Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade Shares of the Valkyrie XBTO Bitcoin Futures Fund Under Nasdaq Rule 5711(g), 50570-50583 [2021-19420]
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Federal Register / Vol. 86, No. 172 / Thursday, September 9, 2021 / Notices
Electronic Statements
• Use the Commission’s internet
submission form (https://www.sec.gov/
rules/submitcomments.htm); or
• Send an email message to rulecomments@sec.gov. Please include File
Number 265–32 on the subject line; or
Paper Statements
• Send paper statements to Vanessa
A. Countryman, Secretary, Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–1090.
All submissions should refer to File No.
265–32. This file number should be
included on the subject line if email is
used. To help us process and review
your statement more efficiently, please
use only one method. The Commission
will post all statements on the SEC’s
website at www.sec.gov.
Statements also will be available for
website viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE, Washington, DC 20549,
on official business days between the
hours of 10:00 a.m. and 3:00 p.m. (ET).
All statements received will be posted
without change; we do not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
Julie
Z. Davis, Senior Special Counsel, Office
of the Advocate for Small Business
Capital Formation, at (202) 551–5407,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–3628.
FOR FURTHER INFORMATION CONTACT:
The
meeting will be open to the public.
Persons needing special
accommodations because of a disability
should notify the contact person listed
in the section above entitled FOR
FURTHER INFORMATION CONTACT. The
agenda for the meeting includes matters
relating to rules and regulations
affecting small and emerging companies
and their investors under the federal
securities laws.
SUPPLEMENTARY INFORMATION:
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Dated: September 2, 2021.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021–19416 Filed 9–8–21; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92861; File No. SR–DTC–
2021–014]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Designation of Longer Period for
Commission Action on a Proposed
Rule Change To Provide Settlement
Services for Transactions Entered Into
Under the Proposed Securities
Financing Transaction Clearing
Service of the National Securities
Clearing Corporation
September 2, 2021.
On July 22, 2021, The Depository
Trust Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) proposed rule change
SR–DTC–2021–014 (‘‘Proposed Rule
Change’’) pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2
The Proposed Rule Change was
published for comment in the Federal
Register on August 11, 2021.3 The
Commission has received no comment
letters on the Proposed Rule Change.
Section 19(b)(2) of the Act 4 provides
that, within 45 days of the publication
of notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for the
Proposed Rule Change is September 25,
2021.
The Commission is extending the 45day period for Commission action on
the Proposed Rule Change. The
Commission finds that it is appropriate
to designate a longer period within
which to take action on the Proposed
Rule Change so that it has sufficient
time to consider and take action on the
Proposed Rule Change.
Accordingly, pursuant to Section
19(b)(2) of the Act 5 and for the reasons
stated above, the Commission
designates November 9, 2021 as the date
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 92572
(August 5, 2021), 86 FR 44077 (August 11, 2021)
(SR–DTC–2021–014) (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 Id.
BILLING CODE 8011–01–P
2 17
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by which the Commission shall either
approve, disapprove, or institute
proceedings to determine whether to
disapprove proposed rule change SR–
DTC–2021–014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–19419 Filed 9–8–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92865; File No. SR–
NASDAQ–2021–066]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of a Proposed Rule Change, as
Modified by Amendment No. 1, To List
and Trade Shares of the Valkyrie XBTO
Bitcoin Futures Fund Under Nasdaq
Rule 5711(g)
September 2, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
23, 2021, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange. On August
25, 2021, the Exchange filed
Amendment No. 1 to the proposed rule
change. The Commission is publishing
this notice to solicit comments on the
proposed rule change, as amended, from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade shares of the Valkyrie XBTO
Bitcoin Futures Fund (the ‘‘Trust’’)
under Nasdaq Rule 5711(g)
(‘‘Commodity Futures Trust Shares’’).
The shares of the Trust are referred to
herein as the ‘‘Shares.’’
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
6 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 86, No. 172 / Thursday, September 9, 2021 / Notices
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The ETF community has worked for
many years to obtain the approval of an
exchange tradeable product that
provides investors with the important
opportunity to gain exposure to digital
currencies such as bitcoin. Since March
2017, the Commission has disapproved
more than a dozen such proposals and
failed to act on many others that were
filed and later withdrawn. During that
period, digital assets have gained
substantial traction in the global and
domestic economy; have become a
sought-after investment tool for a
rapidly-expanding number of
institutional and individual investors;
and have spurred significant investment
and improvement in all aspects of
digital currency ownership, including
storage, security, payments, and
exchange.3
Nasdaq believes that bitcoin and its
surrounding ecosystem have evolved
sufficiently to support the approval of a
Bitcoin Futures ETF because the
concerns the Commission has identified
previously have been addressed. To that
end, Nasdaq believes that its current
proposal differs from previous filings
recently submitted due to significant
developments in the domestic bitcoin
futures market, including:
(1) In previous disapproval orders, the
Commission expressed concern over a
bitcoin fund holding physical bitcoin,
but the Trust instead will pursue its
investment objective solely by holding
CME Bitcoin Futures that are cashsettled and traded on the Chicago
Mercantile Exchange, Inc. (the ‘‘CME’’),
3 For example, Coinbase (COIN) alone sports an
enterprise market capitalization of around $67
billion and it recently reported over 68 million
individual accounts holding $180 billion of digital
currencies, and $462 billion in quarterly notional
value of trading volume.
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which was self-certified with the
Commodity Futures Trading
Commission (the ‘‘CFTC’’) (aside from
holding cash and Money Market
Instruments, as defined herein);
(2) The Commission expressed
concern in previous disapproval orders
about self-regulation and the oversight
necessary to maintain and promote the
fair and transparent trading of listed
products, including bitcoin futures.
Specifically, the Commission expressed
concern with the listing exchange’s
ability to deter fraud and manipulation
in compliance with Section 6(b)(5) of
the Act. The Commission stated that
this could be addressed by entering into
a surveillance agreement with a
‘‘regulated market of significant size.’’
Since the previous disapproval orders,
both the bitcoin and bitcoin futures
markets have developed to the point
that the CME Bitcoin Futures market is
a ‘‘regulated market of significant size,’’
for purposes of compliance with Section
6(b)(5) of the Act.
(3) The CME’s compliance with the
CFTC’s Core Principles (detailed further
herein) also serves to strengthen the
Trust’s resistance to fraud and
manipulation and should appropriately
address the Commission’s concerns
regarding investor protection. The CME
Bitcoin Futures contract is cash settled,
is not readily subject to manipulation or
distortion, and is subject to real-time
trade monitoring and comprehensive
and accurate trade reconstruction.
Background
The Exchange proposes to list and
trade Shares of the Trust under Nasdaq
Rule 5711(g), which governs the listing
and trading of Commodity Futures Trust
Shares on the Exchange.4 The Shares
will be offered by the Trust, which was
established as a Delaware statutory trust
on May 18, 2021. According to the Draft
Registration Statement (as defined
below), the Trust will not be registered
as an investment company under the
Investment Company Act of 1940 and is
not required to register under such act.5
The Trust is registered as a commodity
pool under the Commodity Exchange
Act (‘‘CEA’’).6 The Shares of the Trust
4 Nasdaq Rule 5711(g)(iii) defines Commodity
Futures Trust Shares as ‘‘a security that (A) is
issued by a trust (‘‘Trust’’) that (1) is a commodity
pool as defined in the Commodity Exchange Act
and regulations thereunder, and that is managed by
a commodity pool operator registered with the
Commodity Futures Trading Commission, and (2)
holds positions in futures contracts that track the
performance of a specified commodity, or interests
in a commodity pool which, in turn, holds such
positions; and (B) is issued and redeemed daily in
specified aggregate amounts at net asset value.’’
5 15 U.S.C. 80a–1.
6 7 U.S.C. 1.
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will be registered with the Commission
by means of the Trust’s registration
statement on Form S–1 (the
‘‘Registration Statement’’) under the
Securities Act of 1933, as amended (the
‘‘Securities Act’’). The Registration
Statement will be effective as of the date
of any offer and sale pursuant to the
Registration Statement. A draft
registration statement (the ‘‘Draft
Registration Statement’’) was filed
confidentially with the Commission on
May 21, 2021.7
Valkyrie Funds LLC (the ‘‘Sponsor’’)
serves as the Trust’s sponsor and
commodity pool operator. Vident
Investment Advisory, LLC (the ‘‘SubAdvisor’’) serves as the Trust’s subadvisor and commodity trading advisor.
XBTO Trading, LLC is the research
provider for the Sponsor and the SubAdvisor. Delaware Trust Company (the
‘‘Trustee’’) serves as the trustee for the
Trust. The Sponsor is currently
considering third-party service
providers for the roles of Administrator,
Transfer Agent, Custodian and
Marketing Agent, as described in the
Draft Registration Statement.
The Bitcoin Industry and Market
Bitcoin
Bitcoin is the digital asset that is
native to, and created and transmitted
through the operations of, the peer-topeer Bitcoin Network, a decentralized
network of computers that operates on
cryptographic protocols. No single
entity owns or operates the Bitcoin
Network, the infrastructure of which is
collectively maintained by a
decentralized user base. The Bitcoin
Network allows people to exchange
tokens of value, called bitcoin, which
are recorded on a public transaction
ledger known as the Blockchain. Bitcoin
can be used to pay for goods and
services, or it can be converted to fiat
currencies, such as the U.S. dollar, at
rates determined on bitcoin trading
platforms or in individual end-user-toend-user transactions under a barter
system.
The Bitcoin Network is decentralized
and does not require governmental
authorities or financial institution
intermediaries to create, transmit, or
determine the value of bitcoin. In
addition, no party may easily censor
transactions on the Bitcoin Network. As
a result, the Bitcoin Network is often
7 See Draft Registration Statement on Form S–1
confidentially filed with the Commission on May
21, 2021 (file no. 377–04910). The descriptions of
the Trust and the Shares contained herein are
based, in part, on information in the Draft
Registration Statement.
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referred to as decentralized and
censorship resistant.
The value of bitcoin is determined by
the supply of and demand for bitcoin.
New bitcoins are created and rewarded
to the parties providing the Bitcoin
Network’s infrastructure (‘‘miners’’) in
exchange for their expending
computational power to verify
transactions and add them to the
Blockchain. The Blockchain is
effectively a decentralized database that
includes all blocks that have been
solved by miners, and is updated to
include new blocks as they are solved.
Each bitcoin transaction is broadcast to
the Bitcoin Network and, when
included in a block, recorded in the
Blockchain. Each new block records
outstanding bitcoin transactions, and
outstanding transactions are settled and
validated through such recording. The
Blockchain represents a complete,
transparent, and unbroken history of all
transactions of the Bitcoin Network.
The method for creating new bitcoin
is mathematically controlled in a
manner so that the supply of bitcoin
grows at a limited rate pursuant to a preset schedule. The number of bitcoin
awarded for solving a new block is
automatically halved every 210,000
blocks. Thus, the current fixed reward
for solving a new block is 6.25 bitcoin
per block; the reward decreased from
twenty-five bitcoin in July 2016 and
12.5 in May 2020. It is estimated to
halve again at the start of 2024. This
deliberately controlled rate of bitcoin
creation means that the number of
bitcoin in existence will never exceed
twenty-one million and that bitcoin
cannot be devalued through excessive
production unless the Bitcoin Network’s
source code (and the underlying
protocol for bitcoin issuance) is altered.
As of January 1, 2021, approximately
18,587,000 bitcoin have been mined. It
is estimated that more than ninety
percent of the twenty-one million
bitcoin will have been produced by
2022.
Bitcoin Network
The first step in directly using the
Bitcoin Network for transactions is to
download specialized software referred
to as a ‘‘bitcoin wallet.’’ A user’s bitcoin
wallet can run on a computer or
smartphone and can be used both to
send and to receive bitcoin. Within a
bitcoin wallet, a user can generate one
or more unique ‘‘bitcoin addresses,’’
which are conceptually similar to bank
account numbers. After establishing a
bitcoin address, a user can send or
receive bitcoin from his or her bitcoin
address to another user’s address.
Sending bitcoin from one bitcoin
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address to another is similar in concept
to sending a bank wire from one
person’s bank account to another
person’s bank account, provided,
however, that such transactions are not
managed by an intermediary and
erroneous transactions generally may
not be reversed or remedied once sent.
The amount of bitcoin associated with
each bitcoin address, as well as each
bitcoin transaction to or from such
address, is transparently reflected in the
Blockchain and can be viewed by
websites that operate as ‘‘blockchain
explorers.’’ Copies of the Blockchain
exist on thousands of computers on the
Bitcoin Network. Anyone can view the
blockchain as it is available to observe
without restriction. A user’s bitcoin
wallet will either contain a copy of the
blockchain or be able to connect with
another computer that holds a copy of
the blockchain. The innovative design
of the Bitcoin Network protocol allows
each Bitcoin user to trust that their copy
of the Blockchain will generally be
updated consistent with each other
user’s copy because it is extraordinarily
unlikely that the Blockchain could be
retroactively changed.
When a Bitcoin user wishes to
transfer bitcoin to another user, the
sender must first have the recipient’s
Bitcoin address. The sender then uses
his or her Bitcoin wallet software to
create a proposed transaction to be
added to the Blockchain. The proposal
would reduce the amount of bitcoin
allocated to the sender’s address and
increase the amount allocated to the
recipient’s address, in each case by the
amount of bitcoin desired to be
transferred. The proposal is completely
digital in nature, similar to a file on a
computer, and it can be sent to other
computers participating in the Bitcoin
Network.
Bitcoin Transactions
A bitcoin transaction contains the
sender’s bitcoin address, the recipient’s
bitcoin address, the amount of bitcoin to
be sent, a transaction fee, and the
sender’s digital signature. Bitcoin
transactions are secured by a type of
cryptography known as public-private
key cryptography, represented by the
bitcoin addresses and digital signature
in a transaction’s data file. Each Bitcoin
Network address, or wallet, is associated
with a unique ‘‘public key’’ and ‘‘private
key’’ pair, both of which are lengthy
alphanumeric codes, derived together
and possessing a unique relationship.
The public key is visible to the public
and analogous to the Bitcoin Network
address. The private key is a secret and
may be used to digitally sign a
transaction in a way that proves the
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transaction has been signed by the
holder of the public-private key pair,
without having to reveal the private key.
A user’s private key must be kept in
accordance with appropriate controls
and procedures to ensure that it is used
only for legitimate and intended
transactions. If an unauthorized third
person learns of a user’s private key,
that third person could forge the user’s
digital signature and send the user’s
bitcoin to any arbitrary bitcoin address,
thereby stealing the user’s bitcoin.
Similarly, if a user loses his private key
and cannot restore such access (e.g.,
through a backup), the user may
permanently lose access to the bitcoin
contained in the associated address.
The Bitcoin Network incorporates a
system to prevent double-spending of a
single bitcoin. To prevent the possibility
of double-spending a single bitcoin,
each validated transaction is recorded,
time stamped and publicly displayed in
a ‘‘block’’ in the Blockchain, which is
publicly available. Thus, the Bitcoin
Network provides confirmation against
double-spending by memorializing
every transaction in the Blockchain,
which is publicly accessible and
downloaded in part or in whole by all
users of the Bitcoin Network software
program. Any user may validate,
through their Bitcoin wallet or a
blockchain explorer, that each
transaction in the Bitcoin Network was
authorized by the holder of the
applicable private key. Bitcoin Network
mining software consistent with
reference software requirements
typically validates each such transaction
before including it in the Blockchain.
This cryptographic security ensures that
bitcoin transactions may not generally
be counterfeited, although it does not
protect against the ‘‘real world’’ theft or
coercion of use of a Bitcoin user’s
private key, including the hacking of a
Bitcoin user’s computer or a service
provider’s systems.
A Bitcoin transaction between two
parties is settled when recorded in a
block added to the Blockchain.
Validation of a block is achieved by
confirming the cryptographic hash value
included in the block’s solution and by
the block’s addition to the longest
confirmed Blockchain on the Bitcoin
Network. For a transaction, inclusion in
a block on the Blockchain constitutes a
‘‘confirmation’’ of a Bitcoin transaction.
As each block contains a reference to
the immediately preceding block,
additional blocks appended to and
incorporated into the Blockchain
constitute additional confirmations of
the transactions in such prior blocks,
and a transaction included in a block for
the first time is confirmed once against
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have to re-solve all of the old blocks
sought to be regenerated and be able to
continuously add new blocks to the
Blockchain at a speed that would have
to outpace that of all of the other miners
on the Bitcoin Network, who would be
continuously solving for and adding
new blocks to the Blockchain. There are
no known reports of malicious parties
taking control of the Bitcoin Network or
undoing past transactions in a block
recorded on the Blockchain.
double-spending. The layered
confirmation process makes changing
historical blocks (and reversing
transactions) exponentially more
difficult the further back one goes in the
Blockchain.
To undo past transactions in a block
recorded on the Blockchain, a malicious
actor would have to exert tremendous
computer power in re-solving each
block in the Blockchain starting with
and after the target block and
broadcasting all such blocks to the
Bitcoin Network. The Bitcoin Network
is generally programmed to consider the
longest Blockchain containing solved
and valid blocks to be the most accurate
Blockchain. In order to undo multiple
layers of confirmation and alter the
Blockchain, the malicious actor would
Bitcoin Futures
The CME began offering trading in
Bitcoin Futures in 2017. Each contract
represents five bitcoin and is based on
the CME CF Bitcoin Reference Rate (the
‘‘CME CF BRR’’).8 The contracts trade
and settle like other cash-settled
8 According to CME, the CME CF Bitcoin
Reference Rate aggregates the trade flow of major
bitcoin spot exchanges during a specific calculation
window into a once-a-day reference rate of the U.S.
dollar price of bitcoin. Calculation rules are geared
toward maximum transparency and real-time
replicability in underlying spot markets, including
Bitstamp, Coinbase, Gemini, itBit, and Kraken. For
additional information, refer to https://
www.cmegroup.com/trading/cryptocurrencyindices/cf-bitcoin-reference-rate.html?redirect=/
trading/cf-bitcoin-reference-rate.html.
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50573
commodity futures contracts. Nearly
every measurable metric related to CME
Bitcoin Futures has trended consistently
up since launch and/or accelerated
upward in the past year.9 For example,
there was approximately $2.7 billion in
trading in Bitcoin Futures in March
2021 compared to $118 million, $70
million, and $262 million in total
trading in March 2018, March 2019 and
March 2020, respectively. Bitcoin
Futures traded over $63 billion in
notional amount on the CME in March
2021 and represented $2.5 billion in
average daily open interest compared to
$151 million in March 2020. This
general upward trend in trading volume
and open interest is captured in the
following chart:
9 The recent launch of a bitcoin futures-based
mutual fund from ProShares, the Bitcoin Strategy
ProFund (BTCFX), has increased approximately
14% since its July launch.
