Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 1 to, and Designation of a Longer Period for Commission Action on Proceedings To Determine Whether To Approve or Disapprove, a Proposed Rule Change To List and Trade Shares of the VanEck Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 21032-21045 [2024-06319]
Download as PDF
21032
Federal Register / Vol. 89, No. 59 / Tuesday, March 26, 2024 / Notices
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–BOX–2024–08 and should be
submitted on or before April 16, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.63
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–06329 Filed 3–25–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99782; File No. SR–
CboeBZX–2023–069]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
Amendment No. 1 to, and Designation
of a Longer Period for Commission
Action on Proceedings To Determine
Whether To Approve or Disapprove, a
Proposed Rule Change To List and
Trade Shares of the VanEck Ethereum
ETF Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares
March 20, 2024.
On September 6, 2023, Cboe BZX
Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the VanEck Ethereum ETF
(‘‘Trust’’) under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares. The
proposed rule change was published for
comment in the Federal Register on
September 26, 2023.3
On September 27, 2023, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On December
18, 2023, the Commission instituted
proceedings under Section 19(b)(2)(B) of
ddrumheller on DSK120RN23PROD with NOTICES1
63 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 98457
(Sept. 20, 2023), 88 FR 66076. Comments on the
proposed rule change are available at: https://
www.sec.gov/comments/sr-cboebzx-2023-069/
srcboebzx2023069.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 98566,
88 FR 68236 (Oct. 3, 2023).
1 15
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the Act 6 to determine whether to
approve or disapprove the proposed
rule change.7 On February 16, 2024, the
Exchange filed Amendment No. 1 to the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange.
Amendment No. 1 amended and
replaced in its entirety the proposed
rule change as originally submitted. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as modified by Amendment No.
1, from interested persons and to extend
the time period for approving or
disapproving the proposed rule change,
as modified by Amendment No. 1.
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 VanEck Ethereum ETF (the
‘‘Trust’’),8 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.
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
This Amendment No. 1 to SR–
CboeBZX–2023–069 amends and
replaces in its entirety the proposal as
6 15
U.S.C. 78s(b)(2)(B).
Securities Exchange Act Release No. 99195,
88 FR 88683 (Dec. 22, 2023).
8 The Trust was formed as a Delaware statutory
trust on June 22, 2021 and is operated as a grantor
trust for U.S. federal tax purposes. The Trust has
no fixed termination date.
7 See
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
originally submitted on September 6,
2023. The Exchange submits this
Amendment No. 1 in order to clarify
certain points and add additional details
to the proposal.
The Exchange proposes to list and
trade the Shares under BZX Rule
14.11(e)(4),9 which governs the listing
and trading of Commodity-Based Trust
Shares on the Exchange.10 VanEck
Digital Assets, LLC is the sponsor of the
Trust (‘‘Sponsor’’). The Shares will be
registered with the Commission by
means of the Trust’s registration
statement on Form S–1 (the
‘‘Registration Statement’’).11
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.12 With this in mind, the CME
9 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).
10 Any of the statements or representations
regarding the Benchmark 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.
11 See Amendment No. 1 to Registration
Statement on Form S–1, dated February 16, 2024,
submitted to the Commission by the Sponsor on
behalf of the Trust (333–255888). The descriptions
of the Trust, the Shares, and the Benchmark
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.
12 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
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ddrumheller on DSK120RN23PROD with NOTICES1
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
proposed funds are nearly identical to
the Trust, but proposed to hold bitcoin
instead of ethereum) (‘‘Spot Bitcoin
ETPs’’).13 By way of background, in
2022 the Commission disapproved
proposals 14 to list Spot Bitcoin ETPs,
including the Grayscale Order.15
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.16 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
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.
13 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’’).
14 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.
15 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’’).
16 See Grayscale Investments, LLC v. SEC, 82
F.4th 1239 (D.C. Cir. 2023).
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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.17
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
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
17 See the Spot Bitcoin ETP Approval Order at
3011–3012.
PO 00000
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Fmt 4703
Sfmt 4703
21033
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, Canada,
Switzerland, and France, are able to use
more traditional exchange listed and
traded products (including exchangetraded funds holding physical ETH) to
gain exposure to ETH. Investors across
Europe and Canada 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.18
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
18 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.
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ddrumheller on DSK120RN23PROD with NOTICES1
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,19
Celsius Network LLC,20 BlockFi Inc.21
and Voyager Digital Holdings, Inc.22
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 Trust, 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
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 could
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 non19 See FTX Trading Ltd., et al., Case No. 22–
11068.
20 See Celsius Network LLC, et al., Case No. 22–
10964.
21 See BlockFi Inc., Case No. 22–19361.
22 See Voyager Digital Holdings, Inc., et al., Case
No. 22–10943.
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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 suboptimal 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),23 the Sponsor believes this
concern is mitigated to a significant
degree by the custodial arrangements
that the Trust 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
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
Trust’s ether. After diligent
investigation, the Sponsor believes that
the Custodian’s policies, procedures,
and controls for safekeeping,
exclusively possessing, and controlling
the Trust’s ether holdings are consistent
with industry best practices to protect
23 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’’).
PO 00000
Frm 00095
Fmt 4703
Sfmt 4703
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.
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
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Federal Register / Vol. 89, No. 59 / Tuesday, March 26, 2024 / Notices
means of gaining exposure to ether
through transparent, regulated, U.S.
exchange-listed vehicles.
CME Ether Futures 24
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.25
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
21035
2022 respectively.26 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 27 and unique accounts trading
CME Ether Futures have both increased,
even in the face of heightened ether
price volatility.
CME Group Ether Futures lOlH
60
50
40 , , ,., ,, ,,,.Al,'!!!l.l:,?'!!111/C
30
i#lli:
20
10
0
CME Group
Futures
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18:10 Mar 25, 2024
Jkt 262001
crypto trading platforms, including Bitstamp,
Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
26 Source: CME, 7/31/23
27 A large open interest holder in CME Ether
Futures is an entity that holds at least 25 contracts,
PO 00000
Frm 00096
Fmt 4703
Sfmt 4725
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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26MRN1
EN26MR24.001
24 Unless otherwise noted, all data and analysis
presented in this section and referenced elsewhere
in the filing has been provided by the Sponsor.
25 The CME CF Ether-Dollar Reference Rate is
based on a publicly available calculation
methodology based on pricing sourced from several
EN26MR24.000
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Cumulative Unique Accounts Trading
ddrumheller on DSK120RN23PROD with NOTICES1
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Sep-22
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designed to prevent fraudulent and
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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.
