Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the Franklin Ethereum ETF, a Series of the Franklin Ethereum Trust, Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 18447-18461 [2024-05251]

Download as PDF Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices change should be approved or disapproved. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others • 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– NYSEAMER–2024–14 on the subject line. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has filed the proposed rule change pursuant to section 19(b)(3)(A)(iii) of the Act 15 and Rule 19b–4(f)(6) thereunder.16 Because the proposed rule change does not: (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6)(iii) thereunder.17 At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under section 19(b)(2)(B) 18 of the Act to determine whether the proposed rule 13 See supra, note 9. supra, note 8, at 37503. 15 15 U.S.C. 78s(b)(3)(A)(iii). 16 17 CFR 240.19b–4(f)(6). 17 17 CFR 240.19b–4(f)(6)(iii). In addition, Rule 19b–4(f)(6) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 18 15 U.S.C. 78s(b)(2)(B). 14 See lotter on DSK11XQN23PROD with NOTICES1 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 competition by providing an alternative to similar products offered by other exchanges, including the Cboe Summary Depth.13 The NYSE American Agg Lite market data feed would provide investors with a new option for receiving market data, which was a primary goal of the market data amendments adopted by Regulation NMS.14 Thus, the Exchange believes the proposed rule change is necessary to permit fair competition among national securities exchanges. No written comments were solicited or received with respect to the proposed rule change. VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 18447 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: Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–05254 Filed 3–12–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Electronic Comments Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to file number SR–NYSEAMER–2024–14. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–NYSEAMER–2024–14 and should be submitted on or before April 3, 2024. PO 00000 Frm 00077 Fmt 4703 Sfmt 4703 [Release No. 34–99686; File No. SR– CboeBZX–2024–018] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the Franklin Ethereum ETF, a Series of the Franklin Ethereum Trust, Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares March 7, 2024. 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 February 22, 2024, Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BZX Exchange, Inc. (‘‘BZX’’ or the ‘‘Exchange’’) is filing with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) a proposed rule change to list and trade shares of the Franklin Ethereum ETF (the ‘‘Fund’’), a series of the Franklin Ethereum Trust (the ‘‘Trust’’),3 under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. 19 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 The Trust was formed as a Delaware statutory trust on February 8, 2024. The Fund is operated as a grantor trust for U.S. federal tax purposes. The Trust and the Fund have no fixed termination date. 1 15 E:\FR\FM\13MRN1.SGM 13MRN1 18448 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / 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. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change lotter on DSK11XQN23PROD with NOTICES1 1. Purpose The Exchange proposes to list and trade the Shares under BZX Rule 14.11(e)(4),4 which governs the listing and trading of Commodity-Based Trust Shares on the Exchange.5 Franklin Holdings, LLC is the sponsor of the Fund (‘‘Sponsor’’). The Shares will be registered with the Commission by means of the Trust’s registration statement on Form S–1 (the ‘‘Registration Statement’’).6 The Commission has historically approved or disapproved exchange filings to list and trade series of Trust Issued Receipts, including spot-based Commodity-Based Trust Shares, on the basis of whether the listing exchange has in place a comprehensive surveillance sharing agreement with a regulated market of significant size related to the underlying commodity to be held.7 With this in mind, the CME 4 The Commission approved BZX Rule 14.11(e)(4) in Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR–BATS–2011–018). 5 Any of the statements or representations regarding the index composition, the description of the portfolio or reference assets, limitations on portfolio holdings or reference assets, dissemination and availability of index, reference asset, and intraday indicative values, or the applicability of Exchange listing rules specified in this filing to list a series of Other Securities (collectively, ‘‘Continued Listing Representations’’) shall constitute continued listing requirements for the Shares listed on the Exchange. 6 On February 12, 2024, the Trust filed with the Commission the Registration Statement on Form S– 1, submitted to the Commission by the Sponsor on behalf of the Trust (333–277008). The descriptions of the Trust, the Shares, and the Index (as defined below) contained herein are based, in part, on information in the Registration Statement. The Registration Statement is not yet effective and the Shares will not trade on the Exchange until such time that the Registration Statement is effective. 7 See Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently disapproved by the VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 Ether Futures market, which launched in February 2021, is the proper market to consider in determining whether there is a related regulated market of significant size. Recently, the Commission issued an order granting approval for proposals to list bitcoin-based commodity trust and bitcoin-based trust issued receipts (these funds are nearly identical to the Fund, but hold bitcoin instead of ethereum) (‘‘Spot Bitcoin ETPs’’).8 By way of background, in 2022 the Commission disapproved proposals 9 to list Spot Bitcoin ETPs, including the Grayscale Order.10 Grayscale appealed the decision with the U.S. Court of Appeals for the D.C. Circuit, which held that the Commission. See Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the ‘‘Winklevoss Order’’). Prior orders from the Commission have pointed out that in every prior approval order for Commodity-Based Trust Shares, there has been a derivatives market that represents the regulated market of significant size, generally a Commodity Futures Trading Commission (the ‘‘CFTC’’) regulated futures market. Further to this point, the Commission’s prior orders have noted that the spot commodities and currency markets for which it has previously approved spot ETPs are generally unregulated and that the Commission relied on the underlying futures market as the regulated market of significant size that formed the basis for approving the series of Currency and Commodity-Based Trust Shares, including gold, silver, platinum, palladium, copper, and other commodities and currencies. The Commission specifically noted in the Winklevoss Order that the approval order issued related to the first spot gold ETP ‘‘was based on an assumption that the currency market and the spot gold market were largely unregulated.’’ See Winklevoss Order at 37592. As such, the regulated market of significant size test does not require that the spot bitcoin market be regulated in order for the Commission to approve this proposal, and precedent makes clear that an underlying market for a spot commodity or currency being a regulated market would actually be an exception to the norm. These largely unregulated currency and commodity markets do not provide the same protections as the markets that are subject to the Commission’s oversight, but the Commission has consistently looked to surveillance sharing agreements with the underlying futures market in order to determine whether such products were consistent with the Act. 8 See Exchange Act Release No. 99306 (January 10, 2024), 89 FR 3008 (January 17, 2024) (SelfRegulatory Organizations; NYSE Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.; Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, To List and Trade BitcoinBased Commodity-Based Trust Shares and Trust Units) (the ‘‘Spot Bitcoin ETP Approval Order’’). 9 See Order Disapproving a Proposed Rule Change To List and Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4), CommodityBased Trust Shares, Securities Exchange Act Release No. 97102 (Mar. 10, 2023), 88 FR 16055 (Mar. 15, 2023) (SR–CboeBZX–2022–035) (‘‘VanEck Order II’’) and n.11 therein for the complete list of previous proposals. 10 See Securities Exchange Act Release No. 95180 (June 29, 2022) 87 FR 40299 (July 6, 2022) (SR– NYSEArca–2021–90) (Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, to List and Trade Shares of Grayscale Bitcoin Trust Under NYSE Arca Rule 8.201–E (CommodityBased Trust Shares) (the ‘‘Grayscale Order’’). PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 Commission had failed to adequately explain its reasoning that the proposing exchange had not established that the CME bitcoin futures market was a market of significant size related to spot bitcoin, or that the ‘‘other means’’ asserted were sufficient to satisfy the statutory standard. As a result, the court vacated the Grayscale Order and remanded the matter to the Commission.11 In considering the remand of the Grayscale Order and Spot Bitcoin ETPs, the Commission determined in the Spot Bitcoin ETP Approval Order that the CME Bitcoin Futures market is a regulated market of significant size. Specifically, the Commission stated: [B]ased on the record before the Commission and the improved quality of the correlation analysis in the record . . . the Commission is able to conclude that fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact CME bitcoin futures prices. And because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME—a U.S. regulated market whose bitcoin futures market is consistently highly correlated to spot bitcoin, albeit not of ‘‘significant size’’ related to spot bitcoin—can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals.12 As further discussed below, both the Exchange and the Sponsor believe that this proposal and the included analysis are sufficient to establish that the CME Ether Futures market represents a regulated market of significant size and that this proposal should be approved. Background Ethereum (also referred to as ‘‘ETH’’ or ‘‘ether’’) is free software that is hosted on computers distributed throughout the globe. It employs an array of logic, called a protocol, to create a unified understanding of ownership, commercial activity, and business logic. This allows users to engage in commerce without the need to trust any of its participants or counterparties. Ethereum code creates verifiable and unambiguous rules that assign clear, strong property rights to create a platform for unrestrained business formation and free exchange. It is widely understood that no single intermediary or entity operates or controls the Ethereum network (referred to as ‘‘decentralization’’), the transaction 11 See Grayscale Investments, LLC v. SEC, 82 F.4th 1239 (D.C. Cir. 2023). 12 See the Spot Bitcoin ETP Approval Order at 3011–3012. E:\FR\FM\13MRN1.SGM 13MRN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices validation and recordkeeping infrastructure of which is collectively maintained by a disparate user base. The Ethereum network allows people to exchange tokens of value, or ETH, which are recorded on a distributed public recordkeeping system or ledger known as a blockchain (the ‘‘Ethereum Blockchain’’), and which can be used to pay for goods and services, including computational power on the Ethereum network, or converted to fiat currencies, such as the U.S. dollar, at rates determined on digital asset exchanges or in individual peer-to-peer transactions. Furthermore, by combining the recordkeeping system of the Ethereum Blockchain with a flexible scripting language that is programmable and can be used to implement sophisticated logic and execute a wide variety of instructions, the Ethereum network is intended to act as a foundational infrastructure layer on top of which users can build their own custom software programs, as an alternative to centralized web servers. In theory, anyone can build their own custom software programs on the Ethereum network. In this way, the Ethereum network represents a project to expand blockchain deployment beyond a limited-purpose, peer-to-peer private money system into a flexible, distributed alternative computing infrastructure that is available to all. On the Ethereum network, ETH is the unit of account that users pay for the computational resources consumed by running their programs. Heretofore, U.S. retail investors have lacked a U.S. regulated, U.S. exchangetraded vehicle to gain exposure to ETH. Instead, current options include: (i) facing the counter-party risk, legal uncertainty, technical risk, and complexity associated with accessing spot ether; or (ii) over-the-counter ether funds (‘‘OTC ETH Funds’’) with high management fees and potentially volatile premiums and discounts. Meanwhile, investors in other countries, including Germany, Switzerland and France, are able to use more traditional exchange listed and traded products (including exchange-traded funds holding physical ETH) to gain exposure to ETH. Investors across Europe have access to products which trade on regulated exchanges and provide exposure to a broad array of spot crypto assets. U.S. investors, by contrast, are left with fewer and more risky means of getting ether exposure.13 13 The Exchange notes that the list of countries above is not exhaustive and that securities regulators in a number of additional countries have VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 To this point, the lack of an ETP that holds spot ETH (a ‘‘Spot Ether ETP’’) exposes U.S. investor assets to significant risk because investors that would otherwise seek cryptoasset exposure through a Spot Ether ETP are forced to find alternative exposure through generally riskier means. For example, investors in OTC ETH Funds are not afforded the benefits and protections of regulated Spot Ether ETPs, resulting in retail investors suffering losses due to drastic movements in the premium/discount of OTC ETH Funds. An investor who purchased the largest OTC ETH Fund in January 2021 and held the position at the end of 2022 would have suffered a 69% loss due to the premium/discount, even if the price of ETH did not change. Many retail investors likely suffered losses due to this premium/discount in OTC ETH Fund trading; all such losses could have been avoided if a Spot Ether ETP had been available. Additionally, many U.S. investors that held their digital assets in accounts at FTX,14 Celsius Network LLC,15 BlockFi Inc.16 and Voyager Digital Holdings, Inc.17 have become unsecured creditors in the insolvencies of those entities. If a Spot Ether ETP was available, it is likely that at least a portion of the billions of dollars tied up in those proceedings would still reside in the brokerage accounts of U.S. investors, having instead been invested in a transparent, regulated, and well-understood structure—a Spot Ether ETP. To this point, approval of a Spot Ether ETP would represent a major win for the protection of U.S. investors in the cryptoasset space. The Fund, like all other series of Commodity-Based Trust Shares, is designed to protect investors against the risk of losses through fraud and insolvency that arise by holding digital assets, including ETH, on centralized platforms. Ether Futures ETFs The Exchange and Sponsor applaud the Commission for allowing the launch of ETFs registered under the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’), that provide exposure to ether primarily through CME Ether Futures (‘‘Ether Futures ETFs’’). Allowing such products to list and trade is a productive first step in providing either approved or otherwise allowed the listing and trading of Spot Ether ETPs. 14 See FTX Trading Ltd., et al., Case No. 22– 11068. 15 See Celsius Network LLC, et al., Case No. 22– 10964. 16 See BlockFi Inc., Case No. 22–19361. 17 See Voyager Digital Holdings, Inc., et al., Case No. 22–10943. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 18449 U.S. investors and traders with transparent, exchange-listed tools for expressing a view on ether. The structure of Ether Futures ETFs provides negative outcomes for buy and hold investors as compared to a Spot Ether ETP. Specifically, the cost of rolling CME Ether Futures contracts will cause the Ether Futures ETFs to lag the performance of ether itself and, at over a billion dollars in assets under management, would cost U.S. investors significant amounts of money on an annual basis compared to Spot Ether ETPs. Such rolling costs would not be required for Spot Ether ETPs that hold ether. Further, Ether Futures ETFs could potentially hit CME position limits, which would force an Ether Futures ETF to invest in non-futures assets for ether exposure and cause potential investor confusion and lack of certainty about what such Ether Futures ETFs are actually holding to try to get exposure to ether, not to mention completely changing the risk profile associated with such an ETF. While Ether Futures ETFs represent a useful trading tool, they are clearly a sub-optimal structure for U.S. investors that are looking for long-term exposure to ether that will unnecessarily cost U.S. investors significant amounts of money every year compared to Spot Ether ETPs and the Exchange believes that any proposal to list and trade a Spot Ether ETP should be reviewed by the Commission with this important investor protection context in mind. To the extent the Commission may view differential treatment of Ether Futures ETFs and Spot Ether ETPs as warranted based on the Commission’s concerns about the custody of physical ether that a Spot Ether ETP would hold (compared to cash-settled futures contracts),18 the Sponsor believes this concern is mitigated to a significant degree by the custodial arrangements that the Fund has contracted with the Custodian to provide, as further outlined below. In the custody statement, the Commission stated that the fourth step that a broker-dealer could take to shield traditional securities customers and others from the risks and consequences of digital asset security fraud, theft, or loss is to establish, maintain, and enforce reasonably designed written policies, procedures, and controls for safekeeping 18 See, e.g., Division of Investment Management Staff, Staff Statement on Funds Registered Under the Investment Company Act Investing in the Bitcoin Futures Market, May 11, 2021 (‘‘The Bitcoin Futures market also has not presented the custody challenges associated with some cryptocurrencybased investing because the futures are cashsettled’’). E:\FR\FM\13MRN1.SGM 13MRN1 18450 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 and demonstrating the broker-dealer has exclusive possession or control over digital asset securities that are consistent with industry best practices to protect against the theft, loss, and unauthorized and accidental use of the private keys necessary to access and transfer the digital asset securities the broker-dealer holds in custody. While ether is not a security and the Custodian is not a broker-dealer, the Sponsor believes that similar considerations apply to the Custodian’s holding of the Fund’s ether. After diligent investigation, the Sponsor believes that the Custodian’s policies, procedures, and controls for safekeeping, exclusively possessing, and controlling the Fund’s ether holdings are consistent with industry best practices to protect against the theft, loss, and unauthorized and accidental use of the private keys. As a trust company chartered by the NYDFS, the Sponsor notes that the Custodian is subject to extensive regulation and has among longest track records in the industry of providing custodial services for digital asset private keys. Under the circumstances, therefore, to the extent the Commission believes that its concerns about the risks of spot ether custody justifies differential treatment of a Ether Futures ETF versus a Spot Ether ETP, the Sponsor believes that the fact that the Custodian employs the same types of policies, procedures, and safeguards in handling spot ether that the Commission has stated that brokerdealers should implement with respect to digital asset securities would appear to weaken the justification for treating a Ether Futures ETF compared to a Spot Ether ETP differently due to spot ether custody concerns. VerDate Sep<11>2014 19:20 Mar 12, 2024 Jkt 262001 Based on the foregoing, the Exchange and Sponsor believe that any objective review of the proposals to list Spot Ether ETPs compared to the Ether Futures ETFs would lead to the conclusion that Spot Ether ETPs should be available to U.S. investors and, as such, this proposal and other comparable proposals to list and trade Spot Ether ETPs should be approved by the Commission. Stated simply, U.S. investors will continue to lose significant amounts of money from holding Ether Futures ETFs as compared to Spot Ether ETPs, losses which could be prevented by the Commission approving Spot Ether ETPs. Additionally, any concerns related to preventing fraudulent and manipulative acts and practices related to Spot Ether ETPs would apply equally to the spot markets underlying the futures contracts held by an Ether Futures ETF. Both the Exchange and Sponsor believe that the CME Ether Futures market is a regulated market of significant size and that such manipulation concerns are mitigated, as described extensively below. After allowing the listing and trading of Ether Futures ETFs that hold primarily CME Ether Futures, however, the only consistent outcome would be approving Spot Ether ETPs on the basis that the CME Ether Futures market is a regulated market of significant size. Given the current landscape, approving this proposal (and others like it) and allowing Spot Ether ETPs to be listed and traded alongside Ether Futures ETFs and Spot Bitcoin ETPs would establish a consistent regulatory approach, provide U.S. investors with choice in product structures for ether exposure, and offer flexibility in the means of gaining exposure to ether PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 through transparent, regulated, U.S. exchange-listed vehicles. CME Ether Futures 19 CME began offering trading in Ether Futures in February 2021. Each contract represents 50 ETH and is based on the CME CF Ether-Dollar Reference Rate.20 The contracts trade and settle like other cash-settled commodity futures contracts. Most measurable metrics related to CME Ether Futures have generally trended up since launch, although some metrics have slowed recently. For example, there were 76,293 CME Ether Futures contracts traded in July 2023 (approximately $7.3 billion) compared to 70,305 ($11.1 billion) and 158,409 ($7.5 billion) contracts traded in July 2021, and July 2022 respectively.21 The Sponsor’s research indicates daily correlation between the spot ETH and the CME Ether Futures is 0.998 from the period of 9/1/22 through 9/1/23. The number of large open interest holders 22 and unique accounts trading CME Ether Futures have both increased, even in the face of heightened ether price volatility. BILLING CODE 8011–01–P 19 Unless otherwise noted, all data and analysis presented in this section and referenced elsewhere in the filing has been provided by the Sponsor. 