Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares of the Fidelity Ethereum Fund Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 24519-24534 [2024-07334]

Download as PDF Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange notes that the proposed rule change will facilitate the listing and trading of a new type of CommodityBased Trust Share based on the price of ether that would enhance competition among market participants, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. lotter on DSK11XQN23PROD with NOTICES1 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. 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–NYSEARCA–2024–31 and should be submitted on or before April 29, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.36 J. Matthew DeLesDernier, Deputy Secretary. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: [FR Doc. 2024–07335 Filed 4–5–24; 8:45 am] 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– NYSEARCA–2024–31 on the subject line. Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares of the Fidelity Ethereum Fund Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares 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–NYSEARCA–2024–31. 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/ On November 17, 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 of the Fidelity Ethereum Fund under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The proposed rule change VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–99888; File No. SR– CboeBZX–2023–095] April 2, 2024. 36 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 24519 was published for comment in the Federal Register on December 6, 2023.3 On January 18, 2024, 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 March 4, 2024, 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 March 15, 2024, the Exchange filed Amendment No. 1, which replaced and superseded the proposed rule change in its entirety. Amendment No. 1 to the proposed rule change is described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 1, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BZX Exchange, Inc. (‘‘BZX’’ or the ‘‘Exchange’’) is filing with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) a proposed rule change to list and trade shares of the Fidelity Ethereum Fund (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 3 See Securities Exchange Act Release No. 99045 (Nov. 30, 2023), 88 FR 84840. Comments on the proposed rule change are available at: https:// www.sec.gov/comments/sr-cboebzx-2023-095/ srcboebzx2023095.htm. 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 99390, 89 FR 4639 (Jan. 24, 2024). 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 99667, 89 FR 16804 (Mar. 8, 2024). 8 The Trust was formed as a Delaware statutory trust on October 31, 2023, and is operated as a grantor trust for U.S. federal tax purposes. The Trust has no fixed termination date. E:\FR\FM\08APN1.SGM 08APN1 24520 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change lotter on DSK11XQN23PROD with NOTICES1 1. Purpose This Amendment No. 1 to SR– CboeBZX–2023–095 amends and replaces in its entirety the proposal as originally submitted on November 17, 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 FD Funds Management 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 The Trust will file with the Commission an initial registration statement (the ‘‘Registration Statement’’) on Form S–1 under the Securities Act of 1933 (15 U.S.C. 77a). The description of the operation of the Trust herein is based, in part, on 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 VerDate Sep<11>2014 19:10 Apr 05, 2024 Jkt 262001 Ether Futures market, which launched in February 2021, is the proper market to consider in determining whether there is a related regulated market of significant size. Recently, the Commission issued an order granting approval for proposals to list bitcoin-based commodity trust and bitcoin-based trust issued receipts (these proposed funds are nearly identical to the Trust, but proposed to hold bitcoin instead of ether) (‘‘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 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. 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’’). PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 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: [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 is a network of computers all over the world that follow a set of rules called the Ethereum protocol. The Ethereum protocol creates a unified understanding of ownership, commercial activity, and business logic. This allows users to engage in commerce without the need to trust any of their counterparties. Ethereum code creates verifiable and unambiguous rules that assign clear, strong property rights to create a platform for unrestrained application formation and free exchange. It is widely understood that no single person or entity operates or controls the Ethereum network (referred to as ‘‘decentralization’’), the transaction validation and 16 See Grayscale Investments, LLC v. SEC, 82 F.4th 1239 (D.C. Cir. 2023). 17 See the Spot Bitcoin ETP Approval Order at 3011–3012. E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices recordkeeping infrastructure of which is collectively maintained by a disparate user base. The Ethereum network allows people to exchange tokens of value, including the native asset to the Ethereum network ‘‘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 data storage, trading, and launching applications. 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 and 32 ETH serves as the minimum capital required to run validator software and participate in consensus to add new blocks to the blockchain. 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. 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 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 24521 CME Ether Futures market is a regulated market of significant size. Given the current landscape, approving this proposal (and others like it) and allowing Spot Ether ETPs to be listed and traded alongside Ether Futures ETFs and Spot Bitcoin ETPs would establish a consistent regulatory approach, provide U.S. investors with choice in product structures for ether exposure, and offer flexibility in the means of gaining exposure to ether through transparent, regulated, U.S. exchange-listed vehicles. CME ETH Futures 18 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.19 The contracts trade and settle like other cash-settled commodity futures contracts. Most measurable metrics related to CME ETH Futures have generally trended up since launch, although some metrics have slowed recently. For example, there were 76,293 CME ETH 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.20 The number of large open interest holders 21 and unique accounts trading CME ETH Futures have both increased, even in the face of heightened Ether price volatility. CME Group Ether Futures lOIH so '"' ""'' ' ' ""'""""''""''"'""''""'""'"'""""'"' '"""'"""''"'""""""""""''"""""""'' "'""'"""'' ""'"'"' ' ' '""""''"'"' "'""''"""""'' '""',,,,,,,, 10 ~ 60 S0 ",""""""""'"""''""""'"""~''llrl''II'-,,, £ 40 "''"M'''~~'="""""'''"""'"""""' 'o 30 '"~"""""""""""""""""""""'""""'"'" """"'"""""""""'"" """""" """"'"""'"""""'""""" """'"'" """"'"'"""" "''""""""""""""""""''""'" """"""'""",, '"""""""""'"""'"" , """""'"' j •w""'"'""""""""'-"""""'"""""""""""""-"'""""""'"""""""""""""""""-""""~'""""""'~'""''""'""""""""'"w"""'""""' 10 ""'"'""'""""'"''"'""'""'"""""''"""'"'"''"""""'"""'-""'"'"""'"""''"'""""""""""'"""'""'""""""~"""""'"'"'""""""""""'~"'"""'""""""'-"""""""""""""'"""""""""'""' 0 18 Unless otherwise noted, all data and analysis presented in this section and referenced elsewhere in the filing has been provided by the Sponsor. 