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Prior to listing a new commodity
futures contract, a designated contract
market must either submit a selfcertification to the CFTC that the
contract complies with the CEA and
CFTC regulations or voluntarily submit
the contract for CFTC approval. This
process applies to all futures contracts
and all commodities underlying the
futures contracts, whether the new
futures contracts are related to oil, gold,
or any other commodity.10 On
December 1, 2017, it was announced 11
that the CME had self-certified with the
CFTC new contracts for bitcoin futures
products.12 The CME Bitcoin Futures 13
trade and settle like any other cashsettled commodity futures contracts.14
Like other futures products on the CME,
Bitcoin Futures are subject to oversight
by the CFTC, and the CME itself is
empowered to enforce its own rulebook
as it relates to the Bitcoin Futures.
Furthermore, the CME has a
surveillance team that monitors the
trading of Bitcoin futures at all times
along with the underlying bitcoin spot
exchanges with which the CME has a
surveillance agreement.
As such, the Exchange is proposing to
list and trade Shares of the Trust under
Nasdaq Rule 5711(g), which governs the
listing and trading of Commodity
Futures Trust Shares on the Exchange.
Investment Objective
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According to the Draft Registration
Statement, the investment objective of
the Trust is for the Shares to reflect the
performance of bitcoin as represented
by the CME CF BRR, less the Trust’s
liabilities and expenses.
10 Section 1a(9) of the CEA defines commodity to
include, among other things, ‘‘all services, rights,
and interests in which contracts for future delivery
are presently or in the future dealt in.’’ The
definition of commodity is broad. 7 U.S.C. 1a(9).
11 See ‘‘CFTC Statement on Self-Certification of
Bitcoin Products by CME, CFE and Cantor
Exchange,’’ dated December 1, 2017, available at
https://www.cftc.gov/PressRoom/PressReleases/
pr7654-17.
12 Bitcoin is a commodity as defined in Section
1a(9) of the CEA. 7 U.S.C. 1a(9). See In re Coinflip,
Inc., No. 15–29 (CFTC Sept. 17, 2015), available at
https://www.cftc.gov/ucm/groups/public/@
lrenforcementactions/documents/legalpleading/
enfcoinfliprorder09172015.pdf.
13 The CME Bitcoin Futures are also cash-settled
futures contracts based on the CME CF BRR, which
is based on an aggregation of trade flow from
several bitcoin spot exchanges, that will expire on
a monthly and quarterly basis. CME Futures began
trading on December 17, 2017.
14 The CME is registered with the CFTC and seek
to provide a neutral, regulated marketplace for the
trading of derivatives contracts for commodities,
such as futures, options and certain swaps. The
CME is a member of the Intermarket Surveillance
Group.
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Investment Strategy
The Trust pursues its investment
objective primarily by investing in
Bitcoin Futures. Futures are financial
contracts, the value of which depends
on, or is derived from, the underlying
reference asset. In the case of Bitcoin
Futures, the underlying reference asset
is Bitcoin. Futures contracts may be
cash-settled or physically-settled. When
a cash-settled future expires, if the value
of the underlying asset exceeds the
futures price, the seller pays to the
purchaser cash in the amount of that
excess, and if the futures price exceeds
the value of the underlying asset, the
purchaser pays to the seller cash in the
amount of that excess. When a
physically-settled future expires, the
seller is obligated to deliver the
underlying asset to the purchaser in
exchange for the futures price agreed to
at the outset of the contract. The only
Bitcoin Futures in which the Trust
invests are cash-settled Bitcoin Futures
traded on commodity exchanges
registered with the CFTC.
At expiration, the cash settlement
amount for the Bitcoin Futures held by
the Trust will be determined by
comparing the price at which the Trust
purchased the futures contract on the
relevant futures exchange with the
reference rate specified by that exchange
on the expiration date. For example, the
CME has specified that the reference
rate for its Bitcoin Futures will be a
volume-weighted composite of Bitcoin
prices on multiple Bitcoin exchanges.
The Trust does not invest in Bitcoin or
other digital assets directly.
The Trust seeks to purchase a number
of Bitcoin Futures so that the total value
of the Bitcoin underlying the Bitcoin
Futures held by the Trust is as close to
100% of the net assets of the Trust (the
‘‘Target Exposure’’) as it is reasonably
practicable to achieve, although as
described further in the Draft
Registration Statement, there can be no
assurance that the Trust will be able to
achieve or maintain the Target
Exposure. The Trust intends to execute
these purchases on commodity
exchanges registered with the CFTC
through futures commission merchants
(‘‘FCMs’’). An FCM is a brokerage firm
that solicits or accepts orders to buy or
sell futures contracts and accepts money
or other assets from customers to
support such orders. The Trust does not
intend to hold short positions in any
futures, and accordingly, the most an
investor could lose is the amount of his
or her investment in the Trust. Although
the Trust’s Bitcoin Futures will provide
leverage to the extent that they give the
Trust exposure to an amount of
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underlying Bitcoin with a greater value
than the amount of collateral the Trust
is required to post, the Trust does not
intend to provide investors with
exposure to an amount of Bitcoin in
excess of the Trust’s net assets. The
Trust will engage in active and frequent
trading of Bitcoin Futures in seeking to
maintain the Target Exposure.
In addition to the Trust’s investments
in Bitcoin Futures, the Trust expects to
have significant holdings of cash and
high-quality, short-term debt
instruments that have terms-to-maturity
of less than 397 days, such as U.S.
government securities and repurchase
agreements (the ‘‘Money Market
Instruments’’). The Money Market
Instruments are intended to provide
liquidity, to serve as collateral for the
Trust’s Bitcoin Futures and to support
the Trust’s use of leverage through the
Trust’s Bitcoin Futures. The amount of
Money Market Instruments held by the
Trust may change over time and will be
determined primarily by the amount
needed to seek to achieve or maintain
the Target Exposure.
The Trust will generally hold its
investments in Bitcoin Futures during
periods in which the price of Bitcoin is
flat or declining as well as during
periods in which the price of Bitcoin is
rising, and the Advisor will generally
not seek to change the Trust’s Target
Exposure based on daily price changes.
For example, if the Trust’s positions in
Bitcoin Futures are declining in value,
the Trust generally will not close out its
positions except in order to meet
redemption requests. As a result, any
decrease in value of the Bitcoin Futures
in which the Trust invests will result in
a decrease in the Trust’s net asset value
(‘‘NAV’’).
Calculation of the Trust’s NAV
According to the Draft Registration
Statement, the NAV of the Trust will be
determined in accordance with
Generally Accepted Accounting
Principles (‘‘GAAP’’) as the total value
of bitcoin held by the Trust, plus any
cash or other assets, less any liabilities
including accrued but unpaid expenses.
The NAV per Share will be determined
by dividing the NAV of the Trust by the
number of Shares outstanding.
The NAV of the Trust is typically
determined as of 4:00 p.m. (Eastern
time) on each day the Shares trade on
the Exchange (a ‘‘Business Day’’). The
Trust’s daily activities are generally not
reflected in the NAV determined for the
Business Day on which the transactions
are effected (the trade date), but rather
on the following Business Day.
Bitcoin Futures traded on a U.S.
exchange are generally valued using the
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last traded price before the NAV
calculation time on the date with
respect to which the NAV is being
determined. Money Market Instruments
will generally be valued at their market
price using market quotations or
information provided by a pricing
service.
For more information regarding the
valuation of Trust investments in
calculating the Trust’s NAV, see the
Draft Registration Statement.
Preventing Fraudulent and
Manipulative Practices
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Applicable Standard of Review
In disapproving prior proposals to list
and trade shares of various bitcoin trusts
and bitcoin-based trust issued receipts,
the Commission noted that such
proposals did not adequately
demonstrate that they were designed to
prevent fraudulent and manipulative
acts and practices and to protect
investors and the public interest,
consistent with Section 6(b)(5) of the
Act.15 The Commission does not apply
15 See, e.g., Order Disapproving a Proposed Rule
Change, as Modified by Amendments No. 1 and 2,
to BZX Rule 14.11(e)(4), To List and Trade Shares
Issued by the Winklevoss Bitcoin Trust, Securities
Exchange Act Release No. 80206 (Mar. 10, 2017), 82
FR 14076 (Mar. 16, 2017) (SR–BatsBZX–2016–30)
(‘‘Winklevoss I Order’’); 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 (Aug. 1, 2018) (SR–BatsBZX–2016–30)
(‘‘the Winklevoss II Order’’); Order Disapproving a
Proposed Rule Change, as Modified by Amendment
No. 1, Relating to the Listing and Trading of Shares
of the Bitwise Bitcoin ETF Trust Under NYSE Arca
Rule 8.201–E, Securities Exchange Act Release No.
87267 (October 9, 2019), 84 FR 55382 (October 16,
2019) (SR–NYSEArca–2019–01) (the ‘‘Bitwise
Order’’); Order Disapproving a Proposed Rule
Change, as Modified by Amendment No. 1, to
Amend NYSE Arca Rule 8.201–E (CommodityBased Trust Shares) and to List and Trade Shares
of the United States Bitcoin and Treasury
Investment Trust Under NYSE Arca Rule 8.201–E,
Securities Exchange Act Release No. 88284
(February 26, 2020), 85 FR 12595 (Mar. 3, 2020)
(SR–NYSEArca–2019–39) (the ‘‘Wilshire Phoenix
Order’’); Order Disapproving a Proposed Rule
Change to List and Trade the Shares of the
ProShares Bitcoin ETF and the ProShares Short
Bitcoin ETF, Securities Exchange Act Release No.
83904 (August 22, 2018), 83 FR 43934 (August 28,
2018) (SR–NYSEArca–2017–139); Order
Disapproving a Proposed Rule Change Relating to
Listing and Trading of the Direxion Daily Bitcoin
Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull
Shares, Direxion Daily Bitcoin 1.5X Bull Shares,
Direxion Daily Bitcoin 2X Bull Shares, and Direxion
Daily Bitcoin 2X Bear Shares Under NYSE Arca
Rule 8.200–E, Securities Exchange Act Release No.
83912 (August 22, 2018), 83 FR 43912 (August 28,
2018) (SR–NYSEArca–2018–02); Order
Disapproving a Proposed Rule Change to List and
Trade the Shares of the GraniteShares Bitcoin ETF
and the GraniteShares Short Bitcoin ETF, Securities
Exchange Act Release No. 83913 (August 22, 2018),
83 FR 43923 (August 28, 2018) (SR–CboeBZX–
2018–01) (the ‘‘GraniteShares Order’’).
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a ‘‘cannot be manipulated’’ standard,
but instead seeks to examine whether a
proposal meets the requirements of the
Act.16 The Commission has explained
that a proposal could satisfy the
requirements of the Act in the first
instance by demonstrating that the
listing exchange has entered into a
comprehensive surveillance sharing
agreement (‘‘CSSA’’) with a regulated
market of significant size relating to the
underlying assets.17 The Commission
has also recognized that a listing
exchange would not necessarily need to
enter into a CSSA with a regulated
significant market if the underlying
commodity market inherently possessed
a unique resistance to manipulation
beyond the protections that are utilized
by traditional commodity or securities
markets or if the listing exchange could
demonstrate that there were sufficient
‘‘other means to prevent fraudulent and
manipulative acts and practices.’’ 18
While the earliest of the prior
disapproval orders applied these
standards to a commodity-trust based on
bitcoin, the Commission has stated its
belief that these standards are also
appropriate for an ETP based on Bitcoin
Futures.19
The Commission has noted that
information sharing agreements with
primary markets trading index
components underlying a derivative
product are an important part of a selfregulatory organization’s ability to
monitor for trading abuses in derivative
products.20 In addition, the
Commission’s approval orders for
commodity-futures ETPs 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 (‘‘ISG’’).21 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
futures markets, and the Commission
was in each of those cases dealing with
a large futures market that had been
trading for a number of years before an
16 See
17 See
Winklevoss II Order, 84 FR at 37582.
Wilshire Phoenix Order, 85 FR at 12596–
50575
exchange proposed an ETP based on
those futures.22 And where the
Commission has considered a proposed
ETP based on futures that had only
recently begun trading, the Commission
specifically addressed whether the
futures on which the ETP was based—
which were futures on an index of wellestablished commodity futures—were
illiquid or susceptible to
manipulation.23
As described below, the Exchange
believes the structure and operation of
the Trust are designed to prevent
fraudulent and manipulative acts and
practices, to protect investors and the
public interest, and to respond to the
specific concerns that the Commission
has identified with respect to potential
fraud and manipulation in the context
of a bitcoin ETP. In particular, the
Exchange believes that it has addressed
the Commission’s previously stated
concern that the Exchange must have
entered into a surveillance-sharing
agreement with a regulated market of
significant size as evidence of the
Trust’s resistance to manipulation. In
addition, the Exchange believes that
Bitcoin Futures market has sufficiently
developed since the prior disapproval
orders such that the market for Bitcoin
Futures now resembles the markets for
other commodities at the time the
related commodity futures-based ETP
was approved for listing. Finally, the
Exchange believes it has demonstrated
that the Trust possesses other means to
prevent fraud or manipulation through
the CME’s use of the CME CF BRR as the
reference rate for Bitcoin Futures
contracts. The Exchange also believes
that listing of the Trust’s Shares on the
Exchange will provide investors with
such an opportunity to obtain exposure
to bitcoin within a regulated
environment.
Surveillance Sharing Agreements With a
Market of Significant Size
In previous orders rejecting the listing
of Bitcoin ETFs, the Commission noted
its concerns that the bitcoin market
could be subject to manipulation.24 In
these orders, the Commission cited
numerous precedents 25 in which 19b–4
listing applications were approved
based on findings that the particular
market was either inherently resistant to
manipulation or that the listing
exchange had entered into a
surveillance sharing agreement with a
97.
18 See Winklevoss II Order, 84 FR at 37580,
37582–91; Bitwise Order, 84 FR at 55383, 55385–
406; Wilshire Phoenix Order, 85 FR at 12597.
19 See GraniteShares Order, 83 FR 43925.
20 Id at 43926.
21 Id at 43926, n. 35.
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22 Id
at 43927.
23 Id.
24 See Winklevoss I Order and Winklevoss II
Order.
25 For an extensive listing of such precedents, see
Winklevoss I Order, at 14083 n. 96.
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market of significant size.26 The
Commission noted that, for commoditytrust ETPs ‘‘there has been in every case
at least one significant, regulated market
for trading futures in the underlying
commodity—whether gold, silver,
platinum, palladium or copper—and the
ETP listing exchange has entered into
surveillance sharing agreements with, or
held [ISG] membership in common
with, that market.’’ 27
The CME 28 is a member of the ISG,
the purpose of which is ‘‘to provide a
framework for the sharing of
information and the coordination of
regulatory efforts among exchanges
trading securities and related products
to address potential intermarket
manipulations and trading abuses.’’ 29
Membership of a relevant futures
exchange in ISG is sufficient to meet the
surveillance sharing requirement.30
The Commission has previously noted
that the existence of a surveillance
sharing agreement by itself is not
sufficient for purposes of meeting the
requirements of Section 6(b)(5); the
surveillance sharing agreement must be
with a market of significant size.31 The
Commission has provided an example
of how it interprets the terms
‘‘significant market’’ and ‘‘market of
significant size,’’ though that definition
is meant to be illustrative and not
exclusive: ‘‘the terms ‘significant
market’ and ‘market of significant size’
. . . 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.’’ 32
As discussed below, the Exchange
maintains that the CME is a ‘‘market of
significant size’’ as it satisfies both
elements of the example provided by
the Commission.
Attempts To Manipulate the ETP Could
Only Occur on the CME
The first element of what constitutes
a ‘‘significant market’’ or ‘‘market of
significant size’’ is that there is a
reasonable likelihood that a person
attempting to manipulate the ETP
would also have to trade on a market (or
group of markets) to successfully
manipulate the ETP so that a
surveillance sharing agreement would
assist the ETP listing market in
detecting and deterring misconduct. The
Commission has stated that establishing
a lead-lag relationship (i.e., that price
formation occurs on the lead market and
informs or causes the price on the
lagging market) between the Bitcoin
Futures market and the spot market is
central to understanding whether it is
reasonably likely that a would-be
manipulator of the ETP would need to
trade on the Bitcoin Futures market to
successfully manipulate prices on those
spot platforms that feed into the
proposed ETP’s pricing mechanism.33
The Exchange believes that a lead-lag
relationship between the Bitcoin
Futures market and the spot market
currently exists. There is robust
evidence of this relationship that has
become available since the
Commission’s prior disapproval orders.
First, the Bitcoin Futures market has
grown considerably since the
Commission’s Wilshire Phoenix
Disapproval Order, which is evidenced
by plentiful empirical data. Second, the
staff of the Commission has itself
acknowledged the maturity of the
Bitcoin Futures market such that it has
indicated its comfort with allowing
investment companies registered under
the Investment Company Act of 1940 to
invest in Bitcoin Futures in certain
circumstances. Finally, current
academic research builds upon and
supplements the findings of previous
studies reviewed by the Commission
that a lead-lag relationship can be
statistically observed in relatively recent
data sets of the Bitcoin Futures and spot
market data.
Growth of the Bitcoin Futures Market
Since the dates of the GraniteShares
Order (the most recent disapproval
order related to a Bitcoin Futures ETP)
and the Wilshire Phoenix Order (the
most recent disapproval order related to
a spot bitcoin ETP), there has been
steady and robust growth observed on
the CME Bitcoin Futures market. The
following chart displays such
development in terms of trading
volumes and open interest:
TRADE DATA ON CME BITCOIN FUTURES 34
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Trading Volume—Notional Amount .............................................................................
Trading Volume—Number of Contracts ......................................................................
Open Interest—Notional Amount .................................................................................
Open Interest—Number of Contracts ..........................................................................
26 The Exchange to date has not entered into
surveillance sharing agreements with any
cryptocurrency platform. However, the CME, which
calculates the CME CF BRR, and which has offered
contracts for bitcoin futures products since 2017, is,
as noted below, a member of the ISG. In addition,
each Constituent Platform has entered into a data
sharing agreement with CME. See https://docscfbenchmarks.s3.amazonaws.com/CME+CF+
Constituent+Exchanges+Criteria.pdf.
27 See Winklevoss II Order, at 37594.
28 The CME is regulated by the CFTC, which has
broad reaching anti-fraud and anti-manipulation
authority including with respect to the bitcoin
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Daily average
for week
including August 24, 2018
(week of the
GraniteShares
order)
Daily average
for week
including February 26, 2020
(week of the
Wilshire Phoenix order) 35
$117,000,000
3,629
$95,400,000
2,956
$354,750,000
7,731
$250,250,000
5,407
market since bitcoin has been designated as a
commodity by the CFTC. See A CFTC Primer on
Virtual Currencies (October 17, 2017), available at
https://www.cftc.gov/sites/default/files/idc/groups/
public/documents/file/labcftc_primercurrencies
100417.pdf (the ‘‘CFTC Primer on Virtual
Currencies’’) (‘‘The CFTC’s jurisdiction is
implicated when a virtual currency is used in a
derivatives contract or if there is fraud or
manipulation involving a virtual currency traded in
interstate commerce.’’). See also 7 U.S.C. Sec.
7(d)(3) (‘‘The board of trade shall list on the
contract market only contracts that are not readily
susceptible to manipulation.’’).
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29 See
Daily average for the
week ending May 28,
2021
$2,412,000,000
12,610
$1,662,600,000
8,677
https://isgportal.org/overview.
e.g., Winklevoss II Order, at 37594.