(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
Jun-23
CD
►
30 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
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Federal Register / Vol. 89, No. 59 / Tuesday, March 26, 2024 / Notices
Section 6(b)(5) and the Applicable
Standards
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The Commission has approved
numerous series of Trust Issued
Receipts,28 including Commodity-Based
Trust Shares,29 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
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29 Commodity-Based Trust Shares, as described in
Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
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Federal Register / Vol. 89, No. 59 / Tuesday, March 26, 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
ddrumheller on DSK120RN23PROD 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 31 with a regulated
market of significant size. Both the
Exchange and CME are members of the
Intermarket Surveillance Group
(‘‘ISG’’).32 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
31 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’’).
32 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
VerDate Sep<11>2014
18:10 Mar 25, 2024
Jkt 262001
predominant influence on prices in that
market.33
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.34 35
(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 36 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
33 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.
35 According to reports, the Commission is poised
to allow the launch of ETFs registered under the
Investment Company Act of 1940, as amended (the
‘‘1940 Act’’), that provide exposure to ETH
primarily through CME Ether Futures (‘‘ETH
Futures ETFs’’) as early as October 2023. 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 ETH. https://www.bloomberg.com/news/
articles/2023-08-17/sec-said-to-be-poised-to-allowus-debut-of-ether-futures-etfs-eth#xj4y7vzkg.
36 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’’).
34 See
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21037
for fraudulent and manipulative acts and
practices in the specific context of the
[p]roposals.37
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
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
Trust 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.38 The Sponsor
notes that ether total 24-hour spot
trading volume has averaged $9.4
billion over the year ending September
1, 2023.39 The Sponsor expects that the
Trust would represent a very small
percentage of this daily trading volume
in the spot ether market even in its most
aggressive projections for the Trust’s
assets 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
37 See the Spot Bitcoin ETP Approval Order at
3011–3012.
38 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.’’
39 Source: TokenTerminal.
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Federal Register / Vol. 89, No. 59 / Tuesday, March 26, 2024 / Notices
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
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. 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.
ddrumheller on DSK120RN23PROD with NOTICES1
VanEck Ethereum ETF
Delaware Trust Company is the
trustee (‘‘Trustee’’). The State Street
Bank and Trust Company will be the
administrator (‘‘Administrator’’) and
transfer agent (‘‘Transfer Agent’’) and
will be responsible for the custody of
the Trust’s cash and cash equivalents 40
(the ‘‘Cash Custodian’’). Van Eck
Securities Corporation will be the
marketing agent (‘‘Marketing Agent’’) in
connection with the creation and
redemption of ‘‘Creation Baskets’’, as
defined below, of Shares. A custodian
40 Cash equivalents are short-term instruments
with maturities of less than 3 months.
VerDate Sep<11>2014
18:10 Mar 25, 2024
Jkt 262001
(the ‘‘Custodian’’) will be responsible
for custody of the Trust’s ether.
According to the Registration
Statement, each Share will represent a
fractional undivided beneficial interest
in the Trust’s net assets. The Trust’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 Investment Company Act of 1940, as
amended,41 nor a commodity pool for
purposes of the Commodity Exchange
Act (‘‘CEA’’), and neither the Trust nor
the Sponsor is subject to regulation as
a commodity pool operator or a
commodity trading adviser in
connection with the Shares.
When the Trust sells or redeems its
Shares, it will do so in cash transactions
in blocks of 25,000 Shares (a ‘‘Creation
Basket’’) at the Trust’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 Trust.
For creations, authorized participants
will deliver cash to the Trust’s account
with the Cash Custodian in exchange for
Shares. Upon receipt of an approved
creation order, the Sponsor, on behalf of
the Trust, 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; the Transfer
Agent will only issue ETF shares when
the authorized participant has made
delivery of the cash. Following receipt
by the Cash Custodian of the cash from
an authorized participant, the Sponsor,
on behalf of the Trust, will approve an
order with one or more previously
onboarded trading partners to purchase
the amount of ether represented by the
Creation Basket. This purchase of ether
will normally be cleared through an
affiliate of the Custodian (although the
purchase may also occur directly with
the trading partner) and the ether will
settle directly into the Trust’s account at
the Custodian.42 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
Trust’s assets, and market conditions at
the time of a transaction. Shareholders
41 15
U.S.C. 80a–1.
redemptions, the process will occur in the
reverse order. Upon receipt of an approved
redemption order, the Sponsor, on behalf of the
Trust, 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 50,000 Shares are received by
the Transfer Agent.
42 For
PO 00000
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Fmt 4703
Sfmt 4703
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 Trust.
Investment Objective
According to the Registration
Statement and as further described
below, the investment objective of the
Trust is for the Shares to reflect the
performance of ether less the expenses
of the Trust’s operations. In seeking to
achieve its investment objective, the
Trust will hold ether and will value its
Shares daily based on the reported
Benchmark and process all creations
and redemptions in cash transactions
with authorized participants. The Trust
is not actively managed.
The Benchmark
As described in the Registration
Statement, the Fund will use the
Benchmark to calculate the Trust’s
NAV. The Benchmark is designed to be
a robust price for ETH in USD and there
is no component other than ETH in the
Benchmark. The underlying ether
platforms are sourced from the industry
leading CryptoCompare Exchange
Benchmark review report.
CryptoCompare Exchange Benchmark
was established in 2019 as a tool
designed to bring clarity to the digital
trading platform sector by providing a
framework for assessing risk and in turn
bringing transparency and
accountability to a complex and rapidly
evolving market.43 The current ether
platform composition of the Benchmark
is Bitstamp, Coinbase, Gemini, itBit, and
Kraken. CryptoCompare Data Limited is
the index sponsor and index
administrator for the Benchmark. Data is
the calculation agent for the Benchmark.
The Benchmark is calculated daily
between 00:00 and 24:00 (CET) and the
Benchmark values are disseminated to
43 The CryptoCompare Exchange Benchmark
methodology utilizes a combination of qualitative
and quantitative metrics to analyze a
comprehensive data set across eight categories of
evaluation legal/regulation, KYC/transaction risk,
data provision, security, team/exchange, asset
quality/diversity, market quality and negative
events. The CryptoCompare Exchange Benchmark
review report assigns a grade to each exchange
which helps identify what it believes to be the
lowest risk exchanges in the industry. Based on the
CryptoCompare Exchange Benchmark,
MarketVector Indexes initially selects the top five
exchanges by rank for inclusion in the
MarketVectorTM Ethereum Benchmark Rate. If an
eligible exchange is downgraded by two or more
notches in a semi-annual review and is no longer
in the top five by rank, it is replaced by the highest
ranked non-component exchange. Adjustments to
exchange coverage are announced four business
days prior to the first business day of each of June
and December 23:00 CET. The MarketVectorTM
Ethereum Benchmark Rate is rebalanced at 16:00:00
GMT/BST on the last business day of each of May
and November.