19 The CME CF Ether-Dollar Reference Rate is based on a publicly available calculation methodology based on pricing sourced from several VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 crypto trading platforms, including Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital. 20 Source: CME, 7/31/23. 21 A large open interest holder in CME ETH Futures is an entity that holds at least 25 contracts, PO 00000 Frm 00099 Fmt 4703 Sfmt 4725 which is the equivalent of 1250 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 ETH Futures. E:\FR\FM\08APN1.SGM 08APN1 EN08AP24.006</GPH> lotter on DSK11XQN23PROD with NOTICES1 ()~ 24522 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices CME Group Ether Futures cumulative Unique Ac.counts Trading S,000 4,,500 ... 'Ill C: 4,000 ! 31500 ::, QI 3,000 ::, 2,500 1! I 'o 2,000 1,500 1,000 500 I .'iZ t• CME Ether Futures Average Daily Volume (ADV) and Open Interest (01) "' 10,000 500,000 9,000 450,000 8,000 400,000 7,000 350,000 t5 6,000 !!! 1:! 5,000 300,000 0 u 'II, 3,000 2,000 1,000 0 . . ~ I Jlt II n ., .. ■ ADV 0 250,000 ; ""'""'"'" 0 4,000 !w ~ 200,000 ~ ... 150,000 ··. 1 1111 ·, 100,000 5- w 50,000 0 ■ AvgOI CME Ether Futures Average Dally Volume (ADV) and Open lnterset (OI) 1,000,000,000 800,000,000 600,000,000 400,000,000 L C. < ....N C:::I ..... ....N tlll ::I <( ....N .!. u 0 .... r;i u QJ Cl ■ AvgAggOI VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 PO 00000 Frm 00100 N N .6QJ u.. ■ Fmt 4703 N N L C. < N N C: :l ..., N N N N <( u 0 ll.o :l .,!, N N u' QJ Cl ('/') ('/') ('/') N N N u.. <( .... .6G.l L a. Avg Agg Volume Sfmt 4725 E:\FR\FM\08APN1.SGM C: :l m N ll.o :l < EN08AP24.008</GPH> u.. ....N 08APN1 EN08AP24.007</GPH> lotter on DSK11XQN23PROD with NOTICES1 ....N .6QJ EN08AP24.009</GPH> 200,000,000 lotter on DSK11XQN23PROD with NOTICES1 3 V, < Q. Feb-23 3 Apr-23 H ,::: OcFl2 llllil Aug-22 ii'> Jun-22 ::l ("') Oct-22 (") Dec-22 Jun-23 PO 00000 Frm 00101 Fmt 4703 Sfmt 4725 Dec-23 Oct-23 !£. Apr-23 Z" .... ..,roC Jun-23 % of Futures Volume ¾l V, a, j i i ,l)s i ~ w N ,... i ~ 6~ 08APN1 24523 24 List of exchanges used to determine the stated volumes can be found here: https://coverage. coinmetrics.io/exchange-metrics-v2/volume_ reported_spot_usd_1d. E:\FR\FM\08APN1.SGM 0 a 0 activity and ETH CME futures have often represented a larger percentage of global spot volumes compared to the BTC CME futures. Aug-23 Feb-23 J:;! s: Aug-22 I 23 List of exchanges used to determine stated volume can be found here: https://coverage. coinmetrics.io/exchange-metrics-v2/volume_ reported_future_usd_1d. ol Apr-22 2 Reference Rate related spot exchanges. 22 As a result, CME futures represented an increasing amount of ETH/USD spot and futures volumes, up to 55% as of the end of January 2024. Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices Dec-22 , _ Exchange increased from 0.94 to 14.68 USD billion on a monthly basis. At the same time, total Ether spot volume decreased from 25.31 USD billion to 11.98 USD billion on a monthly basis using the CME CF Ether-Dollar < 0 Jun-22 c VJ been as high as 30% of global ETH spot volumes in October 2023. Since the start of 2023, both BTC and ETH CME futures volumes have trended higher in their overall volume share of global futures Feb-22 The market for CFTC-regulated trading of Ether derivatives has developed substantially recently. From February 2021 to January 2024, CFTC regulated Ether futures notional trading volume on Chicago Mercantile Jkt 262001 <ti Apr-22 Vi Feb-22 ,::: ~ Z" Oct-23 Oct-21 Oec-21 0 O" Aug-23 "8 i'l> Cl VJ ;;;, Dec-21 l:i'l Furthermore, while ETH CME futures represent less than 3% of global ETH futures volumes 23 these same futures contracts represent greater than 10% of global ETH spot volumes, 24 and has 16:37 Apr 05, 2024 22 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. VerDate Sep<11>2014 EN08AP24.011</GPH> EN08AP24.010</GPH> Apr-21 ..,.., Oct-21 0 0 0 0 Feb-21 Ill J:;! $ ("') Jun-21 I Aug-21 !!I :t: Volume ,... 8 ~ ..,_; 0 00 er, 0 0 !JI ;:. 0 w N 0 ,... lotter on DSK11XQN23PROD with NOTICES1 24524 er Feb-22 "' Apr-22 ~ S!. .-+ ,:; 0 Jun-22 ('; 0 c:r Oct-22 (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 28 with a regulated Frm 00102 Fmt 4703 Sfmt 4703 Oct-23 Dec-23 market of significant size. Both the Exchange and CME are members of the Intermarket Surveillance Group (‘‘ISG’’).29 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.30 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.31 32 Aug-23 08APN1 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’’). 29 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 30 See Wilshire Phoenix Disapproval. 31 See Winklevoss Order at 37580. The Commission has also specifically noted that it ‘‘is E:\FR\FM\08APN1.SGM 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. 28 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 PO 00000 Jun-23 ~ Apr-23 ~ "' "O Feb-23 ~ Dec-22 $ Aug-22 I ~ (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 ETH 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. 0 Dec-21 s: m -.. i ~ Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices Jkt 262001 ('; Aug-21 I Oct-21 ::t: j i j ~ j ';ff!. 16:37 Apr 05, 2024 -l m Jun-21 w p Section 6(b)(5) and the Applicable Standards The Commission has approved numerous series of Trust Issued Receipts,25 including Commodity-Based Trust Shares,26 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; 27 and Apr-21 w N 25 See Exchange Rule 14.11(f). 26 Commodity-Based Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 27 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 trading platforms 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 trading platforms 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 trading platform or OTC platform. As a result, the VerDate Sep<11>2014 EN08AP24.012</GPH> Feb-21 \II N p V' ... V' .... p \II 0 b Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices (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 the surveilled market to manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct. The Sponsor examined the correlation between the ETH spot price and the CME ETH futures price. In this study, the price of the Futures front month contract, i.e., the contract with the nearest expiration date, is compared to the ETH spot price. The rolling 24525 correlation between the assets with 90 days windows shows that the futures and spot prices are highly correlated and ranged between 0.94 and 0.998. In addition, the daily returns for ETH spot and CME ETH futures are highly correlated. The following charts evidence these relationships. Rolling correlation between ETH spot and CME ETHfutures price L2. ~'ul:2021 • Jan 2022 -- - ·1iiF2hif Jan 2023 .Jul 2023 Jan 2()24 Date ETH spot and CME ETH futures daily returns VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 requirements of the Exchange Act have been met.’’ Id. at 37582. 32 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 ETH Futures (‘‘ETH Futures PO 00000 Frm 00103 Fmt 4703 Sfmt 4725 0.15 0.2 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. E:\FR\FM\08APN1.SGM 08APN1 EN08AP24.014</GPH> 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 ~0.1 -0.05 0 0.05 0;1 Daily CME ETH futures return EN08AP24.013</GPH> lotter on DSK11XQN23PROD with NOTICES1 ~o.:i -0.15 24526 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices Furthermore, the Sponsor examined intra-day correlations for both price and returns using historical pricing data every hour. This study further evidences Exchange Exchange Exchange Exchange Exchange Exchange the high correlation between the ETH/ USD spot price and CME ETH futures across six the CME CF Ether-Dollar Reference Rate related spot exchanges 33 ETH Intraday price Hourly returns BTC Intraday price Hourly returns Spot exchange Sample Sample Spot exchange Sample Sample 1 2 3 4 5 6 ....................................... ....................................... ....................................... ....................................... ....................................... ....................................... 