 52 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 25-28 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,\73\ 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.'' \74\ Thus, consistent with its 
determination in the Winklevoss Order,\75\ and with the Commission's 
previous orders approving commodity-futures ETPs,\76\ 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.'' \77\
---------------------------------------------------------------------------

    \73\ See Notice, supra note 5, 83 FR at 2709 (``In addition to 
the existing obligations under Exchange rules regarding the 
production of books and records . . ., the registered Market Maker 
in Trust Issued Receipts shall make available to the Exchange such 
books, records or other information pertaining to transactions by 
such entity or registered or non-registered employee affiliated with 
such entity for its or their own accounts for trading the underlying 
physical commodity, related commodity futures or options on 
commodity futures, or any other related commodity derivatives, as 
may be requested by the Exchange.'').
    \74\ Winklevoss Order, supra note 30, 83 FR at 37580.
    \75\ 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).
    \76\ See supra note 35 and accompanying text (noting previous 
commodity-futures ETPs where surveillance sharing in place between 
ETP listing exchange and underlying futures exchanges).
    \77\ Winklevoss Order, supra note 30, 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 CFE, which are bitcoin futures markets 
regulated by the CFTC, through membership in the Intermarket 
Surveillance Group.\78\ And the Sponsor asserts that CFE and CME 
surveil their markets to ensure that they are free from manipulation, 
other price distortion, or disorderly trading,\79\ and that CFE and CME 
are ``significant markets'' based on their structure and volume.\80\ 
Nonetheless, the Commission must disapprove the proposal, because the 
evidence in the record does not support a conclusion that CME's and 
CFE's bitcoin futures markets are markets of significant size.
---------------------------------------------------------------------------

    \78\ See https://www.isgportal.org/isgPortal/public/members.htm 
(listing the current members and affiliate members of the 
Intermarket Surveillance Group).
    \79\ See supra note 55 and accompanying text.
    \80\ See supra notes 59-60 and accompanying text.
---------------------------------------------------------------------------

    The Order Instituting Proceedings sought comment on whether the CME 
and CFE bitcoin futures markets are markets of significant size,\81\ 
but the Exchange has not responded to any of the questions in the Order 
Instituting Proceedings, and the only analysis of

[[Page 43930]]

the underlying futures markets the Notice provides is the generic 
statement that, ``based on numerous conversations with market 
participants, issuers, and discussions with personnel of CFE,'' the 
Exchange ``expects that the market for Bitcoin Futures Contracts will 
be sufficiently liquid to support numerous ETPs shortly after launch.'' 
\82\ The Sponsor argues that the daily volume in the Bitcoin Futures 
Contracts, based on a two-month sample period, exceeds that of the 
futures contracts underlying a previously approved commodity-futures 
ETP investing in freight futures, adding that the Bitcoin Futures 
Contracts trade on an electronic order book, whereas the freight 
futures trade by voice, and that the trading infrastructure of the CME 
and CFE makes them significant markets.\83\ The Sponsor further asserts 
that, if the Funds hit position limits in the Bitcoin Futures 
Contracts, although it could impact trading and liquidity in the 
Shares, the interest in the Shares would support further development of 
the bitcoin futures market.\84\
---------------------------------------------------------------------------

    \81\ See Order Instituting Proceedings, supra note 9, 83 FR at 
15427.
    \82\ Notice, supra note 5, 83 FR at 2710; see also supra note 23 
and accompanying text. The Exchange sought to remove this 
representation from its proposal in Amendment No. 2. See infra note 
128.
    \83\ See supra notes 59-60 and accompanying text.
    \84\ See supra note 61 and accompanying text.
---------------------------------------------------------------------------

    Whether an underlying market is a ``market of significant size,'' 
however, does not depend on whether a market operates by electronic or 
voice trading, and it does not depend solely on trading volume in 
isolation from the broader context of the underlying market. Moreover, 
to the extent that isolated trading volume is relevant, the Commission 
does not believe that a two-month sample is sufficient to establish 
that a market is of significant size. Instead, as noted above and 
stated in the Winklevoss Order, the Commission interprets a 
``significant market'' or ``market of significant size'' to be ``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.'' \85\ Neither the Exchange nor the Sponsor has provided 
an analysis of whether the CME or CFE meets this standard, and the 
Sponsor's assertion that the bitcoin futures markets will grow to 
accommodate demand for the Funds (which are two of nine recently 
proposed bitcoin futures ETPs),\86\ this speculative statement does not 
provide a basis for the Commission to conclude that CME and CFE are 
currently markets of significant size.\87\ Thus, there is no basis in 
the record on which the Commission can conclude that the bitcoin 
futures markets are markets of significant size.
---------------------------------------------------------------------------

    \85\ See supra note 33 and accompanying text (quoting Winklevoss 
Order, supra note 30, 83 FR at 37594).
    \86\ See Notice, supra note 5 (proposing two GraniteShares 
bitcoin-futures ETPs); Securities Exchange Act Release No. 82350 
(Dec. 19, 2017), 82 FR 61100 (Dec. 26, 2017) (SR-NYSEArca-2017-139) 
(proposing two ProShares bitcoin-futures ETPS); Securities Exchange 
Act Release No. 82532 (Jan. 18, 2018), 83 FR 3380 (Jan. 24, 2018) 
(SR-NYSEArca-2018-02) (proposing five Direxion bitcoin-futures 
ETPs).
    \87\ With respect to the Sponsor's argument that daily volume in 
the Bitcoin Futures Contracts over a two-month period exceeds that 
of futures contracts underlying a previously approved commodity-
futures ETP, the Breakwave Dry Bulk Shipping ETF, the Commission 
notes that the futures in question had been trading for at least a 
dozen years before the ETP was proposed, see supra note 37 (SR-
NYSEArca-2017-107), and that the exchange proposing that ETP had 
provided not just daily volume figures, but had provided statistics 
on open interest, yearly volume, and distribution of open interest 
across contract types and had represented that liquidity had 
remained relatively constant over a five-year period. See supra note 
36. Moreover, in approving the Breakwave Dry Bulk Shipping ETF, the 
Commission noted that the listing exchange had represented that 
``the Freight Futures trade on well-established, regulated markets 
that are members of the ISG'' and found that the exchange would be 
able to ``share surveillance information with a significant 
regulated market for trading futures on dry bulk freight.'' 
Securities Exchange Act Release No. 82390, supra note 35, 82 FR at 
61633.
---------------------------------------------------------------------------

    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 bitcoins on CFE, and that the median daily 
notional value of open interest on CME and CFE during the same period 
has been 10,145 bitcoins and 5,601 bitcoins, respectively.\88\ But 
while these futures contract figures are readily available, meaningful 
analysis of the size of the CME or CFE markets relative to the 
underlying bitcoin spot market is challenging, because reliable data 
about the spot market, including its overall size, are unavailable.\89\
---------------------------------------------------------------------------

    \88\ These volume figures were calculated by Commission staff 
using data published by CME and CFE on their websites.
    \89\ See Winklevoss Order, supra note 30, 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.'' \90\ Additionally, the President and COO of CFE, 
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.'' \91\ These statements reinforce the 
Commission's conclusion that there is insufficient evidence to 
determine that the CME and CFE bitcoin futures markets are markets of 
significant size.
---------------------------------------------------------------------------

    \90\ 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 30, 83 FR at 37601 (citing Giancarlo testimony).
    \91\ 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.
---------------------------------------------------------------------------

    Although this conclusion is dispositive with respect to the 
Exchange's proposal, the Commission will also address the Exchange's 
representation that no more than 10% of the net assets of a Fund in the 
aggregate invested in bitcoin futures contracts will be invested in 
contracts whose principal market is neither a member of the Intermarket 
Surveillance Group nor a market with whom the Exchange has a 
comprehensive surveillance-sharing agreement.\92\ The Commission does 
not believe that this representation would function as a meaningful 
limitation when, according to the Notice, there is no minimum amount of 
a Fund that must be invested in such contracts. According to the 
Notice, in the event position, price, or accountability limits are 
reached with respect to bitcoin futures contracts, each Fund may invest 
in listed and OTC swaps on bitcoin or the Benchmark Futures 
Contracts.\93\ 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; 
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 
under the Notice, the

[[Page 43931]]

Commission cannot conclude that surveillance-sharing would be 
available, that the related markets would be regulated, or that the 
related markets would be of significant size.\94\
---------------------------------------------------------------------------

    \92\ See supra note 18 and accompanying text.
    \93\ See Notice, supra note 5, 83 FR 2706; see also supra note 
19 and accompanying text.
    \94\ As discussed below, see Section III.E, infra the exchange 
has filed two untimely amendments to the proposal, each of which 
would have limited the Funds' investments to the Bitcoin Futures 
Contracts. Even if these amendments had been timely, however, the 
Commission would still determine that the proposal was not 
consistent with the Exchange Act. See id.
---------------------------------------------------------------------------

    Additionally, 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 the long and short ETFs is 
similar in magnitude'' \95\--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.
---------------------------------------------------------------------------

    \95\ See supra notes 42-43 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.\96\ While CME and CFE 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 CFE 
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.
---------------------------------------------------------------------------

    \96\ 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 believes that, while the Commission should deny the 
proposed ETPs, it should regulate this environment to stop individual 
consumers from coming to financial harm.\97\
---------------------------------------------------------------------------

    \97\ See Fitzgerald Letter, supra note 12, at 2.
---------------------------------------------------------------------------

    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.\98\
---------------------------------------------------------------------------

    \98\ See NERA Letter, supra note 12, at 5-6.
---------------------------------------------------------------------------

    Several commenters assert that the Commission should deny the 
proposed ETPs to help protect the public from exposure to financial 
risk from an unregulated market.\99\ One commenter asserts that, while 
the risk posed by the cash-settled futures products is mostly 
contained, a bitcoin ETP would expose the public to significant 
financial risk due to a highly volatile, unregulated, and manipulated 
market in bitcoin as well as cryptocurrencies in general.\100\ Several 
commenters further believe that before the Commission approves a 
bitcoin ETP, there should be a proper legal and regulatory framework 
put in place by a suitable governmental body to prevent manipulation 
and protect the public.\101\
---------------------------------------------------------------------------

    \99\ See Desai Letter, supra note 12, at 1; Kumar Letter, supra 
note 12; Malkin Letter, supra note 12, at 2.
    \100\ See Desai Letter, supra note 12, at 1.
    \101\ See Desai Letter, supra note 12, at 1, 2; Kumar Letter, 
supra note 12; Malkin Letter, supra note 12, at 2.
---------------------------------------------------------------------------

2. Analysis
    The Exchange asserts that approval of the proposal would enhance 
competition among market participants, to the benefit of investors and 
that it would protect investors by permitting them to seek exposure to 
bitcoin through efficient and transparent ETPs.\102\ The Exchange also 
states that the Funds would enhance the security afforded to investors 
as compared to a direct investment in bitcoin.\103\ Other commenters 
suggest that the Commission should either seek to regulate the 
underlying bitcoin markets,\104\ or should seek to protect investors 
through disclosure requirements or suitability standards, rather than 
disapproving a bitcoin-ETP proposal.\105\ Several other commenters, 
however, assert that approval of a bitcoin-based ETP would expose 
investors to risks from unregulated bitcoin markets.\106\
---------------------------------------------------------------------------

    \102\ See Notice, supra note 5, 83 FR at 2710-11.
    \103\ See id. at 2710.
    \104\ See supra note 97 and accompanying text.
    \105\ See supra note 98 and accompanying text.
    \106\ See supra notes 99-101 and accompanying text.
---------------------------------------------------------------------------

    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.

[[Page 43932]]

D. Other Comments

    Comment letters also addressed the following topics:
     The desire of investors to gain access to bitcoin through 
an ETP; \107\
---------------------------------------------------------------------------

    \107\ See Kaleda Letter, supra note 12; Santos Letter, supra 
note 12; Netto Letter, supra note 12.
---------------------------------------------------------------------------

     investor understanding about bitcoin; \108\
---------------------------------------------------------------------------

    \108\ See Desai Letter, supra note 12, at 1; Kumar Letter, supra 
note 12.
---------------------------------------------------------------------------

     the valuation of bitcoin and price differentials across 
bitcoin trading venues; \109\
---------------------------------------------------------------------------

    \109\ See Kumar Letter, supra note 12; Malkin Letter, supra note 
12; Bhat Letter, supra note 12; GraniteShares Letter, supra note 12, 
at 6-7, 10-11.
---------------------------------------------------------------------------

     the intrinsic value of bitcoin; \110\
---------------------------------------------------------------------------

    \110\ See Ahn Letter, supra note 12.
---------------------------------------------------------------------------

     the reliability of bitcoin as a store of value; \111\
---------------------------------------------------------------------------

    \111\ See Otenyi Letter, supra note 12; Desai Letter, supra note 
12, at 1.
---------------------------------------------------------------------------

     the volatility of bitcoin prices; \112\
---------------------------------------------------------------------------

    \112\ See Desai Letter, supra note 12, at 1; Malkin Letter, 
supra note 12, at 1; Bhat Letter, supra note 12.
---------------------------------------------------------------------------

     the regulation of bitcoin spot markets; \113\
---------------------------------------------------------------------------

    \113\ See Barnwell Letter, supra note 12, at 2; Desai Letter, 
supra note 12, at 1; Fitzgerald Letter, supra note 12, at 1; Kumar 
Letter, supra note 12; Malkin Letter, supra note 12, at 1.
---------------------------------------------------------------------------

     the operation and valuation of the proposed ETPs; \114\
---------------------------------------------------------------------------

    \114\ See NERA Letter, supra note 12, at 1-3, 5; GraniteShares 
Letter, supra note 12, at 3, 5-6.
---------------------------------------------------------------------------

     arbitrage between the price of the Shares and the 
underlying portfolio instruments; \115\
---------------------------------------------------------------------------

    \115\ See GraniteShares Letter, supra note 12, at 8.
---------------------------------------------------------------------------

     the ability of the Funds to meet redemption orders; \116\
---------------------------------------------------------------------------

    \116\ See id. at 7.
---------------------------------------------------------------------------

     the custody of the assets of the Funds; \117\
---------------------------------------------------------------------------

    \117\ See id. at 3.
---------------------------------------------------------------------------

     the effect on the Funds of a fork in the bitcoin 
blockchain; \118\
---------------------------------------------------------------------------

    \118\ See id. at 6.
---------------------------------------------------------------------------

     the potential impact of Commission approval of the 
proposed ETP on the price of bitcoin and on the U.S. economy; \119\
---------------------------------------------------------------------------

    \119\ See Krohn Letter, supra note 12; Hales Letter, supra note 
12; Santos Letter, supra note 12.
---------------------------------------------------------------------------

     the leadership role that the United States might play in 
the cryptocurrency space if the Commission were to approve the proposed 
ETP; \120\
---------------------------------------------------------------------------

    \120\ See Hales Letter, supra note 12.
---------------------------------------------------------------------------

     the utility of a bitcoin ETP as a global tool for wealth 
distribution; \121\ and
---------------------------------------------------------------------------

    \121\ See Otenyi Letter, supra note 12.
---------------------------------------------------------------------------

     the legitimacy that Commission approval of the proposed 
ETP might confer upon bitcoin as a digital asset.\122\
---------------------------------------------------------------------------

    \122\ See Desai Letter, supra note 12, at 1, 2; Kumar Letter, 
supra note 12; Santos Letter, supra note 12.
---------------------------------------------------------------------------

    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.