31 See, e.g., Winklevoss II Order, at 37589–90.
32 See, e.g., Winklevoss II Order, at 37594; and see
GraniteShares Order, n. 85 and accompanying text.
33 See Wilshire Phoenix Order at 12612.
34 Figures calculated by the Exchange based on
data available at https://www.cmegroup.com/ftp/
bitcoinfutures/. Each Bitcoin Futures contract
represents 5 bitcoin.
35 Data for February 28, 2020 was not available
and thus not included in calculating the daily
averages.
30 See,
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The table above unequivocally
demonstrates that the Bitcoin Futures
market has grown at an accelerating
pace since the prior disapproval orders,
likely as a result of the entry of
institutional participants into both the
Bitcoin Futures market and the spot
bitcoin market (e.g., Tesla,
MicroStrategy, etc. have taken
substantial bitcoin positions).
Accordingly, the Exchange maintains
that because the Bitcoin Futures market
has grown to resemble other futures
markets, a lead-lag relationship that
exists in other mature futures markets
has also likely developed between the
Bitcoin Futures market and the bitcoin
spot market.36 Such a relationship is
demonstrated through analytical models
or other methods that show that the
activities in one market cause the price
formation on the other market, and there
is an emerging consensus among
academics that such a lead-lag
relationship in fact exists.
Recent Statements by the Staff of the
Commission
The Staff of the Commission’s
Division of Investment Management
recently issued its Staff Statement on
Funds Registered under the Investment
Company Act Investing in the Bitcoin
Futures Market.37 In that statement, the
Staff stated that mutual funds registered
under the Investment Company Act of
1940 could invest in the Bitcoin Futures
market so long as the fund had an
appropriate investment strategy and its
prospectus contained full disclosure of
material risks. In reaching such a
determination, the Staff noted that
while previously the Bitcoin Futures
market was in a nascent state with
limited trading volume, ‘‘[t]he Bitcoin
futures market has developed since
then, with increased trading volumes
and open-interest positions. In addition,
the Bitcoin futures market consistently
has produced a reportable price for
Bitcoin futures. The Bitcoin futures
market also has not presented the
custody challenges associated with
some cryptocurrency-based investing
because the futures are cash-settled.’’ 38
In support of this finding, the Staff cited
to the same CME data cited above
regarding trading volumes and openinterest.39 While the statement did not
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36 While
the Exchange believes that the size of the
bitcoin futures market relative to the spot market
has also grown, data on the global bitcoin
exchanges is difficult to state with certainty.
37 See Staff Statement on Funds Registered Under
the Investment Company Act Investing in the
Bitcoin Futures Market (May 11, 2021), available at
https://www.sec.gov/news/public-statement/staffstatement-investing-bitcoin-futures-market#_ftnref5.
38 Id.
39 Id at n. 4.
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go so far as to reach a conclusion that
the Bitcoin Futures market is a
significant market or market of
significant size related to bitcoin in the
context of the requirements of Exchange
Act Section 6(b)(5), the Staff’s own
observations regarding the maturity of
the Bitcoin Futures market is strong
evidence that concerns previously
raised regarding price manipulation in
that market have been significantly
reduced.
Third-Party Research
In the most recent denial order, the
Commission found that academic
evidence on whether a lead-lag
relationship between the Bitcoin
Futures market and spot market was
‘‘mixed’’ and could not conclude based
on that research that a would-be
manipulator of a proposed ETP would
transact on the CME Bitcoin Futures
market.40 The Commission critiqued the
choices made by the authors of such
research regarding ‘‘time period, futures
contracts, spot market platforms, spot
market prices, and analytic
methodologies.’’ The Exchange notes
that the studies cited in that denial
order generally analyzed data sets
covering the first several years of the
Bitcoin Futures market’s existence and
therefore may not be indicative of
current market behavior. While
scholarship stating the price discovery
takes place in the bitcoin spot market
continues to be produced,41 the majority
of the academic literature, including
more recent studies with more recent
data sets, supports the proposition that
price discovery does take place in the
Bitcoin Futures market and therefore a
lead-lag relationship exists between the
spot and futures markets.
In ‘‘What Role do Futures Markets
Play in Bitcoin Pricing? Causality,
Cointegration and Price Discovery from
a Time-Varying Perspective?’’,42 the
authors investigated the existence of
causal relationships, cointegration and
price discovery between bitcoin spot
40 See
Wilshire Phoenix Order at 12612–13.
e.g., Jui-Cheng Hung, Hung-Chun Liu, and
J. Jimmy Yang, ‘‘Trading Activity and Price
Discovery in Bitcoin Futures Markets’’ (March
2021). The Exchange maintains that the vector error
correction model and the modified information
shares model used in this study are inferior to the
Granger and Hasbrouck models used in other
studies for determining price-discovery over longer
periods. Even so, the authors of this study find that
‘‘Bitcoin futures contracts launched by the CME
exhibit superior competitiveness in the price
discovery relative to those by CBOE.’’
42 Yang Hu, Yang Greg Hou and Les Oxley,
International Review of Financial Analysis 72
(September 2020). The Exchange notes that while
the Commission has reviewed a working draft of
this study in a previous denial order, the study has
since been peer-reviewed and published.
41 See,
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50577
and futures markets from December
2017 to June/July 2019 from a timevarying perspective. The study’s authors
applied both a time-varying Granger
causality approach and Hasbrouck
information share approach to explore
the causal relationship between bitcoin
spot and futures markets.43 As the
authors explain therein, the timevarying approach taken for this study is
an important distinction from other
studies that have reached an opposite
conclusion, as it is now well known in
econometrics literature that some
possible cointegration relationships may
be missed if the underlying model
formulation is constrained to be time
invariant.44 This study, like others
before it, reached the conclusion that
the CME futures market, apart from
some short-period exceptions, appears
to dominate the underlying spot market
under both a Granger and Hasbrouck
analysis.
In ‘‘Fractional Cointegration in
Bitcoin Spot and Futures Markets’’, the
authors concluded that, with the
exception of the extraordinary market
events in early months of the Covid-19
pandemic period, ‘‘the futures market
dominates in the price discovery for
bitcoin.’’ 45 The dataset reviewed in that
analysis involved 1-min intraday data of
bitcoin spot and futures prices in the US
dollar from December 18, 2017 to July
31, 2020. Unlike other research
previously reviewed by the Commission
that used Granger and/or Hasbrouck
analysis to determine price formation,
the authors of this study used a
fractionally cointegrated vector
autoregressive model (‘‘FCVAR’’) to
determine which of the spot and futures
price contributes more to price
discovery. According to the study, the
FCVAR model ‘‘is more general [than
the CVAR model] and less restricted
when analyzing the relationship
between different variables’’ in that it
allows for fractional values for the order
of cointegration, whereas a CVAR model
allows only integers. The study found
that while studies using a nonfractional
CVAR model significantly overestimate
the price discovery of the futures
market, the FCVAR model still
43 Id at 3. According to the study, ‘‘Granger
causality is widely used to formally test for leadlag relationships (temporal ordering) to determine
which market (the spot or the futures prices) leads
the other.’’ The time-varying procedures employed
in assessing the Granger causality allowed the study
to determine whether the causal relationship varies
over the time studied.
44 Id at 2.
45 Jinhong Wu et al., ‘‘Fractional Cointegration in
Bitcoin Spot and Futures Markets’’, Journal of
Futures Markets, 1–17 (April 2021).
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concurred with the finding that the
futures market leads the spot market.
The research results discussed above
build upon the already emerging
academic consensus,46 demonstrated
using multiple analytical models, that
the Bitcoin Futures market does lead the
spot market such that a would-be
manipulator would necessarily
conclude that it must trade in the
futures market to successfully
manipulate the spot price of bitcoin.
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The Trust Will Not Be the Predominant
Influence on Prices in the Bitcoin Spot
and Futures Markets
The second element to determine
whether a market or group of markets is
of ‘‘significant size’’ requires that it is
unlikely that trading in the ETP would
be the predominant influence on prices
in that market. The Exchange also
believes that trading in the Shares
would not be the predominant force on
prices in the Bitcoin Futures market (or
spot market) for a number of reasons,
including the significant volume in the
Bitcoin Futures market, the size of
bitcoin’s market cap (approximately $1
trillion), and the significant liquidity
available in the spot market. In addition
to the Bitcoin Futures market data
points cited above, the spot market for
bitcoin is also very liquid.
According to data from CoinRoutes
from February 2021, the cost to buy or
sell $5 million worth of bitcoin averages
roughly 10 basis points with a market
impact of 30 basis points.47 For a $10
million market order, the cost to buy or
sell is roughly 20 basis points with a
market impact of 50 basis points. Stated
another way, a market participant could
46 See, e.g., Burcu Kapar and Jose Olmo, ‘‘An
Analysis of Price Discovery Between Bitcoin
Futures and Spot Markets’’, Economics Letters 174
(January 2019) (‘‘. . . [T]he Bitcoin futures market
dominates the price discovery process.’’); Erdinc
Akyildirim, ‘‘The Development of Bitcoin Futures:
Exploring the Interactions Between Cryptocurrency
Derivatives’’, Finance Research Letters 34 (May
2020) (‘‘While analysing breakpoints in efficiency,
we verify the view that Bitcoin futures dominate
price discovery relative to spot markets.’’);
Alexander Chang, William Herrmann and William
Chai, ‘‘Efficient Price Discovery in the Bitcoin
Markets’’, Wilshire Phoenix (October 2020) (‘‘[W]e
conclude that the CME bitcoin futures contribution
to price formation was greater than the contribution
from the related spot markets made up of the
Constituent Exchanges, indicating that the futures
lead the spot markets and thus contribute more to
price formation. . . .[T]his analysis was performed
using a methodology similar to the one employed
by the Division of Economic and Risk Analysis at
the SEC to evaluate the IEX exchange’s contribution
to price formation in the equities markets.’’)
available at https://www.wilshirephoenix.com/
efficient-price-discovery-in-the-bitcoin-markets/.
47 These statistics are based on samples of bitcoin
liquidity in USD (excluding stablecoins or Euro
liquidity) based on executable quotes on Coinbase
Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
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enter a market buy or sell order for $10
million of bitcoin and only move the
market 0.5%. More strategic purchases
or sales (such as using limit orders and
executing through OTC bitcoin trade
desks) would likely have less obvious
impact on the market—which is
consistent with MicroStrategy,48 Tesla 49
and Square 50 being able to collectively
purchase billions of dollars in bitcoin
without resulting in significant price
movements.
The results from a study conducted by
CF Benchmarks simulating to determine
the extent of ‘‘slippage’’ (i.e., the
difference between the expected price of
a trade and the price at which the trade
was actually executed) offer further
evidence that trading in the Shares is
unlikely to be the predominant
influence in either the bitcoin spot or
futures market.51 The CF Benchmarks
Analysis simulated the purchase of 50
bitcoins a day for 686 days (an amount
chosen specifically to replicate
hypothetical trades by a bitcoin ETP)
and found that the maximum amount of
slippage on a particular day was 0.3%,
with the remainder of values between
0% and 0.15%. Thus, according to CF
Benchmarks, the slippage in this study
could be described as having been
largely negligible or, at most, minor
during the observation period.52 While
the study focused on the impact of a
hypothetical ETP in the bitcoin spot
market, arbitrage mechanisms in the
spot and futures market dictate that it
would be unlikely for a Bitcoin Futures
ETP such as the Trust to overrun the
Bitcoin Futures market without also
overrunning the bitcoin spot market.
Accordingly, the CF Benchmarks
analysis further bolsters the Exchange’s
contention that the Trust and other
similar ETPs would be unlikely to
overrun the market.
As such, the combination of Bitcoin
Futures leading price discovery, the
overall size of the bitcoin market, and
48 See Form 10–Q submitted by MicroStrategy
Incorporated for the quarterly period ended
September 30, 2020 at 8: https://www.sec.gov/
ix?doc=/Archives/edgar/data/1050446/000156459
020047995/mstr-10q_20200930.htm.
49 See Form 10–K submitted by Tesla, Inc. for the
fiscal year ended December 31, 2020 at 23: https://
www.sec.gov/ix?doc=/Archives/edgar/data/
1318605/000156459021004599/tsla-10k_
20201231.htm.
50 See Form 10–Q submitted by Square, Inc. for
the quarterly period ended September 30, 2020 at
51: https://www.sec.gov/ix?doc=/Archives/edgar/
data/1512673/000151267320000012/sq20200930.htm.
51 See CF Benchmarks, ‘‘An Analysis of the
Suitability of the CME CF BRR for the Creation of
Regulated Financial Products,’’ December 2020 (the
‘‘CF Benchmarks Analysis’’), available at: https://
docsend.com/view/kizk7rarzaba6jxf.
52 Id.
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the ability for market participants,
including authorized participants
creating and redeeming in-kind with the
Trust, to buy or sell large amounts of
bitcoin without significant market
impact will help prevent the Shares
from becoming the predominant force
on pricing in either the bitcoin spot or
Bitcoin Futures markets, satisfying part
(b) of the test outlined above.
For these reasons, the Exchange
believes that all evidence strongly
suggests that the CME Bitcoin Futures
market has matured to a ‘‘market of
significant size’’ for purposes of the
Commission’s standard of review as (a)
a would-be manipulator of either bitcoin
or Bitcoin Futures would necessarily
have to execute its scheme on the CME
in order to manipulate the ETP; and (b)
the proposed ETP is unlikely to be the
predominant influence on prices in that
market as the absolute size of both the
futures and spot markers have grown
tremendously since the prior
disapproval orders.
Other Means To Prevent Fraudulent and
Manipulative Acts and Practices
As noted above, the Commission also
permits a listing exchange to
demonstrate that ‘‘other means to
prevent fraudulent and manipulative
acts and practices’’ are sufficient to
justify dispensing with the requisite
surveillance-sharing agreement. The
Exchange maintains that the CME CF
BRR is not readily susceptible to
manipulation due to the design of the
methodology, which adequately protects
the Trust from potential price
manipulation in the Bitcoin Futures and
spot bitcoin markets.53 The use of
medians in the methodology reduces the
effect of outlier prices on one or more
constituent exchange.54 The volumeweighting of medians filters out high
numbers of small trades that may
otherwise control the value of a nonvolume weighted median.55 The use of
twelve non-weighted partitions assures
that price information is sourced
equally over the entire observation
period.56 Influencing the rate would
therefore require trading activity during
multiple partitions on several exchanges
over an extended period, which would
prove a costly and an operationally
intensive undertaking. The methodology
is designed to remove the reliance on
any single contributing exchange, where
53 See CME CR Cryptocurrency Reference Rates
Methodology Guide (Version 9.0) (July 31, 2021),
available at https://docscfbenchmarks.s3.amazonaws.com/CME+CF+
Reference+Rates+Methodology.pdf.
54 Id at 6.
55 Id.
56 Id at 13.
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delayed or missing data from an
exchange does not cause a calculation
failure.
In accordance with the methodology,
if for any constituent exchange the
absolute percentage deviation of the
volume-weighted median trade price in
comparison with the median of the
volume-weighted median trade prices of
all constituent exchanges exceeds a
given threshold (currently set at 10%
and defined in the methodology), all
relevant transactions of that constituent
exchange are flagged as potentially
erroneous and are disregarded in the
calculation of CME CF BRR for that
calculation day.57 Furthermore, for
inclusion in the CME CF BRR’s
calculation, a constituent exchange’s
bitcoin U.S. Dollar spot trading volume
must meet the minimum threshold
(currently, 3% relative contribution over
two (2) consecutive quarters) as detailed
in the methodology.58 The criteria
collectively cause the constituent
exchanges to deliver transparent and
consistent trade and order data to CF
Benchmarks via an API with sufficient
reliability, detail and timeliness.59
Furthermore, the constituent
exchanges maintain fair and transparent
market conditions to impede illegal,
unfair or manipulative trading practices,
and comply with applicable law and
regulations including, capital markets
regulations, money transmission
regulations, client money custody
requirements, know-your-client (KYC)
requirements, and anti-moneylaundering (AML) regulations.60 The
constituent exchanges are also required
to cooperate with inquiries and
investigations of the administrator (CF
Benchmarks) and execute a data sharing
agreement with CME.61
Core Principles Certification of CME
BTC Futures Contracts
The CME Bitcoin Futures comply
with all Core Principles of the CEA. In
adhering to the Core Principles 62
applicable to all Designated Contract
Markets (‘‘DCM’’), the CME certified
that the CME Bitcoin Futures met
specific Core Principles as they apply to
futures contracts traded on a DCM. This
compliance results in the Trust’s core
asset being a well-regulated instrument
that is not readily susceptible to
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57 Id
at 11.
CME CF Cryptocurrency Pricing Products
Constituent Exchange Criteria (Version 5.0) (May
20, 2020) at 4, available at https://docscfbenchmarks.s3.amazonaws.com/CME+CF+
Constituent+Exchanges+Criteria.pdf.
59 Id.
60 Id.
61 Id.
62 17 CFR part 38.
58 See
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manipulation. The following Core
Principles are of particular relevance to
the analysis of this filing.
Contracts Not Readily Subject to
Manipulation
In certifying the CME BTC Futures
Contracts to the CFTC, the CME was
required to include an analysis
describing the contract, a discussion of
the market research it conducted and
note that the contract was designed to
meet the risk management needs of
prospective users and promote price
discovery of bitcoin. The CME
consulted with market users to obtain
their views and opinions during the
contract’s design process to ensure that
the contract’s terms and conditions
reflected the underlying cash market
and would perform the intended risk
management and/or price discovery
functions.
Since the CME BTC Futures Contract
is cash settled by reference to the CME
CF BRR, the CME CF BRR’s
methodology was provided to the CFTC
with supporting information showing
how the CME CF BRR is reflective of the
underlying cash market, is not readily
subject to manipulation or distortion,
and is based on a cash price series that
is reliable, acceptable, publicly available
and timely (as defined in paragraphs
(c)(2) and (c)(3) of Appendix C to part
38 of the CFTC’s Regulations).63
Prevention of Market Disruption
The Core Principles also required
CME to certify that it has the ability to
prevent manipulation, price distortion,
and disruptions of the cash-settlement
process through market surveillance,
compliance, and enforcement practices
and procedures. This would include the
ability to conduct real-time trade
monitoring and comprehensive and
accurate trade reconstruction. Such
trade monitoring also allows for the
detection of developing market
anomalies, such as abnormal price
movements and unusual trading
volumes, and position-limit violations.
CME rules grant exchanges broad
powers to intervene to prevent or reduce
market disruptions. Once a threatened
or actual disruption is detected, the
CME may take steps to prevent the
disruption or reduce its severity. CME’s
program includes automated trading
alerts to detect market anomalies and
position-limit violations as they develop
and before market disruptions occur or
become more serious. CFTC guidance
also requires a DCM to have access to
its traders’ position and transaction data
in the underlying reference market. The
63 Id.
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CME has, through an information
sharing agreement with CF Benchmarks,
the ability to access information about
trader positions and transactions in the
underlying spot BTC markets that
contribute to the CME CF BRR. The
CME has also implemented a series of
risk controls as outlined in the CFTC
Regulation’s Acceptable Practices.64
Position Limits
The CFTC’s Core Principles also call
for the use of position limits or position
accountability to reduce the threat of
market manipulation or congestion. The
CME has set a position limit of 2,000
contracts for the CME Bitcoin Futures.