0.985 0.985 0.982 0.981 0.985 0.985 The Sponsor also examined the distribution of hourly returns of spot ETH/USD to CME futures. One approach to detect potential price manipulation involves analyzing price movements on unregulated exchanges compared to the surveilled market. This comparison focuses on identifying abnormal activity such as sudden price spikes or repetitive trades on 0.985 0.985 0.982 0.981 0.985 0.985 Exchange Exchange Exchange Exchange Exchange Exchange 1 2 3 4 5 6 ...................................... ...................................... ...................................... ...................................... ...................................... ...................................... unregulated exchanges. A preliminary analysis of CME data compared to spot exchanges revealed little to no extreme deviation in hourly returns. The following table shows at least 97.9% cases the hourly returns of the spot exchanges from the regulated exchange are within 50 basis points. This suggests a high degree of similarity in price movements between the regulated Hourly return within CME’s for ETH Spot exchange Exchange Exchange Exchange Exchange Exchange Exchange 1 2 3 4 5 6 <200 bps (%) .............................................. .............................................. .............................................. .............................................. .............................................. .............................................. 99.98 100.00 99.96 99.98 99.92 99.98 <100 bps (%) 0.989 0.988 0.986 0.986 0.986 0.987 exchange and the spot exchanges for most hours. Further analysis using Bitcoin data reveals a similar pattern to the Ethereum (ETH) spot exchanges. The Sponsor concludes that the manipulation in the ETP would require the manipulators to participate in the surveilled market. Hourly return within CME’s for BTC <50 bps (%) 99.92 99.83 99.69 99.81 99.71 99.86 0.999 0.999 0.999 0.999 0.999 0.999 <200 bps (%) 98.63 98.51 97.89 98.32 98.32 98.51 99.96 99.96 99.96 99.98 99.94 99.98 <100 bps (%) 99.94 99.92 99.85 99.88 99.85 99.92 <50 bps (%) 99.46 99.38 98.99 99.27 99.25 99.28 manipulative acts and practices in the specific context of the [p]roposals.35 trading on the relevant spot markets on the pricing of CME Ether Futures. . . . fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact CME bitcoin futures prices. And because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME . . . can be reasonably expected to assist in surveilling for fraudulent and 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 (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 ETH Futures market for a number of reasons. First, because the Trust would not hold CME ETH Futures contracts, the only way that it could be the predominant force on prices in that market is through the spot markets that CME ETH Futures contracts use for pricing.36 The Sponsor notes that ETH total 24-hour spot trading volume has averaged $9.4 billion over the year ending September 1, 2023.37 The Sponsor expects that the Trust would represent a very small percentage of this daily trading volume in the spot ETH 33 The six exchanges are Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital. 34 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’’). 35 See the Spot Bitcoin ETP Approval Order at 3011–3012. 36 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.’’ 37 Source: TokenTerminal. 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 34 also indicates that this test is satisfied for this proposal. As noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded that: lotter on DSK11XQN23PROD with NOTICES1 with hourly return correlations above 0.98. VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 market even in its most aggressive projections for the Trust’s assets and, thus, the Trust would not have an impact on the spot market and therefore could not be the predominant force on prices in the CME ETH Futures market. Second, much like the CME Bitcoin Futures market, the CME ETH 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 ETH and CME ETH 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 into the tens of billions of dollars and more than a billion dollars of exposure through Ether Futures ETFs. With that growth, so too has grown the quantifiable investor protection issues to U.S. investors through roll costs for Ether Futures ETFs and premium/ discount volatility and management fees for OTC ETH Funds. The Exchange believes that the concerns related to the prevention of fraudulent and manipulative acts and practices have been sufficiently addressed to be consistent with the Act and, to the extent that the Commission disagrees with that assertion, also believes that such concerns are now outweighed by these investor protection concerns. As such, the Exchange believes that approving this proposal (and comparable proposals) provides the Commission with the opportunity to allow U.S. investors with access to ether in a regulated and transparent exchangetraded vehicle that would act to limit risk to U.S. investors by: (i) reducing premium and discount volatility; (ii) reducing management fees through meaningful competition; (iii) reducing risks and costs associated with investing in Ether Futures ETFs and operating companies that are imperfect proxies for ether exposure; and (iv) providing an alternative to custodying spot ether. VerDate Sep<11>2014 17:11 Apr 05, 2024 Jkt 262001 Fidelity Ethereum Fund The Registration Statement includes the following description of the Trust and its operations. The Trust will issue Shares that represent fractional undivided beneficial interests in and ownership of the Trust. The Trust is a Delaware statutory trust that operates pursuant to the Declaration of Trust and Trust Agreement (the ‘‘Trust Agreement’’), between Sponsor and Delaware Trust Company, the Delaware trustee of the Trust (the ‘‘Trustee’’). Sponsor manages the Trust and is responsible for the ongoing registration of the Shares. The Trust will engage Fidelity Service Company, Inc. (‘‘FSC’’), a Sponsor affiliate, to be the administrator (‘‘Administrator’’). The transfer agent and cash custodian (the ‘‘Transfer Agent’’ and ‘‘Cash Custodian’’) will facilitate the issuance and redemption of Shares of the Trust and respond to correspondence by Trust shareholders and others relating to its duties, maintain shareholder accounts, and make periodic reports to the Trust. Another affiliate of Sponsor, Fidelity Distributors Company LLC, will be the distributor (‘‘Distributor’’) in connection with the creation and redemption of ‘‘Creation Baskets’’ of Shares. The Sponsor will provide assistance in the marketing of the Shares. Fidelity Digital Asset Services, LLC (‘‘FDAS’’), another Sponsor affiliate, will serve as the Custodian. According to the Registration Statement, each Share will represent a fractional undivided beneficial interest in the Trust. The Trust’s assets will only consist of ether, cash, and cash equivalents.38 Except for cash temporarily held to pay Trust expenses, facilitate redemption transactions, or received in creation transactions, the Trust will only invest in ETH. According to the Registration Statement, the Trust is neither an investment company registered under the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’),39 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. According to the Registration Statement, the Sponsor may, from time to time, stake a portion of the Fund’s assets through one or more trusted staking providers, which may include an affiliate of the Sponsor (‘‘Staking Providers’’). In consideration for any 38 Cash equivalents are short-term instruments with maturities of less than 3 months. 