20 The CME CF Ether-Dollar Reference Rate is based on a publicly available calculation methodology based on pricing sourced from several crypto trading platforms, including Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital. 21 Source: CME, 7/31/23. 22 A large open interest holder in CME Ether Futures is an entity that holds at least 25 contracts, which is the equivalent of 1,250 ether. At a price of approximately $1,867 per ether on 7/31/2023, more than 59 firms had outstanding positions of greater than $2.3 million in CME Ether Futures. E:\FR\FM\13MRN1.SGM 13MRN1 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices CME Group .Ether 18451 LOIH EN13MR24.001</GPH> VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 PO 00000 Frm 00081 Fmt 4703 Sfmt 4725 E:\FR\FM\13MRN1.SGM 13MRN1 EN13MR24.000</GPH> lotter on DSK11XQN23PROD with NOTICES1 CME Group Unique Accounts Trading 18452 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices CME Ether Futures Average Daily Volume (ADV) and Open Interest (01) Ol 10,000 500,000 9,000 450,000 8,000 400,000 7,000 350,000 t5 6,000 e! '!: 5,000 300,000 =I;: (.) =I;: 4,000 3,000 2,000 1,000 0 0 250,000 '!: 0 0 Jw dl 111 ~ ~ ~ .c (l) u. :ii: ~ 1'.!.i "' Jt- ~ ~ ~ ~ ~ ~ ~ ~ ~ C: >- ::, ::, Cl 0. (l) -, ~ Cl) :ii: -, ~ "' ~ 1'i ~ 8 z15 Iu ~ ~ (.) ~ N N N N N N """"' C: "' i "' ■ ADV il 150,000 100,000 1 ·g. w 50,000 ' N N N ~ ~ ~ ~ .c ~ .!. C: ::, :i -, Cl -, ~ :ii: Jt- :ii: -, ~ ~ 200,000 "' N ~ 0. (l) Cl) N N ~ N (') ~ 8 15 2 "' z C: Cl -, (') (') ~ N .c (l) .!. "' u. :ii: (') N .!. (') i Jt- :ii:"' ' .. , 0 (') (') ~ ::, ::, -, -, ~ C: 11Avg 01 CME Ether Futures Average Daily Volume (ADV) and Open lnterset (01) 1,400,000,000 1,200,000,000 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 .!. u.. .-l N N .-l N w, C: ::, .... ~ ~ ■ lotter on DSK11XQN23PROD with NOTICES1 BILLING CODE 8011–01–C Section 6(b)(5) and the Applicable Standards The Commission has approved numerous series of Trust Issued Receipts,23 including Commodity-Based Trust Shares,24 to be listed on U.S. national securities exchanges. In order for any proposed rule change from an exchange to be approved, the Commission must determine that, among other things, the proposal is consistent with the requirements of section 6(b)(5) of the Act, specifically including: (i) the requirement that a 23 See Exchange Rule 14.11(f). Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 24 Commodity-Based VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 rl N ,.!., u 0 rl N u Q) Cl Avg Agg 01 N N N N I ..6 Q) s:::: ::, ..., u. 1111 N N w, ~ 25 The Exchange believes that ETH is resistant to price manipulation and that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ exist to justify dispensing with the requisite surveillance sharing agreement. The geographically diverse and continuous nature of ETH trading render it difficult and prohibitively costly to manipulate the price of ETH. The fragmentation across ETH platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of ETH prices through continuous trading activity challenging. To the extent that there are ETH exchanges engaged in or allowing wash trading or other activity intended to manipulate the price of ETH on other markets, such pricing does not normally impact prices on other exchange because participants will generally ignore markets with quotes that they deem non-executable. Moreover, Frm 00082 Fmt 4703 ,.!., u 0 N N I u Q) 0 M N M w u. ::, -, ..6 N C: Avg Agg Volume national securities exchange’s rules are designed to prevent fraudulent and manipulative acts and practices; 25 and PO 00000 N N Sfmt 4703 (ii) the requirement that an exchange proposal be designed, in general, to protect investors and the public interest. The Exchange believes that this proposal is consistent with the requirements of section 6(b)(5) of the Act and that this filing sufficiently the linkage between the ETH markets and the presence of arbitrageurs in those markets means that the manipulation of the price of ETH price on any single venue would require manipulation of the global ETH price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular ETH or OTC trading platform. As a result, the potential for manipulation on a trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. E:\FR\FM\13MRN1.SGM 13MRN1 EN13MR24.003</GPH> .-l N EN13MR24.002</GPH> .-l ..6 Q) Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices demonstrates that the CME Ether Futures market represents a regulated market of significant size and that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by quantifiable investor protection issues that would be resolved by approving this proposal. (i) Designed To Prevent Fraudulent and Manipulative Acts and Practices lotter on DSK11XQN23PROD with NOTICES1 In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 26 with a regulated market of significant size. Both the Exchange and CME are members of the Intermarket Surveillance Group (‘‘ISG’’).27 The only remaining issue to be addressed is whether the Ether Futures market constitutes a market of significant size, which both the Exchange and the Sponsor believe that it does. 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 manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct; and (b) it is unlikely that trading in the ETP would be the 26 As previously articulated by the Commission, ‘‘The standard requires such surveillance-sharing agreements since ‘‘they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.’’ The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance-sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity; that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party.’’ The Commission has historically held that joint membership in the ISG constitutes such a surveillance sharing agreement. See Securities Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR–NYSEArca–2019–39) (the ‘‘Wilshire Phoenix Disapproval’’). 27 For a list of the current members and affiliate members of ISG, see www.isgportal.com. VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 18453 predominant influence on prices in that market.28 The Commission has also recognized that the ‘‘regulated market of significant size’’ standard is not the only means for satisfying section 6(b)(5) of the Act, specifically providing that a listing exchange could demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement.29 30 surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals’’ makes clear that the Commission believes that CME’s surveillance can capture the effects of trading on the relevant spot markets on the pricing of CME Bitcoin Futures. This same logic would extend to CME Ether Futures markets where CME’s surveillance would be able to capture the effects of trading on the relevant spot markets on the pricing of CME Ether Futures. (a) Manipulation of the ETP The significant market test requires that there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct. In light of the similarly high correlation between spot ETH/CME Ether Futures and spot bitcoin/CME Bitcoin Futures, applying the same rationale that the Commission applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order 31 also indicates that this test is satisfied for this proposal. As noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded that: (b) Predominant Influence on Prices in Spot and ETH Futures . . . fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact CME bitcoin futures prices. And because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME . . . can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals.32 The assumptions from this statement are also true for CME Ether Futures. CME Ether Futures pricing is based on pricing from spot ether markets. The statement from the Spot Bitcoin ETP Approval Order that the surveillancesharing agreement with the CME ‘‘can be reasonably expected to assist in 28 See Wilshire Phoenix Disapproval. Winklevoss Order at 37580. The Commission has also specifically noted that it ‘‘is not applying a ‘cannot be manipulated’ standard; instead, the Commission is examining whether the proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its contentions and to establish that the requirements of the Exchange Act have been met.’’ Id. at 37582. 30 The Commission allowed the launch of ETFs registered under the 1940 Act that provide exposure to ETH through CME Ether Futures (‘‘ETH Futures ETFs’’) in October 2023. 31 See the Spot Bitcoin ETP Approval Order. 32 See the Spot Bitcoin ETP Approval Order at 3011–3012. 29 See PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 The Exchange and Sponsor also believe that trading in the Shares would not be the predominant force on prices in the CME Ether Futures market for a number of reasons. First, because the Fund would not hold CME Ether Futures contracts, the only way that it could be the predominant force on prices in that market is through the spot markets that CME Ether Futures contracts use for pricing.33 The Sponsor notes that ether total 24-hour spot trading volume has averaged $9.4 billion over the year ending September 1, 2023.34 The Sponsor expects that the Fund would represent a very small percentage of this daily trading volume in the spot ether market even in its most aggressive projections for the Fund’s assets and, thus, the Fund would not have an impact on the spot market and therefore could not be the predominant force on prices in the CME Ether Futures market. Second, much like the CME Bitcoin Futures market, the CME Ether Futures market has progressed and matured significantly. As the court found in the Grayscale Order, ‘‘Because the spot market is deeper and more liquid than the futures market, manipulation should be more difficult, not less.’’ The Exchange and sponsor agree with this sentiment and believe it applies equally to the spot ether and CME Ether Futures markets. (c) 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 33 This logic is reflected by the court in the Grayscale Order at 17–18. Specifically, the court found that ‘‘Because Grayscale owns no futures contracts, trading in Grayscale can affect the futures market only through the spot market . . . But Grayscale holds just 3.4 percent of outstanding bitcoin, and the Commission did not suggest Grayscale can dominate the price of bitcoin.’’ 34 Source: TokenTerminal. E:\FR\FM\13MRN1.SGM 13MRN1 18454 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 surveillance-sharing agreement. The Exchange and Sponsor believe that such conditions are present. The Exchange believes that the proposal is designed to protect investors and the public interest. Over the past several years, U.S. investor exposure to ether through OTC ETH Funds has grown into the tens of billions of dollars and more than a billion dollars of exposure through Ether Futures ETFs. With that growth, so too has grown the quantifiable investor protection issues to U.S. investors through roll costs for Ether Futures ETFs and premium/ discount volatility and management fees for OTC ETH Funds. The Exchange believes that the concerns related to the prevention of fraudulent and manipulative acts and practices have been sufficiently addressed to be consistent with the Act and, to the extent that the Commission disagrees with that assertion, also believes that such concerns are now outweighed by these investor protection concerns. As such, the Exchange believes that approving this proposal (and comparable proposals) provides the Commission with the opportunity to allow U.S. investors with access to ether in a regulated and transparent exchangetraded vehicle that would act to limit risk to U.S. investors by: (i) reducing premium and discount volatility; (ii) reducing management fees through meaningful competition; (iii) reducing risks and costs associated with investing in Ether Futures ETFs and operating companies that are imperfect proxies for ether exposure; and (iv) providing an alternative to custodying spot ether. Franklin Ethereum ETF Delaware Trust Company is the trustee (‘‘Trustee’’). Bank of New York Mellon is the custodian for the Fund’s cash and cash equivalents 35 (the ‘‘Cash Custodian’’) and also serves as the Fund’s administrator and transfer agent (the ‘‘Administrator’’ or ‘‘Transfer Agent’’). Coinbase Trust Company, LLC (the ‘‘Custodian’’) will be responsible for custody of the Fund’s ether. According to the Registration Statement, each Share will represent a fractional undivided beneficial interest in the Fund’s net assets. The Fund’s assets will only consist of ether, cash, and cash equivalents. According to the Registration Statement, the Trust is neither an investment company registered under the 1940 Act,36 nor a commodity pool for purposes of the Commodity 35 Cash equivalents are short-term instruments with maturities of less than 3 months. 36 15 U.S.C. 80a–1. VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 Exchange Act (‘‘CEA’’), and neither the Trust, the Fund nor the Sponsor is subject to regulation as a commodity pool operator or a commodity trading adviser in connection with the Shares. According to the Registration Statement, the Sponsor may, from time to time, stake a portion of the Fund’s assets through one or more trusted staking providers, which may include an affiliate of the Sponsor (‘‘Staking Providers’’). In consideration for any staking activity in which the Fund may engage, the Fund would receive certain staking rewards of ether tokens, which may be treated as income to the Fund. When the Fund sells or redeems its Shares, it will do so in cash transactions in large blocks of 50,000 Shares (a ‘‘Creation Basket’’) at the Fund’s net asset value (‘‘NAV’’). A third party will use cash to buy and deliver ether to create Shares or withdraw and sell ether for cash to redeem Shares, on behalf of the Fund. For creations, authorized participants will deliver, or facilitate the delivery of, cash to the Fund’s account with the Cash Custodian in exchange for Shares. Upon receipt of an approved creation order, the Sponsor, on behalf of the Fund, will submit an order to buy the amount of ether represented by a Creation Basket. Based off ether executions, the Cash Custodian will request the required cash from the authorized participant. Following receipt by the Cash Custodian of the cash from an authorized participant, the Sponsor, on behalf of the Fund, will approve an order with one or more previously onboarded trading partners to purchase the amount of ether represented by the Creation Basket.37 Authorized participants may then offer Shares to the public at prices that depend on various factors, including the supply and demand for Shares, the value of the Fund’s assets, and market conditions at the time of a transaction. Shareholders who buy or sell Shares during the day from their broker may do so at a premium or discount relative to the NAV of the Shares of the Fund. Investment Objective According to the Registration Statement and as further described below, the investment objective of the Fund is to generally reflect the performance of the price of ether before payment of the Fund’s expenses and 37 For redemptions, the process will occur in the reverse order. Upon receipt of an approved redemption order, the Sponsor, on behalf of the Fund, will submit an order to sell the amount of ether represented by a Creation Basket and the cash proceeds will be remitted to the authorized participant when the large block of Shares is received by the Transfer Agent. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 liabilities. In seeking to achieve its investment objective, the Fund will hold only ether, cash, and cash equivalents. The Fund will value its Shares daily based on the value of ether as reflected by the CME CF Ether-Dollar Reference Rate—New York Variant (the ‘‘Index’’), which is an independently calculated value based on an aggregation of executed trade flow of major ether spot trading platforms. Specifically, the Index is calculated based on certain transactions of all of its constituent ether trading platforms, which are currently Bitstamp, Coinbase, itBit, Kraken, Gemini, and LMAX Digital, and which may change from time to time. If the Index is not available or the Sponsor determines, in its sole discretion, that the Index should not be used, the Fund’s holdings may be fair valued in accordance with the policy approved by the Sponsor.38 The Index As described in the Registration Statement, the Fund will value its Shares daily based on the value of ether as reflected by the Index. The Index is calculated daily and aggregates the notional value of ether trading activity across major ether spot trading platforms. The Index is designed based on the International Organization of Securities Commissions (‘‘IOSCO’’) Principals for Financial Indexes. The administrator of the Index is CF Benchmarks Ltd. (the ‘‘Index Provider’’). The Index serves as a once-a-day benchmark rate of the U.S. dollar price of ether (USD/ETH), calculated as of 4:00 p.m. ET. The Index aggregates the trade flow of several ether trading platforms, during an observation window between 3:00 p.m. and 4:00 p.m. ET into the U.S. dollar price of one ether at 4:00 p.m. ET. Specifically, the Index is calculated based on the ‘‘Relevant Transactions’’ (as defined below) of all of its constituent ether trading platforms, which are currently Coinbase, Bitstamp, Kraken, itBit, LMAX Digital and Gemini (the ‘‘Constituent Platforms’’), as follows: • All Relevant Transactions are added to a joint list, recording the time of execution, trade price and size for each transaction. • The list is partitioned by timestamp into 12 equally-sized time intervals of 5 (five) minute length. • For each partition separately, the volume-weighted median trade price is calculated from the trade prices and 38 Any alternative method will only be employed on an ad hoc basis. Any permanent change to the calculation of the NAV would require a proposed rule change under Rule 19b–4. E:\FR\FM\13MRN1.SGM 13MRN1 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 sizes of all Relevant Transactions, i.e., across all Constituent Platforms. A volume-weighted median differs from a standard median in that a weighting factor, in this case trade size, is factored into the calculation. • The Index is then determined by the equally-weighted average of the volume medians of all partitions. The Index does not include any futures prices in its methodology. A ‘‘Relevant Transaction’’ is any cryptocurrency versus U.S. dollar spot trade that occurs during the observation window between 3:00 p.m. and 4:00 p.m. ET on a Constituent Platform in the ETH/USD pair that is reported and disseminated by a Constituent Platform through its publicly available Application Programming Interface (‘‘API’’) and observed by the Index Provider. The Sponsor believes that the use of the Index is reflective of a reasonable valuation of the average spot price of ether and that resistance to manipulation is a priority aim of its design methodology. The methodology: (i) takes an observation period and divides it into equal partitions of time; (ii) then calculates the volume-weighted median of all transactions within each partition; and (iii) the value is determined from the arithmetic mean of the volume-weighted medians, equally weighted. By employing the foregoing steps, the Index thereby seeks to ensure that transactions in ether conducted at outlying prices do not have an undue effect on the value of the Index, large trades or clusters of trades transacted over a short period of time will not have an undue influence on the Index value, and the effect of large trades at prices that deviate from the prevailing price are mitigated from having an undue influence on the Index value. In addition, the Sponsor notes that an oversight function is implemented by the Index Provider in seeking to ensure that the Index is administered through codified policies for Index integrity. Index data and the description of the Index are based on information made publicly available by the Index Provider on its website at https:// www.cfbenchmarks.com. Net Asset Value NAV means the total assets of the Fund (which includes ether, cash and cash equivalents) less total liabilities of the Fund. The Administrator will determine the NAV of the Fund on each day that the Exchange is open for regular trading, as promptly as practical after 4:00 p.m. EST. The NAV of the Fund is the aggregate value of the Fund’s assets less its estimated accrued VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 but unpaid liabilities (which include accrued expenses). In determining the Fund’s NAV, the Administrator values the ether held by the Fund based on the price set by the Index as of 4:00 p.m. EST. The Administrator also determines the NAV per Share. The NAV for the Fund will be calculated by the Administrator once a day and will be disseminated daily to all market participants at the same time. If the Index is not available or the Sponsor determines, in its sole discretion, that the Index should not be used, the Fund’s holdings may be fair valued in accordance with the policy approved by the Sponsor. Availability of Information The website for the Fund, which will be publicly accessible at no charge, will contain the following information: (a) the current NAV per Share daily and the prior business day’s NAV and the reported closing price; (b) the BZX Official Closing Price 39 in relation to the NAV as of the time the NAV is calculated and a calculation of the premium or discount of such price against such NAV; (c) data in chart form displaying the frequency distribution of discounts and premiums of the Official Closing Price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Fund, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The aforementioned information will be published as of the close of business available on the Fund’s website at https://www.franklintempleton.com/ investments/options/exchange-tradedfunds, or any successor thereto. The Fund will also disseminate its holdings on a daily basis on its website. The Intraday Indicative Value (‘‘IIV’’) will be calculated by using the prior day’s closing NAV per Share as a base and updating that value during Regular Trading Hours to reflect changes in the value of the Fund’s ether holdings during the trading day, which is based on CME CF Ether-Dollar Real Time Index. The IIV disseminated during Regular Trading Hours 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 Trading Hours through the facilities of the consolidated tape association (CTA) and 39 As defined in Rule 11.23(a)(3), the term ‘‘BZX Official Closing Price’’ shall mean the price disseminated to the consolidated tape as the market center closing trade. PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 18455 Consolidated Quotation System (CQS) high speed lines. In addition, the IIV will be available through on-line information services such as Bloomberg and Reuters. The price of ether will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. As noted above, the Index is calculated daily and aggregates the notional value of ether trading activity across major ether spot trading platforms. Index data, the Index value, and the description of the Index are based on information made publicly available by the Index Provider on its website at https:// www.cfbenchmarks.com. Quotation and last sale information for ether is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in ether is available from major market data vendors and from the trading platforms on which ether are traded. Depth of book information is also available from ether trading platforms. The normal trading hours for ether trading platforms are 24 hours per day, 365 days per year. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the Consolidated Tape Association (‘‘CTA’’). The Custodian The Custodian carefully considers the design of the physical, operational and cryptographic systems for secure storage of the Fund’s private keys in an effort to lower the risk of loss or theft. The Custodian utilizes a variety of security measures to ensure that private keys necessary to transfer digital assets remain uncompromised and that the Fund maintains exclusive ownership of its assets. The Custodian will keep the private keys associated with the Fund’s ether in ‘‘cold storage’’ 40 (the ‘‘Cold 40 The term ‘‘cold storage’’ refers to a safeguarding method by which the private keys corresponding to ether stored on a digital wallet are removed from any computers actively connected to the internet. Cold storage of private keys may involve keeping such wallet on a non-networked computer or E:\FR\FM\13MRN1.SGM Continued 13MRN1 18456 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 Vault Balance’’). The hardware, software, systems, and procedures of the ether Custodian may not be available or cost-effective for many investors to access directly. Only specific individuals are authorized to participate in the custody process, and no individual acting alone will be able to access or use any of the private keys. In addition, no combination of the executive officers of the Sponsor, acting alone or together, will be able to access or use any of the private keys that hold the Fund’s ether. Creation and Redemption of Shares When the Fund sells or redeems its Shares, it will do so in cash transactions in blocks of Shares that are based on the quantity of ether attributable to each Share of the Fund (e.g., a Creation Basket) at the NAV. According to the Registration Statement, on any business day, an authorized participant may place an order to create one or more Creation Baskets. Purchase orders for cash transaction Creation Baskets must be placed by 2:00 p.m. Eastern Time, or the close of regular trading on the Exchange, whichever is earlier. The day on which an order is received is considered the purchase order date. The Administrator determines the required deposit for a given day by dividing the number of ether held by the Fund as of the opening of business on that business day, adjusted for the amount of ether constituting estimated accrued but unpaid fees and expenses of the Fund as of the opening of business on that business day, by the quotient of the number of Shares outstanding at the opening of business divided by the number of Shares in a Creation Basket. The procedures by which an authorized participant can redeem one or more Creation Baskets mirror the procedures for the creation of Creation Baskets. The authorized participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, authorized participants will not directly or indirectly purchase, hold, deliver, or receive ether as part of the creation or redemption process or otherwise direct the Fund or a third party with respect to purchasing, holding, delivering, or receiving ether as part of the creation or redemption process. The Fund will create Shares by receiving ether from a third party that is not the authorized participant and the Fund—not the authorized participant— electronic device or storing the public key and private keys relating to the digital wallet on a storage device (for example, a USB thumb drive) or printed medium (for example, papyrus or paper) and deleting the digital wallet from all computers. VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 is responsible for selecting the third party to deliver the ether. Further, the third party will not be acting as an agent of the authorized participant with respect to the delivery of the ether to the Fund or acting at the direction of the authorized participant with respect to the delivery of the ether to the Fund. The Fund will redeem Shares by delivering ether to a third party that is not the authorized participant and the Fund—not the authorized participant— is responsible for selecting the third party to receive the ether. Further, the third party will not be acting as an agent of the authorized participant with respect to the receipt of the ether from the Fund or acting at the direction of the authorized participant with respect to the receipt of the ether from the Fund. A third party, that is unaffiliated with the Fund and the Sponsor, will use cash to buy and deliver ether to create Shares or withdraw and sell ether for cash to redeem Shares, on behalf of the Fund. The Sponsor (including its delegates) will maintain ownership and control of the Fund’s ether in a manner consistent with good delivery requirements for spot commodity transactions. Rule 14.11(e)(4)—Commodity-Based Trust Shares The Shares will be subject to BZX Rule 14.11(e)(4), which sets forth the initial and continued listing criteria applicable to Commodity-Based Trust Shares. The Exchange represents that, for initial and continued listing, the Fund must be in compliance with Rule 10A–3 under the Act. A minimum of 100,000 Shares will be outstanding at the commencement of listing on the Exchange. The Exchange will obtain a representation that the NAV will be calculated daily and that the NAV and information about the assets of the Fund will be made available to all market participants at the same time. The Exchange notes that, as defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a trust that holds (1) a specified commodity 41 deposited with the trust, or (2) a specified commodity and, in addition to such specified commodity, cash; (b) issued by such trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity and/or cash; and (c) when aggregated in the same specified minimum number, may be redeemed at a holder’s request by such trust which will deliver to the 41 For purposes of Rule 14.11(e)(4), the term commodity takes on the definition of the term as provided in the Commodity Exchange Act. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 redeeming holder the quantity of the underlying commodity and/or cash. Upon termination of the Fund, 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 Rule 14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee without prior notice to and approval of the Exchange. The Exchange also notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor any agent of the Exchange shall have any liability for damages, claims, losses or expenses caused by any errors, omissions or delays in calculating or disseminating any underlying commodity value, the current value of the underlying commodity required to be deposited to the Fund in connection with issuance of Commodity-Based Trust Shares; resulting from any negligent act or omission by the Exchange, or any agent of the Exchange, or any act, condition or cause beyond the reasonable control of the Exchange, its agent, including, but not limited to, an act of God; fire; flood; extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government; communications or power failure; equipment or software malfunction; or any error, omission or delay in the reports of transactions in an underlying commodity. Finally, as required in Rule 14.11(e)(4)(G), 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 in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, which the registered Market Maker may have or over which it may exercise investment discretion. No registered Market Maker shall trade in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity 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 this Rule. In addition to the existing obligations under Exchange rules regarding the production of books and records (see, e.g., Rule 4.2), the registered Market Maker in CommodityBased Trust Shares shall make available to the Exchange such books, records or other information pertaining to E:\FR\FM\13MRN1.SGM 13MRN1 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 transactions by such entity or registered or non-registered employee affiliated with such entity for its or their own accounts for trading the underlying physical commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, as may be requested by the Exchange. The Exchange is able to obtain information regarding trading in the Shares and the underlying ether, Eth Futures contracts, options on Eth Futures, or any other ether derivative through members acting as registered Market Makers, in connection with their proprietary or customer trades. As a general matter, the Exchange has regulatory jurisdiction over its Members and their associated persons, which include any person or entity controlling a Member. To the extent the Exchange may be found to lack jurisdiction over a subsidiary or affiliate of a Member that does business only in commodities or futures contracts, the Exchange could obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such subsidiary or affiliate is a member. 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 BZX Rule 11.18. 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 ether underlying the Shares; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances under which trading in the Shares may be halted. If the IIV or the value of the Index 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 Index occurs. If the interruption to the dissemination of the IIV or the value of the Index 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 VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. 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. BZX will allow trading in the Shares during all trading sessions on the Exchange. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in BZX Rule 11.11(a) the minimum price variation for quoting and entry of orders in securities traded on the Exchange is $0.01 where the price is greater than $1.00 per share or $0.0001 where the price is less than $1.00 per share. The Shares of the Fund will conform to the initial and continued listing criteria set forth in BZX Rule 14.11(e)(4). 18457 distribution of material, non-public information by its employees. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund or the Shares 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 Fund or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. The Exchange represents that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Trading of the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. FINRA conducts certain cross-market surveillances on behalf of the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares and Ether Futures with other markets and other entities that are members of the ISG, and the Exchange, or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares and Ether Futures from such markets and other entities.42 The Exchange may obtain information regarding trading in the Shares and Eth 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. In addition, the Exchange also has a general policy prohibiting the 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: (i) the procedures for the creation and redemption of Creation Baskets (and that the Shares are not individually redeemable); (ii) BZX Rule 3.7, which imposes suitability obligations on Exchange members with respect to recommending transactions in the Shares to customers; (iii) how information regarding the IIV and the Fund’s NAV are disseminated; (iv) the risks involved in trading the Shares outside of Regular Trading Hours 43 when an updated IIV will not be calculated or publicly disseminated; (v) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (vi) trading information. The Information Circular will also reference the fact that there is no regulated source of last sale information regarding ether, that the Commission has no jurisdiction over the trading of ether as a commodity, and that the CFTC has regulatory jurisdiction over the trading of Ether Futures contracts and options on Ether Futures contracts. In addition, the Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Shares. Members purchasing the Shares for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, noaction and interpretive relief granted by the Commission from any rules under the Act. 42 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 43 Regular Trading Hours is the time between 9:30 a.m. and 4:00 p.m. Eastern Time. Surveillance PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 E:\FR\FM\13MRN1.SGM 13MRN1 18458 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices 2. Statutory Basis The Exchange believes that the proposal is consistent with section 6(b) of the Act 44 in general and section 6(b)(5) of the Act 45 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 Commission has approved numerous series of Trust Issued Receipts,46 including Commodity-Based Trust Shares,47 to be listed on U.S. national securities exchanges. In order for any proposed rule change from an exchange to be approved, the Commission must determine that, among other things, the proposal is consistent with the requirements of section 6(b)(5) of the Act, specifically including: (i) the requirement that a national securities exchange’s rules are designed to prevent fraudulent and manipulative acts and practices; 48 and (ii) the requirement that an exchange proposal be designed, in general, to protect investors and the public interest. 44 15 U.S.C. 78f. U.S.C. 78f(b)(5). 46 See Exchange Rule 14.11(f). 47 Commodity-Based Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 48 The Exchange believes that ETH is resistant to price manipulation and that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ exist to justify dispensing with the requisite surveillance sharing agreement. The geographically diverse and continuous nature of ETH trading render it difficult and prohibitively costly to manipulate the price of ETH. The fragmentation across ETH platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of ETH prices through continuous trading activity challenging. To the extent that there are ETH exchanges engaged in or allowing wash trading or other activity intended to manipulate the price of ETH on other markets, such pricing does not normally impact prices on other exchange because participants will generally ignore markets with quotes that they deem non-executable. Moreover, the linkage between the ETH markets and the presence of arbitrageurs in those markets means that the manipulation of the price of ETH price on any single venue would require manipulation of the global ETH price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular ETH exchange or OTC platform. As a result, the potential for manipulation on a trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. lotter on DSK11XQN23PROD with NOTICES1 45 15 VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 The Exchange believes that this proposal is consistent with the requirements of section 6(b)(5) of the Act and that this filing sufficiently demonstrates that the CME Ether Futures market represents a regulated market of significant size and that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by quantifiable investor protection issues that would be resolved by approving this proposal. (i) Designed To Prevent Fraudulent and Manipulative Acts and Practices In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 49 with a regulated market of significant size. Both the Exchange and CME are members of ISG.50 The only remaining issue to be addressed is whether the ETH Futures market constitutes a market of significant size, which both the Exchange and the Sponsor believe that it does. 