E. The Exchange's Untimely Amendments to the Proposal

    As noted above, the deadline for rebuttal comments in response to 
the Order Instituting Proceedings was May 15, 2018.\123\ On August 21, 
2018, however, the Exchange filed Amendment No. 1 with the Commission, 
stating that the amendment ``amends and replaces in its entirety the 
proposal as originally submitted on January 5, 2018.'' Then, on August 
22, 2018, the Exchange filed Amendment No. 2 with the Commission, 
stating that the amendment ``amends and replaces in its entirety 
Amendment No. 1 as submitted on August 21, 2018, which amended and 
replaced in its entirety the proposal as originally submitted on 
January 5, 2018.'' Because these amendments were filed months after the 
deadline for comments on the proposed rule change, the Commission deems 
Amendment No. 1 and Amendment No. 2 to have been untimely filed.
---------------------------------------------------------------------------

    \123\ See supra note 10 and accompanying text.
---------------------------------------------------------------------------

    Even if these amendments had been timely filed, however, the 
Commission would still conclude that the Exchange had not met its 
burden to demonstrate that its proposal is consistent with Exchange Act 
Section 6(b)(5). The change that the amendments made to the proposal 
was to limit the investments of the Funds to Bitcoin Futures Contracts, 
which trade on CFE and CME, eliminating the Funds' ability to invest in 
listed or unlisted swaps on bitcoin or on the Benchmark Futures 
Contracts.\124\ Although CFE and CME are ``regulated markets,'' the 
record, as discussed above, does not provide a basis for the Commission 
to conclude that CFE and CME are regulated markets ``of significant 
size'' in Bitcoin Futures Contracts.\125\ Therefore, even if the 
Exchange's amendments were timely filed, the Commission would be unable 
to find, based on the record, that the Exchange had entered into a 
surveillance-sharing agreement with a regulated market of significant 
size related to bitcoin.\126\
---------------------------------------------------------------------------

    \124\ The Sponsor also represents in its August 20, 2018, 
comment letter that the Funds would invest only in Bitcoin Futures 
Contracts. See GraniteShares Letter, supra note 12, at 5.
    \125\ See supra notes 78-91 and accompanying text.
    \126\ Additionally, even though the Exchange's amendments would 
have removed the representation in the Notice that the Exchange 
expects significant liquidity to exist in the market for Bitcoin 
Futures Contracts, based on numerous conversations with market 
participants, issuers, and discussions with personnel of CFE, see 
supra notes 23 & 82 and accompanying text, the elimination of this 
representation would not alter the Commission's conclusion that the 
Exchange has not met its burden to demonstrate that CFE and CME are 
markets ``of significant size.''
---------------------------------------------------------------------------

F. 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).\127\
---------------------------------------------------------------------------

    \127\ 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).
---------------------------------------------------------------------------

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-CboeBZX-2018-001 is 
disapproved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\128\
---------------------------------------------------------------------------

    \128\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2018-18578 Filed 8-27-18; 8:45 am]
 BILLING CODE 8011-01-P



                                                                             Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices                                                        43923

                                                 For the Commission, by the Division of                 period within which to approve the                        Exchange has offered no record
                                               Trading and Markets, pursuant to delegated               proposed rule change, disapprove the                      evidence to demonstrate that bitcoin
                                               authority.16                                             proposed rule change, or institute                        futures markets are ‘‘markets of
                                               Eduardo A. Aleman,                                       proceedings to determine whether to                       significant size.’’ That failure is critical
                                               Assistant Secretary.                                     approve or disapprove the proposed                        because, as explained below, the
                                               [FR Doc. 2018–18570 Filed 8–27–18; 8:45 am]              rule change.7 On April 5, 2018, the                       Exchange has failed to establish that
                                               BILLING CODE 8011–01–P                                   Commission instituted proceedings                         other means to prevent fraudulent and
                                                                                                        under Section 19(b)(2)(B) of the                          manipulative acts and practices will be
                                                                                                        Exchange Act 8 to determine whether to                    sufficient, and therefore surveillance-
                                               SECURITIES AND EXCHANGE                                  approve or disapprove the proposed                        sharing with a regulated market of
                                               COMMISSION                                               rule change.9 The comment period and                      significant size related to bitcoin is
                                               [Release No. 34–83913; File No. SR–
                                                                                                        rebuttal comment period for the Order                     necessary to satisfy the statutory
                                               CboeBZX–2018–001]                                        Instituting Proceedings closed on May 1,                  requirement that the Exchange’s rules be
                                                                                                        2018, and May 15, 2018, respectively.10                   designed to prevent fraudulent and
                                               Self-Regulatory Organizations; Cboe                      Finally, on June 28, 2018, the                            manipulative acts and practices.14
                                               BZX Exchange, Inc.; Order                                Commission extended the period for
                                                                                                        consideration of the proposed rule                        II. Description of the Proposal
                                               Disapproving a Proposed Rule Change
                                               To List and Trade the Shares of the                      change to September 15, 2018.11 As of                        The Exchange proposes to list and
                                               GraniteShares Bitcoin ETF and the                        August 21, 2018, the Commission had                       trade the Shares under BZX Rule
                                               GraniteShares Short Bitcoin ETF                          received 15 comments on the proposed                      14.11(f)(4), which governs the listing
                                                                                                        rule change.12                                            and trading of Trust Issued Receipts on
                                               August 22, 2018.                                            This order disapproves the proposed                    the Exchange.15 Each Fund will be a
                                               I. Introduction                                          rule change. Although the Commission                      series of the Trust, and the Trust and the
                                                                                                        is disapproving this proposed rule                        Funds will be managed and controlled
                                                  On January 5, 2018, Cboe BZX                          change, the Commission emphasizes                         by GraniteShares Advisors LLC
                                               Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’)                 that its disapproval does not rest on an                  (‘‘Sponsor’’). Bank of New York Mellon
                                               filed with the Securities and Exchange                   evaluation of whether bitcoin, or                         will serve as administrator, custodian,
                                               Commission (‘‘Commission’’), pursuant                    blockchain technology more generally,                     and transfer agent for the Funds.
                                               to Section 19(b)(1) of the Securities                    has utility or value as an innovation or                  Foreside Fund Services, LLC will serve
                                               Exchange Act of 1934 (‘‘Exchange                         an investment. Rather, the Commission                     as the distributor of the Shares
                                               Act’’) 1 and Rule 19b–4 thereunder,2 a                   is disapproving this proposed rule                        (‘‘Distributor’’). The Trust will offer
                                               proposed rule change to list and trade                   change because, as discussed below, the                   Shares of the Funds for sale through the
                                               the shares (‘‘Shares’’) of the                           Exchange has not met its burden under                     Distributor in ‘‘Creation Units’’ in
                                               GraniteShares Bitcoin ETF (‘‘Long                        the Exchange Act and the Commission’s                     transactions with ‘‘Authorized
                                               Fund’’) and the GraniteShares Short                      Rules of Practice to demonstrate that its                 Participants’’ who have entered into
                                               Bitcoin ETF (‘‘Short Fund’’) (each a                     proposal is consistent with the                           agreements with the Distributor.16
                                               ‘‘Fund’’ and, collectively, ‘‘Funds’’)                   requirements of the Exchange Act                             According to the Exchange, the Long
                                               issued by the GraniteShares ETP Trust                    Section 6(b)(5), in particular the                        Fund’s investment objective will be to
                                               (‘‘Trust’’) 3 under BZX Rule 14.11(f)(4).4               requirement that a national securities                    seek results (before fees and expenses)
                                               The proposed rule change was                             exchange’s rules be designed to prevent                   that, both for a single day and over time,
                                               published for comment in the Federal                     fraudulent and manipulative acts and                      correspond to the performance of lead
                                               Register on January 18, 2018.5 The                       practices.13 Among other things, the                      month bitcoin futures contracts listed
                                               comment period for the Notice of
                                                                                                                                                                  and traded on the Cboe Futures
                                               Proposed Rule Change closed on                              7 See Securities Exchange Act Release No. 82759
                                                                                                                                                                  Exchange, Inc. (‘‘CFE’’) (‘‘Benchmark
                                               February 8, 2018.                                        (Feb. 22, 2018), 83 FR 8719 (Feb. 28, 2018).
                                                                                                                                                                  Futures Contracts’’). Conversely, the
                                                  On February 22, 2018, pursuant to                        8 15 U.S.C. 78s(b)(2)(B).
                                                                                                           9 See Securities Exchange Act Release No. 82995        Short Fund’s investment objective will
                                               Section 19(b)(2) of the Exchange Act,6
                                                                                                        (Apr. 5, 2018), 83 FR 15425 (Apr. 10, 2018) (‘‘Order      be to seek results (before fees and
                                               the Commission designated a longer                       Instituting Proceedings’’).                               expenses) that, on a daily basis,
                                                                                                           10 See id. at 15426.
                                                 1 15  U.S.C. 78s(b)(1).
                                                                                                                                                                  correspond to the inverse (¥1x) of the
                                                                                                           11 See Securities Exchange Act Release No. 83548
                                                 2 17  CFR 240.19b–4.                                                                                             daily performance of the Benchmark
                                                                                                        (June 28, 2018), 83 FR 31246 (July 3, 2018).
                                                  3 The Trust filed a registration statement with the      12 See Letters from Anita Desai (Apr. 6, 2018)         Futures Contracts for a single day. Each
                                               Commission on December 15, 2017. See                     (‘‘Desai Letter’’); Ed Kaleda (Apr. 6, 2018) (‘‘Kaleda    Fund generally intends to invest
                                               Registration Statement on Form S–1, dated                Letter’’); Don Krohn (Apr. 7, 2018) (‘‘Krohn Letter’’);   substantially all of its assets in the
                                               December 15, 2017 (File No. 333–222109)                  Adam Malkin (Apr. 8, 2018) (‘‘Malkin Letter’’);
                                               (‘‘Registration Statement’’). The Registration
                                                                                                                                                                  Benchmark Futures Contracts and cash
                                                                                                        Shravan Kumar (Apr. 11, 2018) (‘‘Kumar Letter’’);
                                               Statement ‘‘will be effective as of the date of any      David Barnwell (Apr. 12, 2018) (‘‘Barnwell Letter’’);
                                                                                                                                                                  and cash equivalents (which would be
                                               offer and sale pursuant to the Registration              Louise Fitzgerald (Apr. 18, 2018) (‘‘Fitzgerald           used to collateralize the Benchmark
                                               Statement.’’ Notice, infra note 5, 83 FR at 2705 n.7.    Letter’’); Sharon Brown-Hruska, Managing Director,        Futures Contracts), but may invest in
                                                  4 On August 21, 2018, the Exchange filed
                                                                                                        and Trevor Wagener, Consultant, NERA Economic             other U.S. exchange listed bitcoin
                                               Amendment No. 1 to the proposal, and on August           Consulting (May 18, 2018) (‘‘NERA Letter’’); Alex
                                               22, 2018, the Exchange filed Amendment No. 2 to          Hales (July 8, 2018) (‘‘Hales Letter’’); Anthony C.
                                                                                                                                                                  futures contracts, as available (together
                                               the proposal. As discussed below, however, see           Otenyi (July 18, 2018) (‘‘Otenyi Letter’’); V.K. Bhat
                                               Section III.E, infra, the Commission views these         (July 28, 2018) (‘‘Bhat Letter’’); Sami Santos (Aug.        14 See  infra notes 31–33 and accompanying text.
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                                               amendments as untimely. Furthermore, even if             7, 2018) (‘‘Santos Letter’’); Arthur Netto (Aug. 9,         15 BZX   Rule 14.11(f)(4) applies to Trust Issued
                                               these amendments had been timely filed, they             2018) (‘‘Netto Letter’’); Sam M. Ahn (Aug. 17, 2018)      Receipts that invest in ‘‘Financial Instruments.’’
                                               would not alter the Commission’s conclusion that         (‘‘Ahn Letter’’); and William Rhind, CEO,                 The term ‘‘Financial Instruments,’’ as defined in
                                               the Exchange’s proposal is not consistent with the       GraniteShares (Aug. 20, 2018) (‘‘GraniteShares            BZX Rule 14.11(f)(4)(A)(iv), means any combination
                                               Exchange Act. See id.                                    Letter’’). All comments on the proposed rule change       of investments, including cash; securities; options
                                                  5 See Securities Exchange Act Release No. 82484       are available on the Commission’s website at:             on securities and indices; futures contracts; options
                                               (Jan. 11, 2018), 83 FR 2704 (Jan. 18, 2018)              https://www.sec.gov/comments/sr-cboebzx-2018-             on futures contracts; forward contracts; equity caps,
                                               (‘‘Notice’’).                                            001/cboebzx2018001.htm.                                   collars, and floors; and swap agreements.
                                                  6 15 U.S.C. 78s(b)(2).                                   13 See 15 U.S.C. 78f(b)(5).                              16 See Notice, supra note 5, 83 FR at 2707.