39 15 U.S.C. 80a–1. PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 24527 staking activity in which the Fund may engage, the Fund would receive certain network rewards of ether tokens, which may be treated as income to the Fund as compensation for services provided. Investment Objective According to the Registration Statement, the investment objective of the Trust is to seek to track the performance of ETH, as measured by the performance of the Fidelity Ethereum Reference Rate (the ‘‘Index’’), less the Trust’s expenses and other liabilities. In seeking to achieve its investment objective, the Trust will hold ETH, cash, and cash equivalents and will value its Shares daily as of 4:00 p.m. Eastern time using the Index price to value the ether and process all creations and redemptions in transactions in cash transactions with authorized participants. The Trust is not actively managed. The Index The Index is designed to reflect the performance of ETH in U.S. dollars. The current digital trading platform composition of the Index is Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital. The Index methodology was developed by Fidelity Product Services, LLC (the ‘‘Index Provider’’) and is administered by the Fidelity Index Committee. Coin Metrics, Inc. is the third-party calculation agent for the Index.40 The Index is constructed using ETH price feeds from eligible ETH spot markets and a volume-weighted median price (‘‘VWMP’’) methodology, calculated every 15 seconds based on VWMP spot market data over rolling sixty-minute increments to develop an ETH price composite. The Index market value is the volume-weighted median price of ETH in U.S. dollars over the previous sixty minutes, which is calculated by (1) ordering all individual transactions on eligible spot markets over the previous sixty minutes by price, and then (2) selecting the price associated with the 50th percentile of total volume. Using rolling sixty-minute segments means malicious actors would need to sustain efforts to manipulate the market over an extended period of time, or such malicious actors would need to replicate efforts multiple times across eligible ETH spot markets, 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 40 The Sponsor’s affiliates have an ownership interest in Coin Metrics, Inc. E:\FR\FM\08APN1.SGM 08APN1 24528 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices 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 sixtyminute window to have any influence on the NAV. Index data and the description of the Index are based on information made publicly available by the Index Provider on its website at i.fidelity.com/indices. lotter on DSK11XQN23PROD with NOTICES1 Net Asset Value As described in the Registration Statement, for purposes of calculating the Trust’s NAV per Share, the Trust’s holdings of ETH will be valued using the Index value as of 4:00 p.m. Eastern time. NAV means the total assets of the Trust which will include only ETH, cash, and cash equivalents, if any, less total liabilities of the Trust, each determined on the basis of generally accepted accounting principles. The Administrator calculates the NAV of the Trust once each Exchange trading day. The NAV for a normal trading day will be released after 4:00 p.m. Eastern time. Trading during the core trading session on the Exchange typically closes at 4:00 p.m. Eastern time. However, NAVs are not officially struck until later in the day (often by 5:30 p.m. Eastern time and almost always by 8:00 p.m. Eastern time). The pause between 4:00 p.m. Eastern time and 5:30 p.m. Eastern time (or later) provides an opportunity to algorithmically detect, flag, investigate, and correct unusual pricing should it occur. 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. If the Sponsor determines in good faith that the Index does not reflect an accurate ETH price, then the Trust will cause to be employed an alternative method to determine the fair value of the Trust’s assets as reviewed and approved by the Sponsor’s valuation committee.41 Availability of Information In addition to the price transparency of the Index, the Trust will provide information regarding the Trust’s ETH 41 Such alternative method will only be employed on an ad hoc basis. Any permanent change to the calculation of the NAV would require a proposed rule change under Rule 19b–4. VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 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 42 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 other applicable quantitative information. The Trust will also disseminate its holdings on a daily basis on its website. The aforementioned information will be published as of the close of business and available on the Sponsor’s website at www.fidelity.com, or any successor thereto. The Trust will provide an Intraday Indicative Value (‘‘IIV’’) per Share updated every 15 seconds, as calculated by the Exchange or a third-party financial data provider during the Exchange’s Regular Trading Hours (9:30 a.m. to 4:00 p.m. Eastern time). 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 IIV calculation agent will use the Trust’s ETH holdings and cash and cash equivalents expected to comprise that day’s NAV calculation to calculate the IIV. The calculation agent currently uses the Blockstream Crypto Data Feed Streaming Level 1 43 as the pricing source for the spot ETH, which will be used to update the IIV. 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 price of ETH will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. 42 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. 43 Blockstream provides cryptocurrency data feeds delivering real-time and historical trade data from the world’s leading cryptocurrency venues. See blockstream.com/cryptofeed. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 The value of the Index will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. As noted above, the Index is calculated every day and is constructed using ETH price feeds from eligible ETH spot markets and a VWMP methodology, calculated every 15 seconds based on VWMP spot market data over rolling sixty-minute increments. Information about the Index and Index value, including key elements of how the Index is calculated, will be publicly available at i.fidelity.com/ indices. Quotation and last sale information for ETH 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 ETH is available from major market data vendors and from the trading platforms on which ETH are traded. Depth of book information is also available from ETH trading platforms. The normal trading hours for ETH trading platforms are 24 hours per day, 365 days per year. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the Consolidated Tape Association (‘‘CTA’’). The ETH Custodian The Sponsor has selected FDAS to be the Trust’s Custodian. FDAS is a New York state limited liability trust 44 that serves as ETH custodian to institutional and individual investors. The Custodian maintains a substantial portion of the private keys associated with the Trust’s ETH in ‘‘cold storage’’ or similarly secure technology. Cold storage is a safeguarding method with multiple 44 New York state trust companies are subject to rigorous oversight similar to other types of entities, such as nationally chartered banking entities, that hold customer assets. Like national banks, they must obtain specific approval of their primary regulator for the exercise of their fiduciary powers. Moreover, limited purpose trust companies engaged in the custody of digital assets are subject to even more stringent requirements than national banks which, following initial approval of trust powers, generally can exercise those powers broadly without further approval of the OCC. In contrast, NYDFS requires in their approval orders that limited purpose trust companies obtain separate approval for all material changes in business. E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 layers of protections and protocols, by which the private key(s) corresponding to the Trust’s ETH is (are) generated and