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 manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct; and (b) it is unlikely that trading in the ETP would be the 49 As previously articulated by the Commission, ‘‘The standard requires such surveillance-sharing agreements since ‘‘they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.’’ The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance- sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity; that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party.’’ The Commission has historically held that joint membership in ISG constitutes such a surveillance sharing agreement. See Wilshire Phoenix Disapproval. 50 For a list of the current members and affiliate members of ISG, see www.isgportal.com. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 predominant influence on prices in that market.51 The Commission has also recognized that the ‘‘regulated market of significant size’’ standard is not the only means for satisfying section 6(b)(5) of the Act, specifically providing that a listing exchange could demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement.52 (a) Manipulation of the ETP The significant market test requires that there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct. In light of the similarly high correlation between spot ETH/CME Ether Futures and spot bitcoin/CME Bitcoin Futures, applying the same rationale that the Commission applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order 53 also indicates that this test is satisfied for this proposal. As noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded that: . . . fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact CME bitcoin futures prices. And because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME . . . can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals.54 The assumptions from this statement are also true for CME Ether Futures. CME Ether Futures pricing is based on pricing from spot ether markets. The statement from the Spot Bitcoin ETP Approval Order that the surveillancesharing agreement with the CME ‘‘can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals’’ makes clear that the Commission 51 See Wilshire Phoenix Disapproval. Winklevoss Order at 37580. The Commission has also specifically noted that it ‘‘is not applying a ‘cannot be manipulated’ standard; instead, the Commission is examining whether the proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its contentions and to establish that the requirements of the Exchange Act have been met.’’ Id. at 37582. 53 See the Spot Bitcoin ETP Approval Order. 54 See the Spot Bitcoin ETP Approval Order at 3011–3012. 52 See E:\FR\FM\13MRN1.SGM 13MRN1 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices believes that CME’s surveillance can capture the effects of trading on the relevant spot markets on the pricing of CME Bitcoin Futures. This same logic would extend to CME Ether Futures markets where CME’s surveillance would be able to capture the effects of trading on the relevant spot markets on the pricing of CME Ether Futures. (b) Predominant Influence on Prices in Spot and ETH Futures The Exchange and Sponsor also believe that trading in the Shares would not be the predominant force on prices in the CME Ether Futures market for a number of reasons. First, because the Fund would not hold CME Ether Futures contracts, the only way that it could be the predominant force on prices in that market is through the spot markets that CME Ether Futures contracts use for pricing.55 The Sponsor notes that ether total 24-hour spot trading volume has averaged $9.4 billion over the year ending September 1, 2023.56 The Sponsor expects that the Fund would represent a very small percentage of this daily trading volume in the spot ether market even in its most aggressive projections for the Fund’s assets and, thus, the Fund would not have an impact on the spot market and therefore could not be the predominant force on prices in the CME Ether Futures market. Second, much like the CME Bitcoin Futures market, the CME Ether Futures market has progressed and matured significantly. As the court found in the Grayscale Order, ‘‘Because the spot market is deeper and more liquid than the futures market, manipulation should be more difficult, not less.’’ The Exchange and sponsor agree with this sentiment and believe it applies equally to the spot ether and CME Ether Futures markets. lotter on DSK11XQN23PROD with NOTICES1 (c) 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 and Sponsor believe that such conditions are present. The Exchange believes that the proposal is designed to protect investors 55 This logic is reflected by the court in the Grayscale Order at 17–18. Specifically, the court found that ‘‘Because Grayscale owns no futures contracts, trading in Grayscale can affect the futures market only through the spot market. . .But Grayscale holds just 3.4 percent of outstanding bitcoin, and the Commission did not suggest Grayscale can dominate the price of bitcoin.’’ 56 Source: TokenTerminal. VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 and the public interest. Over the past several years, U.S. investor exposure to ether through OTC ETH Funds has grown into the tens of billions of dollars and more than a billion dollars of exposure through Ether Futures ETFs. With that growth, so too has grown the quantifiable investor protection issues to U.S. investors through roll costs for Ether Futures ETFs and premium/ discount volatility and management fees for OTC ETH Funds. The Exchange believes that the concerns related to the prevention of fraudulent and manipulative acts and practices have been sufficiently addressed to be consistent with the Act and, to the extent that the Commission disagrees with that assertion, also believes that such concerns are now outweighed by these investor protection concerns. As such, the Exchange believes that approving this proposal (and comparable proposals) provides the Commission with the opportunity to allow U.S. investors with access to ether in a regulated and transparent exchangetraded vehicle that would act to limit risk to U.S. investors by: (i) reducing premium and discount volatility; (ii) reducing management fees through meaningful competition; (iii) reducing risks and costs associated with investing in Ether Futures ETFs and operating companies that are imperfect proxies for ether exposure; and (iv) providing an alternative to custodying spot ether. Commodity-Based Trust Shares The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed on the Exchange pursuant to the initial and continued listing criteria in Exchange Rule 14.11(e)(4). 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 the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund or the Shares 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 Fund or the Shares are not in compliance with the applicable listing requirements, the Exchange will PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 18459 commence delisting procedures under Exchange Rule 14.12. The Exchange may obtain information regarding trading in the Shares and listed ether derivatives via the 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. Availability of Information In addition to the price transparency of the Index, the Fund will provide information regarding the Fund’s ETH holdings as well as additional data regarding the Fund. The website for the Fund, which will be publicly accessible at no charge, will contain the following information: (a) the current NAV per Share daily and the prior business day’s NAV and the reported closing price; (b) the BZX Official Closing Price 57 in relation to the NAV as of the time the NAV is calculated and a calculation of the premium or discount of such price against such NAV; (c) data in chart form displaying the frequency distribution of discounts and premiums of the Official Closing Price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Fund, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The aforementioned information will be published as of the close of business available on the Fund’s website at https://www.franklintempleton.com/ investments/options/exchange-tradedfunds, or any successor thereto. The Fund will also disseminate its holdings on a daily basis on its website. The IIV will be calculated by using the prior day’s closing NAV per Share as a base and updating that value during Regular Trading Hours to reflect changes in the value of the Fund’s ether holdings during the trading day, which is based on CME CF Ether-Dollar Real Time Index. The IIV disseminated during Regular Trading Hours 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 Trading Hours through the facilities of the consolidated tape association (CTA) and Consolidated Quotation System (CQS) high speed lines. In addition, the IIV will be available through on-line information services such as Bloomberg and Reuters. 57 As defined in Rule 11.23(a)(3), the term ‘‘BZX Official Closing Price’’ shall mean the price disseminated to the consolidated tape as the market center closing trade. E:\FR\FM\13MRN1.SGM 13MRN1 lotter on DSK11XQN23PROD with NOTICES1 18460 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices The price of ether will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. As noted above, the Index is calculated daily and aggregates the notional value of ether trading activity across major ether spot trading platforms. Index data, the Index value, and the description of the Index are based on information made publicly available by the Index Provider on its website at https:// www.cfbenchmarks.com. Quotation and last sale information for ether is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in ether is available from major market data vendors and from the trading platforms on which ether are traded. Depth of book information is also available from ether trading platforms. The normal trading hours for ether trading platforms are 24 hours per day, 365 days per year. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. In sum, the Exchange believes that this proposal is consistent with the requirements of section 6(b)(5) of the Act, that this filing sufficiently demonstrates that the CME Ether Futures market represents a regulated market of significant size, and that on the whole the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by investor protection issues that would be resolved by approving this proposal. The Exchange believes that the proposal is, in particular, designed to protect investors and the public interest. Premium and discount volatility, high fees, rolling costs, insufficient disclosures, and technical hurdles are putting U.S. investor money at risk on a daily basis that could potentially be eliminated through access to a Spot Ether ETP. As such, the Exchange believes that this proposal acts to limit the risk to U.S. investors that are increasingly seeking exposure to ether by providing direct, 1-for-1 exposure to ether in a regulated, transparent, VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 exchange-traded vehicle, specifically by: (i) reducing premium/discount volatility; (ii) reducing management fees through meaningful competition; (iii) providing an alternative to Ether Futures ETFs which will eliminate roll cost; (iv) reducing risks associated with investing in operating companies that are imperfect proxies for ether exposure; and (v) providing an alternative to custodying spot ether. The investor protection issues for U.S. investors has grown significantly over the last several years, through roll costs for Ether Futures ETFs and premium/discount volatility and management fees for OTC ETH Funds. As discussed throughout, this growth investor protection concerns need to be reevaluated and rebalanced with the prevention of fraudulent and manipulative acts and practices concerns that previous disapproval orders have relied upon. Finally, the Exchange notes that in addition to all of the arguments herein which it believes sufficiently establishes the CME Ether Futures market as a regulated market of significant size, it is logically inconsistent to find that the CME Ether Futures market is a significant market as it relates to the CME Ether Futures market, but not a significant market as it relates to the ether spot market for the numerous reasons laid out above. 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 an additional exchange-traded product 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 The Exchange has neither solicited nor received written comments on the proposed rule change. 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 PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 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 rule-comments@ sec.gov. Please include file number SR– CboeBZX–2024–018 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–CboeBZX–2024–018. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or E:\FR\FM\13MRN1.SGM 13MRN1 Federal Register / Vol. 89, No. 50 / Wednesday, March 13, 2024 / Notices subject to copyright protection. All submissions should refer to file number SR–CboeBZX–2024–018 and should be submitted on or before April 3, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.58 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–05251 Filed 3–12–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–99692; File No. SR– CboeBZX–2024–019] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Modify the Company Listing Fees as Provided Under Exchange Rule 14.13 March 7, 2024. Pursuant to section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) and Rule 19b–4 thereunder,2 notice is hereby given that on February 22, 2024, Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. lotter on DSK11XQN23PROD with NOTICES1 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BZX Exchange, Inc. (‘‘BZX’’ or the ‘‘Exchange’’) is filing with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) a proposed rule change to modify the Company Listing Fees as provided under Exchange Rule 14.13. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/BZX/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. 58 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 17:33 Mar 12, 2024 Jkt 262001 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to modify the Company Listing Fees under Rule 14.13 to provide for an application fee, entry fee, and annual fee specifically applicable to acquisition companies, as described in Rule 14.2(b) (an ‘‘Acquisition Company’’). The Exchange also proposes to adopt new fees applicable to a Company that lists additional shares of an existing class of security already listed on the Exchange or an additional class of security, as further described below, (collectively referred to as ‘‘Additional Listings’’).3 Acquisition Companies may be listed as Tier I or Tier II securities on the Exchange, provided that they meet the applicable listing requirements of the applicable tier and the additional requirements set forth in Rule 14.2(b). Currently, Acquisition Companies, among other issuers that are not otherwise identified in Rule 14.13,4 are subject to the application fee, entry fee, and annual fee as provided under Rule 14.13(b)(1), (2), and (3), respectively, and are assessed the fee based on their listing as a Tier I or Tier II security.5 3 The Exchange initially filed the proposed fee change on January 23, 2024 (SR–CboeBZX–2024– 009). On February 5, 2024, the Exchange withdrew that filing and submitted another proposal (SR– CboeBZX–2024–014). On February 9, 2024, the Exchange withdrew SR–CboeBZX–2024–014 and submitted another proposal (SR–CboeBZX–2024– 015). On February 22, 2024, the Exchange withdrew SR–CboeBZX–2024–015 and submitted this proposal (SR–CboeBZX–2024–019). 4 For example, the entry fees and annual fees for ETPs are cited under Rule 14.13(b)(2)(E) and 14.3(b)(3)(D), respectively. There is no application fee for ETPs listed on the Exchange. 5 For Tier I securities listed on the Exchange, the application fee is $25,000, unless the Company is at any point during the Exchange’s review of the application simultaneously engaged in the application process to list on another national securities exchange, in which case the application fee will be $50,000 (Rule 14.13(b)(1)); the entry fee PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 18461 Now, the Exchange proposes to adopt new fees specifically applicable to Acquisition Companies listed as either Tier I or Tier II securities on the Exchange. Such fee would be the same regardless of whether the Acquisition Company is listed as a Tier I or Tier II security. First, the Exchange proposes to modify the application fees. The Exchange first proposes to re-letter the existing application fee to Rule 14.13(b)(1)(A) with no substantive change, except as described below. Currently, Acquisition Companies are subject to the application fee of $25,000 or $50,000, as applicable for Tier I or Tier II securities, as provided in Rule 14.13(b)(1). The Exchange proposes to adopt Rule 14.13(b)(1)(B), which would provide that an Acquisition Company, under Rule 14.2(b), shall pay to the Exchange a modified application fee of $5,000 regardless of the Tier under which the Acquisition Company lists on the Exchange. The application fee will be $5,000, which must be submitted with the Company’s application. If the Company does not list within 12 months of submitting its application, it will be assessed an additional nonrefundable $5,000 application fee each 12 months thereafter to keep its application open. When a Company that lists a substantial period of time after it first submitted its application, the Exchange must complete additional reviews of the application prior to the listing. These additional reviews are substantially equivalent to the review for a newly applying company and include, for example, additional reviews of individuals associated with the company, staff monitoring of disclosures and public filings by the applicant while its application is pending, and often extensive discussions with the applicant. To offset the costs associated with the ongoing monitoring and additional reviews for companies whose application remains open for an extended period, the Exchange proposes to require that an applicant that does not list within 12 months of submitting its application pay an additional $5,000 application fee each subsequent 12-month period. The is $100,00 less the application fee (Rule 14.13(b)(2)(A)); and the annual fee is $35,000 (Rule 14.13(b)(3)(A)). For a Tier II securities listed on the Exchange, the application fee is $25,000, unless the Company is at any point during the Exchange’s review of the application simultaneously engaged in the application process to list on another national securities exchange, in which case the application fee will be $50,000 (Rule 14.13(b)(1)); the entry fee is $50,00 less the application fee (Rule 14.13(b)(2)(B)); and the annual fee is $20,000 (Rule 14.13(b)(3)(B)). E:\FR\FM\13MRN1.SGM 13MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 50 (Wednesday, March 13, 2024)]
[Notices]
[Pages 18447-18461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-05251]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99686; File No. SR-CboeBZX-2024-018]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To List and Trade Shares of the
Franklin Ethereum ETF, a Series of the Franklin Ethereum Trust, Under
BZX Rule 14.11(e)(4), Commodity-Based Trust Shares