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                                               43924                        Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices

                                               with Benchmark Futures Contracts,                       physical commodity such as the discovery of           effect, and a legal analysis of its
                                               collectively, ‘‘Bitcoin Futures                         new sources of supply or significant                  consistency with applicable
                                               Contracts’’).17                                         disruptions at mining facilities that supply          requirements must all be sufficiently
                                                  The Exchange represents that no more                 the commodity that simply are inapplicable
                                                                                                       as it relates to bitcoin. Further, the Exchange
                                                                                                                                                             detailed and specific to support an
                                               than 10% of the net assets of a Fund in                 believes that the fragmentation across bitcoin        affirmative Commission finding,26 and
                                               the aggregate invested in Bitcoin                       exchanges, the relatively slow speed of               any failure of an SRO to provide this
                                               Futures Contracts shall consist of                      transactions, and the capital necessary to            information may result in the
                                               Bitcoin Futures Contracts whose                         maintain a significant presence on each               Commission not having a sufficient
                                               principal market is neither a member of                 exchange make manipulation of bitcoin                 basis to make an affirmative finding that
                                               the Intermarket Surveillance Group nor                  prices through continuous trading activity            a proposed rule change is consistent
                                               a market with which the Exchange does                   unlikely. Moreover, the linkage between the           with the Exchange Act and the
                                                                                                       bitcoin markets and the presence of
                                               not have a comprehensive surveillance-                  arbitrageurs in those markets means that the
                                                                                                                                                             applicable rules and regulations.27
                                               sharing agreement.18 Further, according                 manipulation of the price of bitcoin price on         Moreover, ‘‘unquestioning reliance’’ on
                                               to the Notice, in the event that position,              any single venue would require manipulation           an SRO’s representations in a proposed
                                               price, or accountability limits are                     of the global bitcoin price in order to be            rule change is not sufficient to justify
                                               reached with respect to Bitcoin Futures                 effective. Arbitrageurs must have funds               Commission approval of a proposed rule
                                               Contracts, each Fund may invest in U.S.                 distributed across multiple bitcoin exchanges         change.28
                                               listed swaps on bitcoin or the                          in order to take advantage of temporary price
                                                                                                       dislocations, thereby making it unlikely that         B. Preventing Fraudulent and
                                               Benchmark Futures Contracts (‘‘Listed                                                                         Manipulative Practices
                                                                                                       there will be strong concentration of funds on
                                               Bitcoin Swaps’’). The Notice also states                any particular bitcoin exchange. As a result,
                                               that, in the event that position, price, or             the potential for manipulation on a particular        1. Applicable Legal Standard
                                               accountability limits are reached with                  bitcoin exchange would require overcoming                To approve the Exchange’s proposal
                                               respect to Listed Bitcoin Swaps, each                   the liquidity supply of such arbitrageurs who         to list the Shares, the Commission must
                                               Fund may invest in over-the-counter                     are effectively eliminating any cross-market          be able to find that the proposal is,
                                               swaps on bitcoin or the Benchmark                       pricing differences. For all of these reasons,
                                                                                                                                                             consistent with Exchange Act Section
                                               Futures Contracts (‘‘OTC Bitcoin                        bitcoin is not particularly susceptible to
                                                                                                       manipulation, especially as compared to               6(b)(5), ‘‘designed to prevent fraudulent
                                               Swaps,’’ and together with Listed                       other approved ETP reference assets.21                and manipulative acts and practices.’’ 29
                                               Bitcoin Swaps, collectively, ‘‘Bitcoin                                                                        As the Commission recently explained
                                               Swaps’’).19                                                The Notice also asserts that the                   in an order disapproving a listing
                                                  The Exchange asserts that ‘‘policy                   susceptibility of the underlying futures              proposal for the Winklevoss Bitcoin
                                               concerns related to an underlying                       contracts to manipulation is mitigated                Trust (‘‘Winklevoss Order’’), although
                                               reference asset and its susceptibility to               by the ‘‘significant liquidity that the               surveillance-sharing agreements are not
                                               manipulation are mitigated as it relates                Exchange expects to exist in the market               the exclusive means by which an
                                               to bitcoin because the very nature of the               for Bitcoin Futures Contracts.’’ 22 The               exchange-traded product (‘‘ETP’’) listing
                                               bitcoin ecosystem makes manipulation                    Notice asserts that the market for bitcoin            exchange can meet its obligations under
                                               of bitcoin difficult.’’ 20 According to the             futures will be ‘‘sufficiently liquid to              Exchange Act Section 6(b)(5), such
                                               Exchange:                                               support numerous ETPs shortly after                   agreements are a widely used means for
                                                                                                       launch,’’ citing ‘‘numerous                           exchanges that list ETPs to meet their
                                                  The geographically diverse and continuous
                                               nature of bitcoin trading makes it difficult            conversations with market participants,               obligations, and the Commission has
                                               and prohibitively costly to manipulate the              issuers, and discussions with personnel               historically recognized their
                                               price of bitcoin and, in many instances, that           of CFE.’’23                                           importance.30
                                               the bitcoin market is generally less                                                                             The Commission has therefore
                                               susceptible to manipulation than the equity,            III. Discussion
                                                                                                                                                             determined that, if the listing exchange
                                               fixed income, and commodity futures                     A. The Applicable Standard for Review                 for an ETP fails to establish that other
                                               markets. There are a number of reasons this
                                               is the case, including that there is not inside            The Commission must consider                       means to prevent fraudulent and
                                               information about revenue, earnings,                    whether the Exchange’s proposal is                    manipulative acts and practices will be
                                               corporate activities, or sources of supply; it          consistent with Exchange Act Section                  sufficient, the listing exchange must
                                               is generally not possible to disseminate false          6(b)(5), which requires, in relevant part,            enter into a surveillance-sharing
                                               or misleading information about bitcoin in              that the rules of a national securities               agreement with a regulated market of
                                               order to manipulate; manipulation of the                exchange be designed ‘‘to prevent                     significant size because ‘‘[s]uch
                                               price on any single venue would require                                                                       agreements provide a necessary
                                               manipulation of the global bitcoin price in
                                                                                                       fraudulent and manipulative acts and
                                                                                                       practices’’ and ‘‘to protect investors and            deterrent to manipulation because they
                                               order to be effective; a substantial over-the-
                                               counter market provides liquidity and shock-            the public interest.’’ 24 Under the                   facilitate the availability of information
                                               absorbing capacity; bitcoin’s 24/7/365 nature           Commission’s Rules of Practice, the                   needed to fully investigate a
                                               provides constant arbitrage opportunities               ‘‘burden to demonstrate that a proposed               manipulation if it were to occur.’’ 31
                                               across all trading venues; and it is unlikely           rule change is consistent with the
                                               that any one actor could obtain a dominant              Exchange Act and the rules and
                                                                                                                                                               26 See   id.
                                               market share.                                           regulations issued thereunder . . . is on
                                                                                                                                                               27 See   id.
                                                  Further, bitcoin is arguably less susceptible                                                                 28 See Susquehanna Int’l Group, LLP v. Securities

                                               to manipulation than other commodities that
                                                                                                       the self-regulatory organization [‘SRO’]              and Exchange Commission, 866 F.3d 442, 447 (D.C.
                                               underlie ETPs; there may be inside                      that proposed the rule change.’’ 25                   Cir. 2017).
                                               information relating to the supply of the                  The description of a proposed rule                    29 15 U.S.C. 78f(b)(5).
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                                                                                                       change, its purpose and operation, its                   30 Order Setting Aside Action by Delegated

                                                  17 See id. at 2705–06. The Bitcoin Futures
                                                                                                                                                             Authority and Disapproving a Proposed Rule
                                                                                                         21 Id.
                                                                                                                                                             Change, as Modified by Amendments No. 1 and 2,
                                               Contracts include the bitcoin futures contracts                                                               To List and Trade Shares of the Winklevoss Bitcoin
                                               listed and traded on the Chicago Mercantile               22 Id.
                                                                                                                                                             Trust, Securities Exchange Act Release No. 83723
                                               Exchange, Inc. (‘‘CME’’). See id. at 2705.                23 Id.at 2710.                                      (July 26, 2018), 83 FR 37579, 37580 (Aug. 1, 2018)
                                                  18 See id. at 2709 n.26.                               24 15U.S.C. 78f(b)(5).                              (SR–BatsBZX–2018–30).
                                                  19 See id. at 2706.                                    25 Rule 700(b)(3), Commission Rules of Practice,       31 Id. (citing Amendment to Rule Filing
                                                  20 Notice, supra note 5, 83 FR at 2706.              17 CFR 201.700(b)(3).                                 Requirements for Self-Regulatory Organizations



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                                                                             Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices                                                       43925

                                               Accordingly, a surveillance-sharing                       exchanges in the Intermarket                             Commission in those orders did not
                                               agreement with a regulated market of                      Surveillance Group.35 While the                          explicitly undertake an analysis of
                                               significant size is required to ensure                                                                             whether the related futures markets
                                               that, in compliance with the Exchange                        35 See, e.g., Securities Exchange Act Release No.
                                                                                                                                                                  were of ‘‘significant size,’’ the exchanges
                                               Act, the proposal is ‘‘designed to                        53105 (Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19,
                                                                                                         2006) (SR–Amex–2005–059) (approval order noted           proposing commodity-futures ETPs on a
                                               prevent fraudulent and manipulative                       that Amex’s ‘‘Information Sharing Agreement with         single reference asset or benchmark
                                               acts and practices.’’ 32 In this context,                 the NYMEX and the CBOT and [Amex’s]                      generally made representations
                                               the Commission has interpreted the                        Memorandum of Understanding with the LME,
                                                                                                                                                                  regarding the trading volume of the
                                               terms ‘‘significant market’’ and ‘‘market                 along with the Exchange’s participation in the ISG,
                                                                                                         in which the CBOT participates . . . create the
                                               of significant size’’ to include a market                 basis for the Amex to monitor for fraudulent and         other trading venues on which current Index
                                               (or group of markets) as to which (a)                     manipulative practices in the trading of the             components are traded are members of the ISG’’);
                                               there is a reasonable likelihood that a                   Shares’’); Securities Exchange Act Release No.           Securities Exchange Act Release No. 57838 (May
                                               person attempting to manipulate the                       53582 (Mar. 31, 2006), 71 FR 17510, 17518 (Apr.          20, 2008), 73 FR 30649, 30652, (May 28, 2008) (SR–
                                                                                                         6, 2006) (SR–Amex–2005–127) (approval order              NYSEArca–2008–09) (approval order noted that
                                               ETP would also have to trade on that                      noted that Amex’s ‘‘comprehensive surveillance           NYSEArca ‘‘may obtain information via the ISG
                                               market to successfully manipulate the                     sharing agreements with the NYMEX and ICE                from other exchanges who are members or affiliate
                                               ETP, so that a surveillance-sharing                       Futures . . . create the basis for the Amex to           members of the ISG,’’ that NYSEArca ‘‘has an
                                               agreement would assist the ETP listing                    monitor for fraudulent and manipulative practices        information sharing agreement in place with ICE
                                                                                                         in the trading of the Units’’ and that ‘‘[s]hould the    Futures,’’ and that NYSEArca will file a proposed
                                               market in detecting and deterring                         USOF invest in oil derivatives traded on markets         rule change ‘‘if the Fund invests in EUAs . . . that
                                               misconduct, and (b) it is unlikely that                   such as the Singapore Oil Market, the Exchange           constitute more than 10% of the weight of the Fund
                                               trading in the ETP would be the                           represents that it will file a proposed rule change
                                                                                                                                                                  where the principal trading market for such
                                               predominant influence on prices in that                   pursuant to Section 19(b) of the [Exchange] Act,
                                                                                                                                                                  component is not a member or affiliate member of
                                                                                                         seeking Commission approval of [Amex’s]
                                               market.33 Thus, a surveillance-sharing                    surveillance agreement with such market’’);
                                                                                                                                                                  the ISG or where the Exchange does not have a
                                               agreement must be entered into with a                                                                              comprehensive surveillance sharing agreement with
                                                                                                         Securities Exchange Act Release No. 54013 (June
                                                                                                                                                                  such market’’); Securities Exchange Act Release No.
                                               ‘‘significant market’’ to assist in                       16, 2006), 71 FR 36372, 36378–79 (June 26, 2006)
                                                                                                                                                                  63635 (Jan. 3, 2011), 76 FR 1489, 1491 (Jan. 10,
                                                                                                         (NYSE–2006–17) (approval order noted that NYSE’s
                                               detecting and deterring manipulation of                   ‘‘comprehensive surveillance sharing agreements          2011) (NYSEArca–2010–103) (approval order noted
                                               the ETP, because someone attempting to                    with the NYMEX, the Kansas City Board of Trade,          that ‘‘with respect to Fund components traded on
                                               manipulate the ETP is reasonably likely                   ICE Futures, and the LME . . . create the basis for      exchanges, not more than 10% of the weight of such
                                                                                                         the NYSE to monitor for fraudulent and                   components in the aggregate will consist of
                                               to also engage in trading activity on that                                                                         components whose principal trading market is not
                                                                                                         manipulative trading practices’’ and that ‘‘all of the
                                               ‘‘significant market.’’                                   other trading venues on which current Index              a member of the Intermarket Surveillance Group or
                                                  Although the Winklevoss Order                          components and CERFs are traded are members of           is a market with which [NYSEArca] does not have
                                               applied these standards to a commodity-                   the ISG’’); Securities Exchange Act Release No.          a comprehensive surveillance sharing agreement’’);
                                                                                                         54450 (Sept. 14, 2006), 71 FR 55230, 55236 (Sept.        Securities Exchange Act Release No. 66553 (Mar. 9,
                                               trust ETP based on bitcoin, the                                                                                    2012), 77 FR 15440, 15444 (Mar. 15, 2012) (SR–
                                                                                                         21, 2006) (SR–Amex–2006–44) (approval order
                                               Commission believes that these                            noted that ‘‘CME, where the futures contract for         NYSEArca–2012–04) (approval order noted that
                                               standards are also appropriate for an                     each of the current Index components is traded, is       NYSEArca ‘‘can obtain market surveillance
                                               ETP based on bitcoin futures. When                        a member of the ISG’’ and that in the event of new       information, including customer identity
                                                                                                         fund investments in ‘‘foreign currency futures           information, from ICE [Futures] and CME, which
                                               approving the first commodity-futures                                                                              are members of the Intermarket Surveillance
                                                                                                         contracts traded on futures exchanges other than
                                               ETP, the Commission specifically noted                    CME, [Amex] must have a CSSA with that futures           Group’’); Securities Exchange Act Release No.
                                               that ‘‘[i]nformation sharing agreements                   exchange or the futures exchange must be an ISG          67223 (June 20, 2012), 77 FR 38117, 38124 (June 26,
                                               with primary markets trading index                        member’’); Securities Exchange Act Release No.           2012) (NYSEAmex–2012–24) (approval order noted
                                                                                                         55029 (Dec. 29, 2006), 72 FR 806, 809–10 (Jan. 8,        that NYSEAmex ‘‘can obtain market surveillance
                                               components underlying a derivative                                                                                 information, including customer identity
                                                                                                         2007) (SR–Amex–2006–76) (approval order noted
                                               product are an important part of a self-                  that Amex’s ‘‘Comprehensive Surveillance Sharing         information, with respect to transactions occurring
                                               regulatory organization’s ability to                      Agreement with the ICE Futures, LME, and                 on exchanges that are members of ISG, including
                                               monitor for trading abuses in derivative                  NYMEX, . . . and membership in the Intermarket           CME, CBOT, COMEX, NYMEX . . . and ICE
                                                                                                         Surveillance Group (‘ISG’) creates the basis for the     Futures US,’’ that NYSEAmex ‘‘currently has in
                                               products.’’ 34 And the Commission’s                                                                                place a comprehensive surveillance sharing
                                                                                                         Amex to monitor fraudulent and manipulative
                                               approval orders for commodity-futures                     practices in the trading of the Shares’’); Securities    agreement with each of CME, NYMEX, ICE Futures
                                               ETPs consistently note the ability of an                  Exchange Act Release No. 56880 (Dec. 3, 2007), 72        Europe, and KCBOT,’’ and that ‘‘while the Fund
                                               ETP listing exchange to share                             FR 69259, 69261 (Dec. 7, 2007) (SR–Amex–2006–            may invest in futures contracts or options on
                                                                                                         96) (approval order noted that Amex has                  futures contracts which trade on markets that are
                                               surveillance information either through                                                                            not members of ISG or with which [NYSEAmex]
                                                                                                         ‘‘information sharing agreements with the
                                               surveillance-sharing agreements or                        InterContinental Exchange, the Chicago Mercantile        does not have in place a comprehensive
                                               through membership by the listing                         Exchange, and the New York Mercantile Exchange           surveillance sharing agreement, such instruments
                                               exchange and the relevant futures                         and may obtain market surveillance information           will never represent more than 10% of the Fund’s
                                                                                                         from other exchanges, including the Chicago Board        holdings’’); Securities Exchange Act Release No.
                                                                                                         of Trade, London Metals Exchange, and the New            73561 (Nov. 7, 2014), 79 FR 68329, 68330 (Nov. 14,
                                               Regarding New Derivative Securities Products,             York Board of Trade through the Intermarket              2014) (NYSEArca–2014–102) (approval order noted
                                               Securities Exchange Act Release No. 40761 (Dec. 8,        Surveillance Group’’); Securities Exchange Act           that ‘‘FINRA may obtain trading information
                                               1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998)          Release No. 55632 (Apr. 13, 2007), 72 FR 19987,          regarding trading in the Shares and Coal Futures
                                               (File No. S7–13–98)).                                     19988 (Apr. 20, 2007) (SR–Amex–2006–112)                 from such markets and other entities that are
                                                  32 15 U.S.C. 78f(b)(5).
                                                                                                         (approval order noted that Amex ‘‘currently has in       members of ISG or with which [NYSEArca] has in
                                                  33 See Winklevoss Order, supra note 30, 83 FR at
                                                                                                         place an Information Sharing Agreement with the          place a comprehensive surveillance sharing
                                               37594. This definition is illustrative and not            NYMEX and ICE Futures’’ and that if ‘‘USNG               agreement’’ and that ‘‘CME is a member of the
                                               exclusive. There could be other types of ‘‘significant    invests in Natural Gas Interests traded on other         ISG’’); Securities Exchange Act Release No. 82390
                                               markets’’ and ‘‘markets of significant size,’’ but this   exchanges, the Amex represented that it will seek        (Dec. 22, 2017), 82 FR 61625, 61631, 61634 (Dec.
                                               definition is an example that will provide guidance       to enter into Information Sharing arrangements with      28, 2017) (NYSEArca–2017–107) (approval order
                                               to market participants. See id.                           those particular exchanges’’); Securities Exchange       noted that NYSEArca ‘‘may obtain information
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                                                  34 Securities Exchange Act Release No. 53105           Act Release No. 57456 (Mar. 7, 2008), 73 FR 13599,       regarding trading in the Shares and Freight Futures
                                               (Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006)         13601 (Mar. 13, 2008) (NYSEArca–2007–91)                 from markets and other entities that are members
                                               (SR–Amex–2005–059). Additionally, the                     (approval order noted that NYSEArca ‘‘can obtain         of ISG or with which [NYSEArca] has in place a
                                               Winklevoss Order discusses the broader history and        market surveillance information, including               CSSA’’ and that ‘‘not more than 10% of the net
                                               importance of surveillance-sharing agreements             customer identity information, with respect to           assets of the Fund in the aggregate invested in
                                               relating to derivative securities products, quoting       transactions occurring on the NYM, the Kansas City       Freight Futures or options on Freight Futures shall
                                               Commission statements dating from 1990 on. See            Board of Trade, ICE, and the LME, pursuant to its        consist of derivatives whose principal market is not
                                               Winklevoss Order, supra note 30, 83 FR at 37592–          comprehensive information sharing agreements             a member of the ISG or is a market with which
                                               94.                                                       with each of those exchanges’’ and that ‘‘[a]ll of the   [NYSEArca] does not have a CSSA’’).