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Federal Register / Vol. 89, No. 59 / Tuesday, March 26, 2024 / Notices
data vendors every fifteen seconds. The
Benchmark is disseminated in USD and
the closing value is calculated at
16:00:00 ET with fixed 16:00 ether
platform rates.
In calculating the closing price of the
Benchmark, the methodology captures
trade prices and sizes from ether
platforms and examines twenty threeminute periods leading up to 4:00 p.m.
EST. It then calculates an equalweighted average of the volumeweighted median price of these twenty
three-minute periods, removing the
highest and lowest contributed prices.
Using twenty consecutive three-minute
segments over a sixty-minute period
means malicious actors would need to
sustain efforts to manipulate the market
over an extended period of time, or
would need to replicate efforts multiple
times across ether platforms, potentially
triggering review. This extended period
also supports authorized participant
activity by capturing volume over a
longer time period, rather than forcing
authorized participants to mark an
individual close or auction. The use of
a median price reduces the ability of
outlier prices to impact the NAV, as it
systematically excludes those prices
from the NAV calculation. The use of a
volume-weighted median (as opposed to
a traditional median) serves as an
additional protection against attempts to
manipulate the NAV by executing a
large number of low-dollar trades,
because any manipulation attempt
would have to involve a majority of
global spot ETH volume in a threeminute window to have any influence
on the NAV. As discussed in the
Registration Statement, removing the
highest and lowest prices further
protects against attempts to manipulate
the NAV, requiring bad actors to act on
multiple ether platforms at once to have
any ability to influence the price.
ddrumheller on DSK120RN23PROD with NOTICES1
Net Asset Value
NAV means the total assets of the
Trust (which includes all ether, cash,
and cash equivalents) less total
liabilities of the Trust. The
Administrator determines the NAV of
the Trust on each day that the Exchange
is open for regular trading, as promptly
as practical after 4:00 p.m. ET based on
the Benchmark. The NAV of the Trust
is the aggregate value of the Trust’s
assets less its estimated accrued but
unpaid liabilities (which include
accrued expenses). In determining the
NAV, the Administrator values the
Shares of the Trust based on the closing
price of the Benchmark as of 4:00 p.m.
Eastern time. The Administrator also
determines the NAV per Share.
VerDate Sep<11>2014
18:10 Mar 25, 2024
Jkt 262001
The NAV for the Trust will be
calculated by the Administrator once a
day and will be disseminated daily to
all market participants at the same time.
The Sponsor will monitor for significant
events related to crypto assets that may
impact the value of ether and will
determine, in good faith, and in
accordance with its valuation policies
and procedures, whether to fair value
the Trust’s ether on a given day based
on whether certain pre-determined
criteria have been met. For example, if
the Benchmark deviates by more than a
pre-determined amount from an
alternate benchmark available to the
Sponsor, the Sponsor may determine to
utilize an alternate benchmark, such as
the MarketVectorTM Ethereum Index or
the S&P Ethereum Index. The Sponsor
may also fair value the Trust’s ether
using observed market transactions from
various trading platforms, including
some or all of the trading platforms
included in the Benchmark.44
Availability of Information
In addition to the price transparency
of the Benchmark, the Trust will
provide information regarding the
Trust’s ETH holdings as well as
additional data regarding the Trust. The
website for the Trust, 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 45 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 Trust, 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 Sponsor’s website at
www.vaneck.com, or any successor
thereto. The NAV for the Trust will be
calculated by the Administrator once a
day and will be disseminated daily to
all market participants at the same time.
Quotation and last-sale information
44 Any alternative method to determining NAV
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.
45 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
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21039
regarding the Shares will be
disseminated through the facilities of
the Consolidated Tape Association
(‘‘CTA’’). The Trust will also
disseminate its holdings on a daily basis
on its website.
The Intraday Indicative Value (‘‘IIV’’)
will be updated during Regular Trading
Hours to reflect changes in the value of
the Trust’s ether holdings during the
trading day. The IIV may differ from the
NAV because NAV is calculated, using
the closing price of the Benchmark,
once a day at 4:00 p.m. Eastern time
whereas the IIV draws prices from the
last trade on each ether platform to
produce a relevant, real-time price. 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 Trust
will provide an IIV per Share updated
every 15 seconds, as calculated by the
Exchange or a third-party financial data
provider during the Exchange’s Regular
Trading Hours (9:30 a.m. to 4:00 p.m.
E.T.). 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 Benchmark is
calculated every 15 seconds and
information about the Benchmark and
Benchmark value, including index data
and key elements of how the Benchmark
is calculated, will be publicly available
at https://www.marketvector.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
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volume information for the Shares will
be published daily in the financial
section of newspapers.
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The Custodian
The Custodian’s services (i) allow
ETH to be deposited from a public
blockchain address to the Trust’s ETH
account and (ii) allow ETH to be
withdrawn from the ETH account to a
public blockchain address as instructed
by the Trust. The custody agreement
requires the Custodian to hold the
Trust’s ETH in cold storage, unless
required to facilitate withdrawals as a
temporary measure. The Custodian will
use segregated cold storage ETH
addresses for the Trust which are
separate from the ETH addresses that
the Custodian uses for its other
customers and which are directly
verifiable via the ETH blockchain. The
Custodian will safeguard the private
keys to the ETH associated with the
Trust’s ETH account. The Custodian
will at all times record and identify in
its books and records that such ETH
constitutes the property of the Trust.
The Custodian will not withdraw the
Trust’s ETH from the Trust’s account
with the Custodian, or loan,
hypothecate, pledge or otherwise
encumber the Trust’s ETH, without the
Trust’s instruction. If the custody
agreement terminates, the Sponsor may
appoint another custodian and the Trust
may enter into a custodian agreement
with such custodian.
Creation and Redemption of Shares
When the Trust sells or redeems its
Shares, it will do so in cash transactions
in blocks of 25,000 Shares that are based
on the amount of ether held by the Trust
on a per unit (i.e., 25,000 Share) basis.