March 7, 2024.
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 February 22, 2024, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change 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

Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
a proposed rule change to list and trade shares of the Franklin
Ethereum ETF (the ``Fund''), a series of the Franklin Ethereum Trust
(the ``Trust''),\3\ under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares.
---------------------------------------------------------------------------

\3\ The Trust was formed as a Delaware statutory trust on
February 8, 2024. The Fund is operated as a grantor trust for U.S.
federal tax purposes. The Trust and the Fund have no fixed
termination date.
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The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

[[Page 18448]]

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\4\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\5\ Franklin Holdings, LLC is the
sponsor of the Fund (``Sponsor''). The Shares will be registered with
the Commission by means of the Trust's registration statement on Form
S-1 (the ``Registration Statement'').\6\
---------------------------------------------------------------------------

\4\ The Commission approved BZX Rule 14.11(e)(4) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\5\ Any of the statements or representations regarding the index
composition, the description of the portfolio or reference assets,
limitations on portfolio holdings or reference assets, dissemination
and availability of index, reference asset, and intraday indicative
values, or the applicability of Exchange listing rules specified in
this filing to list a series of Other Securities (collectively,
``Continued Listing Representations'') shall constitute continued
listing requirements for the Shares listed on the Exchange.
\6\ On February 12, 2024, the Trust filed with the Commission
the Registration Statement on Form S-1, submitted to the Commission
by the Sponsor on behalf of the Trust (333-277008). The descriptions
of the Trust, the Shares, and the Index (as defined below) contained
herein are based, in part, on information in the Registration
Statement. The Registration Statement is not yet effective and the
Shares will not trade on the Exchange until such time that the
Registration Statement is effective.
---------------------------------------------------------------------------

The Commission has historically approved or disapproved exchange
filings to list and trade series of Trust Issued Receipts, including
spot-based Commodity-Based Trust Shares, on the basis of whether the
listing exchange has in place a comprehensive surveillance sharing
agreement with a regulated market of significant size related to the
underlying commodity to be held.\7\ With this in mind, the CME Ether
Futures market, which launched in February 2021, is the proper market
to consider in determining whether there is a related regulated market
of significant size.
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\7\ See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently
disapproved by the Commission. See Securities Exchange Act Release
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the
``Winklevoss Order''). Prior orders from the Commission have pointed
out that in every prior approval order for Commodity-Based Trust
Shares, there has been a derivatives market that represents the
regulated market of significant size, generally a Commodity Futures
Trading Commission (the ``CFTC'') regulated futures market. Further
to this point, the Commission's prior orders have noted that the
spot commodities and currency markets for which it has previously
approved spot ETPs are generally unregulated and that the Commission
relied on the underlying futures market as the regulated market of
significant size that formed the basis for approving the series of
Currency and Commodity-Based Trust Shares, including gold, silver,
platinum, palladium, copper, and other commodities and currencies.
The Commission specifically noted in the Winklevoss Order that the
approval order issued related to the first spot gold ETP ``was based
on an assumption that the currency market and the spot gold market
were largely unregulated.'' See Winklevoss Order at 37592. As such,
the regulated market of significant size test does not require that
the spot bitcoin market be regulated in order for the Commission to
approve this proposal, and precedent makes clear that an underlying
market for a spot commodity or currency being a regulated market
would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to
surveillance sharing agreements with the underlying futures market
in order to determine whether such products were consistent with the
Act.
---------------------------------------------------------------------------

Recently, the Commission issued an order granting approval for
proposals to list bitcoin-based commodity trust and bitcoin-based trust
issued receipts (these funds are nearly identical to the Fund, but hold
bitcoin instead of ethereum) (``Spot Bitcoin ETPs'').\8\ By way of
background, in 2022 the Commission disapproved proposals \9\ to list
Spot Bitcoin ETPs, including the Grayscale Order.\10\ Grayscale
appealed the decision with the U.S. Court of Appeals for the D.C.
Circuit, which held that the Commission had failed to adequately
explain its reasoning that the proposing exchange had not established
that the CME bitcoin futures market was a market of significant size
related to spot bitcoin, or that the ``other means'' asserted were
sufficient to satisfy the statutory standard. As a result, the court
vacated the Grayscale Order and remanded the matter to the
Commission.\11\ In considering the remand of the Grayscale Order and
Spot Bitcoin ETPs, the Commission determined in the Spot Bitcoin ETP
Approval Order that the CME Bitcoin Futures market is a regulated
market of significant size. Specifically, the Commission stated:
---------------------------------------------------------------------------

\8\ See Exchange Act Release No. 99306 (January 10, 2024), 89 FR
3008 (January 17, 2024) (Self-Regulatory Organizations; NYSE Arca,
Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.; Order
Granting Accelerated Approval of Proposed Rule Changes, as Modified
by Amendments Thereto, To List and Trade Bitcoin-Based Commodity-
Based Trust Shares and Trust Units) (the ``Spot Bitcoin ETP Approval
Order'').
\9\ See Order Disapproving a Proposed Rule Change To List and
Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares, Securities Exchange Act Release No.
97102 (Mar. 10, 2023), 88 FR 16055 (Mar. 15, 2023) (SR-CboeBZX-2022-
035) (``VanEck Order II'') and n.11 therein for the complete list of
previous proposals.
\10\ See Securities Exchange Act Release No. 95180 (June 29,
2022) 87 FR 40299 (July 6, 2022) (SR-NYSEArca-2021-90) (Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1,
to List and Trade Shares of Grayscale Bitcoin Trust Under NYSE Arca
Rule 8.201-E (Commodity-Based Trust Shares) (the ``Grayscale
Order'').
\11\ See Grayscale Investments, LLC v. SEC, 82 F.4th 1239 (D.C.
Cir. 2023).

[B]ased on the record before the Commission and the improved
quality of the correlation analysis in the record . . . the
Commission is able to conclude that fraud or manipulation that
impacts prices in spot bitcoin markets would likely similarly impact
CME bitcoin futures prices. And because the CME's surveillance can
assist in detecting those impacts on CME bitcoin futures prices, the
Exchanges' comprehensive surveillance-sharing agreement with the
CME--a U.S. regulated market whose bitcoin futures market is
consistently highly correlated to spot bitcoin, albeit not of
``significant size'' related to spot bitcoin--can be reasonably
expected to assist in surveilling for fraudulent and manipulative
acts and practices in the specific context of the [p]roposals.\12\
---------------------------------------------------------------------------

\12\ See the Spot Bitcoin ETP Approval Order at 3011-3012.

As further discussed below, both the Exchange and the Sponsor
believe that this proposal and the included analysis are sufficient to
establish that the CME Ether Futures market represents a regulated
market of significant size and that this proposal should be approved.
Background
Ethereum (also referred to as ``ETH'' or ``ether'') is free
software that is hosted on computers distributed throughout the globe.
It employs an array of logic, called a protocol, to create a unified
understanding of ownership, commercial activity, and business logic.
This allows users to engage in commerce without the need to trust any
of its participants or counterparties. Ethereum code creates verifiable
and unambiguous rules that assign clear, strong property rights to
create a platform for unrestrained business formation and free
exchange. It is widely understood that no single intermediary or entity
operates or controls the Ethereum network (referred to as
``decentralization''), the transaction

[[Page 18449]]

validation and recordkeeping infrastructure of which is collectively
maintained by a disparate user base. The Ethereum network allows people
to exchange tokens of value, or ETH, which are recorded on a
distributed public recordkeeping system or ledger known as a blockchain
(the ``Ethereum Blockchain''), and which can be used to pay for goods
and services, including computational power on the Ethereum network, or
converted to fiat currencies, such as the U.S. dollar, at rates
determined on digital asset exchanges or in individual peer-to-peer
transactions. Furthermore, by combining the recordkeeping system of the
Ethereum Blockchain with a flexible scripting language that is
programmable and can be used to implement sophisticated logic and
execute a wide variety of instructions, the Ethereum network is
intended to act as a foundational infrastructure layer on top of which
users can build their own custom software programs, as an alternative
to centralized web servers. In theory, anyone can build their own
custom software programs on the Ethereum network. In this way, the
Ethereum network represents a project to expand blockchain deployment
beyond a limited-purpose, peer-to-peer private money system into a
flexible, distributed alternative computing infrastructure that is
available to all. On the Ethereum network, ETH is the unit of account
that users pay for the computational resources consumed by running
their programs.
Heretofore, U.S. retail investors have lacked a U.S. regulated,
U.S. exchange-traded vehicle to gain exposure to ETH. Instead, current
options include: (i) facing the counter-party risk, legal uncertainty,
technical risk, and complexity associated with accessing spot ether; or
(ii) over-the-counter ether funds (``OTC ETH Funds'') with high
management fees and potentially volatile premiums and discounts.
Meanwhile, investors in other countries, including Germany, Switzerland
and France, are able to use more traditional exchange listed and traded
products (including exchange-traded funds holding physical ETH) to gain
exposure to ETH. Investors across Europe have access to products which
trade on regulated exchanges and provide exposure to a broad array of
spot crypto assets. U.S. investors, by contrast, are left with fewer
and more risky means of getting ether exposure.\13\
---------------------------------------------------------------------------

\13\ The Exchange notes that the list of countries above is not
exhaustive and that securities regulators in a number of additional
countries have either approved or otherwise allowed the listing and
trading of Spot Ether ETPs.
---------------------------------------------------------------------------

To this point, the lack of an ETP that holds spot ETH (a ``Spot
Ether ETP'') exposes U.S. investor assets to significant risk because
investors that would otherwise seek cryptoasset exposure through a Spot
Ether ETP are forced to find alternative exposure through generally
riskier means. For example, investors in OTC ETH Funds are not afforded
the benefits and protections of regulated Spot Ether ETPs, resulting in
retail investors suffering losses due to drastic movements in the
premium/discount of OTC ETH Funds. An investor who purchased the
largest OTC ETH Fund in January 2021 and held the position at the end
of 2022 would have suffered a 69% loss due to the premium/discount,
even if the price of ETH did not change. Many retail investors likely
suffered losses due to this premium/discount in OTC ETH Fund trading;
all such losses could have been avoided if a Spot Ether ETP had been
available. Additionally, many U.S. investors that held their digital
assets in accounts at FTX,\14\ Celsius Network LLC,\15\ BlockFi
Inc.\16\ and Voyager Digital Holdings, Inc.\17\ have become unsecured
creditors in the insolvencies of those entities. If a Spot Ether ETP
was available, it is likely that at least a portion of the billions of
dollars tied up in those proceedings would still reside in the
brokerage accounts of U.S. investors, having instead been invested in a
transparent, regulated, and well-understood structure--a Spot Ether
ETP. To this point, approval of a Spot Ether ETP would represent a
major win for the protection of U.S. investors in the cryptoasset
space. The Fund, like all other series of Commodity-Based Trust Shares,
is designed to protect investors against the risk of losses through
fraud and insolvency that arise by holding digital assets, including
ETH, on centralized platforms.
---------------------------------------------------------------------------