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                                               43926                         Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices

                                               underlying futures markets,36 and the
                                                                                                        FR 807, 808 n.11 (Jan. 6, 2011)); Securities             2011), 76 FR 45885, 45886 n.10, 45888 n.20, 45890
                                                 36 See, e.g., Securities Exchange Act Release No.      Exchange Act Release No. 65134 (Aug. 15, 2011),          n.24 (Aug. 1, 2011)); Securities Exchange Act
                                               62213 (June 3, 2010), 75 FR 32828 (June 9, 2010)         76 FR 52034 (Aug. 19, 2011) (SR–NYSEArca–2011–           Release No. 66553 (Mar. 9, 2012), 77 FR 15440
                                               (SR–NYSEArca–2010–22) (notice of proposed rule           23) (notice of proposed rule change included NYSE        (Mar. 15, 2012) (SR–NYSEArca–2012–04) (notice of
                                               change included NYSE Arca’s representations that:        Arca’s representations that: (i) As of January 31,       proposed rule change included NYSE Arca’s
                                               (i) Corn futures volume on Chicago Board of Trade        2011, there was VIX futures contracts open interest      representations that: (i) As of December 30, 2011,
                                               (‘‘CBOT’’) for 2008 and 2009 (through November 30,       on CFE of 163,396 contracts with a value of open         open interest in AUD/USD futures contracts traded
                                               2009) was 59,934,739 contracts and 47,754,866            interest of $3,461,984,900; (ii) total CFE trading       on CME was $11.56 billion, and AUD/USD futures
                                               contracts, respectively, and as of March 16, 2010,       volume in 2010 in VIX futures contracts was              contracts had an average daily trading volume in
                                               CBOT open interest for corn futures was 1,118,103        4,402,616 contracts, with average daily volume of        2011 of 123,006 contracts; (ii) as of December 30,
                                               contracts, and open interest for near month futures      17,741 contracts; and (iii) total volume year-to-date    2011, open interest in CAD/USD futures contracts
                                               was 447,554 contracts; (ii) the corn futures contract    (through January 31, 2011) was 779,493 contracts,        traded on CME was $11.66 billion, and CAD/USD
                                               price was $18,337.50 ($3.6675 per bushel and 5,000       with average daily volume of 38,975 contracts,           futures contracts had an average daily trading
                                               bushels per contract), and the approximate value of      Securities Exchange Act Release No. 64470 (May           volume in 2011 of 89,667 contracts; (iii) as of
                                               all outstanding contracts was $20.5 billion; (iii) as    11, 2011), 76 FR 28493, 28494 n.12 (May 17, 2011));      December 30, 2011, open interest in CHF/USD
                                               of March 16, 2010, open interest in corn swaps           Securities Exchange Act Release No. 65136 (Aug.          futures contracts traded on CME was $4.99 billion,
                                               cleared on CBOT was approximately 2,100                  15, 2011), 76 FR 52037 (Aug. 19, 2011) (SR–              and CHF/USD futures contracts had an average
                                               contracts, with an approximate value of $38.5            NYSEArca–2011–24) (notice of proposed rule               daily trading volume in 2011 of 40,955 contracts;
                                               million; and (iv) the position limits for all months     change included NYSE Arca’s representations that:        (iv) futures contracts based on the U.S. Dollar Index
                                               is 22,000 corn contracts, and the total value of         (i) Natural gas futures volume on NYMEX for 2009         (‘‘USDX’’) were listed on November 20, 1985, and
                                               contracts if position limits were reached would be       and 2010 (through December 31, 2010) was                 options on the USDX futures contracts began
                                               approximately $403.5 million (based on the               47,864,639 contracts and 64,350,673 contracts,           trading on September 3, 1986; (v) as of December
                                               $18,337.50 contract price), Securities Exchange Act      respectively; (ii) as of December 31, 2010, NYMEX        30, 2011, open interest in USDX futures contracts
                                               Release No. 61954 (Apr. 21, 2010), 75 FR 22663,          open interest for all natural gas futures was 772,104    traded on ICE Futures was $5.44 billion, and USDX
                                               22664 n.10 (Apr. 29, 2010)); Securities Exchange         contracts, and the approximate value of all              futures contracts had an average daily trading
                                               Act Release No. 63610 (Dec. 27, 2010), 76 FR 199         outstanding contracts was $35,664,257,310 billion        volume in 2011 of 30,341 contracts; (vi) as of
                                               (Jan. 3, 2011) (SR–NYSEArca–2010–101) (notice of         [sic]; (iii) open interest as of December 31, 2010 for   December 30, 2011, open interest in EUR/USD
                                               proposed rule change included NYSE Arca’s                the near month contract was 166,757 contracts and        futures contracts traded on CME was $46.12 billion,
                                               representations that: (i) As of June 14, 2010, there     the near month contract value was $7,345,645,850         and EUR/USD futures contracts had an average
                                               was VIX futures contracts open interest on CFE of        ($4.405 per MMBtu and 10,000 MMBtu per                   daily trading volume in 2011 of 336,947 contracts;
                                               88,366 contracts, with a contract price of $25.55        contract); (iv) the position accountability limits for   and (vii) as of December 30, 2011, open interest in
                                               and value of open interest of $2,257,751,300; (ii)       all months is 12,000 natural gas contracts and the       JPY/USD futures contracts traded on CME was
                                               total CFE trading volume in 2009 in VIX futures          total value of contracts if position accountability      $25.75 billion, and JPY/USD futures contracts had
                                               contracts was 1,143,612 contracts, with average          limits were reached would be approximately               an average daily trading volume in 2011 of 113,476
                                               daily volume of 4,538 contracts; and (iii) total         $528,600,000 million (based on the $4.405 contract       contracts, Securities Exchange Act Release No.
                                               volume year-to-date (through May 31, 2010) was           price); and (v) as of December 31, 2010, open            66180 (Jan. 18, 2012), 77 FR 3532, 3534–35 (Jan. 24,
                                               1,399,709 contracts, with average daily volume of        interest in natural gas swaps cleared on NYMEX           2012)); Securities Exchange Act Release No. 68165
                                               13,458 contracts, Securities Exchange Act Release
                                                                                                        was approximately 1,493,013 contracts, with an           (Nov. 6, 2012), 77 FR 67707 (Nov. 13, 2012) (SR–
                                               No. 63317 (Nov. 16, 2010), 75 FR 71158, 71159 n.9
                                                                                                        approximate value of $16,463,384,003 ($4.411 per         NYSEArca–2012–102) (notice of proposed rule
                                               (Nov. 22, 2010)); Securities Exchange Act Release
                                                                                                        MMBtu and 2,500 MMBtu per contract), Securities          change included NYSE Arca’s representations that:
                                               No. 63753 (Jan. 21, 2011), 76 FR 4963 (Jan. 27,
                                                                                                        Exchange Act Release No. 64464 (May 11, 2011), 76        (i) Gold and silver futures contracts traded on
                                               2011) (SR–NYSEArca–2010–110) (notice of
                                                                                                        FR 28483, 28484 n.11 (May 17, 2011)); Securities         Commodity Exchange, Inc. (‘‘COMEX’’) are the
                                               proposed rule change included NYSE Arca’s
                                                                                                        Exchange Act Release No. 65344 (Sept. 15, 2011),         global benchmark contracts and most liquid futures
                                               representations that: (i) Natural gas futures volume
                                                                                                        76 FR 58549 (Sept. 21, 2011) (SR–NYSEArca–2011–          contracts in the world for each respective
                                               on New York Mercantile Exchange (‘‘NYMEX’’) for
                                                                                                        48) (notice of proposed rule change included NYSE        commodity; (ii) as of March 15, 2012, open interest
                                               2009 and 2010 (through October 29, 2010) was
                                                                                                        Arca’s representations that: (i) Wheat futures           in gold futures contracts and silver futures contracts
                                               47,864,639 contracts and 52,490,180 contracts,
                                                                                                        volume on CBOT for 2010 and 2011 (through April          traded on CME was $23.7 billion and $8.5 billion,
                                               respectively; (ii) as of October 29, 2010, NYMEX
                                               open interest for natural gas futures was 794,741        29, 2011) was 23,058,783 contracts and 8,860,135         respectively; (iii) gold futures contracts and silver
                                               contracts, and open interest for near month futures      contracts, respectively; (ii) as of April 29, 2011,      futures contracts had an average daily trading
                                               was 47,313 contracts; (iii) the contract price was       open interest for wheat futures was 456,851              volume in 2011 of 138,964 contracts and 63,913
                                               $40,380 ($4.038 per MMBtu and 10,000 MMBtu per           contracts; (iii) the wheat contract price was            contracts, respectively; (iv) CME constitutes the
                                               contract), and the approximate value of all              $40,062.50 (801.25 cents per bushel and 5,000            largest regulated foreign exchange marketplace in
                                               outstanding contracts was $32.1 billion; (iv) the        bushels per contract), and the approximate value of      the world, with over $100 billion in daily liquidity;
                                               position limits for all months is 12,000 natural gas     all outstanding contracts was $18.3 billion; (iv) the    (v) as of March 15, 2012, open interest in Euro
                                               contracts and the total value of contracts if position   position limits for all months was 6,500 wheat           futures contracts and Yen futures contracts traded
                                               limits were reached would be approximately               contracts and the total value of contracts if position   on CME and, for Dollar futures contracts, on ICE
                                               $484.56 million (based on the $40,380 contract           limits were reached would be approximately $260.4        Futures, were $42.7 billion, $20.8 billion, and $4.8
                                               price); and (v) as of October 29, 2010, open interest    million (based on the $40,062.50 contract price); (v)    billion, respectively; and (vi) Euro futures contracts,
                                               in natural gas swaps cleared on NYMEX was                soybean futures volume on CBOT for 2010 and 2011         Yen futures contracts, and Dollar futures contracts
                                               approximately 2,618,092 contracts, with an               (through April 29, 2011) was 36,962,868 contracts        had an average daily trading volume in 2011 of
                                               approximate value of $26.4 billion ($4.038 per           and 16,197,385 contracts, respectively; (vi) as of       325,103, 106,824, and 27,258 contracts,
                                               MMBtu and 2,500 MMBtu per contract), Securities          April 29, 2011, open interest for soybean futures        respectively, Securities Exchange Act Release No.
                                               Exchange Act Release No. 63493 (Dec. 9, 2010), 75        was 572,959 contracts; (vii) the soybean contract        67882 (Sept. 18, 2012), 77 FR 58881, 58883 n.10,
                                               FR 78290, 78291 n.11 (Dec. 15, 2010)); Securities        price was $69,700.00 (1394 cents per bushel and          58883 n.14 (Sept. 24, 2012)); Securities Exchange
                                               Exchange Act Release No. 63869 (Feb. 8, 2011), 76        5,000 bushels per contract), and the approximate         Act Release No. 81686 (Sept. 22, 2017), 82 FR
                                               FR 8799 (Feb. 15, 2011) (SR–NYSEArca–2010–119)           value of all outstanding contracts was $39.9 billion;    45643, 45646 (Sept. 29, 2017) (SR–NYSEArca–
                                               (notice of proposed rule change included NYSE            (viii) the position limits for all months is 6,500       2017–05) (order approving the listing and trading of
                                               Arca’s representations that: (i) WTI crude oil futures   soybean contracts and the total value of contracts       the Direxion Daily Crude Oil Bull 3x Shares and
                                               volume on NYMEX for 2009 and 2010 (through               if position limits were reached would be                 Direxion Daily Crude Oil Bear 3x Shares, citing to
                                               November 30, 2010) was 137,352,118 contracts and         approximately $453 million (based on the                 NYSE Arca’s representations that: (i) The oil
                                               156,155,620 contracts, respectively; (ii) as of          $69,700.00 contract price); (ix) sugar futures volume    contract market was of significant size and
                                               November 30, 2010, NYMEX open interest for WTI           on ICE Futures for 2010 and 2011 (through April          liquidity, and had average daily volume of 650,000
                                               crude oil was 1,342,325 contracts, and open interest     29, 2011) was 27,848,391 contracts and 9,045,069         contracts and daily open interest of 450,000
                                               for near month futures was 323,184 contracts; (iii)      contracts, respectively; (x) as of April 29, 2011,       contracts; (ii) the Sponsor is registered as a
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                                               the position limits for all months is 20,000 WTI         open interest for sugar futures was 570,948              commodity pool operator with the CFTC and is a
                                               crude oil contracts and the total value of contracts     contracts; (xi) the sugar contract price was             member of the National Futures Association, and
                                               if position limits were reached would be                 $24,920.00 (22.25 cents per pound and 112,000            (iii) the CFTC has regulatory jurisdiction over the
                                               approximately $1.68 billion (based on the $84.11         pounds per contract), and the approximate value of       trading of futures contracts traded on U.S. markets);
                                               contract price); and (iv) the contract price was         all outstanding contracts was $14.2 billion; and (xii)   Securities Exchange Act Release No. 82390 (Dec.
                                               $84,110 ($84.11 USD per barrel and 1,000 barrels         the position limits for all months is 15,000 sugar       22, 2017), 82 FR 61625 (Dec. 28, 2017) (SR–
                                               per contract), and the approximate value of all          contracts and the total value of contracts if position   NYSEArca–2017–107) (notice of proposed rule
                                               outstanding contracts was $112.9 billion, Securities     limits were reached would be approximately $373.8        change included NYSE Arca’s representations that:
                                               Exchange Act Release No. 63625 (Dec. 30, 2010), 76       million (based on the $24,920.00 contract price),        (i) Freight futures liquidity has remained relatively
                                                                                                        Securities Exchange Act Release No. 64967 (July 26,      constant, in lot terms, over the last five years with