stored in an offline manner. Private keys are generated in offline computers that are not connected to the internet so that they are resistant to being hacked. Cold storage of private keys may involve keeping such keys on a non-networked computer or electronic device or storing the public key and private keys on a storage device or printed medium and deleting the keys from all computers. The Custodian may receive deposits of ETH but may not send ETH without use of the corresponding private keys. In order to send ETH when the private keys are kept in cold storage, either the private keys must be retrieved from cold storage and entered into a software program to sign the transaction, or the unsigned transaction must be sent to the ‘‘cold’’ server in which the private keys are held for signature by the private keys. At that point, the Custodian can transfer the ETH. The Trust’s Transfer Agent will facilitate the settlement of Shares in response to the placement of creation orders and redemption orders from authorized participants. The Trust will only hold ETH, cash and cash equivalents. The Trust will enter into a cash custody agreement with the Cash Custodian as custodian of the Trust’s cash and cash equivalents. 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 (a ‘‘Creation Basket’’) that are based on the amount of ETH 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 close of Regular Trading Hours on the Exchange or an earlier time as determined and communicated by the Sponsor and its agent. The day on which an order is received is considered the purchase order date. The total deposit of cash required is an amount of cash sufficient to purchase such amount of ETH, the amount of which is equal to the combined NAV of the number of Shares included in the Creation Baskets being created determined as of 4:00 p.m. ET on the date the order to purchase is properly received. The Administrator determines the required deposit for a given day by dividing the number of ETH held by the Trust as of the opening of business on that business day, adjusted for the amount of ETH constituting estimated accrued but unpaid fees and expenses of the Trust VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 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 aggregation of Shares associated with a Creation Basket. The procedures by which an authorized participant can redeem one or more Creation Baskets mirror the procedures for the creation of Creation Baskets. The authorized participants will deliver only cash to create shares and will receive only cash when redeeming shares. Further, authorized participants will not directly or indirectly purchase, hold, deliver, or receive ETH 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 ETH as part of the creation or redemption process. The Trust will create shares by receiving ETH 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 deliver the ETH. Further, the third party will not be acting as an agent of the authorized participant with respect to the delivery of the ETH to the Trust or acting at the direction of the authorized participant with respect to the delivery of the ETH to the Trust. The Trust will redeem shares by delivering ETH to a third party that is not the authorized participant and the Trust— not the authorized participant—is responsible for selecting the third party to receive the ETH. Further, the third party will not be acting as an agent of the authorized participant with respect to the receipt of the ETH from the Trust or acting at the direction of the authorized participant with respect to the receipt of the ETH 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 ETH to create Shares or withdraw and sell ETH for cash to redeem Shares, on behalf of the Trust. The Sponsor will maintain ownership and control of ETH 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, PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 24529 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 45 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 45 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. E:\FR\FM\08APN1.SGM 08APN1 24530 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 Shares must file with the Exchange in a manner prescribed by the Exchange and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, which the registered Market Maker may have or over which it may exercise investment discretion. No registered Market Maker shall trade in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, in an account in which a registered Market Maker, directly or indirectly, controls trading activities, or has a direct interest in the profits or losses thereof, which has not been reported to the Exchange as required by this Rule. In addition to the existing obligations under Exchange rules regarding the production of books and records (see, e.g., Rule 4.2), the registered Market Maker in CommodityBased Trust Shares shall make available to the Exchange such books, records or other information pertaining to 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 ETH, ETH Futures contracts, options on ETH Futures, or any other ETH 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 VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 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 ETH underlying the Shares; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances under which trading in the Shares may be halted. If the IIV or the value of the Index is not being disseminated as required, the Exchange may halt trading during the day in which the interruption to the dissemination of the IIV or the value of the Index occurs. If the interruption to the dissemination of the IIV or the value of the Index persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption. In addition, if the Exchange becomes aware that the NAV with respect to the Shares is not disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. BZX will allow trading in the Shares during all trading sessions on the Exchange. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in BZX Rule 11.11(a) the minimum price variation for quoting and entry of orders in securities traded on the Exchange is $0.01 where the price is greater than $1.00 per share or $0.0001 where the price is less than $1.00 per share. The Shares of the 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 PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 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 ETH 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 ETH Futures from such markets and other entities.46 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. The Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (i) the procedures for the creation and redemption of Creation Baskets (and that the Shares are not individually redeemable); (ii) BZX Rule 3.7, which imposes suitability obligations on Exchange members with respect to recommending transactions in the Shares to customers; (iii) how information regarding the IIV and the Trust’s NAV are disseminated; (iv) the risks involved in trading the Shares outside of Regular Trading Hours 47 when an updated IIV will not be calculated or publicly disseminated; (v) the requirement that members deliver a 46 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 47 Regular Trading Hours is the time between 9:30 a.m. and 4:00 p.m. Eastern Time. E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (vi) trading information. The Information Circular will also reference the fact that there is no regulated source of last sale information regarding ETH, that the Commission has no jurisdiction over the trading of ETH as a commodity, and that the CFTC has regulatory jurisdiction over the trading of ETH Futures contracts and options on ETH 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 48 in general and section 6(b)(5) of the Act 49 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, including Commodity-Based Trust Shares, 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; 50 and 48 15 U.S.C. 78f. U.S.C. 78f(b)(5). 