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 must be placed by 4:00 p.m. ET,
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
total deposit of cash required to create
each Creation Unit is an amount of cash
that is in the same proportion to the
total assets of the Trust, net of accrued
expenses and other liabilities, on the
date the order to purchase is properly
received, as the number of Shares to be
created under the purchase order is in
proportion to the total number of Shares
outstanding on the date the order is
received. The Administrator determines
the required deposit for a given day by
dividing the number of ether held by the
Trust as of the opening of business on
that business day, adjusted for the
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amount of ether constituting estimated
accrued but unpaid fees and expenses of
the Trust 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 Unit.
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 Trust or a third
party with respect to purchasing,
holding, delivering, or receiving ether as
part of the creation or redemption
process.
The Trust will create shares by
receiving ether from a third party that is
not the authorized participant and the
Trust—not the authorized participant—
is responsible for selecting the third
party to facilitate the delivery of 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 Trust or acting at the
direction of the authorized participant
with respect to the delivery of the ether
to the Trust. When fulfilling a
redemption request, the Trust will
deliver ether to a third party that is not
the authorized participant and the
Trust—not the authorized participant—
is responsible for selecting such 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 Trust or acting at the direction of the
authorized participant with respect to
the receipt of the ether from the Trust.
The procedures by which an
authorized participant can redeem one
or more Creation Baskets mirror the
procedures for the creation of Creation
Baskets. A third party, that is
unaffiliated with the Trust 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 Trust.
The Sponsor will maintain ownership
and control of 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
Trust must be in compliance with Rule
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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 Trust
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 46 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.
Upon termination of the Trust, the
Shares will be removed from listing.
The Trustee, Delaware Trust Company,
is a trust company having substantial
capital and surplus and the experience
and facilities for handling corporate
trust business, as required under 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 Trust 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
46 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.
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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
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
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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
Benchmark 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 Benchmark
occurs. If the interruption to the
dissemination of the IIV or the value of
the Benchmark 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 Trust 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
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21041
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.47 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
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 Trust 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 Trust 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
Trust’s NAV are disseminated; (iv) the
risks involved in trading the Shares
outside of Regular Trading Hours 48
when an updated IIV will not be
calculated or publicly disseminated; (v)
the requirement that members deliver a
prospectus to investors purchasing
47 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
48 Regular Trading Hours is the time between 9:30
a.m. and 4:00 p.m. Eastern Time.
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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.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act 49 in general and Section
6(b)(5) of the Act 50 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,51 including Commodity-Based
Trust Shares,52 to be listed on U.S.
national securities. 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; 53 and (ii) the requirement that
49 15
U.S.C. 78f.
U.S.C. 78f(b)(5).
51 See Exchange Rule 14.11(f).
52 Commodity-Based Trust Shares, as described in
Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
53 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
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50 15
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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.
(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 54 with a regulated
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.
54 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
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market of significant size. Both the
Exchange and CME are members of
ISG.55 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.56
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.57
(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 58 also
historically held that joint membership in ISG
constitutes such a surveillance sharing agreement.
See Wilshire Phoenix Disapproval.
55 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
56 See Wilshire Phoenix Disapproval.
57 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.
58 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 Bitcoin-
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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.59
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
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.
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(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
Trust 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.60 The Sponsor
notes that ether total 24-hour spot
trading volume has averaged $9.4
billion over the year ending September
1, 2023.61 The Sponsor expects that the
Trust would represent a very small
percentage of this daily trading volume
Based Commodity-Based Trust Shares and Trust
Units) (the ‘‘Spot Bitcoin ETP Approval Order’’).
59 See the Spot Bitcoin ETP Approval Order at
3011–3012.
60 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.’’
61 Source: TokenTerminal.
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in the spot ether market even in its most
aggressive projections for the Trust’s
assets 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
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. 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
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21043
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 Trust 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 Trust 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 Benchmark, the Trust will
provide information regarding the
Trust’s ETH holdings as well as
additional data regarding the Trust. The
website for the Trust, 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 62 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 Trust, if shorter); (d) the
prospectus; and (e) other applicable
quantitative information. The
aforementioned information will be
published as of the close of business
62 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.
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available on the Sponsor’s website at
www.vaneck.com, or any successor
thereto. The NAV for the Trust will be
calculated by the Administrator once a
day and will be disseminated daily to
all market participants at the same time.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the Consolidated Tape Association
(‘‘CTA’’). The Trust will also
disseminate its holdings on a daily basis
on its website.
The Intraday Indicative Value (‘‘IIV’’)
will be updated during Regular Trading
Hours to reflect changes in the value of
the Trust’s ether holdings during the
trading day. The IIV may differ from the
NAV because NAV is calculated, using
the closing price of the Benchmark,
once a day at 4:00 p.m. Eastern time
whereas the IIV draws prices from the
last trade on each ether platform to
produce a relevant, real-time price. 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 Trust
will provide an IIV per Share updated
every 15 seconds, as calculated by the
Exchange or a third-party financial data
provider during the Exchange’s Regular
Trading Hours (9:30 a.m. to 4:00 p.m.
E.T.). 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 Benchmark is
calculated every 15 seconds and
information about the Benchmark and
Benchmark value, including index data
and key elements of how the Benchmark
is calculated, will be publicly available
at https://www.marketvector.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.
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18:10 Mar 25, 2024
Jkt 262001
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.
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 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
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
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. Notice of Designation of a Longer
Period for Commission Action on
Proceedings To Determine Whether To
Approve or Disapprove the Proposed
Rule Change, as Modified by
Amendment No. 1
Section 19(b)(2) of the Act 63 provides
that, after initiating proceedings, the
Commission shall issue an order
approving or disapproving the proposed
rule change not later than 180 days after
the date of publication of notice of filing
of the proposed rule change. The
Commission may extend the period for
issuing an order approving or
disapproving the proposed rule change,
however, by not more than 60 days if
the Commission determines that a
longer period is appropriate and
publishes the reasons for such
determination. The proposed rule
change was published for comment in
the Federal Register on September 26,
2023.64 The 180th day after publication
of the proposed rule change is March
24, 2024. The Commission is extending
the time period for approving or
disapproving the proposed rule change
for an additional 60 days.
The Commission finds that it is
appropriate to designate a longer period
within which to issue an order
approving or disapproving the proposed
rule change so that it has sufficient time
to consider the proposed rule change, as
63 15
U.S.C. 78s(b)(2).
supra note 3 and accompanying text.
64 See
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modified by Amendment No. 1, and the
issues raised therein. Accordingly, the
Commission, pursuant to Section
19(b)(2) of the Act,65 designates May 23,
2024, as the date by which the
Commission shall either approve or
disapprove the proposed rule change
(File No. SR–CboeBZX–2023–069).
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2023–069 and should be
submitted on or before April 16, 2024.