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                                                                            Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices                                                         43927

                                               Commission was in each of those cases                   Commission has considered a proposed                      agreement with a market of significant
                                               dealing with a large futures market that                ETP based on futures that had only                        size relating to bitcoin, the asset
                                               had been trading for a number of years                  recently begun trading,38 the                             underlying the proposed ETPs, or that
                                               before an exchange proposed an ETP                      Commission specifically addressed                         alternative means of preventing fraud
                                               based on those futures.37 And where the                 whether the futures on which the ETP                      and manipulation would be sufficient to
                                                                                                       was based—which were futures on an                        satisfy the requirement of Exchange Act
                                               approximately 1.1 million lots trading annually; (ii)   index of well-established commodity                       Section 6(b)(5) that the proposed rule
                                               open interest currently stood at approximately          futures—were illiquid or susceptible to                   change be designed to prevent
                                               290,000 lots across all asset classes representing an
                                               estimated value of more than $3 billion, and, of        manipulation.39                                           fraudulent and manipulative acts and
                                               such open interest, Capesize contracts accounted          Accordingly, the Commission                             practices.
                                               for approximately 50%, Panamax for approximately        examines below whether the
                                               40%, and Handymax for approximately 10%,                                                                          2. Comments Received
                                                                                                       representations by the Exchange, and
                                               Securities Exchange Act Release No. 81681 (Sept.                                                                     One commenter asserts that data on a
                                               22, 2017), 82 FR 45342, 45345 (Sept. 28, 2017)). See
                                                                                                       the comments received from the public,
                                               also Securities Exchange Act Release No. 53582          support a finding that the Exchange has                   week’s activity on the Gemini exchange,
                                               (Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006) (SR–        entered into a surveillance-sharing                       which provides a critical input for the
                                               Amex–2005–127) (notice of proposed rule change                                                                    CFE bitcoin futures, show substantial
                                               included Amex’s representations that: (i) WTI light,                                                              quantities of bitcoin are bought and sold
                                                                                                       15, 2011), 76 FR 58549 (Sept. 21, 2011) (SR–
                                               sweet crude oil contract, listed and traded at
                                               NYMEX, trades in units of 42,000 gallons (1,000
                                                                                                       NYSEArca–2011–48). U.S. Dollar Index futures              all at once. The commenter believes that
                                                                                                       began trading in 1985, https://www.theice.com/            this behavior does not appear to be the
                                               barrels), and annual daily contract volume on
                                                                                                       publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf,
                                               NYMEX from 2001 through October 2005 was
                                                                                                       and the first ETPs based on U.S. Dollar Index
                                                                                                                                                                 result of natural trading and in the long
                                               149,028, 182,718, 181,748, 212,382 and 242,262,                                                                   run would prevent true price
                                               respectively; (ii) annual daily contract volume on      futures was approved for listing and trading in
                                               ICE Futures for Brent crude contracts from 2001         2007. See Securities Exchange Act Release No.             discovery.40
                                               through October 2005 was 74,011, 86,499, 96,767,        55292 (Feb. 14, 2007), 72 FR 8406 (Feb. 26, 2007)            One commenter states that
                                               102,361 and 120,695 respectively; (iii) annual daily    (SR–Amex–2006–86). Australian Dollar futures and          commencing an ETP without allowing
                                               contract volume on NYMEX for heating oil futures        Euro futures began trading in 1987 and 1999,
                                                                                                       respectively, and Canadian Dollar futures, Swiss          the market to adjust to the cash-settled
                                               from 2001 through October 2005 was 41,710,
                                               42,781, 46,327, 51,745 and 52,334, respectively; (iv)   Franc futures, and Yen futures began trading in           futures products would be akin to
                                               annual daily contract volume on NYMEX for               2002, see https://www.cmegroup.com/media-room/            ‘‘putting the cart before the horse’’ and
                                               natural gas contracts from 2001 through October         historical-first-trade-dates.html, and the first ETPs     seems to be an attempt to appease
                                               2005 was 47,457, 97,431, 76,148, 70,048 and             based on each of these individual currency futures
                                                                                                       were approved for listing and trading in 2012. See        institutional investors.41
                                               77,149, respectively; and (v) annual daily contract
                                               volume on NYMEX for gasoline contracts from 2001        Securities Exchange Act Release No. 66553 (Mar. 9,           One commenter states that the market
                                               through October 2005 was 38,033, 43,919, 44,688,        2012), 77 FR 15440 (Mar. 15, 2012) (SR–NYSEArca–          for bitcoin derivatives other than bitcoin
                                               51,315 and 53,577, respectively, Securities             2012–04). Silver futures and gold futures began           exchange-traded futures appears to be
                                               Exchange Act Release No. 53324 (Feb. 16, 2006), 71      trading in 1933 and 1974, respectively, see https://
                                                                                                       www.cmegroup.com/media-room/historical-first-
                                                                                                                                                                 developing and that financial
                                               FR 9614, 9618 (Feb. 24, 2006)); Securities Exchange
                                               Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987      trade-dates.html, and the first ETPs based on each        institutions are reportedly moving
                                               (Apr. 20, 2007) (SR–Amex–2006–112) (notice of           of these commodity futures were approved for              toward launching bitcoin-related trading
                                               proposed rule change included Amex’s                    listing and trading in 2006. See Securities Exchange      desks and other operations. This
                                               representations that annual daily contract volume       Act Release No. 55029 (Dec. 29, 2006), 72 FR 806          commenter believes that the proposed
                                               on NYMEX for natural gas contracts from 2001            (Jan. 8, 2007) (SR–Amex–2006–76). Freight futures
                                               through October 2006 was 47,457, 97,431, 76,148,        have been cleared since 2005, and the first ETP           offering of both long and short ETPs
                                               70,048, 76,265, and 102,097, respectively,              based on freight futures was approved for listing         raises the possibility that market makers
                                               Securities Exchange Act Release No. 55372 (Feb. 28,     and trading in 2017. See Securities Exchange Act          in bitcoin-related derivatives could
                                               2007), 72 FR 10267, 10268 (Mar. 7, 2007)).              Release No. 82390 (Dec. 22, 2017), 82 FR 61625,           make two-sided markets if interest in
                                                  37 For example, corn futures began trading in        61626 n.6 (Dec. 28, 2017) (SR–NYSEArca–2017–
                                                                                                       107) (noting that ‘‘Freight Futures have been cleared     the long and short ETPs is similar in
                                               1877, see https://www.cmegroup.com/media-room/
                                               historical-first-trade-dates.html, and the first ETP    since 2005’’).                                            magnitude. The commenter further
                                               based on corn futures was approved for listing and         38 The Exchange filed its proposal less than one       believes that interest outside of the
                                               trading in 2010. See Securities Exchange Act            month after bitcoin futures began trading on either       bitcoin ETPs may be sufficient to
                                               Release No. 62213 (June 3, 2010), 75 FR 32828 (June     CME or CFE.
                                                                                                                                                                 motivate market makers to maintain
                                               9, 2010) (SR–NYSEArca–2010–22). VIX futures                39 At issue were futures on an index comprising

                                               began trading in 2004, see http://cfe.cboe.com/cfe-     futures on crude oil, Brent crude oil, natural gas,       bitcoin derivatives desks.42 In addition,
                                               products/vx-cboe-volatility-index-vix-futures/          heating oil, gasoline, gas oil, live cattle, wheat,       the commenter suggests that questions
                                               contract-specifications, and the first ETPs based on    aluminum, corn, copper, soybeans, lean hogs, gold,        about bitcoin derivatives markets can be
                                               VIX futures were approved for listing and trading       sugar, cotton, red wheat, coffee, standard lead,          addressed through market depth
                                               in 2010. See Securities Exchange Act Release No.        feeder cattle, zinc, primary nickel, cocoa, and silver.
                                               63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR–    See Securities Exchange Act Release No. 53659             analyses, discussions with potential
                                               NYSEArca–2010–10). Natural gas futures began            (Apr. 17, 2006), 71 FR 21074, 21080 (Apr. 24, 2006)       bitcoin derivatives liquidity providers,
                                               trading in 1990, see https://www.cmegroup.com/          (SR–NYSE–2006–17) (notice of proposed rule                and analyses of order and trade data
                                               media-room/historical-first-trade-dates.html, and       change to list shares of iShares GSCI Commodity-          across CME and CFE to determine the
                                               the first ETP based on natural gas was approved for     Indexed Trust). The Commission concluded that
                                               listing and trading in 2007. See Securities Exchange    requirements of Exchange Act Section 6(b)(5) had          plausibility of simultaneous liquidity
                                               Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987      been met because concerns about manipulation              collapses on both bitcoin future
                                               (Apr. 20, 2007) (SR–Amex–2006–112). Crude oil           would be addressed by the arbitrage relationship          markets.43
                                               futures began trading in 1983, see https://             between the new index futures and the existing               Six commenters assert that there is
                                               www.cmegroup.com/media-room/historical-first-           component futures, as well as the ETP listing
                                               trade-dates.html, and the first ETP based on crude      exchange’s comprehensive surveillance-sharing             manipulation in the bitcoin market.44
                                               oil futures was approved for listing and trading in     agreements not only with the market for the index         One commenter states that it is widely
                                               2006. See Securities Exchange Act Release No.           futures, but also with the markets for the                known in the cryptocurrency
                                               53582 (Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006)       component futures. See Securities Exchange Act
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                                               (SR–Amex–2005–127). Wheat futures, sugar futures,       Release No. 54013 (June 16, 2006), 71 FR 36372,             40 See Malkin Letter, supra note 12, at 1–2.
                                               and soybean futures began trading in 1877, 1914,        36379 (June 26, 2006) (SR–NYSE–2006–17) (order              41 See
                                               and 1936, respectively, see https://                    approving listing of shares of iShares GSCI                        Desai Letter, supra note 12, at 1.
                                                                                                                                                                   42 See NERA Letter, supra note 12, at 2.
                                               www.cmegroup.com/media-room/historical-first-           Commodity-Indexed Trust). Additionally, the
                                                                                                                                                                   43 See id.
                                               trade-dates.html and https://www.theice.com/            approval order for the ETP noted that, if the volume
                                               publicdocs/ICE_Sugar_Brochure.pdf, and the first        in any futures contract that was part of the reference      44 See Desai Letter, supra note 12, at 1; Fitzgerald

                                               ETPs based on each of these commodity futures           index fell below a specified multiple of production       Letter, supra note 12, at 1; Kumar Letter, supra note
                                               were approved for listing and trading in 2011. See      of the underlying commodity, that contract’s weight       12; Krohn Letter, supra note 12; Barnwell Letter,
                                               Securities Exchange Act Release No. 65344 (Sept.        in the index would decrease. See id. at 36374.            supra note 12, at 2; Bhat Letter, supra note 12.