As a result of this position limit, an
attempt to manipulate the price of the
CME Bitcoin Futures, and consequently
the shares in the Trust, would yield
little benefit due to the limited potential
profit available from the trading of 2,000
contracts.
Ongoing Coordination With CFTC on
CME Bitcoin Futures
Since the launch of CME Bitcoin
Futures, the CME has worked with the
CFTC on a regular and frequent basis to
assess the trading in the contract and
ensure that the market is free from fraud
and manipulation. CFTC staff, in the
recent past, has actively engaged CME
in reviewing CME’s surveillance
program for bitcoin products pursuant
to part 38 (Designated Contract Markets)
of the CFTC’s regulations. This
engagement has concerned CME’s
analysis of the trading activities and
strategies of bitcoin futures market
participants of significant size and
outreach to these market participants. It
has also concerned CME’s ability to
obtain transactional information from
the constituent exchanges that
contribute data to the bitcoin reference
rate in addition to CME’s continued
monitoring of the bitcoin reference rate
as a price series, particularly during the
index’s one-hour calculation window.
Creation and Redemption of Shares
According to the Draft Registration
Statement, the Trust will issue and
64 These risk controls include: (1) Dynamic circuit
breakers, which monitor for significant price
movements within a trading session by defining an
upper and lower limit of how far bitcoin futures can
move (10%) in any one hour rolling window and,
if triggered, matching is suspended for 2 minutes;
(2) velocity logic, which is designed to detect
market movement of a predefined number of ticks
either up or down within a predefined time and, if
triggered, matching is suspended for 10 seconds; (3)
daily price limits, which is the maximum daily
price range permitted for BTC futures (+/¥ 30%
from prior day settlement); and (4) initial margin
(currently set at 35% of notional value for outright
positions) charged for all open positions based on
expected volatility over a two-day close out period.
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redeem Shares on a continuous basis at
the NAV per Share only in large,
specified blocks each consisting of a
certain number of Shares (each such
block of shares called a ‘‘Creation Unit,’’
and collectively, the ‘‘Creation Units’’)
in transactions with broker-dealers and
large institutional investors that have
entered into participation agreements
(‘‘Authorized Participants’’). It is
currently anticipated that a Creation
Unit will consist of 50,000 Shares,
although this number may change from
time to time. It is currently expected
that the Trust’s Creation Units will
generally be issued and redeemed for
cash. Except when aggregated in
Creation Units, the Shares are not
redeemable securities. Once created,
Shares of the Trust may trade on the
secondary market in amounts less than
a Creation Unit.
Creation Procedures. On any Business
Day, an Authorized Participant may
place an order to create one or more
Creation Units. Purchase orders must be
placed by 2:00 p.m. (Eastern time). The
cut-off time may be earlier if, for
example, the Exchange or another
exchange material to the valuation or
operation of the Trust closes before the
cut-off time. If a purchase order is
received prior to the applicable cut-off
time, the day on which the Marketing
Agent receives a valid purchase order is
the purchase order date. If the purchase
order is received after the applicable
cut-off time, the purchase order date
will be the next Business Day. Purchase
orders are irrevocable. By placing a
purchase order, and prior to delivery of
such Creation Units, an Authorized
Participant’s DTC account will be
charged the non-refundable transaction
fee due for the purchase order.
Redemption Procedures. On any
Business Day, an Authorized Participant
may place an order with the Marketing
Agent to redeem one or more Creation
Units. Redemption orders must be
received prior to 2:00 p.m. (Eastern
time), or earlier if, for example, the
Exchange or another exchange material
to the valuation or operation of the
Trust closes before the cut-off time. If a
redemption order is received prior to
the applicable cut-off time, the day on
which the Marketing Agent receives a
valid redemption order is the
redemption order date. If the
redemption order is received after the
applicable cut-off time, the redemption
order date will be the next day.
Redemption orders are irrevocable.
Individual shareholders may not redeem
directly from the Trust.
By placing a redemption order, an
Authorized Participant agrees to deliver
the Creation Units to be redeemed
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through DTC’s book-entry system to the
applicable Trust not later than noon
(Eastern time), on the first Business Day
immediately following the redemption
order date (T+1). The Sponsor reserves
the right to extend the deadline for the
Trust to receive the Creation Units
required for settlement up to the second
Business Day following the redemption
order date (T+2). By placing a
redemption order, and prior to receipt of
the redemption proceeds, an Authorized
Participant must wire to the Custodian
the non-refundable transaction fee due
for the redemption order or any
proceeds due will be reduced by the
amount of the fee payable. At its sole
discretion, the Sponsor may agree to a
delivery date other than T+2. Additional
fees may apply for special settlement.
Upon the request of an Authorized
Participant made at the time of a
redemption order, the Sponsor at its
sole discretion may determine, in
addition to delivering redemption
proceeds, to transfer futures contracts to
the Authorized Participant pursuant to
an exchange of a futures contract for
related position (‘‘EFCRP’’) or to a block
trade sale of futures contracts to the
Authorized Participant.
Exchange’s Regular Market Session
(9:30 a.m. to 4:00 p.m. (Eastern time)).66
The IIV will be calculated by using the
prior day’s closing NAV per Share as a
base and updating that value during the
Exchange’s Regular Market Session to
reflect changes in the value of the
Trust’s NAV during the trading day.
The IIV disseminated during the
Exchange’s Regular Market Session
should not be viewed as an actual realtime update of the NAV, which will be
calculated only once at the end of each
trading day. The IIV will be widely
disseminated on a per Share basis every
15 seconds during the Exchange’s
Regular Market Session by one or more
major market data vendors. In addition,
the IIV will be available through on-line
information services.
The NAV for the Trust will be
calculated by the Sponsor once a day
and will be disseminated daily to all
market participants at the same time.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the Consolidated Tape Association
(‘‘CTA’’).
Initial and Continued Listing
The Trust’s website
(www.valkyriefunds.io) will include
quantitative information on a per Share
basis updated on a daily basis,
including (i) the current NAV per Share
daily and the prior business day’s NAV
and the reported closing price; (ii) the
mid-point of the bid-ask price 65 in
relation to the NAV as of the time the
NAV is calculated (‘‘Bid-Ask Price’’)
and a calculation of the premium or
discount of such price against such
NAV; and (iii) data in chart format
displaying the frequency distribution of
discounts and premiums of the daily
Bid-Ask Price against the NAV, within
appropriate ranges, for each of the four
previous calendar quarters (or for the
life of the Trust, if shorter). In addition,
on each business day the Trust’s website
will provide pricing information for the
Shares. Also, an estimated value that
reflects an estimated intraday value of
the Trust’s portfolio (the ‘‘Intraday
Indicative Value’’), will be
disseminated.
The Trust’s website will provide an
intra-day indicative value (‘‘IIV’’) per
Share updated every 15 seconds, as
calculated by the Exchange or a thirdparty financial data provider during the
The Shares will be subject to Nasdaq
Rule 5711(g)(vi), which sets forth the
initial and continued listing criteria
applicable to Commodity Futures Trust
Shares. The Exchange will obtain a
representation that the Trust’s NAV will
be calculated daily and will be made
available to all market participants at
the same time. Upon termination of the
Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust
Company, is a trust company having
substantial capital and surplus and the
experience and facilities for handling
corporate trust business, as required
under Nasdaq Rule 5711(g)(vi)(D) and
no change will be made to the trustee
without prior notice to and approval of
the Exchange.
As required in Nasdaq Rule
5711(g)(vii), the Exchange notes that any
registered market maker (‘‘Market
Maker’’) in the Shares must file with the
Exchange, in a manner prescribed by the
Exchange, and keep current a list
identifying all accounts for trading the
underlying commodity, related futures
or options on futures, or any other
related derivatives, which the registered
Market Maker may have or over which
it may exercise investment discretion.
No registered Market Maker in the
Shares shall trade in the underlying
65 The bid-ask price of the Trust is determined
using the highest bid and lowest offer on the
Consolidated Tape as of the time of calculation of
the closing day NAV.
66 The IIV on a per Share basis disseminated
during the Regular Market Session should not be
viewed as a real-time update of the NAV, which is
calculated once a day.
Availability of Information
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commodity, related futures or options
on futures, or any other related
derivatives, in an account in which a
registered Market Maker, directly or
indirectly, controls trading activities, or
has a direct interest in the profits or
losses thereof, which has not been
reported to the Exchange as required by
Nasdaq Rule 5711(g). In addition to the
existing obligations under Exchange
rules regarding the production of books
and records, the registered Market
Maker in the Shares shall make
available to the Exchange such books,
records or other information pertaining
to transactions by such entity or any
limited partner, officer or approved
person thereof, registered or nonregistered employee affiliated with such
entity for its or their own accounts in
the underlying commodity, related
futures or options on futures, or any
other related derivatives, as may be
requested by the Exchange.
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Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. The Exchange will
allow trading in the Shares from 4:00
a.m. to 8:00 p.m. (Eastern time). The
Exchange has appropriate rules to
facilitate transactions in the Shares
during all trading sessions. The Shares
of the Trust will conform to the initial
and continued listing criteria set forth in
Nasdaq Rule 5711(g).
Trading Halts
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in the Shares.
The Exchange will halt trading in the
Shares under the conditions specified in
Nasdaq Rules 4120 and 4121, including
without limitation the conditions
specified in Nasdaq Rule 4120(a)(9) and
the trading pauses under Nasdaq Rules
4120(a)(11) and (12).
Trading may be halted because of
market conditions or for reasons that, in
the view of the Exchange, make trading
in the Shares inadvisable. These may
include: (1) The extent to which trading
is not occurring in the futures contracts
underlying the Shares; or (2) whether
other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present.
As indicated in Commentary .03 to
Nasdaq Rule 5711(g), if the IIV or the
value of the underlying futures contract
is not being disseminated as required,
the Exchange may halt trading during
the day in which the interruption to the
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dissemination of the IIV or the value of
the underlying futures contract occurs.
If the interruption to the dissemination
of the IIV or the value of the underlying
futures contract persists past the trading
day in which it occurred, the Exchange
will halt trading no later than the
beginning of the trading day following
the interruption. In addition, if the
Exchange becomes aware that the NAV
with respect to the Shares is not
disseminated to all market participants
at the same time, it will halt trading in
the Shares until such time as the NAV
is available to all market participants.
Surveillance
The Exchange believes that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares on the Exchange during all
trading sessions and to deter and detect
violations of Exchange rules and the
applicable federal securities laws.
Trading of Shares on the Exchange will
be subject to the Exchange’s
surveillance procedures for derivative
products. The Exchange will require the
Trust to represent to the Exchange that
it will advise the Exchange of any
failure by the Trust to comply with the
continued listing requirements, and,
pursuant to its obligations under
Section 19(g)(1) of the Exchange Act, the
Exchange will surveil for compliance
with the continued listing requirements.
If the Trust is not in compliance with
the applicable listing requirements, the
Exchange will commence delisting
procedures under the Nasdaq 5800
Series. In addition, the Exchange also
has a general policy prohibiting the
distribution of material, non-public
information by its employees.
Additionally, the Bitcoin Futures will
be subject to the rules and surveillance
programs of CME and the CFTC.67 The
Exchange or the Financial Industry
Regulatory Authority (‘‘FINRA’’), on
behalf of the Exchange, will
communicate as needed regarding
67 The CFTC issued a press release on December
1, 2017, noting the self-certifications from CFE and
CME and highlighting the rigorous process that the
CFTC had undertaken in its engagement with CFE
and CME prior to the self-certification for the
Bitcoin Futures. The press release focused on the
ongoing surveillances that will occur on each listing
exchange, including surveillance based on
information sharing with the underlying cash
bitcoin exchanges as well as the actions that the
CFTC will undertake after the contracts are
launched, including monitoring and analyzing the
size and development of the market, positions and
changes in positions over time, open interest, initial
margin requirements, and variation margin
payments, stress testing positions, conduct reviews
of designated contract markets, derivatives clearing
organizations, clearing firms, and individual traders
involved in trading and clearing bitcoin futures. For
more information, see https://www.cftc.gov/
PressRoom/PressReleases/pr7654-17.
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50581
trading in the Shares and the underlying
Bitcoin Futures via ISG from other
exchanges who are members or affiliates
of the ISG or with which the Exchange
has entered into a comprehensive
surveillance sharing agreement.68 The
Exchange may also obtain information
regarding trading in the spot bitcoin
market from exchanges with which the
CME or the Exchange has entered into
a comprehensive surveillance sharing
agreement. In addition, the Exchange is
able to access, as needed, trade
information for certain fixed income
instruments reported to FINRA’s Trade
Reporting and Compliance Engine
(‘‘TRACE’’).
Information Circular
Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (1) The
procedures for purchases and
redemptions of Shares in Creation Units
(and that Shares are not individually
redeemable); (2) Section 10 of Nasdaq
General Rule 9, which imposes
suitability obligations on Nasdaq
members with respect to recommending
transactions in the Shares to customers;
(3) how information regarding the IIV is
disseminated; (4) the risks involved in
trading the Shares during the PreMarket and Post-Market Sessions when
an updated IIV will not be calculated or
publicly disseminated; (5) the
requirement that members deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (6) trading information.
The Information Circular will also
discuss any exemptive, no-action and
interpretive relief granted by the
Commission from any rules under the
Act.
Additionally, the Information Circular
will reference that the Trust is subject
to various fees and expenses described
in the Draft Registration Statement. The
Information Circular will also disclose
the trading hours of the Shares. The
Information Circular will disclose that
information about the Shares will be
68 For a list of the current members and affiliate
members of ISG, see www.isgportal.com. The
Exchange notes that not all components of the
Disclosed Portfolio for the Trust may trade on
markets that are members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement. Not more than 10%
of the net assets of the Trust in the aggregate
invested in Bitcoin Futures shall consist of Bitcoin
Futures whose principal market is not a member of
the ISG or with which the Exchange has in place
a comprehensive surveillance sharing agreement.
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publicly available on the Trust’s
website.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act 69 in general and Section
6(b)(5) of the Act 70 in particular in that
it is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Exchange
believes that its surveillance procedures
are adequate to properly monitor the
trading of the Shares on the Exchange
during all trading sessions and to deter
and detect violations of Exchange rules
and the applicable federal securities
laws. Additionally, the Bitcoin Futures
will be subject to the rules and
surveillance programs of CME and the
CFTC. Trading of the Shares through the
Exchange will be subject to the
Exchange’s surveillance procedures for
derivative products, including
Commodity Futures Trust Shares. The
Exchange or FINRA, on behalf of the
Exchange, will communicate as needed
regarding trading in the Shares and the
underlying Bitcoin Futures via ISG,
from other exchanges who are members
or affiliates of the ISG, or with which
the Exchange has entered into a
comprehensive surveillance sharing
agreement. The Exchange may also
obtain information regarding trading in
the spot bitcoin market via the ISG, from
other exchanges who are members or
affiliates of the ISG, or from other
exchanges with which the Exchange has
entered into a comprehensive
surveillance sharing agreement. In
addition, the Exchange is able to access,
as needed, trade information for certain
fixed income instruments reported to
TRACE. The Exchange prohibits the
distribution of material non-public
information by its employees.
The Exchange believes that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares on the Exchange during all
trading sessions and to deter and detect
violations of Exchange rules and the
applicable federal securities laws. The
69 15
70 15
U.S.C. 78f.
U.S.C. 78f(b)(5).
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Exchange further believes that the
proposal is designed to prevent
fraudulent and manipulative acts and
practices in that the Exchange expects
that the market for Bitcoin Futures will
be sufficiently liquid to support
numerous ETPs shortly after launch.
This belief is based on numerous
conversations with market participants,
issuers, and discussions with personnel
of CFE. As such, the Exchange believes
that the expected liquidity in the market
for Bitcoin Futures, combined with the
Exchange surveillance procedures
related to the Shares, and the broader
regulatory structure will prevent trading
in the Shares from being susceptible to
manipulation.
Because of its innovative features as a
cryptoasset, bitcoin has gained wide
acceptance as a secure means of
exchange in the commercial
marketplace and has generated
significant interest among investors. In
less than a decade since its creation in
2008, bitcoin has achieved significant
market penetration, with payments giant
PayPal and thousands of merchants and
businesses accepting it as a form of
commercial payment, as well as
receiving official recognition from
several governments, including Japan
and Australia. Accordingly, investor
interest in gaining exposure to bitcoin is
increasing exponentially as well. As
expected, the total volume of bitcoin
transactions in the market continues to
grow exponentially.
Despite the growing investor interest
in bitcoin, the primary means for
investors to gain access to bitcoin
exposure remains either through the
Bitcoin Futures or direct investment
through bitcoin exchanges or over-thecounter trading. For regular investors
simply wishing to express an
investment viewpoint in bitcoin,
investment through the Bitcoin Futures
is complex and requires active
management, and direct investment in
bitcoin brings with it significant
inconvenience, complexity, expense
and risk. The Shares would therefore
represent a significant innovation in the
bitcoin market by providing an
inexpensive and simple vehicle for
investors to gain exposure to bitcoin in
a secure and easily accessible product
that is familiar and transparent to
investors. Such an innovation would
help to perfect the mechanism of a free
and open market and, in general, to
protect investors and the public interest
by improving investor access to bitcoin
exposure through efficient and
transparent exchange-traded derivative
products.
In addition to improved convenience,
efficiency and transparency, the Trust
PO 00000
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will also help to prevent fraudulent and
manipulative acts and practices by
enhancing the security afforded to
investors as compared to a direct
investment in bitcoin. Despite the
extensive security mechanisms built
into the Bitcoin network, a remaining
risk to owning bitcoin directly is the
need for the holder to retain and protect
the ‘‘private key’’ required to spend or
sell bitcoin after purchase. If a holder’s
private key is compromised or simply
lost, their bitcoin can be rendered
unavailable—i.e., effectively lost to the
investor. Investment vehicles that invest
directly in bitcoin or investors that hold
their bitcoin through digital wallets or
other storage mechanisms must take
extraordinary steps in order to protect
their bitcoin, such as placing their
bitcoin in ‘‘cold storage.’’ This risk will
be eliminated for the Trust because the
exposure to bitcoin is gained through
cash-settled Bitcoin Futures that do not
present any of the security issues that
exist with direct investment in bitcoin.
The Trust expects that it will
generally seek to remain fully exposed
to Bitcoin Futures even during times of
adverse market conditions. Under
Normal Market Conditions, the Trust
will generally hold only Bitcoin Futures
and Money Market Instruments (which
are used to collateralize the Bitcoin
Futures).