For the Commission, by the Division
of Trading and Markets, pursuant to
delegated authority.66
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
1, is consistent with the Act. Comments
may be submitted by any of the
following methods:
Sherry Haywood,
Assistant Secretary.
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–2023–069 on the subject line.
[Release No. 34–99783; File No. SR–
NASDAQ–2024–012]
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–2023–069. 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
65 15
U.S.C. 78s(b)(2).
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[FR Doc. 2024–06319 Filed 3–25–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend
Options 7, Section 3
March 20, 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 March 7,
2024, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) 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
The Exchange proposes to amend The
Nasdaq Options Market LLC’s (‘‘NOM’’)
Rules at Options 7, Section 3, Nasdaq
Options Market—Ports and Other
Services.3
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
66 17
CFR 200.30–3(a)(12), (57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The Exchange initially filed the proposed
pricing changes on November 28, 2023 (SR–
NASDAQ–2023–050) to be effective on December 1,
2023. On December 5, 2023, the Exchange withdrew
SR–NASDAQ–2023–050 and placed it with SR–
NASDAQ–2023–054. On January 16, 2023, the
Exchange withdrew SR–NASDAQ–2023–054 and
submitted SR–NASDAQ–2024–003. On March 7,
2024, the Exchange withdrew SR–NASDAQ–2024–
003 and submitted this filing.
1 15
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Fmt 4703
Sfmt 4703
21045
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 amend
Options 7, Section 3, Nasdaq Options
Market—Ports and Other Services.
Specifically, the Exchange proposes to
amend Options 7, Section 3(i) to
increase the per port, per month SQF
Port 4 and SQF Purge 5 Port Fees for all
ports over 20 ports (21 and above) from
$500 to $750.6
Today, NOM assesses SQF Ports and
SQF Purge Ports a per port, per month
fee based on a tiered fee schedule.
Specifically, NOM assesses an SQF Port
and an SQF Purge Port fee of $1,500 per
port, per month for the first 5 ports (1–
5), a $1,000 per port, per month fee for
the next 15 ports (6–20), and a $750 per
port, per month fee for all ports over 20
ports (21 and above).
At this time, the Exchange proposes to
amend the per port, per month fee for
SQF Ports and SQF Ports above 20 ports
4 ‘‘Specialized Quote Feed’’ or ‘‘SQF’’ is an
interface that allows Market Makers to connect,
send, and receive messages related to quotes and
Immediate-or-Cancel Orders into and from the
Exchange. Features include the following: (1)
options symbol directory messages (e.g., underlying
instruments); (2) system event messages (e.g., start
of trading hours messages and start of opening); (3)
trading action messages (e.g., halts and resumes); (4)
execution messages; (5) quote messages; (6)
Immediate-or-Cancel Order messages; (7) risk
protection triggers and purge notifications; and (8)
opening imbalance messages. The SQF Purge
Interface only receives and notifies of purge
requests from the Market Maker. Market Makers
may only enter interest into SQF in their assigned
options series. Immediate-or-Cancel Orders entered
into SQF are not subject to the Order Price
Protection, Market Order Spread Protection, or Size
Limitation in Options 3, Section 15(a)(1) and (a)(2),
and (b)(2), respectively. See Options 3, Section
7(e)(1)(B).
5 SQF Purge is a specific port for the SQF
interface that only receives and notifies of purge
requests from the NOM Market Maker.
6 The Exchange also proposes a technical
amendment to remove an extraneous period in
Options 7, Section 3 in the second paragraph.
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Agencies
[Federal Register Volume 89, Number 59 (Tuesday, March 26, 2024)]
[Notices]
[Pages 21032-21045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-06319]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99782; File No. SR-CboeBZX-2023-069]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment No. 1 to, and Designation of a Longer Period for
Commission Action on Proceedings To Determine Whether To Approve or
Disapprove, a Proposed Rule Change To List and Trade Shares of the
VanEck Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares
March 20, 2024.
On September 6, 2023, Cboe BZX Exchange, Inc. (``BZX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
VanEck Ethereum ETF (``Trust'') under BZX Rule 14.11(e)(4), Commodity-
Based Trust Shares. The proposed rule change was published for comment
in the Federal Register on September 26, 2023.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 98457 (Sept. 20,
2023), 88 FR 66076. Comments on the proposed rule change are
available at: https://www.sec.gov/comments/sr-cboebzx-2023-069/srcboebzx2023069.htm.
---------------------------------------------------------------------------
On September 27, 2023, pursuant to Section 19(b)(2) of the Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On December 18, 2023, the Commission instituted proceedings
under Section 19(b)(2)(B) of the Act \6\ to determine whether to
approve or disapprove the proposed rule change.\7\ On February 16,
2024, the Exchange filed Amendment No. 1 to the proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. Amendment No. 1 amended and replaced in its entirety the
proposed rule change as originally submitted. The Commission is
publishing this notice to solicit comments on the proposed rule change,
as modified by Amendment No. 1, from interested persons and to extend
the time period for approving or disapproving the proposed rule change,
as modified by Amendment No. 1.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 98566, 88 FR 68236
(Oct. 3, 2023).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 99195, 88 FR 88683
(Dec. 22, 2023).
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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 VanEck Ethereum
ETF (the ``Trust''),\8\ under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares.
---------------------------------------------------------------------------
\8\ The Trust was formed as a Delaware statutory trust on June
22, 2021 and is operated as a grantor trust for U.S. federal tax
purposes. The Trust has no fixed termination date.
---------------------------------------------------------------------------
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.
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
This Amendment No. 1 to SR-CboeBZX-2023-069 amends and replaces in
its entirety the proposal as originally submitted on September 6, 2023.
The Exchange submits this Amendment No. 1 in order to clarify certain
points and add additional details to the proposal.
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\9\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\10\ VanEck Digital Assets, LLC is
the sponsor of the Trust (``Sponsor''). The Shares will be registered
with the Commission by means of the Trust's registration statement on
Form S-1 (the ``Registration Statement'').\11\
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\9\ 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).
\10\ Any of the statements or representations regarding the
Benchmark 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.
\11\ See Amendment No. 1 to Registration Statement on Form S-1,
dated February 16, 2024, submitted to the Commission by the Sponsor
on behalf of the Trust (333-255888). The descriptions of the Trust,
the Shares, and the Benchmark 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.
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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.\12\ With this in mind, the CME
[[Page 21033]]
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.