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                                               43928                         Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices

                                               community that volatility in the bitcoin                  oversight by the Commodity Futures                    when the production of the underlying
                                               market is the result of manipulation                      Trading Commission (‘‘CFTC’’). This                   commodity is dominated by relatively
                                               through the coordinated use of high-                      commenter cites statements by the                     few players operating under a common
                                               frequency trading across multiple                         CFTC that it has the legal authority and              organization.54 The Sponsor also asserts
                                               exchanges.45 Another commenter                            means to police certain spot markets for              that CFE and CME surveil their markets
                                               asserts that it is common knowledge                       fraud and manipulation through                        to ensure that they are free from
                                               that the bitcoin market is being                          ‘‘heightened review’’ collaboration with              manipulation, other price distortion, or
                                               manipulated and asserts that                              exchanges, that exchanges will provide                disorderly trading or expiration of
                                               BitConnect, which was recently shut                       the CFTC surveillance team with trade                 futures contracts and that it is not
                                               down and had promised risk-free                           settlement data upon request, and that                necessary for the Exchange to enter into
                                               annual returns of up to 120%, is an                       the exchanges will enter into                         surveillance-sharing agreements with
                                               example of Ponzi and multi-level                          information-sharing agreements with                   the underlying bitcoin spot markets.55
                                               marketing schemes that are too                            spot market platforms and monitor
                                                                                                                                                               The Sponsor states that investors should
                                               common. This commenter argues that                        trading activity on the spot markets. The
                                                                                                                                                               only consider the price of the Bitcoin
                                               the Commission should not send the                        commenter also states that the Gemini
                                                                                                                                                               Futures Contracts, rather than the price
                                               wrong signal to bitcoin manipulators—                     exchange has announced that it would
                                                                                                         use Nasdaq’s market surveillance                      of bitcoin itself,56 but also concedes
                                               who, the commenter asserts, currently
                                                                                                         system to monitor its marketplace.50                  that, to the extent price manipulation is
                                               operate with impunity—by approving a
                                               bitcoin ETP.46                                               This commenter further asserts that                possible in the underlying market and
                                                  One commenter asserts that, in an                      market surveillance is generally a                    affects the price of the futures contracts,
                                               unregulated market, a small minority                      prerequisite to identifying potential                 the NAV of the Funds would be affected
                                               can manipulate the price of bitcoin and                   market manipulation and discourages                   as well.57
                                               other ‘‘altcoins’’ and that bitcoin and                   market manipulation. The commenter                       The Sponsor asserts that CFE and
                                               other cryptocurrencies are freely                         believes that the emergence of                        CME have specific and well-established
                                               manipulated by players who hold a                         institutionalized market surveillance on              trading and clearing rules to maintain
                                               disproportionate amount of                                both futures and spot markets is a                    an orderly and continuous market for
                                               cryptocurrencies or access to fiat                        positive sign for the long-term future of             bitcoin futures contracts that is
                                               currencies. This commenter cites data                     bitcoin markets.51 The commenter                      supported by market makers providing
                                               showing that 4.11% of bitcoin addresses                   suggests that the Commission, in                      continuous two-sided markets
                                               own 96.53% of all the bitcoin in                          coordination with the CFTC, self-                     throughout the day.58 The Sponsor
                                               circulation, that the top four addresses                  regulatory organizations, bitcoin futures             concedes that bitcoin futures contracts
                                               control 3.13% of all bitcoin currently in                 exchanges, and bitcoin spot market                    have limited operating histories, but
                                               distribution (worth over $4 billion), and                 platforms, could gather market                        asserts that the market infrastructure for
                                               that 115 individuals control bitcoin                      surveillance data to conduct an                       these contracts is at least as advanced as
                                               worth over $24 billion.47                                 independent analysis of trade and                     that underlying the futures contracts
                                                  One commenter asserts that                             settlement patterns and determine                     used by a previously approved ETP that
                                               widespread pump-and-dump schemes                          whether potentially manipulative                      invests in freight futures contracts,
                                               organized through the messaging                           trading practices occur on bitcoin spot               noting that bitcoin futures trade with an
                                               platform ‘‘Telegram’’ are evidence of                     and futures markets.52                                electronic order book, while freight
                                               manipulation.48 This commenter further                       A commenter asserts that bitcoin
                                                                                                                                                               futures trade by voice orders, and
                                               cites an inquiry by then-New York                         ETPs should be structured in such a
                                                                                                                                                               asserting that the daily dollar volume in
                                               Attorney General Eric Schneiderman                        way that the funds own bitcoin directly,
                                                                                                         because this commenter believes that                  bitcoin futures contracts over a two-
                                               into cryptocurrency exchanges and the
                                                                                                         cryptocurrency ETPs that are based on                 month period exceeds that of freight
                                               use of trading ‘‘bots’’ on those
                                                                                                         futures or other derivatives would invite             futures contracts.59 The Sponsor asserts
                                               exchanges to manipulate the market,
                                                                                                         manipulation of prices. A bitcoin ETP                 that CFE and CME are significant
                                               and asserts that such activity can drive
                                               prices above fair market value by over                    that holds the underlying                             markets based on the existing market as
                                               300%. The commenter notes the Kraken                      cryptocurrency directly, this commenter               well as the trading infrastructure.60 The
                                               exchange’s refusal to cooperate with this                 states, would be simpler, more                        Sponsor further concedes that, if the
                                               inquiry and believes that this refusal                    transparent, and less subject to complex              Funds hit position limits in Bitcoin
                                               should pose serious questions for                         and destabilizing trading strategies.53               Futures Contracts, this would
                                               investors and the Commission about the                       The Sponsor asserts that the operation             potentially affect the trading and
                                               Kraken exchange’s operations,                             of, and risks posed by, an ETP that seeks             liquidity of the Shares, but asserts that
                                               particularly after the Kraken exchange                    to track the performance of a bitcoin                 this risk is disclosed to investors in the
                                               recently exited the Japanese market due                   futures contract, are relatively                      Registration Statement, that other
                                               to regulatory requirements.49                             straightforward and similar to the                    commodity-futures-based ETPs face
                                                  One commenter states that a                            operation and risks involved with many                similar risks, and that interest from
                                               commonly cited factor mitigating                          existing commodity-futures-based ETPs,                investors in the Shares would support
                                               possible susceptibility to manipulation                   and that the Commission has not raised
                                               is the securities exchanges’ own                          concerns about the risk of market                        54 See GraniteShares Letter, supra note 12, at 1–

                                               surveillance procedures, in addition to                   manipulation in the underlying                        2. The Commission notes that the Sponsor did not
                                                                                                                                                               submit its comment letter until 97 days after the
                                               the futures exchanges’ surveillance                       commodity markets, even when the risk
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                                                                                                                                                               close of the comment period under the Order
                                               procedures and market surveillance and                    is disclosed in the offering document for             Instituting Proceedings.
                                                                                                         a commodity-futures-based ETP, or                        55 See id. at 2 & n.2, 6.
                                                 45 See Barnwell Letter, supra note 12, at 2.                                                                     56 See id. at 8.
                                                 46 See Kumar Letter, supra note 12.                       50 See NERA Letter, supra note 12, at 4–5.             57 See id. at 6, 8.
                                                 47 See Fitzgerald Letter, supra note 12, at 1–2.          51 See id. at 5.                                       58 See id. at 2–3, 8–9.
                                                 48 See id. at 2.                                          52 See id.                                             59 See id. at 3.
                                                 49 See id.                                                53 See Krohn Letter, supra note 12.                    60 See id. at 8–9.




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                                                                            Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices                                                       43929

                                               development of the bitcoin futures                      inherently resistant to manipulation, or                who trade in the underlying bitcoin spot
                                               market.61                                               that other means of surveillance will                   markets, where a substantial majority of
                                                                                                       suffice—a listing exchange must                         trading, the Commission concluded in
                                               3. Analysis
                                                                                                       demonstrate that it has entered into a                  the Winklevoss Order, ‘‘occurs on
                                                  The Exchange asserts that the price of               surveillance-sharing agreement with a                   unregulated venues overseas that are
                                               bitcoin is inherently resistant to                      regulated market of significant size                    relatively new and that, generally,
                                               manipulation,62 offering, in summary                    relating to the underlying asset.70                     appear to trade only digital assets.’’ 74
                                               fashion, a list of arguments that are                      The Exchange asserts that its existing               Thus, consistent with its determination
                                               exactly the same as arguments that it or                surveillance procedures and its ability                 in the Winklevoss Order,75 and with the
                                               commenters already raised with respect                  to share surveillance information with                  Commission’s previous orders
                                               to previous proposals for bitcoin-based                 U.S. futures exchanges are sufficient to                approving commodity-futures ETPs,76
                                               ETPs.63 The Commission                                  meet the requirements of Exchange Act                   the Commission believes that the
                                               comprehensively addressed each of                       Section 6(b)(5).71 One commenter also                   Exchange must demonstrate that it has
                                               these arguments in the Winklevoss                       asserts that the exchange’s own                         in place a surveillance-sharing
                                               Order, finding in each case that the                    surveillance procedures, along with                     agreement with a regulated market of
                                               Exchange had failed to carry its burden                 market surveillance and oversight by the                significant size related to bitcoin,
                                               to demonstrate that the argument was                    CFTC, can mitigate manipulation.72                      because ‘‘[s]uch agreements provide a
                                               correct,64 and finding overall that the                    While the Exchange would, pursuant                   necessary deterrent to manipulation
                                               Exchange ‘‘ha[d] not demonstrated that                  to its listing rules, be able to obtain                 because they facilitate the availability of
                                               the structure of the spot market for                    certain information regarding trading in                information needed to fully investigate
                                               bitcoin is uniquely resistant to                        the Shares and in the underlying bitcoin                a manipulation if it were to occur.’’ 77
                                               manipulation.’’ 65 Given that the                       or any bitcoin derivative through                          The Exchange represents that it is able
                                               Exchange has merely repeated these                      registered market makers,73 this trade                  to share surveillance information with
                                               arguments, providing no elaboration or                  information would be limited to the                     CME and CFE, which are bitcoin futures
                                               support, the Commission would have no                   activities of market participants who                   markets regulated by the CFTC, through
                                               basis—other than ‘‘unquestioning                        trade on the Exchange. Furthermore,                     membership in the Intermarket
                                               reliance’’ on the Exchange’s                            neither the Exchange’s ability to surveil               Surveillance Group.78 And the Sponsor
                                               representations—on which to come to a                   trading in the Shares nor its ability to                asserts that CFE and CME surveil their
                                               different conclusion here.66                            share surveillance information with                     markets to ensure that they are free from
                                                  The Sponsor concedes that                                                                                    manipulation, other price distortion, or
                                                                                                       other securities exchanges trading the
                                               manipulation of the underlying bitcoin                                                                          disorderly trading,79 and that CFE and
                                                                                                       Shares would give the Exchange insight
                                               markets may affect the value of the                                                                             CME are ‘‘significant markets’’ based on
                                               Shares,67 but argues that the risk of                   into the activity and identity of market
                                                                                                       participants who trade in bitcoin futures               their structure and volume.80
                                               manipulation has been disclosed to                                                                              Nonetheless, the Commission must
                                               investors and that the Commission has                   contracts or other bitcoin derivatives or
                                                                                                                                                               disapprove the proposal, because the
                                               not raised similar concerns in                             70 See id. The Sponsor argues that it is not         evidence in the record does not support
                                               connection with previously approved                     necessary for the Exchange to enter into a              a conclusion that CME’s and CFE’s
                                               commodity-futures ETPs, even when the                   surveillance-sharing agreement with an underlying       bitcoin futures markets are markets of
                                               risk of manipulation has been disclosed                 bitcoin trading venue, but the Commission has not       significant size.
                                               to investors or when the underlying                     asserted that such a surveillance-sharing agreement
                                                                                                       is necessary. Instead, the Commission has held in          The Order Instituting Proceedings
                                               commodity market was controlled by                      the Winklevoss Order ‘‘that—when the spot market        sought comment on whether the CME
                                               relatively few players.68 But the                       is unregulated—the requirement of preventing            and CFE bitcoin futures markets are
                                               Commission, as it stated in the                         fraudulent and manipulative acts may possibly be        markets of significant size,81 but the
                                               Winklevoss Order, is not applying a                     satisfied by showing that the ETP listing market has
                                                                                                       entered into a surveillance-sharing agreement with      Exchange has not responded to any of
                                               ‘‘cannot be manipulated’’ standard to                   a regulated market of significant size in derivatives   the questions in the Order Instituting
                                               ETPs.69 Rather, the Commission has                      related to the underlying asset.’’ Id. at 37600         Proceedings, and the only analysis of
                                               held that—absent a showing that the                     (emphasis added).
                                               underlying assets for an ETP are                           71 See Notice, supra note 5, 83 FR at 2709.
                                                                                                                                                                  74 Winklevoss Order, supra note 30, 83 FR at
                                                                                                          72 See supra notes 50–51 and accompanying text.
                                                                                                                                                               37580.
                                                 61 See id. at 7.                                      This commenter also suggests that the                      75 See id. at 37591 (finding that ‘‘traditional