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that the Exchange will
obtain a representation from the issuer
of the Shares that the NAV will be
calculated daily and that the NAV and
the Disclosed Portfolio will be made
available to all market participants at
the same time. In addition, a large
amount of information is publicly
available regarding the Trust and the
Shares, thereby promoting market
transparency. Moreover, the Intraday
Indicative Value will be disseminated
by one or more major market data
vendors at least every 15 seconds during
Regular Trading Hours. On each
business day, before commencement of
trading in Shares during Regular
Trading Hours, the Trust will disclose
on its website the Disclosed Portfolio
that will form the basis for the Trust’s
calculation of NAV at the end of the
business day. Pricing information will
be available on the Trust’s website
including: (1) The prior business day’s
reported NAV, the Bid/Ask Price of the
Trust, and a calculation of the premium
and discount of the Bid/Ask Price
against the NAV; and (2) data in chart
format displaying the frequency
distribution of discounts and premiums
of the daily Bid/Ask Price against the
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NAV, within appropriate ranges, for
each of the four previous calendar
quarters.
Additionally, information regarding
market price and trading of the Shares
will be continually available on a realtime basis throughout the day on
brokers’ computer screens and other
electronic services, and quotation and
last sale information for the Shares will
be available on the facilities of the CTA.
The Trust’s website will include a form
of the prospectus for the Trust and
additional data relating to NAV and
other applicable quantitative
information. Trading in Shares of the
Trust will be halted under the
conditions specified in Nasdaq Rule
4120(b). Trading may also be halted
because of market conditions or for
reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable. Finally, trading in the
Shares will be subject to Nasdaq Rule
4120(a)(9), which sets forth
circumstances under which Shares of
the Trust may be halted and delisting
proceedings commenced. In addition, as
noted above, investors will have ready
access to information regarding the
Trust’s holdings, the Intraday Indicative
Value, the Disclosed Portfolio, and
quotation and last sale information for
the Shares.
Intraday price quotations on Money
Market Instruments of the type held by
the Trust are available from major
broker-dealer firms and from thirdparties, which may provide prices free
with a time delay, or ‘‘live’’ with a paid
fee. For Bitcoin Futures, such intraday
information is available directly from
the applicable listing venue. Intraday
price information is also available
through subscription services, such as
Bloomberg and Thomson Reuters,
which can be accessed by authorized
participants and other investors. Pricing
information related to Money Market
Instruments will be available through
issuer websites and publicly available
quotation services such as Bloomberg,
Markit and Thomson Reuters.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of additional types of actively-managed
exchange-traded products that will
enhance competition among market
participants, to the benefit of investors
and the marketplace. As noted above,
the Exchange has in place surveillance
procedures relating to trading in the
Shares and may obtain information via
ISG from other exchanges that are
members of ISG or with which the
Exchange has entered into a
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comprehensive surveillance sharing
agreement as well as trade information
for certain fixed income instruments as
reported to FINRA’s TRACE. Not more
than 10% of the net assets of the Trust
in the aggregate invested in Bitcoin
Futures shall consist of Bitcoin Futures
whose principal market is not a member
of the ISG or with which the Exchange
has in place a comprehensive
surveillance sharing agreement. In
addition, as noted above, investors will
have ready access to information
regarding the Trust’s holdings, the
Intraday Indicative Value, the Disclosed
Portfolio, and quotation and last sale
information for the Shares.
For the above reasons, the Exchange
believes that the proposed rule change
is consistent with the requirements of
Section 6(b)(5) of the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change
rather will facilitate the listing and
trading of additional actively-managed
exchange-traded products that will
enhance competition among both
market participants and listing venues,
to the benefit of investors and the
marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will: (a) By order approve or disapprove
such proposed rule change, or (b)
institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
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50583
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2021–066 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2021–066. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2021–066 and
should be submitted on or before
September 30, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.71
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–19420 Filed 9–8–21; 8:45 am]
BILLING CODE 8011–01–P
71 17
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Agencies
[Federal Register Volume 86, Number 172 (Thursday, September 9, 2021)]
[Notices]
[Pages 50570-50583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-19420]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92865; File No. SR-NASDAQ-2021-066]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of a Proposed Rule Change, as Modified by Amendment
No. 1, To List and Trade Shares of the Valkyrie XBTO Bitcoin Futures
Fund Under Nasdaq Rule 5711(g)
September 2, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 23, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the Exchange.
On August 25, 2021, the Exchange filed Amendment No. 1 to the proposed
rule change. The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the Valkyrie XBTO
Bitcoin Futures Fund (the ``Trust'') under Nasdaq Rule 5711(g)
(``Commodity Futures Trust Shares''). The shares of the Trust are
referred to herein as the ``Shares.''
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at
the principal office of the Exchange, and at the Commission's Public
Reference Room.
[[Page 50571]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The ETF community has worked for many years to obtain the approval
of an exchange tradeable product that provides investors with the
important opportunity to gain exposure to digital currencies such as
bitcoin. Since March 2017, the Commission has disapproved more than a
dozen such proposals and failed to act on many others that were filed
and later withdrawn. During that period, digital assets have gained
substantial traction in the global and domestic economy; have become a
sought-after investment tool for a rapidly-expanding number of
institutional and individual investors; and have spurred significant
investment and improvement in all aspects of digital currency
ownership, including storage, security, payments, and exchange.\3\
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\3\ For example, Coinbase (COIN) alone sports an enterprise
market capitalization of around $67 billion and it recently reported
over 68 million individual accounts holding $180 billion of digital
currencies, and $462 billion in quarterly notional value of trading
volume.
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Nasdaq believes that bitcoin and its surrounding ecosystem have
evolved sufficiently to support the approval of a Bitcoin Futures ETF
because the concerns the Commission has identified previously have been
addressed. To that end, Nasdaq believes that its current proposal
differs from previous filings recently submitted due to significant
developments in the domestic bitcoin futures market, including:
(1) In previous disapproval orders, the Commission expressed
concern over a bitcoin fund holding physical bitcoin, but the Trust
instead will pursue its investment objective solely by holding CME
Bitcoin Futures that are cash-settled and traded on the Chicago
Mercantile Exchange, Inc. (the ``CME''), which was self-certified with
the Commodity Futures Trading Commission (the ``CFTC'') (aside from
holding cash and Money Market Instruments, as defined herein);
(2) The Commission expressed concern in previous disapproval orders
about self-regulation and the oversight necessary to maintain and
promote the fair and transparent trading of listed products, including
bitcoin futures. Specifically, the Commission expressed concern with
the listing exchange's ability to deter fraud and manipulation in
compliance with Section 6(b)(5) of the Act. The Commission stated that
this could be addressed by entering into a surveillance agreement with
a ``regulated market of significant size.'' Since the previous
disapproval orders, both the bitcoin and bitcoin futures markets have
developed to the point that the CME Bitcoin Futures market is a
``regulated market of significant size,'' for purposes of compliance
with Section 6(b)(5) of the Act.
(3) The CME's compliance with the CFTC's Core Principles (detailed
further herein) also serves to strengthen the Trust's resistance to
fraud and manipulation and should appropriately address the
Commission's concerns regarding investor protection. The CME Bitcoin
Futures contract is cash settled, is not readily subject to
manipulation or distortion, and is subject to real-time trade
monitoring and comprehensive and accurate trade reconstruction.
Background
The Exchange proposes to list and trade Shares of the Trust under
Nasdaq Rule 5711(g), which governs the listing and trading of Commodity
Futures Trust Shares on the Exchange.\4\ The Shares will be offered by
the Trust, which was established as a Delaware statutory trust on May
18, 2021. According to the Draft Registration Statement (as defined
below), the Trust will not be registered as an investment company under
the Investment Company Act of 1940 and is not required to register
under such act.\5\ The Trust is registered as a commodity pool under
the Commodity Exchange Act (``CEA'').\6\ The Shares of the Trust will
be registered with the Commission by means of the Trust's registration
statement on Form S-1 (the ``Registration Statement'') under the
Securities Act of 1933, as amended (the ``Securities Act''). The
Registration Statement will be effective as of the date of any offer
and sale pursuant to the Registration Statement. A draft registration
statement (the ``Draft Registration Statement'') was filed
confidentially with the Commission on May 21, 2021.\7\
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\4\ Nasdaq Rule 5711(g)(iii) defines Commodity Futures Trust
Shares as ``a security that (A) is issued by a trust (``Trust'')
that (1) is a commodity pool as defined in the Commodity Exchange
Act and regulations thereunder, and that is managed by a commodity
pool operator registered with the Commodity Futures Trading
Commission, and (2) holds positions in futures contracts that track
the performance of a specified commodity, or interests in a
commodity pool which, in turn, holds such positions; and (B) is
issued and redeemed daily in specified aggregate amounts at net
asset value.''
\5\ 15 U.S.C. 80a-1.
\6\ 7 U.S.C. 1.
\7\ See Draft Registration Statement on Form S-1 confidentially
filed with the Commission on May 21, 2021 (file no. 377-04910). The
descriptions of the Trust and the Shares contained herein are based,
in part, on information in the Draft Registration Statement.
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Valkyrie Funds LLC (the ``Sponsor'') serves as the Trust's sponsor
and commodity pool operator. Vident Investment Advisory, LLC (the
``Sub-Advisor'') serves as the Trust's sub-advisor and commodity
trading advisor. XBTO Trading, LLC is the research provider for the
Sponsor and the Sub-Advisor. Delaware Trust Company (the ``Trustee'')
serves as the trustee for the Trust. The Sponsor is currently
considering third-party service providers for the roles of
Administrator, Transfer Agent, Custodian and Marketing Agent, as
described in the Draft Registration Statement.
The Bitcoin Industry and Market
Bitcoin
Bitcoin is the digital asset that is native to, and created and
transmitted through the operations of, the peer-to-peer Bitcoin
Network, a decentralized network of computers that operates on
cryptographic protocols. No single entity owns or operates the Bitcoin
Network, the infrastructure of which is collectively maintained by a
decentralized user base. The Bitcoin Network allows people to exchange
tokens of value, called bitcoin, which are recorded on a public
transaction ledger known as the Blockchain. Bitcoin can be used to pay
for goods and services, or it can be converted to fiat currencies, such
as the U.S. dollar, at rates determined on bitcoin trading platforms or
in individual end-user-to-end-user transactions under a barter system.
The Bitcoin Network is decentralized and does not require
governmental authorities or financial institution intermediaries to
create, transmit, or determine the value of bitcoin. In addition, no
party may easily censor transactions on the Bitcoin Network. As a
result, the Bitcoin Network is often
[[Page 50572]]
referred to as decentralized and censorship resistant.
The value of bitcoin is determined by the supply of and demand for
bitcoin. New bitcoins are created and rewarded to the parties providing
the Bitcoin Network's infrastructure (``miners'') in exchange for their
expending computational power to verify transactions and add them to
the Blockchain. The Blockchain is effectively a decentralized database
that includes all blocks that have been solved by miners, and is
updated to include new blocks as they are solved. Each bitcoin
transaction is broadcast to the Bitcoin Network and, when included in a
block, recorded in the Blockchain. Each new block records outstanding
bitcoin transactions, and outstanding transactions are settled and
validated through such recording. The Blockchain represents a complete,
transparent, and unbroken history of all transactions of the Bitcoin
Network.
The method for creating new bitcoin is mathematically controlled in
a manner so that the supply of bitcoin grows at a limited rate pursuant
to a pre-set schedule. The number of bitcoin awarded for solving a new
block is automatically halved every 210,000 blocks. Thus, the current
fixed reward for solving a new block is 6.25 bitcoin per block; the
reward decreased from twenty-five bitcoin in July 2016 and 12.5 in May
2020. It is estimated to halve again at the start of 2024. This
deliberately controlled rate of bitcoin creation means that the number
of bitcoin in existence will never exceed twenty-one million and that
bitcoin cannot be devalued through excessive production unless the
Bitcoin Network's source code (and the underlying protocol for bitcoin
issuance) is altered. As of January 1, 2021, approximately 18,587,000
bitcoin have been mined. It is estimated that more than ninety percent
of the twenty-one million bitcoin will have been produced by 2022.
Bitcoin Network
The first step in directly using the Bitcoin Network for
transactions is to download specialized software referred to as a
``bitcoin wallet.'' A user's bitcoin wallet can run on a computer or
smartphone and can be used both to send and to receive bitcoin. Within
a bitcoin wallet, a user can generate one or more unique ``bitcoin
addresses,'' which are conceptually similar to bank account numbers.
After establishing a bitcoin address, a user can send or receive
bitcoin from his or her bitcoin address to another user's address.
Sending bitcoin from one bitcoin address to another is similar in
concept to sending a bank wire from one person's bank account to
another person's bank account, provided, however, that such
transactions are not managed by an intermediary and erroneous
transactions generally may not be reversed or remedied once sent.
The amount of bitcoin associated with each bitcoin address, as well
as each bitcoin transaction to or from such address, is transparently
reflected in the Blockchain and can be viewed by websites that operate
as ``blockchain explorers.'' Copies of the Blockchain exist on
thousands of computers on the Bitcoin Network. Anyone can view the
blockchain as it is available to observe without restriction. A user's
bitcoin wallet will either contain a copy of the blockchain or be able
to connect with another computer that holds a copy of the blockchain.
The innovative design of the Bitcoin Network protocol allows each
Bitcoin user to trust that their copy of the Blockchain will generally
be updated consistent with each other user's copy because it is
extraordinarily unlikely that the Blockchain could be retroactively
changed.
When a Bitcoin user wishes to transfer bitcoin to another user, the
sender must first have the recipient's Bitcoin address. The sender then
uses his or her Bitcoin wallet software to create a proposed
transaction to be added to the Blockchain. The proposal would reduce
the amount of bitcoin allocated to the sender's address and increase
the amount allocated to the recipient's address, in each case by the
amount of bitcoin desired to be transferred. The proposal is completely
digital in nature, similar to a file on a computer, and it can be sent
to other computers participating in the Bitcoin Network.
Bitcoin Transactions
A bitcoin transaction contains the sender's bitcoin address, the
recipient's bitcoin address, the amount of bitcoin to be sent, a
transaction fee, and the sender's digital signature. Bitcoin
transactions are secured by a type of cryptography known as public-
private key cryptography, represented by the bitcoin addresses and
digital signature in a transaction's data file. Each Bitcoin Network
address, or wallet, is associated with a unique ``public key'' and
``private key'' pair, both of which are lengthy alphanumeric codes,
derived together and possessing a unique relationship.
The public key is visible to the public and analogous to the
Bitcoin Network address. The private key is a secret and may be used to
digitally sign a transaction in a way that proves the transaction has
been signed by the holder of the public-private key pair, without
having to reveal the private key. A user's private key must be kept in
accordance with appropriate controls and procedures to ensure that it
is used only for legitimate and intended transactions. If an
unauthorized third person learns of a user's private key, that third
person could forge the user's digital signature and send the user's
bitcoin to any arbitrary bitcoin address, thereby stealing the user's
bitcoin. Similarly, if a user loses his private key and cannot restore
such access (e.g., through a backup), the user may permanently lose
access to the bitcoin contained in the associated address.
The Bitcoin Network incorporates a system to prevent double-
spending of a single bitcoin. To prevent the possibility of double-
spending a single bitcoin, each validated transaction is recorded, time
stamped and publicly displayed in a ``block'' in the Blockchain, which
is publicly available. Thus, the Bitcoin Network provides confirmation
against double-spending by memorializing every transaction in the
Blockchain, which is publicly accessible and downloaded in part or in
whole by all users of the Bitcoin Network software program. Any user
may validate, through their Bitcoin wallet or a blockchain explorer,
that each transaction in the Bitcoin Network was authorized by the
holder of the applicable private key. Bitcoin Network mining software
consistent with reference software requirements typically validates
each such transaction before including it in the Blockchain. This
cryptographic security ensures that bitcoin transactions may not
generally be counterfeited, although it does not protect against the
``real world'' theft or coercion of use of a Bitcoin user's private
key, including the hacking of a Bitcoin user's computer or a service
provider's systems.
A Bitcoin transaction between two parties is settled when recorded
in a block added to the Blockchain. Validation of a block is achieved
by confirming the cryptographic hash value included in the block's
solution and by the block's addition to the longest confirmed
Blockchain on the Bitcoin Network. For a transaction, inclusion in a
block on the Blockchain constitutes a ``confirmation'' of a Bitcoin
transaction. As each block contains a reference to the immediately
preceding block, additional blocks appended to and incorporated into
the Blockchain constitute additional confirmations of the transactions
in such prior blocks, and a transaction included in a block for the
first time is confirmed once against
[[Page 50573]]
double-spending. The layered confirmation process makes changing
historical blocks (and reversing transactions) exponentially more
difficult the further back one goes in the Blockchain.
To undo past transactions in a block recorded on the Blockchain, a
malicious actor would have to exert tremendous computer power in re-
solving each block in the Blockchain starting with and after the target
block and broadcasting all such blocks to the Bitcoin Network. The
Bitcoin Network is generally programmed to consider the longest
Blockchain containing solved and valid blocks to be the most accurate
Blockchain. In order to undo multiple layers of confirmation and alter
the Blockchain, the malicious actor would have to re-solve all of the
old blocks sought to be regenerated and be able to continuously add new
blocks to the Blockchain at a speed that would have to outpace that of
all of the other miners on the Bitcoin Network, who would be
continuously solving for and adding new blocks to the Blockchain. There
are no known reports of malicious parties taking control of the Bitcoin
Network or undoing past transactions in a block recorded on the
Blockchain.
Bitcoin Futures
The CME began offering trading in Bitcoin Futures in 2017. Each
contract represents five bitcoin and is based on the CME CF Bitcoin
Reference Rate (the ``CME CF BRR'').\8\ The contracts trade and settle
like other cash-settled commodity futures contracts. Nearly every
measurable metric related to CME Bitcoin Futures has trended
consistently up since launch and/or accelerated upward in the past
year.\9\ For example, there was approximately $2.7 billion in trading
in Bitcoin Futures in March 2021 compared to $118 million, $70 million,
and $262 million in total trading in March 2018, March 2019 and March
2020, respectively. Bitcoin Futures traded over $63 billion in notional
amount on the CME in March 2021 and represented $2.5 billion in average
daily open interest compared to $151 million in March 2020. This
general upward trend in trading volume and open interest is captured in
the following chart:
---------------------------------------------------------------------------
\8\ According to CME, the CME CF Bitcoin Reference Rate
aggregates the trade flow of major bitcoin spot exchanges during a
specific calculation window into a once-a-day reference rate of the
U.S. dollar price of bitcoin. Calculation rules are geared toward
maximum transparency and real-time replicability in underlying spot
markets, including Bitstamp, Coinbase, Gemini, itBit, and Kraken.
For additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.
\9\ The recent launch of a bitcoin futures-based mutual fund
from ProShares, the Bitcoin Strategy ProFund (BTCFX), has increased
approximately 14% since its July launch.
[GRAPHIC] [TIFF OMITTED] TN09SE21.002
[[Page 50574]]
Prior to listing a new commodity futures contract, a designated
contract market must either submit a self-certification to the CFTC
that the contract complies with the CEA and CFTC regulations or
voluntarily submit the contract for CFTC approval. This process applies
to all futures contracts and all commodities underlying the futures
contracts, whether the new futures contracts are related to oil, gold,
or any other commodity.\10\ On December 1, 2017, it was announced \11\
that the CME had self-certified with the CFTC new contracts for bitcoin
futures products.\12\ The CME Bitcoin Futures \13\ trade and settle
like any other cash-settled commodity futures contracts.\14\ Like other
futures products on the CME, Bitcoin Futures are subject to oversight
by the CFTC, and the CME itself is empowered to enforce its own
rulebook as it relates to the Bitcoin Futures. Furthermore, the CME has
a surveillance team that monitors the trading of Bitcoin futures at all
times along with the underlying bitcoin spot exchanges with which the
CME has a surveillance agreement.