\14\ See FTX Trading Ltd., et al., Case No. 22-11068.
\15\ See Celsius Network LLC, et al., Case No. 22-10964.
\16\ See BlockFi Inc., Case No. 22-19361.
\17\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
---------------------------------------------------------------------------

Ether Futures ETFs
The Exchange and Sponsor applaud the Commission for allowing the
launch of ETFs registered under the Investment Company Act of 1940, as
amended (the ``1940 Act''), that provide exposure to ether primarily
through CME Ether Futures (``Ether Futures ETFs''). Allowing such
products to list and trade is a productive first step in providing U.S.
investors and traders with transparent, exchange-listed tools for
expressing a view on ether.
The structure of Ether Futures ETFs provides negative outcomes for
buy and hold investors as compared to a Spot Ether ETP. Specifically,
the cost of rolling CME Ether Futures contracts will cause the Ether
Futures ETFs to lag the performance of ether itself and, at over a
billion dollars in assets under management, would cost U.S. investors
significant amounts of money on an annual basis compared to Spot Ether
ETPs. Such rolling costs would not be required for Spot Ether ETPs that
hold ether. Further, Ether Futures ETFs could potentially hit CME
position limits, which would force an Ether Futures ETF to invest in
non-futures assets for ether exposure and cause potential investor
confusion and lack of certainty about what such Ether Futures ETFs are
actually holding to try to get exposure to ether, not to mention
completely changing the risk profile associated with such an ETF. While
Ether Futures ETFs represent a useful trading tool, they are clearly a
sub-optimal structure for U.S. investors that are looking for long-term
exposure to ether that will unnecessarily cost U.S. investors
significant amounts of money every year compared to Spot Ether ETPs and
the Exchange believes that any proposal to list and trade a Spot Ether
ETP should be reviewed by the Commission with this important investor
protection context in mind.
To the extent the Commission may view differential treatment of
Ether Futures ETFs and Spot Ether ETPs as warranted based on the
Commission's concerns about the custody of physical ether that a Spot
Ether ETP would hold (compared to cash-settled futures contracts),\18\
the Sponsor believes this concern is mitigated to a significant degree
by the custodial arrangements that the Fund has contracted with the
Custodian to provide, as further outlined below. In the custody
statement, the Commission stated that the fourth step that a broker-
dealer could take to shield traditional securities customers and others
from the risks and consequences of digital asset security fraud, theft,
or loss is to establish, maintain, and enforce reasonably designed
written policies, procedures, and controls for safekeeping

[[Page 18450]]

and demonstrating the broker-dealer has exclusive possession or control
over digital asset securities that are consistent with industry best
practices to protect against the theft, loss, and unauthorized and
accidental use of the private keys necessary to access and transfer the
digital asset securities the broker-dealer holds in custody. While
ether is not a security and the Custodian is not a broker-dealer, the
Sponsor believes that similar considerations apply to the Custodian's
holding of the Fund's ether. After diligent investigation, the Sponsor
believes that the Custodian's policies, procedures, and controls for
safekeeping, exclusively possessing, and controlling the Fund's ether
holdings are consistent with industry best practices to protect against
the theft, loss, and unauthorized and accidental use of the private
keys. As a trust company chartered by the NYDFS, the Sponsor notes that
the Custodian is subject to extensive regulation and has among longest
track records in the industry of providing custodial services for
digital asset private keys. Under the circumstances, therefore, to the
extent the Commission believes that its concerns about the risks of
spot ether custody justifies differential treatment of a Ether Futures
ETF versus a Spot Ether ETP, the Sponsor believes that the fact that
the Custodian employs the same types of policies, procedures, and
safeguards in handling spot ether that the Commission has stated that
broker-dealers should implement with respect to digital asset
securities would appear to weaken the justification for treating a
Ether Futures ETF compared to a Spot Ether ETP differently due to spot
ether custody concerns.
---------------------------------------------------------------------------

\18\ See, e.g., Division of Investment Management Staff, Staff
Statement on Funds Registered Under the Investment Company Act
Investing in the Bitcoin Futures Market, May 11, 2021 (``The Bitcoin
Futures market also has not presented the custody challenges
associated with some cryptocurrency-based investing because the
futures are cash-settled'').
---------------------------------------------------------------------------

Based on the foregoing, the Exchange and Sponsor believe that any
objective review of the proposals to list Spot Ether ETPs compared to
the Ether Futures ETFs would lead to the conclusion that Spot Ether
ETPs should be available to U.S. investors and, as such, this proposal
and other comparable proposals to list and trade Spot Ether ETPs should
be approved by the Commission. Stated simply, U.S. investors will
continue to lose significant amounts of money from holding Ether
Futures ETFs as compared to Spot Ether ETPs, losses which could be
prevented by the Commission approving Spot Ether ETPs. Additionally,
any concerns related to preventing fraudulent and manipulative acts and
practices related to Spot Ether ETPs would apply equally to the spot
markets underlying the futures contracts held by an Ether Futures ETF.
Both the Exchange and Sponsor believe that the CME Ether Futures market
is a regulated market of significant size and that such manipulation
concerns are mitigated, as described extensively below. After allowing
the listing and trading of Ether Futures ETFs that hold primarily CME
Ether Futures, however, the only consistent outcome would be approving
Spot Ether ETPs on the basis that the CME Ether Futures market is a
regulated market of significant size.
Given the current landscape, approving this proposal (and others
like it) and allowing Spot Ether ETPs to be listed and traded alongside
Ether Futures ETFs and Spot Bitcoin ETPs would establish a consistent
regulatory approach, provide U.S. investors with choice in product
structures for ether exposure, and offer flexibility in the means of
gaining exposure to ether through transparent, regulated, U.S.
exchange-listed vehicles.
CME Ether Futures \19\
---------------------------------------------------------------------------

\19\ Unless otherwise noted, all data and analysis presented in
this section and referenced elsewhere in the filing has been
provided by the Sponsor.
---------------------------------------------------------------------------

CME began offering trading in Ether Futures in February 2021. Each
contract represents 50 ETH and is based on the CME CF Ether-Dollar
Reference Rate.\20\ The contracts trade and settle like other cash-
settled commodity futures contracts. Most measurable metrics related to
CME Ether Futures have generally trended up since launch, although some
metrics have slowed recently. For example, there were 76,293 CME Ether
Futures contracts traded in July 2023 (approximately $7.3 billion)
compared to 70,305 ($11.1 billion) and 158,409 ($7.5 billion) contracts
traded in July 2021, and July 2022 respectively.\21\ The Sponsor's
research indicates daily correlation between the spot ETH and the CME
Ether Futures is 0.998 from the period of 9/1/22 through 9/1/23.
---------------------------------------------------------------------------

\20\ The CME CF Ether-Dollar Reference Rate is based on a
publicly available calculation methodology based on pricing sourced
from several crypto trading platforms, including Bitstamp, Coinbase,
Gemini, itBit, Kraken, and LMAX Digital.
\21\ Source: CME, 7/31/23.
---------------------------------------------------------------------------

The number of large open interest holders \22\ and unique accounts
trading CME Ether Futures have both increased, even in the face of
heightened ether price volatility.
---------------------------------------------------------------------------

\22\ A large open interest holder in CME Ether Futures is an
entity that holds at least 25 contracts, which is the equivalent of
1,250 ether. At a price of approximately $1,867 per ether on 7/31/
2023, more than 59 firms had outstanding positions of greater than
$2.3 million in CME Ether Futures.
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BILLING CODE 8011-01-P

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[GRAPHIC] [TIFF OMITTED] TN13MR24.000

[GRAPHIC] [TIFF OMITTED] TN13MR24.001

[[Page 18452]]

[GRAPHIC] [TIFF OMITTED] TN13MR24.002

[GRAPHIC] [TIFF OMITTED] TN13MR24.003

BILLING CODE 8011-01-C
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\23\ including Commodity-Based Trust Shares,\24\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\25\ and (ii) the requirement that an exchange proposal be designed, in
general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
section 6(b)(5) of the Act and that this filing sufficiently

[[Page 18453]]

demonstrates that the CME Ether Futures market represents a regulated
market of significant size and that, on the whole, the manipulation
concerns previously articulated by the Commission are sufficiently
mitigated to the point that they are outweighed by quantifiable
investor protection issues that would be resolved by approving this
proposal.
---------------------------------------------------------------------------

\23\ See Exchange Rule 14.11(f).
\24\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\25\ The Exchange believes that ETH is resistant to price
manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of ETH trading render it difficult and
prohibitively costly to manipulate the price of ETH. The
fragmentation across ETH platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of ETH prices
through continuous trading activity challenging. To the extent that
there are ETH exchanges engaged in or allowing wash trading or other
activity intended to manipulate the price of ETH on other markets,
such pricing does not normally impact prices on other exchange
because participants will generally ignore markets with quotes that
they deem non-executable. Moreover, the linkage between the ETH
markets and the presence of arbitrageurs in those markets means that
the manipulation of the price of ETH price on any single venue would
require manipulation of the global ETH price in order to be
effective. Arbitrageurs must have funds distributed across multiple
trading platforms in order to take advantage of temporary price
dislocations, thereby making it unlikely that there will be strong
concentration of funds on any particular ETH or OTC trading
platform. As a result, the potential for manipulation on a trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market
pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place \26\ with a regulated market of significant size.
Both the Exchange and CME are members of the Intermarket Surveillance
Group (``ISG'').\27\ The only remaining issue to be addressed is
whether the Ether Futures market constitutes a market of significant
size, which both the Exchange and the Sponsor believe that it does. 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 manipulate the ETP, so that a
surveillance-sharing agreement would assist the listing exchange 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.\28\
---------------------------------------------------------------------------

\26\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance-sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in the ISG
constitutes such a surveillance sharing agreement. See Securities
Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595
(March 3, 2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix
Disapproval'').
\27\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\28\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
section 6(b)(5) of the Act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.^{29 30}
---------------------------------------------------------------------------

\29\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
\30\ The Commission allowed the launch of ETFs registered under
the 1940 Act that provide exposure to ETH through CME Ether Futures
(``ETH Futures ETFs'') in October 2023.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
The significant market test requires that there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to manipulate the ETP, so that a
surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct. In light of the similarly high
correlation between spot ETH/CME Ether Futures and spot bitcoin/CME
Bitcoin Futures, applying the same rationale that the Commission
applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order
\31\ also indicates that this test is satisfied for this proposal. As
noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded
that:
---------------------------------------------------------------------------

\31\ See the Spot Bitcoin ETP Approval Order.

. . . fraud or manipulation that impacts prices in spot bitcoin
markets would likely similarly impact CME bitcoin futures prices.
And because the CME's surveillance can assist in detecting those
impacts on CME bitcoin futures prices, the Exchanges' comprehensive
surveillance-sharing agreement with the CME . . . can be reasonably
expected to assist in surveilling for fraudulent and manipulative
acts and practices in the specific context of the [p]roposals.\32\
---------------------------------------------------------------------------

\32\ See the Spot Bitcoin ETP Approval Order at 3011-3012.

The assumptions from this statement are also true for CME Ether
Futures. CME Ether Futures pricing is based on pricing from spot ether
markets. The statement from the Spot Bitcoin ETP Approval Order that
the surveillance-sharing agreement with the CME ``can be reasonably
expected to assist in surveilling for fraudulent and manipulative acts
and practices in the specific context of the [p]roposals'' makes clear
that the Commission believes that CME's surveillance can capture the
effects of trading on the relevant spot markets on the pricing of CME
Bitcoin Futures. This same logic would extend to CME Ether Futures
markets where CME's surveillance would be able to capture the effects
of trading on the relevant spot markets on the pricing of CME Ether
Futures.
(b) Predominant Influence on Prices in Spot and ETH Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the CME Ether Futures
market for a number of reasons. First, because the Fund would not hold
CME Ether Futures contracts, the only way that it could be the
predominant force on prices in that market is through the spot markets
that CME Ether Futures contracts use for pricing.\33\ The Sponsor notes
that ether total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\34\ The Sponsor expects that
the Fund would represent a very small percentage of this daily trading
volume in the spot ether market even in its most aggressive projections
for the Fund's assets and, thus, the Fund would not have an impact on
the spot market and therefore could not be the predominant force on
prices in the CME Ether Futures market. Second, much like the CME
Bitcoin Futures market, the CME Ether Futures market has progressed and
matured significantly. As the court found in the Grayscale Order,
``Because the spot market is deeper and more liquid than the futures
market, manipulation should be more difficult, not less.'' The Exchange
and sponsor agree with this sentiment and believe it applies equally to
the spot ether and CME Ether Futures markets.
---------------------------------------------------------------------------

\33\ This logic is reflected by the court in the Grayscale Order
at 17-18. Specifically, the court found that ``Because Grayscale
owns no futures contracts, trading in Grayscale can affect the
futures market only through the spot market . . . But Grayscale
holds just 3.4 percent of outstanding bitcoin, and the Commission
did not suggest Grayscale can dominate the price of bitcoin.''
\34\ Source: TokenTerminal.
---------------------------------------------------------------------------

[[Page 18454]]

surveillance-sharing agreement. The Exchange and Sponsor believe that
such conditions are present.
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ether through OTC ETH Funds has grown into the
tens of billions of dollars and more than a billion dollars of exposure
through Ether Futures ETFs. With that growth, so too has grown the
quantifiable investor protection issues to U.S. investors through roll
costs for Ether Futures ETFs and premium/discount volatility and
management fees for OTC ETH Funds. The Exchange believes that the
concerns related to the prevention of fraudulent and manipulative acts
and practices have been sufficiently addressed to be consistent with
the Act and, to the extent that the Commission disagrees with that
assertion, also believes that such concerns are now outweighed by these
investor protection concerns. As such, the Exchange believes that
approving this proposal (and comparable proposals) provides the
Commission with the opportunity to allow U.S. investors with access to
ether in a regulated and transparent exchange-traded vehicle that would
act to limit risk to U.S. investors by: (i) reducing premium and
discount volatility; (ii) reducing management fees through meaningful
competition; (iii) reducing risks and costs associated with investing
in Ether Futures ETFs and operating companies that are imperfect
proxies for ether exposure; and (iv) providing an alternative to
custodying spot ether.
Franklin Ethereum ETF
Delaware Trust Company is the trustee (``Trustee''). Bank of New
York Mellon is the custodian for the Fund's cash and cash equivalents
\35\ (the ``Cash Custodian'') and also serves as the Fund's
administrator and transfer agent (the ``Administrator'' or ``Transfer
Agent''). Coinbase Trust Company, LLC (the ``Custodian'') will be
responsible for custody of the Fund's ether.
---------------------------------------------------------------------------

\35\ Cash equivalents are short-term instruments with maturities
of less than 3 months.
---------------------------------------------------------------------------