---------------------------------------------------------------------------
\12\ 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 proposed funds are nearly identical to the
Trust, but proposed to hold bitcoin instead of ethereum) (``Spot
Bitcoin ETPs'').\13\ By way of background, in 2022 the Commission
disapproved proposals \14\ to list Spot Bitcoin ETPs, including the
Grayscale Order.\15\ 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.\16\ 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:
---------------------------------------------------------------------------
\13\ 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'').
\14\ 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.
\15\ 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'').
\16\ 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.\17\
---------------------------------------------------------------------------
\17\ 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 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, Canada,
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 and
Canada 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.\18\
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\18\ 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.
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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
[[Page 21034]]
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,\19\ Celsius Network LLC,\20\ BlockFi Inc.\21\ and Voyager Digital
Holdings, Inc.\22\ 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 Trust, 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.
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\19\ See FTX Trading Ltd., et al., Case No. 22-11068.
\20\ See Celsius Network LLC, et al., Case No. 22-10964.
\21\ See BlockFi Inc., Case No. 22-19361.
\22\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
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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 could 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),\23\
the Sponsor believes this concern is mitigated to a significant degree
by the custodial arrangements that the Trust 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 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 Trust's ether. After diligent investigation, the Sponsor
believes that the Custodian's policies, procedures, and controls for
safekeeping, exclusively possessing, and controlling the Trust'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.
---------------------------------------------------------------------------
\23\ 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
[[Page 21035]]
means of gaining exposure to ether through transparent, regulated, U.S.
exchange-listed vehicles.
CME Ether Futures \24\
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\24\ 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.\25\ 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.\26\ 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.
---------------------------------------------------------------------------
\25\ 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.
\26\ Source: CME, 7/31/23
---------------------------------------------------------------------------
The number of large open interest holders \27\ and unique accounts
trading CME Ether Futures have both increased, even in the face of
heightened ether price volatility.
---------------------------------------------------------------------------
\27\ 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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[GRAPHIC] [TIFF OMITTED] TN26MR24.001
[[Page 21036]]
[GRAPHIC] [TIFF OMITTED] TN26MR24.002
[GRAPHIC] [TIFF OMITTED] TN26MR24.003
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\28\ including Commodity-Based Trust Shares,\29\ 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;
\30\ 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 21037]]
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.
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\28\ See Exchange Rule 14.11(f).
\29\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\30\ 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.
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(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 \31\ with a regulated market of significant size.
Both the Exchange and CME are members of the Intermarket Surveillance
Group (``ISG'').\32\ 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.\33\
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\31\ 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'').
\32\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\33\ 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.34 35
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\34\ 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.
\35\ According to reports, the Commission is poised to allow the
launch of ETFs registered under the Investment Company Act of 1940,
as amended (the ``1940 Act''), that provide exposure to ETH
primarily through CME Ether Futures (``ETH Futures ETFs'') as early
as October 2023. 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 ETH.
https://www.bloomberg.com/news/articles/2023-08-17/sec-said-to-be-poised-to-allow-us-debut-of-ether-futures-etfs-eth#xj4y7vzkg.
---------------------------------------------------------------------------
(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
\36\ also indicates that this test is satisfied for this proposal. As
noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded
that:
---------------------------------------------------------------------------
\36\ 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'').
. . . 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.\37\
---------------------------------------------------------------------------
\37\ 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 Trust 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.\38\ The Sponsor notes
that ether total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\39\ The Sponsor expects that
the Trust would represent a very small percentage of this daily trading
volume in the spot ether market even in its most aggressive projections
for the Trust's assets 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
[[Page 21038]]
believe it applies equally to the spot ether and CME Ether Futures
markets.
---------------------------------------------------------------------------
\38\ 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.''
\39\ 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. 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.
VanEck Ethereum ETF
Delaware Trust Company is the trustee (``Trustee''). The State
Street Bank and Trust Company will be the administrator
(``Administrator'') and transfer agent (``Transfer Agent'') and will be
responsible for the custody of the Trust's cash and cash equivalents
\40\ (the ``Cash Custodian''). Van Eck Securities Corporation will be
the marketing agent (``Marketing Agent'') in connection with the
creation and redemption of ``Creation Baskets'', as defined below, of
Shares. A custodian (the ``Custodian'') will be responsible for custody
of the Trust's ether.
---------------------------------------------------------------------------
\40\ 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 Trust's net assets.
The Trust'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 Investment Company Act of 1940,
as amended,\41\ nor a commodity pool for purposes of the Commodity
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is
subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the Shares.
---------------------------------------------------------------------------
\41\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------
When the Trust sells or redeems its Shares, it will do so in cash
transactions in blocks of 25,000 Shares (a ``Creation Basket'') at the
Trust'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 Trust. For creations, authorized
participants will deliver cash to the Trust's account with the Cash
Custodian in exchange for Shares. Upon receipt of an approved creation
order, the Sponsor, on behalf of the Trust, 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; the Transfer Agent will only issue ETF shares
when the authorized participant has made delivery of the cash.
Following receipt by the Cash Custodian of the cash from an authorized
participant, the Sponsor, on behalf of the Trust, will approve an order
with one or more previously onboarded trading partners to purchase the
amount of ether represented by the Creation Basket. This purchase of
ether will normally be cleared through an affiliate of the Custodian
(although the purchase may also occur directly with the trading
partner) and the ether will settle directly into the Trust's account at
the Custodian.\42\ 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 Trust'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 Trust.
---------------------------------------------------------------------------
\42\ For redemptions, the process will occur in the reverse
order. Upon receipt of an approved redemption order, the Sponsor, on
behalf of the Trust, 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 50,000 Shares are
received by the Transfer Agent.
---------------------------------------------------------------------------
Investment Objective
According to the Registration Statement and as further described
below, the investment objective of the Trust is for the Shares to
reflect the performance of ether less the expenses of the Trust's
operations. In seeking to achieve its investment objective, the Trust
will hold ether and will value its Shares daily based on the reported
Benchmark and process all creations and redemptions in cash
transactions with authorized participants. The Trust is not actively
managed.
The Benchmark
As described in the Registration Statement, the Fund will use the
Benchmark to calculate the Trust's NAV. The Benchmark is designed to be
a robust price for ETH in USD and there is no component other than ETH
in the Benchmark. The underlying ether platforms are sourced from the
industry leading CryptoCompare Exchange Benchmark review report.
CryptoCompare Exchange Benchmark was established in 2019 as a tool
designed to bring clarity to the digital trading platform sector by
providing a framework for assessing risk and in turn bringing
transparency and accountability to a complex and rapidly evolving
market.\43\ The current ether platform composition of the Benchmark is
Bitstamp, Coinbase, Gemini, itBit, and Kraken. CryptoCompare Data
Limited is the index sponsor and index administrator for the Benchmark.