---------------------------------------------------------------------------
\10\ Section 1a(9) of the CEA defines commodity to include,
among other things, ``all services, rights, and interests in which
contracts for future delivery are presently or in the future dealt
in.'' The definition of commodity is broad. 7 U.S.C. 1a(9).
\11\ See ``CFTC Statement on Self-Certification of Bitcoin
Products by CME, CFE and Cantor Exchange,'' dated December 1, 2017,
available at https://www.cftc.gov/PressRoom/PressReleases/pr7654-17.
\12\ Bitcoin is a commodity as defined in Section 1a(9) of the
CEA. 7 U.S.C. 1a(9). See In re Coinflip, Inc., No. 15-29 (CFTC Sept.
17, 2015), available at https://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf.
\13\ The CME Bitcoin Futures are also cash-settled futures
contracts based on the CME CF BRR, which is based on an aggregation
of trade flow from several bitcoin spot exchanges, that will expire
on a monthly and quarterly basis. CME Futures began trading on
December 17, 2017.
\14\ The CME is registered with the CFTC and seek to provide a
neutral, regulated marketplace for the trading of derivatives
contracts for commodities, such as futures, options and certain
swaps. The CME is a member of the Intermarket Surveillance Group.
---------------------------------------------------------------------------
As such, the Exchange is proposing to list and trade Shares of the
Trust under Nasdaq Rule 5711(g), which governs the listing and trading
of Commodity Futures Trust Shares on the Exchange.
Investment Objective
According to the Draft Registration Statement, the investment
objective of the Trust is for the Shares to reflect the performance of
bitcoin as represented by the CME CF BRR, less the Trust's liabilities
and expenses.
Investment Strategy
The Trust pursues its investment objective primarily by investing
in Bitcoin Futures. Futures are financial contracts, the value of which
depends on, or is derived from, the underlying reference asset. In the
case of Bitcoin Futures, the underlying reference asset is Bitcoin.
Futures contracts may be cash-settled or physically-settled. When a
cash-settled future expires, if the value of the underlying asset
exceeds the futures price, the seller pays to the purchaser cash in the
amount of that excess, and if the futures price exceeds the value of
the underlying asset, the purchaser pays to the seller cash in the
amount of that excess. When a physically-settled future expires, the
seller is obligated to deliver the underlying asset to the purchaser in
exchange for the futures price agreed to at the outset of the contract.
The only Bitcoin Futures in which the Trust invests are cash-settled
Bitcoin Futures traded on commodity exchanges registered with the CFTC.
At expiration, the cash settlement amount for the Bitcoin Futures
held by the Trust will be determined by comparing the price at which
the Trust purchased the futures contract on the relevant futures
exchange with the reference rate specified by that exchange on the
expiration date. For example, the CME has specified that the reference
rate for its Bitcoin Futures will be a volume-weighted composite of
Bitcoin prices on multiple Bitcoin exchanges. The Trust does not invest
in Bitcoin or other digital assets directly.
The Trust seeks to purchase a number of Bitcoin Futures so that the
total value of the Bitcoin underlying the Bitcoin Futures held by the
Trust is as close to 100% of the net assets of the Trust (the ``Target
Exposure'') as it is reasonably practicable to achieve, although as
described further in the Draft Registration Statement, there can be no
assurance that the Trust will be able to achieve or maintain the Target
Exposure. The Trust intends to execute these purchases on commodity
exchanges registered with the CFTC through futures commission merchants
(``FCMs''). An FCM is a brokerage firm that solicits or accepts orders
to buy or sell futures contracts and accepts money or other assets from
customers to support such orders. The Trust does not intend to hold
short positions in any futures, and accordingly, the most an investor
could lose is the amount of his or her investment in the Trust.
Although the Trust's Bitcoin Futures will provide leverage to the
extent that they give the Trust exposure to an amount of underlying
Bitcoin with a greater value than the amount of collateral the Trust is
required to post, the Trust does not intend to provide investors with
exposure to an amount of Bitcoin in excess of the Trust's net assets.
The Trust will engage in active and frequent trading of Bitcoin Futures
in seeking to maintain the Target Exposure.
In addition to the Trust's investments in Bitcoin Futures, the
Trust expects to have significant holdings of cash and high-quality,
short-term debt instruments that have terms-to-maturity of less than
397 days, such as U.S. government securities and repurchase agreements
(the ``Money Market Instruments''). The Money Market Instruments are
intended to provide liquidity, to serve as collateral for the Trust's
Bitcoin Futures and to support the Trust's use of leverage through the
Trust's Bitcoin Futures. The amount of Money Market Instruments held by
the Trust may change over time and will be determined primarily by the
amount needed to seek to achieve or maintain the Target Exposure.
The Trust will generally hold its investments in Bitcoin Futures
during periods in which the price of Bitcoin is flat or declining as
well as during periods in which the price of Bitcoin is rising, and the
Advisor will generally not seek to change the Trust's Target Exposure
based on daily price changes. For example, if the Trust's positions in
Bitcoin Futures are declining in value, the Trust generally will not
close out its positions except in order to meet redemption requests. As
a result, any decrease in value of the Bitcoin Futures in which the
Trust invests will result in a decrease in the Trust's net asset value
(``NAV'').
Calculation of the Trust's NAV
According to the Draft Registration Statement, the NAV of the Trust
will be determined in accordance with Generally Accepted Accounting
Principles (``GAAP'') as the total value of bitcoin held by the Trust,
plus any cash or other assets, less any liabilities including accrued
but unpaid expenses. The NAV per Share will be determined by dividing
the NAV of the Trust by the number of Shares outstanding.
The NAV of the Trust is typically determined as of 4:00 p.m.
(Eastern time) on each day the Shares trade on the Exchange (a
``Business Day''). The Trust's daily activities are generally not
reflected in the NAV determined for the Business Day on which the
transactions are effected (the trade date), but rather on the following
Business Day.
Bitcoin Futures traded on a U.S. exchange are generally valued
using the
[[Page 50575]]
last traded price before the NAV calculation time on the date with
respect to which the NAV is being determined. Money Market Instruments
will generally be valued at their market price using market quotations
or information provided by a pricing service.
For more information regarding the valuation of Trust investments
in calculating the Trust's NAV, see the Draft Registration Statement.
Preventing Fraudulent and Manipulative Practices
Applicable Standard of Review
In disapproving prior proposals to list and trade shares of various
bitcoin trusts and bitcoin-based trust issued receipts, the Commission
noted that such proposals did not adequately demonstrate that they were
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest, consistent with Section
6(b)(5) of the Act.\15\ The Commission does not apply a ``cannot be
manipulated'' standard, but instead seeks to examine whether a proposal
meets the requirements of the Act.\16\ The Commission has explained
that a proposal could satisfy the requirements of the Act in the first
instance by demonstrating that the listing exchange has entered into a
comprehensive surveillance sharing agreement (``CSSA'') with a
regulated market of significant size relating to the underlying
assets.\17\ The Commission has also recognized that a listing exchange
would not necessarily need to enter into a CSSA with a regulated
significant market if the underlying commodity market inherently
possessed a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets or if
the listing exchange could demonstrate that there were sufficient
``other means to prevent fraudulent and manipulative acts and
practices.'' \18\ While the earliest of the prior disapproval orders
applied these standards to a commodity-trust based on bitcoin, the
Commission has stated its belief that these standards are also
appropriate for an ETP based on Bitcoin Futures.\19\
---------------------------------------------------------------------------
\15\ See, e.g., Order Disapproving a Proposed Rule Change, as
Modified by Amendments No. 1 and 2, to BZX Rule 14.11(e)(4), To List
and Trade Shares Issued by the Winklevoss Bitcoin Trust, Securities
Exchange Act Release No. 80206 (Mar. 10, 2017), 82 FR 14076 (Mar.
16, 2017) (SR-BatsBZX-2016-30) (``Winklevoss I Order''); 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 (Aug. 1,
2018) (SR-BatsBZX-2016-30) (``the Winklevoss II Order''); Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1,
Relating to the Listing and Trading of Shares of the Bitwise Bitcoin
ETF Trust Under NYSE Arca Rule 8.201-E, Securities Exchange Act
Release No. 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019)
(SR-NYSEArca-2019-01) (the ``Bitwise Order''); Order Disapproving a
Proposed Rule Change, as Modified by Amendment No. 1, to Amend NYSE
Arca Rule 8.201-E (Commodity-Based Trust Shares) and to List and
Trade Shares of the United States Bitcoin and Treasury Investment
Trust Under NYSE Arca Rule 8.201-E, Securities Exchange Act Release
No. 88284 (February 26, 2020), 85 FR 12595 (Mar. 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Order''); Order
Disapproving a Proposed Rule Change to List and Trade the Shares of
the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF,
Securities Exchange Act Release No. 83904 (August 22, 2018), 83 FR
43934 (August 28, 2018) (SR-NYSEArca-2017-139); Order Disapproving a
Proposed Rule Change Relating to Listing and Trading of the Direxion
Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull
Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily
Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares
Under NYSE Arca Rule 8.200-E, Securities Exchange Act Release No.
83912 (August 22, 2018), 83 FR 43912 (August 28, 2018) (SR-NYSEArca-
2018-02); Order Disapproving a Proposed Rule Change to List and
Trade the Shares of the GraniteShares Bitcoin ETF and the
GraniteShares Short Bitcoin ETF, Securities Exchange Act Release No.
83913 (August 22, 2018), 83 FR 43923 (August 28, 2018) (SR-CboeBZX-
2018-01) (the ``GraniteShares Order'').
\16\ See Winklevoss II Order, 84 FR at 37582.
\17\ See Wilshire Phoenix Order, 85 FR at 12596-97.
\18\ See Winklevoss II Order, 84 FR at 37580, 37582-91; Bitwise
Order, 84 FR at 55383, 55385-406; Wilshire Phoenix Order, 85 FR at
12597.
\19\ See GraniteShares Order, 83 FR 43925.
---------------------------------------------------------------------------
The Commission has noted that information 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.\20\ In
addition, the Commission's approval orders for commodity-futures ETPs
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 (``ISG'').\21\ 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 futures markets, and the Commission was in each of those
cases dealing with a large futures market that had been trading for a
number of years before an exchange proposed an ETP based on those
futures.\22\ And where the Commission has considered a proposed ETP
based on futures that had only recently begun trading, 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.\23\
---------------------------------------------------------------------------
\20\ Id at 43926.
\21\ Id at 43926, n. 35.
\22\ Id at 43927.
\23\ Id.
---------------------------------------------------------------------------
As described below, the Exchange believes the structure and
operation of the Trust are designed to prevent fraudulent and
manipulative acts and practices, to protect investors and the public
interest, and to respond to the specific concerns that the Commission
has identified with respect to potential fraud and manipulation in the
context of a bitcoin ETP. In particular, the Exchange believes that it
has addressed the Commission's previously stated concern that the
Exchange must have entered into a surveillance-sharing agreement with a
regulated market of significant size as evidence of the Trust's
resistance to manipulation. In addition, the Exchange believes that
Bitcoin Futures market has sufficiently developed since the prior
disapproval orders such that the market for Bitcoin Futures now
resembles the markets for other commodities at the time the related
commodity futures-based ETP was approved for listing. Finally, the
Exchange believes it has demonstrated that the Trust possesses other
means to prevent fraud or manipulation through the CME's use of the CME
CF BRR as the reference rate for Bitcoin Futures contracts. The
Exchange also believes that listing of the Trust's Shares on the
Exchange will provide investors with such an opportunity to obtain
exposure to bitcoin within a regulated environment.
Surveillance Sharing Agreements With a Market of Significant Size
In previous orders rejecting the listing of Bitcoin ETFs, the
Commission noted its concerns that the bitcoin market could be subject
to manipulation.\24\ In these orders, the Commission cited numerous
precedents \25\ in which 19b-4 listing applications were approved based
on findings that the particular market was either inherently resistant
to manipulation or that the listing exchange had entered into a
surveillance sharing agreement with a
[[Page 50576]]
market of significant size.\26\ The Commission noted that, for
commodity-trust ETPs ``there has been in every case at least one
significant, regulated market for trading futures in the underlying
commodity--whether gold, silver, platinum, palladium or copper--and the
ETP listing exchange has entered into surveillance sharing agreements
with, or held [ISG] membership in common with, that market.'' \27\
---------------------------------------------------------------------------
\24\ See Winklevoss I Order and Winklevoss II Order.
\25\ For an extensive listing of such precedents, see Winklevoss
I Order, at 14083 n. 96.
\26\ The Exchange to date has not entered into surveillance
sharing agreements with any cryptocurrency platform. However, the
CME, which calculates the CME CF BRR, and which has offered
contracts for bitcoin futures products since 2017, is, as noted
below, a member of the ISG. In addition, each Constituent Platform
has entered into a data sharing agreement with CME. See https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges+Criteria.pdf.
\27\ See Winklevoss II Order, at 37594.
---------------------------------------------------------------------------
The CME \28\ is a member of the ISG, the purpose of which is ``to
provide a framework for the sharing of information and the coordination
of regulatory efforts among exchanges trading securities and related
products to address potential intermarket manipulations and trading
abuses.'' \29\ Membership of a relevant futures exchange in ISG is
sufficient to meet the surveillance sharing requirement.\30\
---------------------------------------------------------------------------
\28\ The CME is regulated by the CFTC, which has broad reaching
anti-fraud and anti-manipulation authority including with respect to
the bitcoin market since bitcoin has been designated as a commodity
by the CFTC. See A CFTC Primer on Virtual Currencies (October 17,
2017), available at https://www.cftc.gov/sites/default/files/idc/groups/public/documents/file/labcftc_primercurrencies100417.pdf (the
``CFTC Primer on Virtual Currencies'') (``The CFTC's jurisdiction is
implicated when a virtual currency is used in a derivatives contract
or if there is fraud or manipulation involving a virtual currency
traded in interstate commerce.''). See also 7 U.S.C. Sec. 7(d)(3)
(``The board of trade shall list on the contract market only
contracts that are not readily susceptible to manipulation.'').
\29\ See https://isgportal.org/overview.
\30\ See, e.g., Winklevoss II Order, at 37594.
---------------------------------------------------------------------------
The Commission has previously noted that the existence of a
surveillance sharing agreement by itself is not sufficient for purposes
of meeting the requirements of Section 6(b)(5); the surveillance
sharing agreement must be with a market of significant size.\31\ The
Commission has provided an example of how it interprets the terms
``significant market'' and ``market of significant size,'' though that
definition is meant to be illustrative and not exclusive: ``the terms
`significant market' and `market of significant size' . . . 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.'' \32\
---------------------------------------------------------------------------
\31\ See, e.g., Winklevoss II Order, at 37589-90.
\32\ See, e.g., Winklevoss II Order, at 37594; and see
GraniteShares Order, n. 85 and accompanying text.
---------------------------------------------------------------------------
As discussed below, the Exchange maintains that the CME is a
``market of significant size'' as it satisfies both elements of the
example provided by the Commission.
Attempts To Manipulate the ETP Could Only Occur on the CME
The first element of what constitutes a ``significant market'' or
``market of significant size'' is that there is a reasonable likelihood
that a person attempting to manipulate the ETP would also have to trade
on a market (or group of markets) to successfully manipulate the ETP so
that a surveillance sharing agreement would assist the ETP listing
market in detecting and deterring misconduct. The Commission has stated
that establishing a lead-lag relationship (i.e., that price formation
occurs on the lead market and informs or causes the price on the
lagging market) between the Bitcoin Futures market and the spot market
is central to understanding whether it is reasonably likely that a
would-be manipulator of the ETP would need to trade on the Bitcoin
Futures market to successfully manipulate prices on those spot
platforms that feed into the proposed ETP's pricing mechanism.\33\
---------------------------------------------------------------------------
\33\ See Wilshire Phoenix Order at 12612.
---------------------------------------------------------------------------
The Exchange believes that a lead-lag relationship between the
Bitcoin Futures market and the spot market currently exists. There is
robust evidence of this relationship that has become available since
the Commission's prior disapproval orders. First, the Bitcoin Futures
market has grown considerably since the Commission's Wilshire Phoenix
Disapproval Order, which is evidenced by plentiful empirical data.
Second, the staff of the Commission has itself acknowledged the
maturity of the Bitcoin Futures market such that it has indicated its
comfort with allowing investment companies registered under the
Investment Company Act of 1940 to invest in Bitcoin Futures in certain
circumstances. Finally, current academic research builds upon and
supplements the findings of previous studies reviewed by the Commission
that a lead-lag relationship can be statistically observed in
relatively recent data sets of the Bitcoin Futures and spot market
data.
Growth of the Bitcoin Futures Market
Since the dates of the GraniteShares Order (the most recent
disapproval order related to a Bitcoin Futures ETP) and the Wilshire
Phoenix Order (the most recent disapproval order related to a spot
bitcoin ETP), there has been steady and robust growth observed on the
CME Bitcoin Futures market. The following chart displays such
development in terms of trading volumes and open interest:
---------------------------------------------------------------------------
\34\ Figures calculated by the Exchange based on data available
at https://www.cmegroup.com/ftp/bitcoinfutures/. Each Bitcoin
Futures contract represents 5 bitcoin.
\35\ Data for February 28, 2020 was not available and thus not
included in calculating the daily averages.
Trade Data on CME Bitcoin Futures \34\
----------------------------------------------------------------------------------------------------------------
Daily average Daily average
for week for week
including including
August 24, February 26, Daily average for the
2018 (week of 2020 (week of week ending May 28,
the the Wilshire 2021
GraniteShares Phoenix order)
order) \35\
----------------------------------------------------------------------------------------------------------------
Trading Volume--Notional Amount........................ $117,000,000 $354,750,000 $2,412,000,000
Trading Volume--Number of Contracts.................... 3,629 7,731 12,610
Open Interest--Notional Amount......................... $95,400,000 $250,250,000 $1,662,600,000
Open Interest--Number of Contracts..................... 2,956 5,407 8,677
----------------------------------------------------------------------------------------------------------------
[[Page 50577]]
The table above unequivocally demonstrates that the Bitcoin Futures
market has grown at an accelerating pace since the prior disapproval
orders, likely as a result of the entry of institutional participants
into both the Bitcoin Futures market and the spot bitcoin market (e.g.,
Tesla, MicroStrategy, etc. have taken substantial bitcoin positions).
Accordingly, the Exchange maintains that because the Bitcoin Futures
market has grown to resemble other futures markets, a lead-lag
relationship that exists in other mature futures markets has also
likely developed between the Bitcoin Futures market and the bitcoin
spot market.\36\ Such a relationship is demonstrated through analytical
models or other methods that show that the activities in one market
cause the price formation on the other market, and there is an emerging
consensus among academics that such a lead-lag relationship in fact
exists.