                                                 62 See
                                                                                                       Commission—in coordination with the CFTC,               means’’ of surveillance were not sufficient in the
                                                        supra notes 20–21 and accompanying text.
                                                 63 See Winklevoss Order, supra note 30, 83 FR at
                                                                                                       SROs, futures markets, and bitcoin spot platforms—      absence of a surveillance-sharing agreement with a
                                                                                                       could gather market surveillance data to                regulated market of significant size related to the
                                               37582–84 (Section III.B.1(a) of the order).             independently analyze whether manipulative
                                                 64 See id. at 37584–87 (Section III.B.1(b) of the                                                             underlying asset).
                                                                                                       practices occur on bitcoin spot and futures                76 See supra note 35 and accompanying text
                                               order).                                                 platforms. See supra note 52 and accompanying
                                                 65 See id. at 37584.                                                                                          (noting previous commodity-futures ETPs where
                                                                                                       text. As noted above, however, it is the Exchange
                                                 66 See supra note 28 and accompanying text                                                                    surveillance sharing in place between ETP listing
                                                                                                       that bears the burden to demonstrate that its
                                                                                                                                                               exchange and underlying futures exchanges).
                                               (discussing the holding of Susquehanna Int’l            proposal is designed to ‘‘prevent fraudulent and           77 Winklevoss Order, supra note 30, 83 FR at
                                               Group, LLP v. Securities and Exchange                   manipulative acts and practices.’’ See supra notes
                                               Commission). Additionally, the Trust’s Registration     25–28 and accompanying text.                            37580 (quoting Amendment to Rule Filing
                                               Statement acknowledges that bitcoin spot markets           73 See Notice, supra note 5, 83 FR at 2709 (‘‘In     Requirements for Self-Regulatory Organizations
                                               have been the subject of fraud and security                                                                     Regarding New Derivative Securities Products,
                                                                                                       addition to the existing obligations under Exchange
                                               breaches, that the ‘‘nature of the assets held at                                                               Securities Exchange Act Release No. 40761 (Dec. 8,
                                                                                                       rules regarding the production of books and records
                                               Bitcoin Exchanges make them appealing targets for                                                               1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998)
                                                                                                       . . ., the registered Market Maker in Trust Issued
                                                                                                                                                               (File No. S7–13–98)).
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                                               hackers,’’ and that the bitcoin spot markets’           Receipts shall make available to the Exchange such         78 See https://www.isgportal.org/isgPortal/public/
                                               exposure to ‘‘fraud and security breaches . . . could   books, records or other information pertaining to
                                               have a negative impact on the Bitcoin Futures           transactions by such entity or registered or non-       members.htm (listing the current members and
                                               Contracts in which the Funds invest.’’ See              registered employee affiliated with such entity for     affiliate members of the Intermarket Surveillance
                                               Registration Statement, supra note 3, at 9.             its or their own accounts for trading the underlying    Group).
                                                 67 See supra note 57 and accompanying text.                                                                      79 See supra note 55 and accompanying text.
                                                                                                       physical commodity, related commodity futures or
                                                 68 See supra note 54 and accompanying text.                                                                      80 See supra notes 59–60 and accompanying text.
                                                                                                       options on commodity futures, or any other related
                                                 69 See Winklevoss Order, supra note 30, 83 FR at      commodity derivatives, as may be requested by the          81 See Order Instituting Proceedings, supra note 9,

                                               37582.                                                  Exchange.’’).                                           83 FR at 15427.



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                                               43930                        Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices

                                               the underlying futures markets the                      that the bitcoin futures markets will                  and COO of CFE, recently
                                               Notice provides is the generic statement                grow to accommodate demand for the                     acknowledged in a letter to the
                                               that, ‘‘based on numerous conversations                 Funds (which are two of nine recently                  Commission staff that ‘‘the current
                                               with market participants, issuers, and                  proposed bitcoin futures ETPs),86 this                 bitcoin futures trading volumes on Cboe
                                               discussions with personnel of CFE,’’ the                speculative statement does not provide                 Futures Exchange and CME may not
                                               Exchange ‘‘expects that the market for                  a basis for the Commission to conclude                 currently be sufficient to support ETPs
                                               Bitcoin Futures Contracts will be                       that CME and CFE are currently markets                 seeking 100% long or short exposure to
                                               sufficiently liquid to support numerous                 of significant size.87 Thus, there is no               bitcoin.’’ 91 These statements reinforce
                                               ETPs shortly after launch.’’ 82 The                     basis in the record on which the                       the Commission’s conclusion that there
                                               Sponsor argues that the daily volume in                 Commission can conclude that the                       is insufficient evidence to determine
                                               the Bitcoin Futures Contracts, based on                 bitcoin futures markets are markets of                 that the CME and CFE bitcoin futures
                                               a two-month sample period, exceeds                      significant size.                                      markets are markets of significant size.
                                               that of the futures contracts underlying                   Publicly available data show that the                  Although this conclusion is
                                               a previously approved commodity-                        median daily notional trading volume,                  dispositive with respect to the
                                               futures ETP investing in freight futures,               from inception through August 10,                      Exchange’s proposal, the Commission
                                               adding that the Bitcoin Futures                         2018, has been 14,185 bitcoins on CME                  will also address the Exchange’s
                                               Contracts trade on an electronic order                  and 5,184 bitcoins on CFE, and that the                representation that no more than 10% of
                                               book, whereas the freight futures trade                 median daily notional value of open                    the net assets of a Fund in the aggregate
                                               by voice, and that the trading                          interest on CME and CFE during the                     invested in bitcoin futures contracts will
                                               infrastructure of the CME and CFE                       same period has been 10,145 bitcoins                   be invested in contracts whose principal
                                               makes them significant markets.83 The                   and 5,601 bitcoins, respectively.88 But                market is neither a member of the
                                               Sponsor further asserts that, if the                    while these futures contract figures are               Intermarket Surveillance Group nor a
                                               Funds hit position limits in the Bitcoin                readily available, meaningful analysis of              market with whom the Exchange has a
                                               Futures Contracts, although it could                    the size of the CME or CFE markets                     comprehensive surveillance-sharing
                                               impact trading and liquidity in the                     relative to the underlying bitcoin spot                agreement.92 The Commission does not
                                               Shares, the interest in the Shares would                market is challenging, because reliable                believe that this representation would
                                               support further development of the                      data about the spot market, including its              function as a meaningful limitation
                                               bitcoin futures market.84                               overall size, are unavailable.89                       when, according to the Notice, there is
                                                  Whether an underlying market is a                       The Commission also notes that in                   no minimum amount of a Fund that
                                               ‘‘market of significant size,’’ however,                recent testimony CFTC Chairman                         must be invested in such contracts.
                                               does not depend on whether a market                     Giancarlo characterized the volume of                  According to the Notice, in the event
                                               operates by electronic or voice trading,                the bitcoin futures markets as ‘‘quite                 position, price, or accountability limits
                                               and it does not depend solely on trading                small.’’ 90 Additionally, the President                are reached with respect to bitcoin
                                               volume in isolation from the broader                                                                           futures contracts, each Fund may invest
                                                                                                          86 See Notice, supra note 5 (proposing two
                                               context of the underlying market.                                                                              in listed and OTC swaps on bitcoin or
                                                                                                       GraniteShares bitcoin-futures ETPs); Securities
                                               Moreover, to the extent that isolated                   Exchange Act Release No. 82350 (Dec. 19, 2017), 82     the Benchmark Futures Contracts.93 The
                                               trading volume is relevant, the                         FR 61100 (Dec. 26, 2017) (SR–NYSEArca–2017–            Notice does not establish any limit on
                                               Commission does not believe that a two-                 139) (proposing two ProShares bitcoin-futures          the Funds’ holdings of these other
                                               month sample is sufficient to establish                 ETPS); Securities Exchange Act Release No. 82532       bitcoin-related derivatives; it provides
                                                                                                       (Jan. 18, 2018), 83 FR 3380 (Jan. 24, 2018) (SR–
                                               that a market is of significant size.                   NYSEArca–2018–02) (proposing five Direxion             no analysis of the size and liquidity of
                                               Instead, as noted above and stated in the               bitcoin-futures ETPs).                                 markets for those derivatives; and it
                                               Winklevoss Order, the Commission                           87 With respect to the Sponsor’s argument that
                                                                                                                                                              does not discuss whether the Exchange
                                               interprets a ‘‘significant market’’ or                  daily volume in the Bitcoin Futures Contracts over     has the ability to share surveillance
                                                                                                       a two-month period exceeds that of futures
                                               ‘‘market of significant size’’ to be ‘‘a                contracts underlying a previously approved             information with the markets for these
                                               market (or group of markets) as to which                commodity-futures ETP, the Breakwave Dry Bulk          derivatives. Thus, as to what might be
                                               (a) there is a reasonable likelihood that               Shipping ETF, the Commission notes that the            a substantial proportion of the Funds’
                                               a person attempting to manipulate the                   futures in question had been trading for at least a    portfolios under the Notice, the
                                                                                                       dozen years before the ETP was proposed, see supra
                                               ETP would also have to trade on that                    note 37 (SR–NYSEArca–2017–107), and that the
                                               market to successfully manipulate the                   exchange proposing that ETP had provided not just      Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2,
                                               ETP, so that a surveillance-sharing                     daily volume figures, but had provided statistics on   2018). At a price of approximately $7,700 per
                                                                                                       open interest, yearly volume, and distribution of      Bitcoin, this represents a notional amount of about
                                               agreement would assist the ETP listing                  open interest across contract types and had            $94 million. In comparison, the notional amount of
                                               market in detecting and deterring                       represented that liquidity had remained relatively     the open interest in CME’s WTI crude oil futures
                                               misconduct, and (b) it is unlikely that                 constant over a five-year period. See supra note 36.   was more than one thousand times greater, about
                                               trading in the ETP would be the                         Moreover, in approving the Breakwave Dry Bulk          $170 billion (2,600,000 contracts) as of Feb[.] 2,
                                                                                                       Shipping ETF, the Commission noted that the            2018 and the notional amount represented by the
                                               predominant influence on prices in that                 listing exchange had represented that ‘‘the Freight    open interest of Comex gold futures was about $74
                                               market.’’ 85 Neither the Exchange nor                   Futures trade on well-established, regulated           billion (549,000 contracts).’’ See Written Testimony
                                               the Sponsor has provided an analysis of                 markets that are members of the ISG’’ and found        of J. Christopher Giancarlo, Chairman, Commodity
                                               whether the CME or CFE meets this                       that the exchange would be able to ‘‘share             Futures Trading Commission, Before the Senate
                                                                                                       surveillance information with a significant            Banking Committee at text accompanying nn. 14–
                                               standard, and the Sponsor’s assertion                   regulated market for trading futures on dry bulk       15 (Feb. 6, 2018). See also Winklevoss Order, supra
                                                                                                       freight.’’ Securities Exchange Act Release No.         note 30, 83 FR at 37601 (citing Giancarlo
                                                  82 Notice, supra note 5, 83 FR at 2710; see also     82390, supra note 35, 82 FR at 61633.                  testimony).
                                               supra note 23 and accompanying text. The
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                                                                                                          88 These volume figures were calculated by             91 Letter from Chris Concannon, President and
                                               Exchange sought to remove this representation from      Commission staff using data published by CME and       COO, Cboe Global Markets, to Dalia Blass, Director,
                                               its proposal in Amendment No. 2. See infra note         CFE on their websites.                                 Division of Investment Management, Commission,
                                               128.                                                       89 See Winklevoss Order, supra note 30, 83 FR at    at 5 (Mar. 23, 2018), available at https://
                                                  83 See supra notes 59–60 and accompanying text.                                                             www.sec.gov/divisions/investment/cboe-global-
                                                                                                       37601.
                                                  84 See supra note 61 and accompanying text.             90 CFTC Chairman Giancarlo testified: ‘‘It is       markets-innovation-cryptocurrency.pdf.
                                                  85 See supra note 33 and accompanying text                                                                     92 See supra note 18 and accompanying text.
                                                                                                       important to put the new Bitcoin futures market in
                                               (quoting Winklevoss Order, supra note 30, 83 FR at      perspective. It is quite small with open interest at      93 See Notice, supra note 5, 83 FR 2706; see also

                                               37594).                                                 the CME of 6,695 bitcoin and at Cboe Futures           supra note 19 and accompanying text.



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                                                                            Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices                                                      43931