50 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 lotter on DSK11XQN23PROD with NOTICES1 49 15 VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 (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 and, as described and discussed above, the Sponsor’s analysis demonstrates that the Exchange has satisfied the requirements under the Act that the CME ETH Futures Market (i) is a regulated market, (ii) has a comprehensive surveillance-sharing agreement with the Exchange; and (iii) satisfies the Commission’s ‘‘significant market’’ definition.’’ In addition, the Exchange believes that this proposal is consistent with the requirements of section 6(b)(5) of the Act because this filing sufficiently demonstrates that the standard that has previously been articulated by the Commission applicable to Commodity-Based Trust Shares has been met as outlined below. (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 51 with a regulated 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 trading platforms 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 trading platforms 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 trading platform 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. 51 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 PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 24531 market of significant size. Both the Exchange and CME are members of ISG.52 As such, 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.53 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.54 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 55 also 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. 52 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 53 See Wilshire Phoenix Disapproval. 54 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. 55 See Exchange Act Release No. 99306 (January 10, 2024), 89 FR 3008 (January 17, 2024) (Self- E:\FR\FM\08APN1.SGM Continued 08APN1 24532 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices 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.56 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 lotter on DSK11XQN23PROD with NOTICES1 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.57 The Sponsor notes that ether total 24-hour spot trading volume has averaged $9.4 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 BitcoinBased Commodity-Based Trust Shares and Trust Units) (the ‘‘Spot Bitcoin ETP Approval Order’’). 56 See the Spot Bitcoin ETP Approval Order at 3011–3012. 57 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.’’ VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 billion over the year ending September 1, 2023.58 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, thus, the Trust would not have an impact on the spot market and therefore could not be the predominant force on prices in the CME Ether Futures market. Second, much like the CME Bitcoin Futures market, the CME Ether Futures market has progressed and matured significantly. As the court found in the Grayscale Order, ‘‘Because the spot market is deeper and more liquid than the futures market, manipulation should be more difficult, not less.’’ The Exchange and Sponsor agree with this sentiment and believe it applies equally to the spot ether and CME Ether Futures markets. (c) Other Means To Prevent Fraudulent and Manipulative Acts and Practices As noted above, the Commission also permits a listing exchange to demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement. The Exchange and Sponsor believe that such conditions are present. The Exchange believes that the proposal is designed to protect investors and the public interest. Over the past several years, U.S. investor exposure to ether through OTC ETH Funds has grown into the tens of billions of dollars and more than a billion dollars of exposure through Ether Futures ETFs. With that growth, so too has grown the quantifiable investor protection issues to U.S. investors through roll costs for Ether Futures ETFs and premium/ discount volatility and management fees for OTC ETH Funds. The Exchange believes that the concerns related to the prevention of fraudulent and manipulative acts and practices have been sufficiently addressed to be consistent with the Act and, to the extent that the Commission disagrees with that assertion, also believes that such concerns are now outweighed by these investor protection concerns. As such, the Exchange believes that approving this proposal (and comparable proposals) provides the Commission with the opportunity to allow U.S. investors with access to ether in a regulated and transparent exchangetraded vehicle that would act to limit risk to U.S. investors by: (i) reducing premium and discount volatility; (ii) reducing management fees through 58 Source: PO 00000 TokenTerminal. Frm 00110 Fmt 4703 Sfmt 4703 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—Rule 14.11(e)(4) 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 ETH 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 The Exchange also believes that the proposal promotes market transparency in that a large amount of information is currently available about ETH and will be available regarding the Trust and the Shares. In addition to the price transparency of the Index, 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 E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 Official Closing Price 59 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 other applicable quantitative information. The Trust will also disseminate its holdings on a daily basis on its website. The aforementioned information will be published as of the close of business and available on the Sponsor’s website at www.fidelity.com, or any successor thereto. The Trust will provide an Intraday Indicative Value (‘‘IIV’’) per Share updated every 15 seconds, as calculated by the Exchange or a third-party financial data provider during the Exchange’s Regular Trading Hours (9:30 a.m. to 4:00 p.m. Eastern time). 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 IIV calculation agent will use the Trust’s ETH holdings and cash and cash equivalents expected to comprise that day’s NAV calculation to calculate the IIV. The calculation agent currently uses the Blockstream Crypto Data Feed Streaming Level 1 60 as the pricing source for the spot ETH, which will be used to update the IIV. 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 price of ETH will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. The value of the Index will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. As noted above, the Index is calculated every day and is constructed using ETH price feeds from eligible ETH 59 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. 60 Blockstream provides cryptocurrency data feeds delivering real-time and historical trade data from the world’s leading cryptocurrency venues. See blockstream.com/cryptofeed. VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 spot markets and a VWMP methodology, calculated every 15 seconds based on VWMP spot market data over rolling sixty-minute increments. Information about the Index and Index value, including key elements of how the Index is calculated, will be publicly available at i.fidelity.com/ indices. Quotation and last sale information for ETH 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 ETH is available from major market data vendors and from the trading platforms on which ETH are traded. Depth of book information is also available from ETH trading platforms. The normal trading hours for ETH trading platforms are 24 hours per day, 365 days per year. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the Consolidated Tape Association (‘‘CTA’’). 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 ETH 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. 