---------------------------------------------------------------------------
\36\ While the Exchange believes that the size of the bitcoin
futures market relative to the spot market has also grown, data on
the global bitcoin exchanges is difficult to state with certainty.
---------------------------------------------------------------------------
Recent Statements by the Staff of the Commission
The Staff of the Commission's Division of Investment Management
recently issued its Staff Statement on Funds Registered under the
Investment Company Act Investing in the Bitcoin Futures Market.\37\ In
that statement, the Staff stated that mutual funds registered under the
Investment Company Act of 1940 could invest in the Bitcoin Futures
market so long as the fund had an appropriate investment strategy and
its prospectus contained full disclosure of material risks. In reaching
such a determination, the Staff noted that while previously the Bitcoin
Futures market was in a nascent state with limited trading volume,
``[t]he Bitcoin futures market has developed since then, with increased
trading volumes and open-interest positions. In addition, the Bitcoin
futures market consistently has produced a reportable price for Bitcoin
futures. The Bitcoin futures market also has not presented the custody
challenges associated with some cryptocurrency-based investing because
the futures are cash-settled.'' \38\ In support of this finding, the
Staff cited to the same CME data cited above regarding trading volumes
and open-interest.\39\ While the statement did not go so far as to
reach a conclusion that the Bitcoin Futures market is a significant
market or market of significant size related to bitcoin in the context
of the requirements of Exchange Act Section 6(b)(5), the Staff's own
observations regarding the maturity of the Bitcoin Futures market is
strong evidence that concerns previously raised regarding price
manipulation in that market have been significantly reduced.
---------------------------------------------------------------------------
\37\ See Staff Statement on Funds Registered Under the
Investment Company Act Investing in the Bitcoin Futures Market (May
11, 2021), available at https://www.sec.gov/news/public-statement/staff-statement-investing-bitcoin-futures-market#_ftnref5.
\38\ Id.
\39\ Id at n. 4.
---------------------------------------------------------------------------
Third-Party Research
In the most recent denial order, the Commission found that academic
evidence on whether a lead-lag relationship between the Bitcoin Futures
market and spot market was ``mixed'' and could not conclude based on
that research that a would-be manipulator of a proposed ETP would
transact on the CME Bitcoin Futures market.\40\ The Commission
critiqued the choices made by the authors of such research regarding
``time period, futures contracts, spot market platforms, spot market
prices, and analytic methodologies.'' The Exchange notes that the
studies cited in that denial order generally analyzed data sets
covering the first several years of the Bitcoin Futures market's
existence and therefore may not be indicative of current market
behavior. While scholarship stating the price discovery takes place in
the bitcoin spot market continues to be produced,\41\ the majority of
the academic literature, including more recent studies with more recent
data sets, supports the proposition that price discovery does take
place in the Bitcoin Futures market and therefore a lead-lag
relationship exists between the spot and futures markets.
---------------------------------------------------------------------------
\40\ See Wilshire Phoenix Order at 12612-13.
\41\ See, e.g., Jui-Cheng Hung, Hung-Chun Liu, and J. Jimmy
Yang, ``Trading Activity and Price Discovery in Bitcoin Futures
Markets'' (March 2021). The Exchange maintains that the vector error
correction model and the modified information shares model used in
this study are inferior to the Granger and Hasbrouck models used in
other studies for determining price-discovery over longer periods.
Even so, the authors of this study find that ``Bitcoin futures
contracts launched by the CME exhibit superior competitiveness in
the price discovery relative to those by CBOE.''
---------------------------------------------------------------------------
In ``What Role do Futures Markets Play in Bitcoin Pricing?
Causality, Cointegration and Price Discovery from a Time-Varying
Perspective?'',\42\ the authors investigated the existence of causal
relationships, cointegration and price discovery between bitcoin spot
and futures markets from December 2017 to June/July 2019 from a time-
varying perspective. The study's authors applied both a time-varying
Granger causality approach and Hasbrouck information share approach to
explore the causal relationship between bitcoin spot and futures
markets.\43\ As the authors explain therein, the time-varying approach
taken for this study is an important distinction from other studies
that have reached an opposite conclusion, as it is now well known in
econometrics literature that some possible cointegration relationships
may be missed if the underlying model formulation is constrained to be
time invariant.\44\ This study, like others before it, reached the
conclusion that the CME futures market, apart from some short-period
exceptions, appears to dominate the underlying spot market under both a
Granger and Hasbrouck analysis.
---------------------------------------------------------------------------
\42\ Yang Hu, Yang Greg Hou and Les Oxley, International Review
of Financial Analysis 72 (September 2020). The Exchange notes that
while the Commission has reviewed a working draft of this study in a
previous denial order, the study has since been peer-reviewed and
published.
\43\ Id at 3. According to the study, ``Granger causality is
widely used to formally test for lead-lag relationships (temporal
ordering) to determine which market (the spot or the futures prices)
leads the other.'' The time-varying procedures employed in assessing
the Granger causality allowed the study to determine whether the
causal relationship varies over the time studied.
\44\ Id at 2.
---------------------------------------------------------------------------
In ``Fractional Cointegration in Bitcoin Spot and Futures
Markets'', the authors concluded that, with the exception of the
extraordinary market events in early months of the Covid-19 pandemic
period, ``the futures market dominates in the price discovery for
bitcoin.'' \45\ The dataset reviewed in that analysis involved 1-min
intraday data of bitcoin spot and futures prices in the US dollar from
December 18, 2017 to July 31, 2020. Unlike other research previously
reviewed by the Commission that used Granger and/or Hasbrouck analysis
to determine price formation, the authors of this study used a
fractionally cointegrated vector autoregressive model (``FCVAR'') to
determine which of the spot and futures price contributes more to price
discovery. According to the study, the FCVAR model ``is more general
[than the CVAR model] and less restricted when analyzing the
relationship between different variables'' in that it allows for
fractional values for the order of cointegration, whereas a CVAR model
allows only integers. The study found that while studies using a
nonfractional CVAR model significantly overestimate the price discovery
of the futures market, the FCVAR model still
[[Page 50578]]
concurred with the finding that the futures market leads the spot
market.
---------------------------------------------------------------------------
\45\ Jinhong Wu et al., ``Fractional Cointegration in Bitcoin
Spot and Futures Markets'', Journal of Futures Markets, 1-17 (April
2021).
---------------------------------------------------------------------------
The research results discussed above build upon the already
emerging academic consensus,\46\ demonstrated using multiple analytical
models, that the Bitcoin Futures market does lead the spot market such
that a would-be manipulator would necessarily conclude that it must
trade in the futures market to successfully manipulate the spot price
of bitcoin.
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\46\ See, e.g., Burcu Kapar and Jose Olmo, ``An Analysis of
Price Discovery Between Bitcoin Futures and Spot Markets'',
Economics Letters 174 (January 2019) (``. . . [T]he Bitcoin futures
market dominates the price discovery process.''); Erdinc Akyildirim,
``The Development of Bitcoin Futures: Exploring the Interactions
Between Cryptocurrency Derivatives'', Finance Research Letters 34
(May 2020) (``While analysing breakpoints in efficiency, we verify
the view that Bitcoin futures dominate price discovery relative to
spot markets.''); Alexander Chang, William Herrmann and William
Chai, ``Efficient Price Discovery in the Bitcoin Markets'', Wilshire
Phoenix (October 2020) (``[W]e conclude that the CME bitcoin futures
contribution to price formation was greater than the contribution
from the related spot markets made up of the Constituent Exchanges,
indicating that the futures lead the spot markets and thus
contribute more to price formation. . . .[T]his analysis was
performed using a methodology similar to the one employed by the
Division of Economic and Risk Analysis at the SEC to evaluate the
IEX exchange's contribution to price formation in the equities
markets.'') available at https://www.wilshirephoenix.com/efficient-price-discovery-in-the-bitcoin-markets/.
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The Trust Will Not Be the Predominant Influence on Prices in the
Bitcoin Spot and Futures Markets
The second element to determine whether a market or group of
markets is of ``significant size'' requires that it is unlikely that
trading in the ETP would be the predominant influence on prices in that
market. The Exchange also believes that trading in the Shares would not
be the predominant force on prices in the Bitcoin Futures market (or
spot market) for a number of reasons, including the significant volume
in the Bitcoin Futures market, the size of bitcoin's market cap
(approximately $1 trillion), and the significant liquidity available in
the spot market. In addition to the Bitcoin Futures market data points
cited above, the spot market for bitcoin is also very liquid.
According to data from CoinRoutes from February 2021, the cost to
buy or sell $5 million worth of bitcoin averages roughly 10 basis
points with a market impact of 30 basis points.\47\ For a $10 million
market order, the cost to buy or sell is roughly 20 basis points with a
market impact of 50 basis points. Stated another way, a market
participant could enter a market buy or sell order for $10 million of
bitcoin and only move the market 0.5%. More strategic purchases or
sales (such as using limit orders and executing through OTC bitcoin
trade desks) would likely have less obvious impact on the market--which
is consistent with MicroStrategy,\48\ Tesla \49\ and Square \50\ being
able to collectively purchase billions of dollars in bitcoin without
resulting in significant price movements.
---------------------------------------------------------------------------
\47\ These statistics are based on samples of bitcoin liquidity
in USD (excluding stablecoins or Euro liquidity) based on executable
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
\48\ See Form 10-Q submitted by MicroStrategy Incorporated for
the quarterly period ended September 30, 2020 at 8: https://www.sec.gov/ix?doc=/Archives/edgar/data/1050446/000156459020047995/mstr-10q_20200930.htm.
\49\ See Form 10-K submitted by Tesla, Inc. for the fiscal year
ended December 31, 2020 at 23: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
\50\ See Form 10-Q submitted by Square, Inc. for the quarterly
period ended September 30, 2020 at 51: https://www.sec.gov/ix?doc=/Archives/edgar/data/1512673/000151267320000012/sq-20200930.htm.
---------------------------------------------------------------------------
The results from a study conducted by CF Benchmarks simulating to
determine the extent of ``slippage'' (i.e., the difference between the
expected price of a trade and the price at which the trade was actually
executed) offer further evidence that trading in the Shares is unlikely
to be the predominant influence in either the bitcoin spot or futures
market.\51\ The CF Benchmarks Analysis simulated the purchase of 50
bitcoins a day for 686 days (an amount chosen specifically to replicate
hypothetical trades by a bitcoin ETP) and found that the maximum amount
of slippage on a particular day was 0.3%, with the remainder of values
between 0% and 0.15%. Thus, according to CF Benchmarks, the slippage in
this study could be described as having been largely negligible or, at
most, minor during the observation period.\52\ While the study focused
on the impact of a hypothetical ETP in the bitcoin spot market,
arbitrage mechanisms in the spot and futures market dictate that it
would be unlikely for a Bitcoin Futures ETP such as the Trust to
overrun the Bitcoin Futures market without also overrunning the bitcoin
spot market. Accordingly, the CF Benchmarks analysis further bolsters
the Exchange's contention that the Trust and other similar ETPs would
be unlikely to overrun the market.
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\51\ See CF Benchmarks, ``An Analysis of the Suitability of the
CME CF BRR for the Creation of Regulated Financial Products,''
December 2020 (the ``CF Benchmarks Analysis''), available at:
https://docsend.com/view/kizk7rarzaba6jxf.
\52\ Id.
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As such, the combination of Bitcoin Futures leading price
discovery, the overall size of the bitcoin market, and the ability for
market participants, including authorized participants creating and
redeeming in-kind with the Trust, to buy or sell large amounts of
bitcoin without significant market impact will help prevent the Shares
from becoming the predominant force on pricing in either the bitcoin
spot or Bitcoin Futures markets, satisfying part (b) of the test
outlined above.
For these reasons, the Exchange believes that all evidence strongly
suggests that the CME Bitcoin Futures market has matured to a ``market
of significant size'' for purposes of the Commission's standard of
review as (a) a would-be manipulator of either bitcoin or Bitcoin
Futures would necessarily have to execute its scheme on the CME in
order to manipulate the ETP; and (b) the proposed ETP is unlikely to be
the predominant influence on prices in that market as the absolute size
of both the futures and spot markers have grown tremendously since the
prior disapproval orders.
Other Means To Prevent Fraudulent and Manipulative Acts and Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange maintains that
the CME CF BRR is not readily susceptible to manipulation due to the
design of the methodology, which adequately protects the Trust from
potential price manipulation in the Bitcoin Futures and spot bitcoin
markets.\53\ The use of medians in the methodology reduces the effect
of outlier prices on one or more constituent exchange.\54\ The volume-
weighting of medians filters out high numbers of small trades that may
otherwise control the value of a non-volume weighted median.\55\ The
use of twelve non-weighted partitions assures that price information is
sourced equally over the entire observation period.\56\ Influencing the
rate would therefore require trading activity during multiple
partitions on several exchanges over an extended period, which would
prove a costly and an operationally intensive undertaking. The
methodology is designed to remove the reliance on any single
contributing exchange, where
[[Page 50579]]
delayed or missing data from an exchange does not cause a calculation
failure.
---------------------------------------------------------------------------
\53\ See CME CR Cryptocurrency Reference Rates Methodology Guide
(Version 9.0) (July 31, 2021), available at https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Reference+Rates+Methodology.pdf.
\54\ Id at 6.
\55\ Id.
\56\ Id at 13.
---------------------------------------------------------------------------
In accordance with the methodology, if for any constituent exchange
the absolute percentage deviation of the volume-weighted median trade
price in comparison with the median of the volume-weighted median trade
prices of all constituent exchanges exceeds a given threshold
(currently set at 10% and defined in the methodology), all relevant
transactions of that constituent exchange are flagged as potentially
erroneous and are disregarded in the calculation of CME CF BRR for that
calculation day.\57\ Furthermore, for inclusion in the CME CF BRR's
calculation, a constituent exchange's bitcoin U.S. Dollar spot trading
volume must meet the minimum threshold (currently, 3% relative
contribution over two (2) consecutive quarters) as detailed in the
methodology.\58\ The criteria collectively cause the constituent
exchanges to deliver transparent and consistent trade and order data to
CF Benchmarks via an API with sufficient reliability, detail and
timeliness.\59\
---------------------------------------------------------------------------
\57\ Id at 11.
\58\ See CME CF Cryptocurrency Pricing Products Constituent
Exchange Criteria (Version 5.0) (May 20, 2020) at 4, available at
https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges+Criteria.pdf.
\59\ Id.
---------------------------------------------------------------------------
Furthermore, the constituent exchanges maintain fair and
transparent market conditions to impede illegal, unfair or manipulative
trading practices, and comply with applicable law and regulations
including, capital markets regulations, money transmission regulations,
client money custody requirements, know-your-client (KYC) requirements,
and anti-money-laundering (AML) regulations.\60\ The constituent
exchanges are also required to cooperate with inquiries and
investigations of the administrator (CF Benchmarks) and execute a data
sharing agreement with CME.\61\
---------------------------------------------------------------------------
\60\ Id.
\61\ Id.
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Core Principles Certification of CME BTC Futures Contracts
The CME Bitcoin Futures comply with all Core Principles of the CEA.
In adhering to the Core Principles \62\ applicable to all Designated
Contract Markets (``DCM''), the CME certified that the CME Bitcoin
Futures met specific Core Principles as they apply to futures contracts
traded on a DCM. This compliance results in the Trust's core asset
being a well-regulated instrument that is not readily susceptible to
manipulation. The following Core Principles are of particular relevance
to the analysis of this filing.
---------------------------------------------------------------------------
\62\ 17 CFR part 38.
---------------------------------------------------------------------------
Contracts Not Readily Subject to Manipulation
In certifying the CME BTC Futures Contracts to the CFTC, the CME
was required to include an analysis describing the contract, a
discussion of the market research it conducted and note that the
contract was designed to meet the risk management needs of prospective
users and promote price discovery of bitcoin. The CME consulted with
market users to obtain their views and opinions during the contract's
design process to ensure that the contract's terms and conditions
reflected the underlying cash market and would perform the intended
risk management and/or price discovery functions.
Since the CME BTC Futures Contract is cash settled by reference to
the CME CF BRR, the CME CF BRR's methodology was provided to the CFTC
with supporting information showing how the CME CF BRR is reflective of
the underlying cash market, is not readily subject to manipulation or
distortion, and is based on a cash price series that is reliable,
acceptable, publicly available and timely (as defined in paragraphs
(c)(2) and (c)(3) of Appendix C to part 38 of the CFTC's
Regulations).\63\
---------------------------------------------------------------------------
\63\ Id. at Appendix C paragraphs (c)(2) and (c)(3).
---------------------------------------------------------------------------
Prevention of Market Disruption
The Core Principles also required CME to certify that it has the
ability to prevent manipulation, price distortion, and disruptions of
the cash-settlement process through market surveillance, compliance,
and enforcement practices and procedures. This would include the
ability to conduct real-time trade monitoring and comprehensive and
accurate trade reconstruction. Such trade monitoring also allows for
the detection of developing market anomalies, such as abnormal price
movements and unusual trading volumes, and position-limit violations.
CME rules grant exchanges broad powers to intervene to prevent or
reduce market disruptions. Once a threatened or actual disruption is
detected, the CME may take steps to prevent the disruption or reduce
its severity. CME's program includes automated trading alerts to detect
market anomalies and position-limit violations as they develop and
before market disruptions occur or become more serious. CFTC guidance
also requires a DCM to have access to its traders' position and
transaction data in the underlying reference market. The CME has,
through an information sharing agreement with CF Benchmarks, the
ability to access information about trader positions and transactions
in the underlying spot BTC markets that contribute to the CME CF BRR.
The CME has also implemented a series of risk controls as outlined in
the CFTC Regulation's Acceptable Practices.\64\
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\64\ These risk controls include: (1) Dynamic circuit breakers,
which monitor for significant price movements within a trading
session by defining an upper and lower limit of how far bitcoin
futures can move (10%) in any one hour rolling window and, if
triggered, matching is suspended for 2 minutes; (2) velocity logic,
which is designed to detect market movement of a predefined number
of ticks either up or down within a predefined time and, if
triggered, matching is suspended for 10 seconds; (3) daily price
limits, which is the maximum daily price range permitted for BTC
futures (+/- 30% from prior day settlement); and (4) initial margin
(currently set at 35% of notional value for outright positions)
charged for all open positions based on expected volatility over a
two-day close out period.
---------------------------------------------------------------------------
Position Limits
The CFTC's Core Principles also call for the use of position limits
or position accountability to reduce the threat of market manipulation
or congestion. The CME has set a position limit of 2,000 contracts for
the CME Bitcoin Futures. As a result of this position limit, an attempt
to manipulate the price of the CME Bitcoin Futures, and consequently
the shares in the Trust, would yield little benefit due to the limited
potential profit available from the trading of 2,000 contracts.
Ongoing Coordination With CFTC on CME Bitcoin Futures
Since the launch of CME Bitcoin Futures, the CME has worked with
the CFTC on a regular and frequent basis to assess the trading in the
contract and ensure that the market is free from fraud and
manipulation. CFTC staff, in the recent past, has actively engaged CME
in reviewing CME's surveillance program for bitcoin products pursuant
to part 38 (Designated Contract Markets) of the CFTC's regulations.