                                               Commission cannot conclude that                         futures market would warrant further                     2. Analysis
                                               surveillance-sharing would be available,                analysis before approval.
                                               that the related markets would be                                                                                   The Exchange asserts that approval of
                                                                                                       C. Protecting Investors and the Public                   the proposal would enhance
                                               regulated, or that the related markets
                                                                                                       Interest                                                 competition among market participants,
                                               would be of significant size.94
                                                                                                       1. Comments Received                                     to the benefit of investors and that it
                                                  Additionally, while one commenter
                                                                                                                                                                would protect investors by permitting
                                               suggests that the market for bitcoin                      One commenter believes that, while                     them to seek exposure to bitcoin
                                               derivatives other than exchange-traded                  the Commission should deny the                           through efficient and transparent
                                               futures appears to be developing—and                    proposed ETPs, it should regulate this                   ETPs.102 The Exchange also states that
                                               that the offering of long and short                     environment to stop individual
                                               bitcoin ETPs ‘‘raises the possibility that                                                                       the Funds would enhance the security
                                                                                                       consumers from coming to financial                       afforded to investors as compared to a
                                               market makers in Bitcoin derivatives                    harm.97
                                               could make two-sided markets if                                                                                  direct investment in bitcoin.103 Other
                                                                                                         One commenter suggests that the                        commenters suggest that the
                                               interest in the long and short ETFs is                  Commission could address some of its
                                               similar in magnitude’’ 95—these                                                                                  Commission should either seek to
                                                                                                       concerns about the proposed ETPs by                      regulate the underlying bitcoin
                                               speculative statements do not provide a                 working with self-regulatory
                                               basis for the Commission to conclude                                                                             markets,104 or should seek to protect
                                                                                                       organizations, and in particular FINRA,
                                               that the non-exchange-traded bitcoin                                                                             investors through disclosure
                                                                                                       to create bitcoin and cryptocurrency-
                                               derivatives market is now, or may                                                                                requirements or suitability standards,
                                                                                                       related asset suitability requirements. In
                                               eventually be, of significant size.                                                                              rather than disapproving a bitcoin-ETP
                                                                                                       addition, this commenter suggests that
                                                                                                                                                                proposal.105 Several other commenters,
                                                  The Commission therefore concludes                   targeted disclosure requirements could
                                                                                                                                                                however, assert that approval of a
                                               that Exchange has not demonstrated that                 make investors aware of volatility,
                                                                                                                                                                bitcoin-based ETP would expose
                                               it has entered into a surveillance-                     discourage retail investors from
                                                                                                                                                                investors to risks from unregulated
                                               sharing agreement with a regulated                      investing more than a small portion of
                                                                                                                                                                bitcoin markets.106
                                               market of significant size related to                   their portfolio in cryptocurrency-related
                                               bitcoin, or that, given the current                     assets, and present historical scenarios                    The Commission acknowledges that,
                                               absence of such an agreement, the                       to retail investors to demonstrate how                   compared to trading in unregulated
                                               exchange’s own surveillance procedures                  an instrument such as a particular                       bitcoin spot markets, trading a bitcoin-
                                               described above would, by themselves,                   bitcoin ETP would have performed over                    based ETP on a national securities
                                               be sufficient to satisfy the requirement                time. This commenter believes that                       exchange may provide some additional
                                               of Exchange Act Section 6(b)(5) that an                 suitability requirements are less                        protection to investors, but the
                                               exchange’s rules be designed to prevent                 prescriptive than an effective ban on a                  Commission must consider this
                                               fraudulent and manipulative acts and                    class of product and that they could                     potential benefit in the broader context
                                               practices.96 While CME and CFE are                      balance the Commission’s interest in                     of whether the proposal meets each of
                                               regulated markets for bitcoin                           protecting retail investors against its                  the applicable requirements of the
                                               derivatives, there is no basis in the                   interest in allowing cryptocurrency-                     Exchange Act. Pursuant to Section
                                               record for the Commission to conclude                   related asset markets to continue to                     19(b)(2) of the Exchange Act, the
                                               that these markets are of significant size.             develop in regulated markets where the                   Commission must disapprove a
                                               Additionally, because bitcoin futures                   Commission can observe their                             proposed rule change filed by a national
                                               have been trading on CME and CFE only                   performance closely.98                                   securities exchange if it does not find
                                               since December 2017, the Commission                       Several commenters assert that the                     that the proposed rule change is
                                               has no basis on which to predict how                    Commission should deny the proposed                      consistent with the applicable
                                               these markets may grow or develop over                  ETPs to help protect the public from                     requirements of the Exchange Act—
                                               time, or whether or when they may                       exposure to financial risk from an                       including the requirement under
                                               reach significant size.                                 unregulated market.99 One commenter                      Section 6(b)(5) that the rules of a
                                                  Although the Exchange has not                        asserts that, while the risk posed by the                national securities exchange be
                                               demonstrated that a regulated bitcoin                   cash-settled futures products is mostly                  designed to prevent fraudulent and
                                               futures market of significant size                      contained, a bitcoin ETP would expose                    manipulative acts and practices.
                                               currently exists, the Commission is not                 the public to significant financial risk                    Thus, even if a proposed rule change
                                               suggesting that the development of such                 due to a highly volatile, unregulated,                   would provide certain benefits to
                                               a market would automatically require                    and manipulated market in bitcoin as                     investors and the markets, the proposed
                                               approval of a proposed rule change                      well as cryptocurrencies in general.100                  rule change may still fail to meet other
                                               seeking to list and trade shares of an                  Several commenters further believe that                  requirements under the Exchange Act.
                                               ETP holding bitcoins as an asset. The                   before the Commission approves a                         For the reasons discussed above, the
                                               Commission would need to analyze the                    bitcoin ETP, there should be a proper                    Exchange has not met its burden of
                                               facts and circumstances of any                          legal and regulatory framework put in                    demonstrating an adequate basis in the
                                               particular proposal and examine                         place by a suitable governmental body                    record for the Commission to find that
                                               whether any unique features of a bitcoin                to prevent manipulation and protect the                  the proposal is consistent with
                                                                                                       public.101                                               Exchange Act Section 6(b)(5), and,
                                                 94 As discussed below, see Section III.E, infra the                                                            accordingly, the Commission must
                                                                                                         97 See  Fitzgerald Letter, supra note 12, at 2.
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                                               exchange has filed two untimely amendments to the
                                                                                                         98 See
                                                                                                                                                                disapprove the proposal.
                                               proposal, each of which would have limited the                    NERA Letter, supra note 12, at 5–6.
                                               Funds’ investments to the Bitcoin Futures                  99 See Desai Letter, supra note 12, at 1; Kumar
                                                                                                                                                                  102 See Notice, supra note 5, 83 FR at 2710–11.
                                               Contracts. Even if these amendments had been            Letter, supra note 12; Malkin Letter, supra note 12,
                                                                                                                                                                  103 See id. at 2710.
                                               timely, however, the Commission would still             at 2.
                                               determine that the proposal was not consistent with        100 See Desai Letter, supra note 12, at 1.              104 See supra note 97 and accompanying text.

                                               the Exchange Act. See id.                                  101 See Desai Letter, supra note 12, at 1, 2; Kumar     105 See supra note 98 and accompanying text.
                                                 95 See supra notes 42–43 and accompanying text.
                                                                                                       Letter, supra note 12; Malkin Letter, supra note 12,       106 See supra notes 99–101 and accompanying
                                                 96 See 15 U.S.C. 78f(b)(5).                           at 2.                                                    text.



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                                               43932                         Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices

                                               D. Other Comments                                       unnecessary, as they do not bear on the                F. Basis for Disapproval
                                                 Comment letters also addressed the                    basis for the Commission’s decision to                   The record before the Commission
                                               following topics:                                       disapprove the proposal.                               does not provide a basis for the
                                                 • The desire of investors to gain                     E. The Exchange’s Untimely                             Commission to conclude that the
                                               access to bitcoin through an ETP; 107                   Amendments to the Proposal                             Exchange has met its burden under the
                                                 • investor understanding about                                                                               Exchange Act and the Commission’s
                                               bitcoin; 108                                               As noted above, the deadline for
                                                                                                       rebuttal comments in response to the                   Rules of Practice to demonstrate that its
                                                 • the valuation of bitcoin and price                                                                         proposed rule change is consistent with
                                               differentials across bitcoin trading                    Order Instituting Proceedings was May
                                                                                                       15, 2018.123 On August 21, 2018,                       Exchange Act Section 6(b)(5).127
                                               venues; 109
                                                 • the intrinsic value of bitcoin; 110                 however, the Exchange filed                            IV. Conclusion
                                                 • the reliability of bitcoin as a store               Amendment No. 1 with the                                 For the reasons set forth above, the
                                               of value; 111                                           Commission, stating that the                           Commission does not find, pursuant to
                                                 • the volatility of bitcoin prices; 112               amendment ‘‘amends and replaces in its                 Section 19(b)(2) of the Exchange Act,
                                                 • the regulation of bitcoin spot                      entirety the proposal as originally                    that the proposed rule change is
                                               markets; 113                                            submitted on January 5, 2018.’’ Then, on
                                                                                                                                                              consistent with the requirements of the
                                                 • the operation and valuation of the                  August 22, 2018, the Exchange filed
                                                                                                                                                              Exchange Act and the rules and
                                               proposed ETPs; 114                                      Amendment No. 2 with the
                                                                                                                                                              regulations thereunder applicable to a
                                                 • arbitrage between the price of the                  Commission, stating that the
                                                                                                                                                              national securities exchange, and in
                                               Shares and the underlying portfolio                     amendment ‘‘amends and replaces in its
                                                                                                                                                              particular, with Section 6(b)(5) of the
                                               instruments; 115                                        entirety Amendment No. 1 as submitted
                                                                                                                                                              Exchange Act.
                                                 • the ability of the Funds to meet                    on August 21, 2018, which amended                        It is therefore ordered, pursuant to
                                               redemption orders; 116                                  and replaced in its entirety the proposal              Section 19(b)(2) of the Exchange Act,
                                                 • the custody of the assets of the                    as originally submitted on January 5,                  that proposed rule change SR–
                                               Funds; 117                                              2018.’’ Because these amendments were
                                                                                                                                                              CboeBZX–2018–001 is disapproved.
                                                 • the effect on the Funds of a fork in                filed months after the deadline for
                                               the bitcoin blockchain; 118                             comments on the proposed rule change,                    For the Commission, by the Division of
                                                 • the potential impact of Commission                  the Commission deems Amendment No.                     Trading and Markets, pursuant to delegated
                                                                                                                                                              authority.128
                                               approval of the proposed ETP on the                     1 and Amendment No. 2 to have been
                                               price of bitcoin and on the U.S.                        untimely filed.                                        Brent J. Fields,
                                               economy; 119                                               Even if these amendments had been                   Secretary.
                                                 • the leadership role that the United                 timely filed, however, the Commission                  [FR Doc. 2018–18578 Filed 8–27–18; 8:45 am]
                                               States might play in the cryptocurrency                 would still conclude that the Exchange                 BILLING CODE 8011–01–P
                                               space if the Commission were to                         had not met its burden to demonstrate
                                               approve the proposed ETP; 120                           that its proposal is consistent with
                                                 • the utility of a bitcoin ETP as a                   Exchange Act Section 6(b)(5). The                      SECURITIES AND EXCHANGE
                                               global tool for wealth distribution; 121                change that the amendments made to                     COMMISSION
                                               and                                                     the proposal was to limit the                          [Release No. 34–83908; File No. SR–
                                                 • the legitimacy that Commission                      investments of the Funds to Bitcoin                    CboeBZX–2018–064]
                                               approval of the proposed ETP might                      Futures Contracts, which trade on CFE
                                               confer upon bitcoin as a digital asset.122              and CME, eliminating the Funds’ ability                Self-Regulatory Organizations; Cboe
                                                 Ultimately, however, additional                       to invest in listed or unlisted swaps on               BZX Exchange, Inc.; Notice of Filing
                                               discussion of these tangential topics is                bitcoin or on the Benchmark Futures                    and Immediate Effectiveness of a
                                                                                                       Contracts.124 Although CFE and CME                     Proposed Rule Change To Amend
                                                 107 See Kaleda Letter, supra note 12; Santos
                                                                                                       are ‘‘regulated markets,’’ the record, as              Certain Representations Relating to
                                               Letter, supra note 12; Netto Letter, supra note 12.     discussed above, does not provide a                    the Listing and Trading of Shares of
                                                 108 See Desai Letter, supra note 12, at 1; Kumar

                                               Letter, supra note 12.
                                                                                                       basis for the Commission to conclude                   the Innovator S&P 500 Buffer ETFs
                                                 109 See Kumar Letter, supra note 12; Malkin           that CFE and CME are regulated markets
                                                                                                       ‘‘of significant size’’ in Bitcoin Futures             August 22, 2018.
                                               Letter, supra note 12; Bhat Letter, supra note 12;
                                               GraniteShares Letter, supra note 12, at 6–7, 10–11.     Contracts.125 Therefore, even if the                      Pursuant to Section 19(b)(1) of the
                                                 110 See Ahn Letter, supra note 12.
                                                                                                       Exchange’s amendments were timely                      Securities Exchange Act of 1934 (the
                                                 111 See Otenyi Letter, supra note 12; Desai Letter,
                                                                                                       filed, the Commission would be unable                  ‘‘Act’’),1 and Rule 19b–4 thereunder,2
                                               supra note 12, at 1.                                                                                           notice is hereby given that on August
                                                 112 See Desai Letter, supra note 12, at 1; Malkin     to find, based on the record, that the
                                                                                                       Exchange had entered into a                            16, 2018, Cboe BZX Exchange, Inc. (the
                                               Letter, supra note 12, at 1; Bhat Letter, supra note
                                               12.                                                     surveillance-sharing agreement with a                  ‘‘Exchange’’ or ‘‘BZX’’) filed with the
                                                 113 See Barnwell Letter, supra note 12, at 2; Desai
                                                                                                       regulated market of significant size                   Securities and Exchange Commission
                                               Letter, supra note 12, at 1; Fitzgerald Letter, supra   related to bitcoin.126                                 (‘‘Commission’’) the proposed rule
                                               note 12, at 1; Kumar Letter, supra note 12; Malkin                                                             change as described in Items I and II
                                               Letter, supra note 12, at 1.
                                                                                                         123 See supra note 10 and accompanying text.
                                                 114 See NERA Letter, supra note 12, at 1–3, 5;
                                                                                                         124 The Sponsor also represents in its August 20,    23 & 82 and accompanying text, the elimination of
                                               GraniteShares Letter, supra note 12, at 3, 5–6.
                                                 115 See GraniteShares Letter, supra note 12, at 8.    2018, comment letter that the Funds would invest       this representation would not alter the
                                                                                                       only in Bitcoin Futures Contracts. See                 Commission’s conclusion that the Exchange has not
                                                 116 See id. at 7.
                                                                                                                                                              met its burden to demonstrate that CFE and CME
daltland on DSKBBV9HB2PROD with NOTICES




                                                 117 See id. at 3.
                                                                                                       GraniteShares Letter, supra note 12, at 5.
                                                                                                         125 See supra notes 78–91 and accompanying text.     are markets ‘‘of significant size.’’
                                                 118 See id. at 6.                                                                                               127 In disapproving the proposed rule change, the
                                                                                                         126 Additionally, even though the Exchange’s
                                                 119 See Krohn Letter, supra note 12; Hales Letter,                                                           Commission has considered its impact on
                                                                                                       amendments would have removed the
                                               supra note 12; Santos Letter, supra note 12.            representation in the Notice that the Exchange         efficiency, competition, and capital formation. See
                                                 120 See Hales Letter, supra note 12.
                                                                                                       expects significant liquidity to exist in the market   15 U.S.C. 78c(f).
                                                 121 See Otenyi Letter, supra note 12.                                                                           128 17 CFR 200.30–3(a)(12).
                                                                                                       for Bitcoin Futures Contracts, based on numerous
                                                 122 See Desai Letter, supra note 12, at 1, 2; Kumar                                                             1 15 U.S.C. 78s(b)(1).
                                                                                                       conversations with market participants, issuers, and
                                               Letter, supra note 12; Santos Letter, supra note 12.    discussions with personnel of CFE, see supra notes        2 17 CFR 240.19b–4.




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Document Created: 2018-08-28 00:22:51
Document Modified: 2018-08-28 00:22:51
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation83 FR 43923 

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