According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the Fund's net assets.
The Fund's assets will only consist of ether, cash, and cash
equivalents.
According to the Registration Statement, the Trust is neither an
investment company registered under the 1940 Act,\36\ nor a commodity
pool for purposes of the Commodity Exchange Act (``CEA''), and neither
the Trust, the Fund nor the Sponsor is subject to regulation as a
commodity pool operator or a commodity trading adviser in connection
with the Shares.
---------------------------------------------------------------------------

\36\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

According to the Registration Statement, the Sponsor may, from time
to time, stake a portion of the Fund's assets through one or more
trusted staking providers, which may include an affiliate of the
Sponsor (``Staking Providers''). In consideration for any staking
activity in which the Fund may engage, the Fund would receive certain
staking rewards of ether tokens, which may be treated as income to the
Fund.
When the Fund sells or redeems its Shares, it will do so in cash
transactions in large blocks of 50,000 Shares (a ``Creation Basket'')
at the Fund's net asset value (``NAV''). A third party will use cash to
buy and deliver ether to create Shares or withdraw and sell ether for
cash to redeem Shares, on behalf of the Fund. For creations, authorized
participants will deliver, or facilitate the delivery of, cash to the
Fund's account with the Cash Custodian in exchange for Shares. Upon
receipt of an approved creation order, the Sponsor, on behalf of the
Fund, will submit an order to buy the amount of ether represented by a
Creation Basket. Based off ether executions, the Cash Custodian will
request the required cash from the authorized participant. Following
receipt by the Cash Custodian of the cash from an authorized
participant, the Sponsor, on behalf of the Fund, will approve an order
with one or more previously onboarded trading partners to purchase the
amount of ether represented by the Creation Basket.\37\ Authorized
participants may then offer Shares to the public at prices that depend
on various factors, including the supply and demand for Shares, the
value of the Fund's assets, and market conditions at the time of a
transaction. Shareholders who buy or sell Shares during the day from
their broker may do so at a premium or discount relative to the NAV of
the Shares of the Fund.
---------------------------------------------------------------------------

\37\ For redemptions, the process will occur in the reverse
order. Upon receipt of an approved redemption order, the Sponsor, on
behalf of the Fund, will submit an order to sell the amount of ether
represented by a Creation Basket and the cash proceeds will be
remitted to the authorized participant when the large block of
Shares is received by the Transfer Agent.
---------------------------------------------------------------------------

Investment Objective
According to the Registration Statement and as further described
below, the investment objective of the Fund is to generally reflect the
performance of the price of ether before payment of the Fund's expenses
and liabilities. In seeking to achieve its investment objective, the
Fund will hold only ether, cash, and cash equivalents. The Fund will
value its Shares daily based on the value of ether as reflected by the
CME CF Ether-Dollar Reference Rate--New York Variant (the ``Index''),
which is an independently calculated value based on an aggregation of
executed trade flow of major ether spot trading platforms.
Specifically, the Index is calculated based on certain transactions of
all of its constituent ether trading platforms, which are currently
Bitstamp, Coinbase, itBit, Kraken, Gemini, and LMAX Digital, and which
may change from time to time. If the Index is not available or the
Sponsor determines, in its sole discretion, that the Index should not
be used, the Fund's holdings may be fair valued in accordance with the
policy approved by the Sponsor.\38\
---------------------------------------------------------------------------

\38\ Any alternative method will only be employed on an ad hoc
basis. Any permanent change to the calculation of the NAV would
require a proposed rule change under Rule 19b-4.
---------------------------------------------------------------------------

The Index
As described in the Registration Statement, the Fund will value its
Shares daily based on the value of ether as reflected by the Index. The
Index is calculated daily and aggregates the notional value of ether
trading activity across major ether spot trading platforms. The Index
is designed based on the International Organization of Securities
Commissions (``IOSCO'') Principals for Financial Indexes. The
administrator of the Index is CF Benchmarks Ltd. (the ``Index
Provider'').
The Index serves as a once-a-day benchmark rate of the U.S. dollar
price of ether (USD/ETH), calculated as of 4:00 p.m. ET. The Index
aggregates the trade flow of several ether trading platforms, during an
observation window between 3:00 p.m. and 4:00 p.m. ET into the U.S.
dollar price of one ether at 4:00 p.m. ET. Specifically, the Index is
calculated based on the ``Relevant Transactions'' (as defined below) of
all of its constituent ether trading platforms, which are currently
Coinbase, Bitstamp, Kraken, itBit, LMAX Digital and Gemini (the
``Constituent Platforms''), as follows:
All Relevant Transactions are added to a joint list,
recording the time of execution, trade price and size for each
transaction.
The list is partitioned by timestamp into 12 equally-sized
time intervals of 5 (five) minute length.
For each partition separately, the volume-weighted median
trade price is calculated from the trade prices and

[[Page 18455]]

sizes of all Relevant Transactions, i.e., across all Constituent
Platforms. A volume-weighted median differs from a standard median in
that a weighting factor, in this case trade size, is factored into the
calculation.
The Index is then determined by the equally-weighted
average of the volume medians of all partitions.
The Index does not include any futures prices in its methodology. A
``Relevant Transaction'' is any cryptocurrency versus U.S. dollar spot
trade that occurs during the observation window between 3:00 p.m. and
4:00 p.m. ET on a Constituent Platform in the ETH/USD pair that is
reported and disseminated by a Constituent Platform through its
publicly available Application Programming Interface (``API'') and
observed by the Index Provider.
The Sponsor believes that the use of the Index is reflective of a
reasonable valuation of the average spot price of ether and that
resistance to manipulation is a priority aim of its design methodology.
The methodology: (i) takes an observation period and divides it into
equal partitions of time; (ii) then calculates the volume-weighted
median of all transactions within each partition; and (iii) the value
is determined from the arithmetic mean of the volume-weighted medians,
equally weighted. By employing the foregoing steps, the Index thereby
seeks to ensure that transactions in ether conducted at outlying prices
do not have an undue effect on the value of the Index, large trades or
clusters of trades transacted over a short period of time will not have
an undue influence on the Index value, and the effect of large trades
at prices that deviate from the prevailing price are mitigated from
having an undue influence on the Index value.
In addition, the Sponsor notes that an oversight function is
implemented by the Index Provider in seeking to ensure that the Index
is administered through codified policies for Index integrity.
Index data and the description of the Index are based on
information made publicly available by the Index Provider on its
website at https://www.cfbenchmarks.com.
Net Asset Value
NAV means the total assets of the Fund (which includes ether, cash
and cash equivalents) less total liabilities of the Fund. The
Administrator will determine the NAV of the Fund on each day that the
Exchange is open for regular trading, as promptly as practical after
4:00 p.m. EST. The NAV of the Fund is the aggregate value of the Fund's
assets less its estimated accrued but unpaid liabilities (which include
accrued expenses). In determining the Fund's NAV, the Administrator
values the ether held by the Fund based on the price set by the Index
as of 4:00 p.m. EST. The Administrator also determines the NAV per
Share.
The NAV for the Fund will be calculated by the Administrator once a
day and will be disseminated daily to all market participants at the
same time.
If the Index is not available or the Sponsor determines, in its
sole discretion, that the Index should not be used, the Fund's holdings
may be fair valued in accordance with the policy approved by the
Sponsor.
Availability of Information
The website for the Fund, which will be publicly accessible at no
charge, will contain the following information: (a) the current NAV per
Share daily and the prior business day's NAV and the reported closing
price; (b) the BZX Official Closing Price \39\ in relation to the NAV
as of the time the NAV is calculated and a calculation of the premium
or discount of such price against such NAV; (c) data in chart form
displaying the frequency distribution of discounts and premiums of the
Official Closing Price against the NAV, within appropriate ranges for
each of the four previous calendar quarters (or for the life of the
Fund, if shorter); (d) the prospectus; and (e) other applicable
quantitative information. The aforementioned information will be
published as of the close of business available on the Fund's website
at https://www.franklintempleton.com/investments/options/exchange-traded-funds, or any successor thereto. The Fund will also disseminate
its holdings on a daily basis on its website.
---------------------------------------------------------------------------

\39\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

The Intraday Indicative Value (``IIV'') will be calculated by using
the prior day's closing NAV per Share as a base and updating that value
during Regular Trading Hours to reflect changes in the value of the
Fund's ether holdings during the trading day, which is based on CME CF
Ether-Dollar Real Time Index. The IIV disseminated during Regular
Trading Hours 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 Trading Hours through the
facilities of the consolidated tape association (CTA) and Consolidated
Quotation System (CQS) high speed lines. In addition, the IIV will be
available through on-line information services such as Bloomberg and
Reuters.
The price of ether will be made available by one or more major
market data vendors, updated at least every 15 seconds during Regular
Trading Hours.
As noted above, the Index is calculated daily and aggregates the
notional value of ether trading activity across major ether spot
trading platforms. Index data, the Index value, and the description of
the Index are based on information made publicly available by the Index
Provider on its website at https://www.cfbenchmarks.com.
Quotation and last sale information for ether is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. Information relating to trading, including price
and volume information, in ether is available from major market data
vendors and from the trading platforms on which ether are traded. Depth
of book information is also available from ether trading platforms. The
normal trading hours for ether trading platforms are 24 hours per day,
365 days per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last-sale information regarding
the Shares will be disseminated through the facilities of the
Consolidated Tape Association (``CTA'').
The Custodian
The Custodian carefully considers the design of the physical,
operational and cryptographic systems for secure storage of the Fund's
private keys in an effort to lower the risk of loss or theft. The
Custodian utilizes a variety of security measures to ensure that
private keys necessary to transfer digital assets remain uncompromised
and that the Fund maintains exclusive ownership of its assets. The
Custodian will keep the private keys associated with the Fund's ether
in ``cold storage'' \40\ (the ``Cold

[[Page 18456]]

Vault Balance''). The hardware, software, systems, and procedures of
the ether Custodian may not be available or cost-effective for many
investors to access directly. Only specific individuals are authorized
to participate in the custody process, and no individual acting alone
will be able to access or use any of the private keys. In addition, no
combination of the executive officers of the Sponsor, acting alone or
together, will be able to access or use any of the private keys that
hold the Fund's ether.
---------------------------------------------------------------------------

\40\ The term ``cold storage'' refers to a safeguarding method
by which the private keys corresponding to ether stored on a digital
wallet are removed from any computers actively connected to the
internet. Cold storage of private keys may involve keeping such
wallet on a non-networked computer or electronic device or storing
the public key and private keys relating to the digital wallet on a
storage device (for example, a USB thumb drive) or printed medium
(for example, papyrus or paper) and deleting the digital wallet from
all computers.
---------------------------------------------------------------------------

Creation and Redemption of Shares
When the Fund sells or redeems its Shares, it will do so in cash
transactions in blocks of Shares that are based on the quantity of
ether attributable to each Share of the Fund (e.g., a Creation Basket)
at the NAV. According to the Registration Statement, on any business
day, an authorized participant may place an order to create one or more
Creation Baskets. Purchase orders for cash transaction Creation Baskets
must be placed by 2:00 p.m. Eastern Time, or the close of regular
trading on the Exchange, whichever is earlier. The day on which an
order is received is considered the purchase order date. The
Administrator determines the required deposit for a given day by
dividing the number of ether held by the Fund as of the opening of
business on that business day, adjusted for the amount of ether
constituting estimated accrued but unpaid fees and expenses of the Fund
as of the opening of business on that business day, by the quotient of
the number of Shares outstanding at the opening of business divided by
the number of Shares in a Creation Basket. The procedures by which an
authorized participant can redeem one or more Creation Baskets mirror
the procedures for the creation of Creation Baskets.
The authorized participants will deliver only cash to create Shares
and will receive only cash when redeeming Shares. Further, authorized
participants will not directly or indirectly purchase, hold, deliver,
or receive ether as part of the creation or redemption process or
otherwise direct the Fund or a third party with respect to purchasing,
holding, delivering, or receiving ether as part of the creation or
redemption process.
The Fund will create Shares by receiving ether from a third party
that is not the authorized participant and the Fund--not the authorized
participant--is responsible for selecting the third party to deliver
the ether. Further, the third party will not be acting as an agent of
the authorized participant with respect to the delivery of the ether to
the Fund or acting at the direction of the authorized participant with
respect to the delivery of the ether to the Fund. The Fund will redeem
Shares by delivering ether to a third party that is not the authorized
participant and the Fund--not the authorized participant--is
responsible for selecting the third party to receive the ether.
Further, the third party will not be acting as an agent of the
authorized participant with respect to the receipt of the ether from
the Fund or acting at the direction of the authorized participant with
respect to the receipt of the ether from the Fund.
A third party, that is unaffiliated with the Fund and the Sponsor,
will use cash to buy and deliver ether to create Shares or withdraw and
sell ether for cash to redeem Shares, on behalf of the Fund.
The Sponsor (including its delegates) will maintain ownership and
control of the Fund's ether in a manner consistent with good delivery
requirements for spot commodity transactions.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
The Shares will be subject to BZX Rule 14.11(e)(4), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange represents that, for initial
and continued listing, the Fund must be in compliance with Rule 10A-3
under the Act. A minimum of 100,000 Shares will be outstanding at the
commencement of listing on the Exchange. The Exchange will obtain a
representation that the NAV will be calculated daily and that the NAV
and information about the assets of the Fund will be made available to
all market participants at the same time. The Exchange notes that, as
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a
trust that holds (1) a specified commodity \41\ deposited with the
trust, or (2) a specified commodity and, in addition to such specified
commodity, cash; (b) issued by such trust in a specified aggregate
minimum number in return for a deposit of a quantity of the underlying
commodity and/or cash; and (c) when aggregated in the same specified
minimum number, may be redeemed at a holder's request by such trust
which will deliver to the redeeming holder the quantity of the
underlying commodity and/or cash.
---------------------------------------------------------------------------

\41\ For purposes of Rule 14.11(e)(4), the term commodity takes
on the definition of the term as provided in the Commodity Exchange
Act.
---------------------------------------------------------------------------

Upon termination of the Fund, 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 Rule
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee
without prior notice to and approval of the Exchange. The Exchange also
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor
any agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions or delays in
calculating or disseminating any underlying commodity value, the
current value of the underlying commodity required to be deposited to
the Fund in connection with issuance of Commodity-Based Trust Shares;
resulting from any negligent act or omission by the Exchange, or any
agent of the Exchange, or any act, condition or cause beyond the
reasonable control of the Exchange, its agent, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission or delay in the reports of
transactions in an underlying commodity. Finally, as required in Rule
14.11(e)(4)(G), 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 in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker shall
trade in an underlying commodity, related commodity futures or options
on commodity futures, or any other related commodity 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 this Rule. In addition to the existing obligations under Exchange
rules regarding the production of books and records (see, e.g., Rule
4.2), the registered Market Maker in Commodity-Based Trust Shares shall
make available to the Exchange such books, records or other information
pertaining to