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. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 24533 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. III. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– CboeBZX–2023–095 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–2023–095. 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 E:\FR\FM\08APN1.SGM 08APN1 24534 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices SR–CboeBZX–2023–095 and should be submitted on or before April 29, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.61 J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2024–07334 Filed 4–5–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–99887; File No. SR– NYSEARCA–2023–70] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares of the Grayscale Ethereum Trust April 2, 2024. On October 10, 2023, NYSE Arca, Inc. (‘‘NYSE Arca’’ 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 of the Grayscale Ethereum Trust under NYSE Arca Rule 8.201–E (Commodity-Based Trust Shares). The proposed rule change was published for comment in the Federal Register on October 27, 2023.3 On December 5, 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 January 25, 2024, 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 March 15, 2024, the Exchange filed Amendment No. 1, which replaced and superseded the proposed rule change in its entirety. Amendment No. 1 to the proposed rule change is described in Items I and II below, which Items have been prepared 61 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. 98780 (Oct. 23, 2023), 88 FR 73892. Comments on the proposed rule change are available at: https:// www.sec.gov/comments/sr-nysearca-2023-70/ srnysearca202370.htm. 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 99082, 88 FR 85962 (Dec. 11, 2023). 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 99428, 89 FR 6155 (Jan. 31, 2024). lotter on DSK11XQN23PROD with NOTICES1 1 15 VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 1, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade shares of the following under NYSE Arca Rule 8.201–E: Grayscale Ethereum Trust (ETH) (the ‘‘Trust’’).8 This Amendment No. 1 to SR– NYSEARCA–2023–70 replaces SR– NYSEARCA–2023–70 as originally filed and supersedes such filing in its entirety. The proposed rule change is available on the Exchange’s website at www.nyse.com, at the principal office of the Exchange, 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 self-regulatory organization 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 those statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose Under NYSE Arca Rule 8.201–E, the Exchange may propose to list and/or trade pursuant to unlisted trading privileges ‘‘Commodity-Based Trust Shares.’’ 9 The Exchange proposes to list and trade shares (‘‘Shares’’) 10 of the Trust pursuant to NYSE Arca Rule 8.201–E.11 8 The Trust was previously named Ethereum Investment Trust, whose name was changed pursuant to a Certificate of Amendment to the Certificate of Trust of Ethereum Investment Trust filed with the Delaware Secretary of State on January 11, 2019. 9 Commodity-Based Trust Shares are securities issued by a trust that represent investors’ discrete identifiable and undivided beneficial ownership interest in the commodities deposited into the Trust. 10 The Shares are expected to be listed under the ticker symbol ‘‘ETH.’’ 11 On April 17, 2020, the Trust confidentially filed its draft registration statement on Form 10 under the ’34 Act) (File No. 377–03131) (the ‘‘Draft Registration Statement on Form 10’’). On June 16, PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 The Trust is the world’s largest Ethereum (‘‘ETH’’) investment fund by assets under management as of the date of this filing. The Trust has approximately $11.8 billion in assets under management 12 (representing 2.5% of all ETH in circulation), its 2020, the Trust confidentially filed Amendment No. 1 to the Draft Registration Statement on Form 10. The Jumpstart Our Business Startups Act (the ‘‘JOBS Act’’), enacted on April 5, 2012, added section 6(e) to the Securities Act of 1933 (the ‘‘Securities Act’’ or ‘‘’33 Act’’). section 6(e) of the Securities Act provides that an ‘‘emerging growth company’’ may confidentially submit to the Commission a draft registration statement for confidential, non-public review by the Commission staff prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed not later than 21 days before the date on which the issuer conducts a road show, as such term is defined in Securities Act Rule 433(h)(4). An emerging growth company is defined in section 2(a)(19) of the Securities Act as an issuer with less than $1,000,000,000 total annual gross revenues during its most recently completed fiscal year. The Trust meets the definition of an emerging growth company and consequently submitted its Draft Registration Statement on Form 10 to the Commission on a confidential basis. On August 6, 2020, the Trust filed its registration statement on Form 10 under the Securities Act (File No. 000– 56193) (the ‘‘Registration Statement on Form 10’’). On October 2, 2020, the Trust filed Amendment No. 1 to the Registration Statement on Form 10. On, October 5, 2020, the Registration Statement on Form 10 was automatically deemed effective. On March 5, 2021, February 25, 2022, March 1, 2023, and February 23, 2024, the Trust filed its annual report on Form 10–K under the Securities Act (File No. 000–56193) (the ‘‘Annual Reports’’). On November 6, 2020, May 7, 2021, August 6, 2021, November 5, 2021, May 6, 2022, August 5, 2022, November 4, 2022, May 5, 2023, August 4, 2023, and November 3, 2023, the Trust filed its quarterly reports on Form 10–Q under the Securities Act (File No. 000–56193) (the ‘‘Quarterly Reports’’). The descriptions of the Trust, the Shares, and ETH contained herein are based, in part, on the Annual Reports and Quarterly Reports. On January 17, 2019, the Trust submitted to the Commission an amended Form D as a business trust. Shares of the Trust have been quoted on OTC Market’s OTCQX Best Marketplace under the symbol ‘‘ETHE’’ since June 20, 2019. On May 23, 2019 and March 20, 2020, the Trust published annual reports for ETHE for the periods ended December 31, 2018 and December 31, 2019, respectively. On May 23, 2019, August 8, 2019, November 11, 2019, May 8, 2020, and August 6, 2020, the Trust published quarterly reports for ETHE for the periods ended March 31, 2019, June 30, 2019, September 30, 2019, March 31, 2020, and June 30, 2020, respectively. Reports published before October 5, 2020, the date on which the Trust’s Shares became registered pursuant to section 12(g) of the Act, can be found on OTC Market’s website (https:// www.otcmarkets.com/stock/ETHE/disclosure), and reports published on or after October 5, 2020 can be found on OTC Market’s website and the Commission’s website (https://www.sec.gov/edgar/ browse/?CIK=1725210&owner=exclude). The Shares will be of the same class and will have the same rights as shares of ETHE. According to the Sponsor, freely tradeable shares of ETHE will remain freely tradeable Shares on the date of the listing of the Shares that are unregistered under the Securities Act. Restricted shares of ETHE will remain subject to private placement restrictions on such date, and the holders of such restricted shares will continue to hold those Shares subject to those restrictions until they become freely tradable Shares. 12 As of March 13, 2024. E:\FR\FM\08APN1.SGM 08APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 68 (Monday, April 8, 2024)]
[Notices]
[Pages 24519-24534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-07334]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99888; File No. SR-CboeBZX-2023-095]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade
Shares of the Fidelity Ethereum Fund Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares

April 2, 2024.