This engagement has concerned CME's analysis of the trading activities
and strategies of bitcoin futures market participants of significant
size and outreach to these market participants. It has also concerned
CME's ability to obtain transactional information from the constituent
exchanges that contribute data to the bitcoin reference rate in
addition to CME's continued monitoring of the bitcoin reference rate as
a price series, particularly during the index's one-hour calculation
window.
Creation and Redemption of Shares
According to the Draft Registration Statement, the Trust will issue
and
[[Page 50580]]
redeem Shares on a continuous basis at the NAV per Share only in large,
specified blocks each consisting of a certain number of Shares (each
such block of shares called a ``Creation Unit,'' and collectively, the
``Creation Units'') in transactions with broker-dealers and large
institutional investors that have entered into participation agreements
(``Authorized Participants''). It is currently anticipated that a
Creation Unit will consist of 50,000 Shares, although this number may
change from time to time. It is currently expected that the Trust's
Creation Units will generally be issued and redeemed for cash. Except
when aggregated in Creation Units, the Shares are not redeemable
securities. Once created, Shares of the Trust may trade on the
secondary market in amounts less than a Creation Unit.
Creation Procedures. On any Business Day, an Authorized Participant
may place an order to create one or more Creation Units. Purchase
orders must be placed by 2:00 p.m. (Eastern time). The cut-off time may
be earlier if, for example, the Exchange or another exchange material
to the valuation or operation of the Trust closes before the cut-off
time. If a purchase order is received prior to the applicable cut-off
time, the day on which the Marketing Agent receives a valid purchase
order is the purchase order date. If the purchase order is received
after the applicable cut-off time, the purchase order date will be the
next Business Day. Purchase orders are irrevocable. By placing a
purchase order, and prior to delivery of such Creation Units, an
Authorized Participant's DTC account will be charged the non-refundable
transaction fee due for the purchase order.
Redemption Procedures. On any Business Day, an Authorized
Participant may place an order with the Marketing Agent to redeem one
or more Creation Units. Redemption orders must be received prior to
2:00 p.m. (Eastern time), or earlier if, for example, the Exchange or
another exchange material to the valuation or operation of the Trust
closes before the cut-off time. If a redemption order is received prior
to the applicable cut-off time, the day on which the Marketing Agent
receives a valid redemption order is the redemption order date. If the
redemption order is received after the applicable cut-off time, the
redemption order date will be the next day. Redemption orders are
irrevocable. Individual shareholders may not redeem directly from the
Trust.
By placing a redemption order, an Authorized Participant agrees to
deliver the Creation Units to be redeemed through DTC's book-entry
system to the applicable Trust not later than noon (Eastern time), on
the first Business Day immediately following the redemption order date
(T+1). The Sponsor reserves the right to extend the deadline for the
Trust to receive the Creation Units required for settlement up to the
second Business Day following the redemption order date (T+2). By
placing a redemption order, and prior to receipt of the redemption
proceeds, an Authorized Participant must wire to the Custodian the non-
refundable transaction fee due for the redemption order or any proceeds
due will be reduced by the amount of the fee payable. At its sole
discretion, the Sponsor may agree to a delivery date other than T+2.
Additional fees may apply for special settlement.
Upon the request of an Authorized Participant made at the time of a
redemption order, the Sponsor at its sole discretion may determine, in
addition to delivering redemption proceeds, to transfer futures
contracts to the Authorized Participant pursuant to an exchange of a
futures contract for related position (``EFCRP'') or to a block trade
sale of futures contracts to the Authorized Participant.
Availability of Information
The Trust's website (www.valkyriefunds.io) will include
quantitative information on a per Share basis updated on a daily basis,
including (i) the current NAV per Share daily and the prior business
day's NAV and the reported closing price; (ii) the mid-point of the
bid-ask price \65\ in relation to the NAV as of the time the NAV is
calculated (``Bid-Ask Price'') and a calculation of the premium or
discount of such price against such NAV; and (iii) data in chart format
displaying the frequency distribution of discounts and premiums of the
daily Bid-Ask Price against the NAV, within appropriate ranges, for
each of the four previous calendar quarters (or for the life of the
Trust, if shorter). In addition, on each business day the Trust's
website will provide pricing information for the Shares. Also, an
estimated value that reflects an estimated intraday value of the
Trust's portfolio (the ``Intraday Indicative Value''), will be
disseminated.
---------------------------------------------------------------------------
\65\ The bid-ask price of the Trust is determined using the
highest bid and lowest offer on the Consolidated Tape as of the time
of calculation of the closing day NAV.
---------------------------------------------------------------------------
The Trust's website will provide an intra-day indicative value
(``IIV'') per Share updated every 15 seconds, as calculated by the
Exchange or a third-party financial data provider during the Exchange's
Regular Market Session (9:30 a.m. to 4:00 p.m. (Eastern time)).\66\ The
IIV will be calculated by using the prior day's closing NAV per Share
as a base and updating that value during the Exchange's Regular Market
Session to reflect changes in the value of the Trust's NAV during the
trading day.
---------------------------------------------------------------------------
\66\ The IIV on a per Share basis disseminated during the
Regular Market Session should not be viewed as a real-time update of
the NAV, which is calculated once a day.
---------------------------------------------------------------------------
The IIV disseminated during the Exchange's Regular Market Session
should not be viewed as an actual real-time update of the NAV, which
will be calculated only once at the end of each trading day. The IIV
will be widely disseminated on a per Share basis every 15 seconds
during the Exchange's Regular Market Session by one or more major
market data vendors. In addition, the IIV will be available through on-
line information services.
The NAV for the Trust will be calculated by the Sponsor once a day
and will be disseminated daily to all market participants at the same
time. Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
Initial and Continued Listing
The Shares will be subject to Nasdaq Rule 5711(g)(vi), which sets
forth the initial and continued listing criteria applicable to
Commodity Futures Trust Shares. The Exchange will obtain a
representation that the Trust's NAV will be calculated daily and will
be made available to all market participants at the same time. Upon
termination of the Trust, the Shares will be removed from listing. The
Trustee, Delaware Trust Company, is a trust company having substantial
capital and surplus and the experience and facilities for handling
corporate trust business, as required under Nasdaq Rule 5711(g)(vi)(D)
and no change will be made to the trustee without prior notice to and
approval of the Exchange.
As required in Nasdaq Rule 5711(g)(vii), the Exchange notes that
any registered market maker (``Market Maker'') in the Shares must file
with the Exchange, in a manner prescribed by the Exchange, and keep
current a list identifying all accounts for trading the underlying
commodity, related futures or options on futures, or any other related
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker in
the Shares shall trade in the underlying
[[Page 50581]]
commodity, related futures or options on futures, or any other related
derivatives, in an account in which a registered Market Maker, directly
or indirectly, controls trading activities, or has a direct interest in
the profits or losses thereof, which has not been reported to the
Exchange as required by Nasdaq Rule 5711(g). In addition to the
existing obligations under Exchange rules regarding the production of
books and records, the registered Market Maker in the Shares shall make
available to the Exchange such books, records or other information
pertaining to transactions by such entity or any limited partner,
officer or approved person thereof, registered or non-registered
employee affiliated with such entity for its or their own accounts in
the underlying commodity, related futures or options on futures, or any
other related derivatives, as may be requested by the Exchange.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. The Exchange will
allow trading in the Shares from 4:00 a.m. to 8:00 p.m. (Eastern time).
The Exchange has appropriate rules to facilitate transactions in the
Shares during all trading sessions. The Shares of the Trust will
conform to the initial and continued listing criteria set forth in
Nasdaq Rule 5711(g).
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in Nasdaq Rules 4120 and 4121, including
without limitation the conditions specified in Nasdaq Rule 4120(a)(9)
and the trading pauses under Nasdaq Rules 4120(a)(11) and (12).
Trading may be halted because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable. These may include: (1) The extent to which trading is not
occurring in the futures contracts underlying the Shares; or (2)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.
As indicated in Commentary .03 to Nasdaq Rule 5711(g), if the IIV
or the value of the underlying futures contract is not being
disseminated as required, the Exchange may halt trading during the day
in which the interruption to the dissemination of the IIV or the value
of the underlying futures contract occurs. If the interruption to the
dissemination of the IIV or the value of the underlying futures
contract persists past the trading day in which it occurred, the
Exchange will halt trading no later than the beginning of the trading
day following the interruption. In addition, if the Exchange becomes
aware that the NAV with respect to the Shares is not disseminated to
all market participants at the same time, it will halt trading in the
Shares until such time as the NAV is available to all market
participants.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. Trading of Shares on
the Exchange will be subject to the Exchange's surveillance procedures
for derivative products. The Exchange will require the Trust to
represent to the Exchange that it will advise the Exchange of any
failure by the Trust to comply with the continued listing requirements,
and, pursuant to its obligations under Section 19(g)(1) of the Exchange
Act, the Exchange will surveil for compliance with the continued
listing requirements. If the Trust is not in compliance with the
applicable listing requirements, the Exchange will commence delisting
procedures under the Nasdaq 5800 Series. In addition, the Exchange also
has a general policy prohibiting the distribution of material, non-
public information by its employees.
Additionally, the Bitcoin Futures will be subject to the rules and
surveillance programs of CME and the CFTC.\67\ The Exchange or the
Financial Industry Regulatory Authority (``FINRA''), on behalf of the
Exchange, will communicate as needed regarding trading in the Shares
and the underlying Bitcoin Futures via ISG from other exchanges who are
members or affiliates of the ISG or with which the Exchange has entered
into a comprehensive surveillance sharing agreement.\68\ The Exchange
may also obtain information regarding trading in the spot bitcoin
market from exchanges with which the CME or the Exchange has entered
into a comprehensive surveillance sharing agreement. In addition, the
Exchange is able to access, as needed, trade information for certain
fixed income instruments reported to FINRA's Trade Reporting and
Compliance Engine (``TRACE'').
---------------------------------------------------------------------------
\67\ The CFTC issued a press release on December 1, 2017, noting
the self-certifications from CFE and CME and highlighting the
rigorous process that the CFTC had undertaken in its engagement with
CFE and CME prior to the self-certification for the Bitcoin Futures.
The press release focused on the ongoing surveillances that will
occur on each listing exchange, including surveillance based on
information sharing with the underlying cash bitcoin exchanges as
well as the actions that the CFTC will undertake after the contracts
are launched, including monitoring and analyzing the size and
development of the market, positions and changes in positions over
time, open interest, initial margin requirements, and variation
margin payments, stress testing positions, conduct reviews of
designated contract markets, derivatives clearing organizations,
clearing firms, and individual traders involved in trading and
clearing bitcoin futures. For more information, see https://www.cftc.gov/PressRoom/PressReleases/pr7654-17.
\68\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com. The Exchange notes that not all
components of the Disclosed Portfolio for the Trust may trade on
markets that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement. Not more than
10% of the net assets of the Trust in the aggregate invested in
Bitcoin Futures shall consist of Bitcoin Futures whose principal
market is not a member of the ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (1) The procedures for purchases
and redemptions of Shares in Creation Units (and that Shares are not
individually redeemable); (2) Section 10 of Nasdaq General Rule 9,
which imposes suitability obligations on Nasdaq members with respect to
recommending transactions in the Shares to customers; (3) how
information regarding the IIV is disseminated; (4) the risks involved
in trading the Shares during the Pre-Market and Post-Market Sessions
when an updated IIV will not be calculated or publicly disseminated;
(5) the requirement that members deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (6) trading information. The
Information Circular will also discuss any exemptive, no-action and
interpretive relief granted by the Commission from any rules under the
Act.
Additionally, the Information Circular will reference that the
Trust is subject to various fees and expenses described in the Draft
Registration Statement. The Information Circular will also disclose the
trading hours of the Shares. The Information Circular will disclose
that information about the Shares will be
[[Page 50582]]
publicly available on the Trust's website.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \69\ in general and Section 6(b)(5) of the Act \70\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\69\ 15 U.S.C. 78f.
\70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Exchange believes that its surveillance procedures are adequate to
properly monitor the trading of the Shares on the Exchange during all
trading sessions and to deter and detect violations of Exchange rules
and the applicable federal securities laws. Additionally, the Bitcoin
Futures will be subject to the rules and surveillance programs of CME
and the CFTC. Trading of the Shares through the Exchange will be
subject to the Exchange's surveillance procedures for derivative
products, including Commodity Futures Trust Shares. The Exchange or
FINRA, on behalf of the Exchange, will communicate as needed regarding
trading in the Shares and the underlying Bitcoin Futures via ISG, from
other exchanges who are members or affiliates of the ISG, or with which
the Exchange has entered into a comprehensive surveillance sharing
agreement. The Exchange may also obtain information regarding trading
in the spot bitcoin market via the ISG, from other exchanges who are
members or affiliates of the ISG, or from other exchanges with which
the Exchange has entered into a comprehensive surveillance sharing
agreement. In addition, the Exchange is able to access, as needed,
trade information for certain fixed income instruments reported to
TRACE. The Exchange prohibits the distribution of material non-public
information by its employees.
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. The Exchange further
believes that the proposal is designed to prevent fraudulent and
manipulative acts and practices in that the Exchange expects that the
market for Bitcoin Futures will be sufficiently liquid to support
numerous ETPs shortly after launch. This belief is based on numerous
conversations with market participants, issuers, and discussions with
personnel of CFE. As such, the Exchange believes that the expected
liquidity in the market for Bitcoin Futures, combined with the Exchange
surveillance procedures related to the Shares, and the broader
regulatory structure will prevent trading in the Shares from being
susceptible to manipulation.
Because of its innovative features as a cryptoasset, bitcoin has
gained wide acceptance as a secure means of exchange in the commercial
marketplace and has generated significant interest among investors. In
less than a decade since its creation in 2008, bitcoin has achieved
significant market penetration, with payments giant PayPal and
thousands of merchants and businesses accepting it as a form of
commercial payment, as well as receiving official recognition from
several governments, including Japan and Australia. Accordingly,
investor interest in gaining exposure to bitcoin is increasing
exponentially as well. As expected, the total volume of bitcoin
transactions in the market continues to grow exponentially.
Despite the growing investor interest in bitcoin, the primary means
for investors to gain access to bitcoin exposure remains either through
the Bitcoin Futures or direct investment through bitcoin exchanges or
over-the-counter trading. For regular investors simply wishing to
express an investment viewpoint in bitcoin, investment through the
Bitcoin Futures is complex and requires active management, and direct
investment in bitcoin brings with it significant inconvenience,
complexity, expense and risk. The Shares would therefore represent a
significant innovation in the bitcoin market by providing an
inexpensive and simple vehicle for investors to gain exposure to
bitcoin in a secure and easily accessible product that is familiar and
transparent to investors. Such an innovation would help to perfect the
mechanism of a free and open market and, in general, to protect
investors and the public interest by improving investor access to
bitcoin exposure through efficient and transparent exchange-traded
derivative products.
In addition to improved convenience, efficiency and transparency,
the Trust will also help to prevent fraudulent and manipulative acts
and practices by enhancing the security afforded to investors as
compared to a direct investment in bitcoin. Despite the extensive
security mechanisms built into the Bitcoin network, a remaining risk to
owning bitcoin directly is the need for the holder to retain and
protect the ``private key'' required to spend or sell bitcoin after
purchase. If a holder's private key is compromised or simply lost,
their bitcoin can be rendered unavailable--i.e., effectively lost to
the investor. Investment vehicles that invest directly in bitcoin or
investors that hold their bitcoin through digital wallets or other
storage mechanisms must take extraordinary steps in order to protect
their bitcoin, such as placing their bitcoin in ``cold storage.'' This
risk will be eliminated for the Trust because the exposure to bitcoin
is gained through cash-settled Bitcoin Futures that do not present any
of the security issues that exist with direct investment in bitcoin.
The Trust expects that it will generally seek to remain fully
exposed to Bitcoin Futures even during times of adverse market
conditions. Under Normal Market Conditions, the Trust will generally
hold only Bitcoin Futures and Money Market Instruments (which are used
to collateralize the Bitcoin Futures).
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV will be calculated daily and that the NAV and the
Disclosed Portfolio will be made available to all market participants
at the same time. In addition, a large amount of information is
publicly available regarding the Trust and the Shares, thereby
promoting market transparency. Moreover, the Intraday Indicative Value
will be disseminated by one or more major market data vendors at least
every 15 seconds during Regular Trading Hours. On each business day,
before commencement of trading in Shares during Regular Trading Hours,
the Trust will disclose on its website the Disclosed Portfolio that
will form the basis for the Trust's calculation of NAV at the end of
the business day. Pricing information will be available on the Trust's
website including: (1) The prior business day's reported NAV, the Bid/
Ask Price of the Trust, and a calculation of the premium and discount
of the Bid/Ask Price against the NAV; and (2) data in chart format
displaying the frequency distribution of discounts and premiums of the
daily Bid/Ask Price against the
[[Page 50583]]
NAV, within appropriate ranges, for each of the four previous calendar
quarters.
Additionally, information regarding market price and trading of the
Shares will be continually available on a real-time basis throughout
the day on brokers' computer screens and other electronic services, and
quotation and last sale information for the Shares will be available on
the facilities of the CTA. The Trust's website will include a form of
the prospectus for the Trust and additional data relating to NAV and
other applicable quantitative information. Trading in Shares of the
Trust will be halted under the conditions specified in Nasdaq Rule
4120(b). Trading may also be halted because of market conditions or for
reasons that, in the view of the Exchange, make trading in the Shares
inadvisable. Finally, trading in the Shares will be subject to Nasdaq
Rule 4120(a)(9), which sets forth circumstances under which Shares of
the Trust may be halted and delisting proceedings commenced. In
addition, as noted above, investors will have ready access to
information regarding the Trust's holdings, the Intraday Indicative
Value, the Disclosed Portfolio, and quotation and last sale information
for the Shares.
Intraday price quotations on Money Market Instruments of the type
held by the Trust are available from major broker-dealer firms and from
third-parties, which may provide prices free with a time delay, or
``live'' with a paid fee. For Bitcoin Futures, such intraday
information is available directly from the applicable listing venue.
Intraday price information is also available through subscription
services, such as Bloomberg and Thomson Reuters, which can be accessed
by authorized participants and other investors. Pricing information
related to Money Market Instruments will be available through issuer
websites and publicly available quotation services such as Bloomberg,
Markit and Thomson Reuters.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
additional types of actively-managed exchange-traded products that will
enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG from other exchanges that are members of ISG
or with which the Exchange has entered into a comprehensive
surveillance sharing agreement as well as trade information for certain
fixed income instruments as reported to FINRA's TRACE. Not more than
10% of the net assets of the Trust in the aggregate invested in Bitcoin
Futures shall consist of Bitcoin Futures whose principal market is not
a member of the ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. In addition, as noted
above, investors will have ready access to information regarding the
Trust's holdings, the Intraday Indicative Value, the Disclosed
Portfolio, and quotation and last sale information for the Shares.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change rather will facilitate the listing and trading of
additional actively-managed exchange-traded products that will enhance
competition among both market participants and listing venues, to the
benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2021-066 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2021-066. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2021-066 and should be submitted
on or before September 30, 2021.
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\71\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\71\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-19420 Filed 9-8-21; 8:45 am]
BILLING CODE 8011-01-P