Data is the calculation agent for the Benchmark. The Benchmark is
calculated daily between 00:00 and 24:00 (CET) and the Benchmark values
are disseminated to
[[Page 21039]]
data vendors every fifteen seconds. The Benchmark is disseminated in
USD and the closing value is calculated at 16:00:00 ET with fixed 16:00
ether platform rates.
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\43\ The CryptoCompare Exchange Benchmark methodology utilizes a
combination of qualitative and quantitative metrics to analyze a
comprehensive data set across eight categories of evaluation legal/
regulation, KYC/transaction risk, data provision, security, team/
exchange, asset quality/diversity, market quality and negative
events. The CryptoCompare Exchange Benchmark review report assigns a
grade to each exchange which helps identify what it believes to be
the lowest risk exchanges in the industry. Based on the
CryptoCompare Exchange Benchmark, MarketVector Indexes initially
selects the top five exchanges by rank for inclusion in the
MarketVectorTM Ethereum Benchmark Rate. If an eligible
exchange is downgraded by two or more notches in a semi-annual
review and is no longer in the top five by rank, it is replaced by
the highest ranked non-component exchange. Adjustments to exchange
coverage are announced four business days prior to the first
business day of each of June and December 23:00 CET. The
MarketVectorTM Ethereum Benchmark Rate is rebalanced at
16:00:00 GMT/BST on the last business day of each of May and
November.
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In calculating the closing price of the Benchmark, the methodology
captures trade prices and sizes from ether platforms and examines
twenty three-minute periods leading up to 4:00 p.m. EST. It then
calculates an equal-weighted average of the volume-weighted median
price of these twenty three-minute periods, removing the highest and
lowest contributed prices. Using twenty consecutive three-minute
segments over a sixty-minute period means malicious actors would need
to sustain efforts to manipulate the market over an extended period of
time, or would need to replicate efforts multiple times across ether
platforms, potentially triggering review. This extended period also
supports authorized participant activity by capturing volume over a
longer time period, rather than forcing authorized participants to mark
an individual close or auction. The use of a median price reduces the
ability of outlier prices to impact the NAV, as it systematically
excludes those prices from the NAV calculation. The use of a volume-
weighted median (as opposed to a traditional median) serves as an
additional protection against attempts to manipulate the NAV by
executing a large number of low-dollar trades, because any manipulation
attempt would have to involve a majority of global spot ETH volume in a
three-minute window to have any influence on the NAV. As discussed in
the Registration Statement, removing the highest and lowest prices
further protects against attempts to manipulate the NAV, requiring bad
actors to act on multiple ether platforms at once to have any ability
to influence the price.
Net Asset Value
NAV means the total assets of the Trust (which includes all ether,
cash, and cash equivalents) less total liabilities of the Trust. The
Administrator determines the NAV of the Trust on each day that the
Exchange is open for regular trading, as promptly as practical after
4:00 p.m. ET based on the Benchmark. The NAV of the Trust is the
aggregate value of the Trust's assets less its estimated accrued but
unpaid liabilities (which include accrued expenses). In determining the
NAV, the Administrator values the Shares of the Trust based on the
closing price of the Benchmark as of 4:00 p.m. Eastern time. The
Administrator also determines the NAV per Share.
The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. The Sponsor will monitor for significant events related to
crypto assets that may impact the value of ether and will determine, in
good faith, and in accordance with its valuation policies and
procedures, whether to fair value the Trust's ether on a given day
based on whether certain pre-determined criteria have been met. For
example, if the Benchmark deviates by more than a pre-determined amount
from an alternate benchmark available to the Sponsor, the Sponsor may
determine to utilize an alternate benchmark, such as the
MarketVector\TM\ Ethereum Index or the S&P Ethereum Index. The Sponsor
may also fair value the Trust's ether using observed market
transactions from various trading platforms, including some or all of
the trading platforms included in the Benchmark.\44\
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\44\ Any alternative method to determining NAV 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.
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Availability of Information
In addition to the price transparency of the Benchmark, the Trust
will provide information regarding the Trust's ETH holdings as well as
additional data regarding the Trust. The website for the Trust, 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 \45\ 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 Trust, 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 Sponsor's website at www.vaneck.com, or any
successor thereto. The NAV for the Trust will be calculated by the
Administrator once a day and will be disseminated daily to all market
participants at the same time. Quotation and last-sale information
regarding the Shares will be disseminated through the facilities of the
Consolidated Tape Association (``CTA''). The Trust will also
disseminate its holdings on a daily basis on its website.
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\45\ 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.
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The Intraday Indicative Value (``IIV'') will be updated during
Regular Trading Hours to reflect changes in the value of the Trust's
ether holdings during the trading day. The IIV may differ from the NAV
because NAV is calculated, using the closing price of the Benchmark,
once a day at 4:00 p.m. Eastern time whereas the IIV draws prices from
the last trade on each ether platform to produce a relevant, real-time
price. 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 Trust will
provide an IIV per Share updated every 15 seconds, as calculated by the
Exchange or a third-party financial data provider during the Exchange's
Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). 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 Benchmark is calculated every 15 seconds and
information about the Benchmark and Benchmark value, including index
data and key elements of how the Benchmark is calculated, will be
publicly available at https://www.marketvector.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
[[Page 21040]]
volume information for the Shares will be published daily in the
financial section of newspapers.
The Custodian
The Custodian's services (i) allow ETH to be deposited from a
public blockchain address to the Trust's ETH account and (ii) allow ETH
to be withdrawn from the ETH account to a public blockchain address as
instructed by the Trust. The custody agreement requires the Custodian
to hold the Trust's ETH in cold storage, unless required to facilitate
withdrawals as a temporary measure. The Custodian will use segregated
cold storage ETH addresses for the Trust which are separate from the
ETH addresses that the Custodian uses for its other customers and which
are directly verifiable via the ETH blockchain. The Custodian will
safeguard the private keys to the ETH associated with the Trust's ETH
account. The Custodian will at all times record and identify in its
books and records that such ETH constitutes the property of the Trust.
The Custodian will not withdraw the Trust's ETH from the Trust's
account with the Custodian, or loan, hypothecate, pledge or otherwise
encumber the Trust's ETH, without the Trust's instruction. If the
custody agreement terminates, the Sponsor may appoint another custodian
and the Trust may enter into a custodian agreement with such custodian.