[[Page 18457]]

transactions by such entity or registered or non-registered employee
affiliated with such entity for its or their own accounts for trading
the underlying physical commodity, related commodity futures or options
on commodity futures, or any other related commodity derivatives, as
may be requested by the Exchange.
The Exchange is able to obtain information regarding trading in the
Shares and the underlying ether, Eth Futures contracts, options on Eth
Futures, or any other ether derivative through members acting as
registered Market Makers, in connection with their proprietary or
customer trades.
As a general matter, the Exchange has regulatory jurisdiction over
its Members and their associated persons, which include any person or
entity controlling a Member. To the extent the Exchange may be found to
lack jurisdiction over a subsidiary or affiliate of a Member that does
business only in commodities or futures contracts, the Exchange could
obtain information regarding the activities of such subsidiary or
affiliate through surveillance sharing agreements with regulatory
organizations of which such subsidiary or affiliate is a member.
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 BZX Rule 11.18. 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 ether
underlying the Shares; or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present. Trading in the Shares also will be subject to Rule
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading
in the Shares may be halted.
If the IIV or the value of the Index 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 Index
occurs. If the interruption to the dissemination of the IIV or the
value of the Index 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.
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. BZX will allow
trading in the Shares during all trading sessions on the Exchange. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BZX Rule 11.11(a) the
minimum price variation for quoting and entry of orders in securities
traded on the Exchange is $0.01 where the price is greater than $1.00
per share or $0.0001 where the price is less than $1.00 per share. The
Shares of the Fund will conform to the initial and continued listing
criteria set forth in BZX Rule 14.11(e)(4).
Surveillance
The Exchange represents that its surveillance procedures are
adequate to properly monitor the trading of the Shares on the Exchange
during all trading sessions and to deter and detect violations of
Exchange rules and the applicable federal securities laws. Trading of
the Shares through the Exchange will be subject to the Exchange's
surveillance procedures for derivative products, including Commodity-
Based Trust Shares. FINRA conducts certain cross-market surveillances
on behalf of the Exchange pursuant to a regulatory services agreement.
The Exchange is responsible for FINRA's performance under this
regulatory services agreement.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares and Ether Futures
with other markets and other entities that are members of the ISG, and
the Exchange, or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in the Shares and Ether Futures
from such markets and other entities.\42\ The Exchange may obtain
information regarding trading in the Shares and Eth 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.
---------------------------------------------------------------------------

\42\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Fund or the Shares 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 Fund or the
Shares are not in compliance with the applicable listing requirements,
the Exchange will commence delisting procedures under Exchange Rule
14.12.
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: (i) the procedures for the
creation and redemption of Creation Baskets (and that the Shares are
not individually redeemable); (ii) BZX Rule 3.7, which imposes
suitability obligations on Exchange members with respect to
recommending transactions in the Shares to customers; (iii) how
information regarding the IIV and the Fund's NAV are disseminated; (iv)
the risks involved in trading the Shares outside of Regular Trading
Hours \43\ when an updated IIV will not be calculated or publicly
disseminated; (v) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (vi) trading information. The
Information Circular will also reference the fact that there is no
regulated source of last sale information regarding ether, that the
Commission has no jurisdiction over the trading of ether as a
commodity, and that the CFTC has regulatory jurisdiction over the
trading of Ether Futures contracts and options on Ether Futures
contracts.
---------------------------------------------------------------------------

\43\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------

In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Shares. Members purchasing the Shares for resale to
investors will deliver a prospectus to such investors. The Information
Circular will also discuss any exemptive, no-action and interpretive
relief granted by the Commission from any rules under the Act.

[[Page 18458]]

2. Statutory Basis
The Exchange believes that the proposal is consistent with section
6(b) of the Act \44\ in general and section 6(b)(5) of the Act \45\ 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.
---------------------------------------------------------------------------

\44\ 15 U.S.C. 78f.
\45\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Commission has approved numerous series of Trust Issued
Receipts,\46\ including Commodity-Based Trust Shares,\47\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\48\ and (ii) the requirement that an exchange proposal be designed, in
general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
section 6(b)(5) of the Act and that this filing sufficiently
demonstrates that the CME Ether Futures market represents a regulated
market of significant size and that, on the whole, the manipulation
concerns previously articulated by the Commission are sufficiently
mitigated to the point that they are outweighed by quantifiable
investor protection issues that would be resolved by approving this
proposal.
---------------------------------------------------------------------------

\46\ See Exchange Rule 14.11(f).
\47\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\48\ The Exchange believes that ETH is resistant to price
manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of ETH trading render it difficult and
prohibitively costly to manipulate the price of ETH. The
fragmentation across ETH platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of ETH prices
through continuous trading activity challenging. To the extent that
there are ETH exchanges engaged in or allowing wash trading or other
activity intended to manipulate the price of ETH on other markets,
such pricing does not normally impact prices on other exchange
because participants will generally ignore markets with quotes that
they deem non-executable. Moreover, the linkage between the ETH
markets and the presence of arbitrageurs in those markets means that
the manipulation of the price of ETH price on any single venue would
require manipulation of the global ETH price in order to be
effective. Arbitrageurs must have funds distributed across multiple
trading platforms in order to take advantage of temporary price
dislocations, thereby making it unlikely that there will be strong
concentration of funds on any particular ETH exchange or OTC
platform. As a result, the potential for manipulation on a trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market
pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place \49\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\50\ The only remaining
issue to be addressed is whether the ETH Futures market constitutes a
market of significant size, which both the Exchange and the Sponsor
believe that it does. 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
manipulate the ETP, so that a surveillance-sharing agreement would
assist the listing exchange 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.\51\
---------------------------------------------------------------------------

\49\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance- sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in ISG
constitutes such a surveillance sharing agreement. See Wilshire
Phoenix Disapproval.
\50\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\51\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
section 6(b)(5) of the Act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\52\
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\52\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
The significant market test requires that there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to manipulate the ETP, so that a
surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct. In light of the similarly high
correlation between spot ETH/CME Ether Futures and spot bitcoin/CME
Bitcoin Futures, applying the same rationale that the Commission
applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order
\53\ also indicates that this test is satisfied for this proposal. As
noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded
that:
---------------------------------------------------------------------------

\53\ See the Spot Bitcoin ETP Approval Order.

. . . fraud or manipulation that impacts prices in spot bitcoin
markets would likely similarly impact CME bitcoin futures prices.
And because the CME's surveillance can assist in detecting those
impacts on CME bitcoin futures prices, the Exchanges' comprehensive
surveillance-sharing agreement with the CME . . . can be reasonably
expected to assist in surveilling for fraudulent and manipulative
acts and practices in the specific context of the [p]roposals.\54\
---------------------------------------------------------------------------

\54\ See the Spot Bitcoin ETP Approval Order at 3011-3012.

[[Page 18459]]

believes that CME's surveillance can capture the effects of trading on
the relevant spot markets on the pricing of CME Bitcoin Futures. This
same logic would extend to CME Ether Futures markets where CME's
surveillance would be able to capture the effects of trading on the
relevant spot markets on the pricing of CME Ether Futures.
(b) Predominant Influence on Prices in Spot and ETH Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the CME Ether Futures
market for a number of reasons. First, because the Fund would not hold
CME Ether Futures contracts, the only way that it could be the
predominant force on prices in that market is through the spot markets
that CME Ether Futures contracts use for pricing.\55\ The Sponsor notes
that ether total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\56\ The Sponsor expects that
the Fund would represent a very small percentage of this daily trading
volume in the spot ether market even in its most aggressive projections
for the Fund's assets and, thus, the Fund would not have an impact on
the spot market and therefore could not be the predominant force on
prices in the CME Ether Futures market. Second, much like the CME
Bitcoin Futures market, the CME Ether Futures market has progressed and
matured significantly. As the court found in the Grayscale Order,
``Because the spot market is deeper and more liquid than the futures
market, manipulation should be more difficult, not less.'' The Exchange
and sponsor agree with this sentiment and believe it applies equally to
the spot ether and CME Ether Futures markets.
---------------------------------------------------------------------------

\55\ This logic is reflected by the court in the Grayscale Order
at 17-18. Specifically, the court found that ``Because Grayscale
owns no futures contracts, trading in Grayscale can affect the
futures market only through the spot market. . .But Grayscale holds
just 3.4 percent of outstanding bitcoin, and the Commission did not
suggest Grayscale can dominate the price of bitcoin.''
\56\ Source: TokenTerminal.
---------------------------------------------------------------------------

(c) 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 and Sponsor
believe that such conditions are present.
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ether through OTC ETH Funds has grown into the
tens of billions of dollars and more than a billion dollars of exposure
through Ether Futures ETFs. With that growth, so too has grown the
quantifiable investor protection issues to U.S. investors through roll
costs for Ether Futures ETFs and premium/discount volatility and
management fees for OTC ETH Funds. The Exchange believes that the
concerns related to the prevention of fraudulent and manipulative acts
and practices have been sufficiently addressed to be consistent with
the Act and, to the extent that the Commission disagrees with that
assertion, also believes that such concerns are now outweighed by these
investor protection concerns. As such, the Exchange believes that
approving this proposal (and comparable proposals) provides the
Commission with the opportunity to allow U.S. investors with access to
ether in a regulated and transparent exchange-traded vehicle that would
act to limit risk to U.S. investors by: (i) reducing premium and
discount volatility; (ii) reducing management fees through meaningful
competition; (iii) reducing risks and costs associated with investing
in Ether Futures ETFs and operating companies that are imperfect
proxies for ether exposure; and (iv) providing an alternative to
custodying spot ether.
Commodity-Based Trust Shares
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed on the Exchange pursuant to the initial and
continued listing criteria in Exchange Rule 14.11(e)(4). 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 the Shares through the
Exchange will be subject to the Exchange's surveillance procedures for
derivative products, including Commodity-Based Trust Shares. The issuer
has represented to the Exchange that it will advise the Exchange of any
failure by the Fund or the Shares 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 Fund or the Shares are not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. The Exchange
may obtain information regarding trading in the Shares and listed ether
derivatives via the 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.
Availability of Information
In addition to the price transparency of the Index, the Fund will
provide information regarding the Fund's ETH holdings as well as
additional data regarding the Fund. The website for the Fund, which
will be publicly accessible at no charge, will contain the following
information: (a) the current NAV per Share daily and the prior business
day's NAV and the reported closing price; (b) the BZX Official Closing
Price \57\ in relation to the NAV as of the time the NAV is calculated
and a calculation of the premium or discount of such price against such
NAV; (c) data in chart form displaying the frequency distribution of
discounts and premiums of the Official Closing Price against the NAV,
within appropriate ranges for each of the four previous calendar
quarters (or for the life of the Fund, if shorter); (d) the prospectus;
and (e) other applicable quantitative information. The aforementioned
information will be published as of the close of business available on
the Fund's website at https://www.franklintempleton.com/investments/options/exchange-traded-funds, or any successor thereto. The Fund will
also disseminate its holdings on a daily basis on its website.
---------------------------------------------------------------------------

\57\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

The IIV will be calculated by using the prior day's closing NAV per
Share as a base and updating that value during Regular Trading Hours to
reflect changes in the value of the Fund's ether holdings during the
trading day, which is based on CME CF Ether-Dollar Real Time Index. The
IIV disseminated during Regular Trading Hours 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 Trading Hours through the facilities of the
consolidated tape association (CTA) and Consolidated Quotation System
(CQS) high speed lines. In addition, the IIV will be available through
on-line information services such as Bloomberg and Reuters.

[[Page 18460]]

The price of ether will be made available by one or more major
market data vendors, updated at least every 15 seconds during Regular
Trading Hours.
As noted above, the Index is calculated daily and aggregates the
notional value of ether trading activity across major ether spot
trading platforms. Index data, the Index value, and the description of
the Index are based on information made publicly available by the Index
Provider on its website at https://www.cfbenchmarks.com.
Quotation and last sale information for ether is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. Information relating to trading, including price
and volume information, in ether is available from major market data
vendors and from the trading platforms on which ether are traded. Depth
of book information is also available from ether trading platforms. The
normal trading hours for ether trading platforms are 24 hours per day,
365 days per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last-sale information regarding
the Shares will be disseminated through the facilities of the CTA.
In sum, the Exchange believes that this proposal is consistent with
the requirements of section 6(b)(5) of the Act, that this filing
sufficiently demonstrates that the CME Ether Futures market represents
a regulated market of significant size, and that on the whole the
manipulation concerns previously articulated by the Commission are
sufficiently mitigated to the point that they are outweighed by
investor protection issues that would be resolved by approving this
proposal.
The Exchange believes that the proposal is, in particular, designed
to protect investors and the public interest. Premium and discount
volatility, high fees, rolling costs, insufficient disclosures, and
technical hurdles are putting U.S. investor money at risk on a daily
basis that could potentially be eliminated through access to a Spot
Ether ETP. As such, the Exchange believes that this proposal acts to
limit the risk to U.S. investors that are increasingly seeking exposure
to ether by providing direct, 1-for-1 exposure to ether in a regulated,
transparent, exchange-traded vehicle, specifically by: (i) reducing
premium/discount volatility; (ii) reducing management fees through
meaningful competition; (iii) providing an alternative to Ether Futures
ETFs which will eliminate roll cost; (iv) reducing risks associated
with investing in operating companies that are imperfect proxies for
ether exposure; and (v) providing an alternative to custodying spot
ether. The investor protection issues for U.S. investors has grown
significantly over the last several years, through roll costs for Ether
Futures ETFs and premium/discount volatility and management fees for
OTC ETH Funds. As discussed throughout, this growth investor protection
concerns need to be reevaluated and rebalanced with the prevention of
fraudulent and manipulative acts and practices concerns that previous
disapproval orders have relied upon. Finally, the Exchange notes that
in addition to all of the arguments herein which it believes
sufficiently establishes the CME Ether Futures market as a regulated
market of significant size, it is logically inconsistent to find that
the CME Ether Futures market is a significant market as it relates to
the CME Ether Futures market, but not a significant market as it
relates to the ether spot market for the numerous reasons laid out
above.
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
an additional exchange-traded product 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

The Exchange has neither solicited nor received written comments on
the proposed rule change.

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-CboeBZX-2024-018 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-CboeBZX-2024-018. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or

[[Page 18461]]

subject to copyright protection. All submissions should refer to file
number SR-CboeBZX-2024-018 and should be submitted on or before April
3, 2024.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\58\
---------------------------------------------------------------------------

\58\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-05251 Filed 3-12-24; 8:45 am]
BILLING CODE 8011-01-P

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