Creation and Redemption of Shares
When the Trust sells or redeems its Shares, it will do so in cash
transactions in blocks of 25,000 Shares that are based on the amount of
ether held by the Trust on a per unit (i.e., 25,000 Share) basis.
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 must be placed by 4:00 p.m. ET, 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 total deposit of cash required to create each Creation Unit
is an amount of cash that is in the same proportion to the total assets
of the Trust, net of accrued expenses and other liabilities, on the
date the order to purchase is properly received, as the number of
Shares to be created under the purchase order is in proportion to the
total number of Shares outstanding on the date the order is received.
The Administrator determines the required deposit for a given day by
dividing the number of ether held by the Trust 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
Trust 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 Unit.
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 Trust or a third party with respect to purchasing,
holding, delivering, or receiving ether as part of the creation or
redemption process.
The Trust will create shares by receiving ether from a third party
that is not the authorized participant and the Trust--not the
authorized participant--is responsible for selecting the third party to
facilitate the delivery of 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 Trust or acting at the direction of the
authorized participant with respect to the delivery of the ether to the
Trust. When fulfilling a redemption request, the Trust will deliver
ether to a third party that is not the authorized participant and the
Trust--not the authorized participant--is responsible for selecting
such 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 Trust or acting at the direction of
the authorized participant with respect to the receipt of the ether
from the Trust.
The procedures by which an authorized participant can redeem one or
more Creation Baskets mirror the procedures for the creation of
Creation Baskets. A third party, that is unaffiliated with the Trust
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 Trust.
The Sponsor will maintain ownership and control of 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 Trust 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 Trust 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 \46\ 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.
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\46\ 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.
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Upon termination of the Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust Company, is a trust company having
substantial capital and surplus and the experience and facilities for
handling corporate trust business, as required under 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 Trust 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
[[Page 21041]]
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 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 Benchmark 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
Benchmark occurs. If the interruption to the dissemination of the IIV
or the value of the Benchmark 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 Trust 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.\47\ 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.
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\47\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
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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 Trust 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 Trust 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 Trust's NAV are disseminated;
(iv) the risks involved in trading the Shares outside of Regular
Trading Hours \48\ when an updated IIV will not be calculated or
publicly disseminated; (v) the requirement that members deliver a
prospectus to investors purchasing
[[Page 21042]]
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.
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\48\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
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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.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \49\ in general and Section 6(b)(5) of the Act \50\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\49\ 15 U.S.C. 78f.
\50\ 15 U.S.C. 78f(b)(5).
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The Commission has approved numerous series of Trust Issued
Receipts,\51\ including Commodity-Based Trust Shares,\52\ to be listed
on U.S. national securities. 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; \53\ 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.
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\51\ See Exchange Rule 14.11(f).
\52\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\53\ 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.
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(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 \54\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\55\ 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.\56\
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\54\ 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.
\55\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\56\ See Wilshire Phoenix Disapproval.
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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.\57\
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\57\ 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.
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(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
\58\ also
[[Page 21043]]
indicates that this test is satisfied for this proposal. As noted
above, in the Spot Bitcoin ETP Approval Order, the SEC concluded that:
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\58\ 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'').
. . . 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.\59\
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\59\ 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 Trust 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.\60\ The Sponsor notes
that ether total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\61\ The Sponsor expects that
the Trust would represent a very small percentage of this daily trading
volume in the spot ether market even in its most aggressive projections
for the Trust's assets 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.
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\60\ 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.''
\61\ Source: TokenTerminal.
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(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. 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 Trust 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 Trust 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 Benchmark, the Trust
will provide information regarding the Trust's ETH holdings as well as
additional data regarding the Trust. The website for the Trust, 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 \62\ 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 Trust, if shorter); (d) the
prospectus; and (e) other applicable quantitative information. The
aforementioned information will be published as of the close of
business
[[Page 21044]]
available on the Sponsor's website at www.vaneck.com, or any successor
thereto. The NAV for the Trust will be calculated by the Administrator
once a day and will be disseminated daily to all market participants at
the same time. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the Consolidated Tape
Association (``CTA''). The Trust will also disseminate its holdings on
a daily basis on its website.
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\62\ 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.
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The Intraday Indicative Value (``IIV'') will be updated during
Regular Trading Hours to reflect changes in the value of the Trust's
ether holdings during the trading day. The IIV may differ from the NAV
because NAV is calculated, using the closing price of the Benchmark,
once a day at 4:00 p.m. Eastern time whereas the IIV draws prices from
the last trade on each ether platform to produce a relevant, real-time
price. 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 Trust will
provide an IIV per Share updated every 15 seconds, as calculated by the
Exchange or a third-party financial data provider during the Exchange's
Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). 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 Benchmark is calculated every 15 seconds and
information about the Benchmark and Benchmark value, including index
data and key elements of how the Benchmark is calculated, will be
publicly available at https://www.marketvector.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.
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 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. Notice of Designation of a Longer Period for Commission Action on
Proceedings To Determine Whether To Approve or Disapprove the Proposed
Rule Change, as Modified by Amendment No. 1
Section 19(b)(2) of the Act \63\ provides that, after initiating
proceedings, the Commission shall issue an order approving or
disapproving the proposed rule change not later than 180 days after the
date of publication of notice of filing of the proposed rule change.
The Commission may extend the period for issuing an order approving or
disapproving the proposed rule change, however, by not more than 60
days if the Commission determines that a longer period is appropriate
and publishes the reasons for such determination. The proposed rule
change was published for comment in the Federal Register on September
26, 2023.\64\ The 180th day after publication of the proposed rule
change is March 24, 2024. The Commission is extending the time period
for approving or disapproving the proposed rule change for an
additional 60 days.
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\63\ 15 U.S.C. 78s(b)(2).
\64\ See supra note 3 and accompanying text.
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The Commission finds that it is appropriate to designate a longer
period within which to issue an order approving or disapproving the
proposed rule change so that it has sufficient time to consider the
proposed rule change, as
[[Page 21045]]
modified by Amendment No. 1, and the issues raised therein.
Accordingly, the Commission, pursuant to Section 19(b)(2) of the
Act,\65\ designates May 23, 2024, as the date by which the Commission
shall either approve or disapprove the proposed rule change (File No.
SR-CboeBZX-2023-069).
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\65\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 1, 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-2023-069 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-2023-069. 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-CboeBZX-2023-069 and should
be submitted on or before April 16, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\66\
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\66\ 17 CFR 200.30-3(a)(12), (57).
Sherry Haywood,
Assistant Secretary.
[FR Doc. 2024-06319 Filed 3-25-24; 8:45 am]
BILLING CODE 8011-01-P