On November 17, 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 of the Fidelity Ethereum
Fund under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The
proposed rule change was published for comment in the Federal Register
on December 6, 2023.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 99045 (Nov. 30,
2023), 88 FR 84840. Comments on the proposed rule change are
available at: https://www.sec.gov/comments/sr-cboebzx-2023-095/srcboebzx2023095.htm.
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On January 18, 2024, 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 March 4, 2024, 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 March 15, 2024,
the Exchange filed Amendment No. 1, which replaced and superseded the
proposed rule change in its entirety. Amendment No. 1 to the proposed
rule change is described in Items I and II below, which Items have been
prepared by the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change, as modified by Amendment
No. 1, from interested persons.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 99390, 89 FR 4639
(Jan. 24, 2024).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 99667, 89 FR 16804
(Mar. 8, 2024).
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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 Fidelity
Ethereum Fund (the ``Trust''),\8\ under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares.
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\8\ The Trust was formed as a Delaware statutory trust on
October 31, 2023, and is operated as a grantor trust for U.S.
federal tax purposes. The Trust has no fixed termination date.
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The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

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

[[Page 24520]]

proposed rule change. The text of these statements may be examined at
the places specified in Item III 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-2023-095 amends and replaces in
its entirety the proposal as originally submitted on November 17, 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\ FD Funds Management 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\ The Trust will file with the Commission an initial
registration statement (the ``Registration Statement'') on Form S-1
under the Securities Act of 1933 (15 U.S.C. 77a). The description of
the operation of the Trust herein is based, in part, on 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 Ether
Futures market, which launched in February 2021, is the proper market
to consider in determining whether there is a related regulated market
of significant size.
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\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.
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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 ether) (``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:
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\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\
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\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 is a network of computers all over the world that follow a
set of rules called the Ethereum protocol. The Ethereum protocol
creates a unified understanding of ownership, commercial activity, and
business logic. This allows users to engage in commerce without the
need to trust any of their counterparties. Ethereum code creates
verifiable and unambiguous rules that assign clear, strong property
rights to create a platform for unrestrained application formation and
free exchange. It is widely understood that no single person or entity
operates or controls the Ethereum network (referred to as
``decentralization''), the transaction validation and

[[Page 24521]]

recordkeeping infrastructure of which is collectively maintained by a
disparate user base. The Ethereum network allows people to exchange
tokens of value, including the native asset to the Ethereum network
``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 data
storage, trading, and launching applications. 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 and 32 ETH serves as the minimum
capital required to run validator software and participate in consensus
to add new blocks to the blockchain.
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.
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 any concerns
related to preventing fraudulent and manipulative acts and practices
related to Spot Ether ETPs would apply equally to the spot markets
underlying the futures contracts held by an Ether Futures ETF. Both the
Exchange and Sponsor believe that the CME Ether Futures market is a
regulated market of significant size and that such manipulation
concerns are mitigated, as described extensively below. After allowing
the listing and trading of Ether Futures ETFs that hold primarily CME
Ether Futures, however, the only consistent outcome would be approving
Spot Ether ETPs on the basis that the CME Ether Futures market is a
regulated market of significant size.
Given the current landscape, approving this proposal (and others
like it) and allowing Spot Ether ETPs to be listed and traded alongside
Ether Futures ETFs and Spot Bitcoin ETPs would establish a consistent
regulatory approach, provide U.S. investors with choice in product
structures for ether exposure, and offer flexibility in the means of
gaining exposure to ether through transparent, regulated, U.S.
exchange-listed vehicles.
CME ETH Futures \18\
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\18\ Unless otherwise noted, all data and analysis presented in
this section and referenced elsewhere in the filing has been
provided by the Sponsor.
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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.\19\ The contracts trade and settle like other cash-
settled commodity futures contracts. Most measurable metrics related to
CME ETH Futures have generally trended up since launch, although some
metrics have slowed recently. For example, there were 76,293 CME ETH
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.\20\
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\19\ 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.
\20\ Source: CME, 7/31/23.
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The number of large open interest holders \21\ and unique accounts
trading CME ETH Futures have both increased, even in the face of
heightened Ether price volatility.
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\21\ A large open interest holder in CME ETH Futures is an
entity that holds at least 25 contracts, which is the equivalent of
1250 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 ETH Futures.
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The market for CFTC-regulated trading of Ether derivatives has
developed substantially recently. From February 2021 to January 2024,
CFTC regulated Ether futures notional trading volume on Chicago
Mercantile Exchange increased from 0.94 to 14.68 USD billion on a
monthly basis. At the same time, total Ether spot volume decreased from
25.31 USD billion to 11.98 USD billion on a monthly basis using the CME
CF Ether-Dollar Reference Rate related spot exchanges.\22\ As a result,
CME futures represented an increasing amount of ETH/USD spot and
futures volumes, up to 55% as of the end of January 2024.
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\22\ 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.
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Furthermore, while ETH CME futures represent less than 3% of global
ETH futures volumes \23\ these same futures contracts represent greater
than 10% of global ETH spot volumes,\24\ and has been as high as 30% of
global ETH spot volumes in October 2023. Since the start of 2023, both
BTC and ETH CME futures volumes have trended higher in their overall
volume share of global futures activity and ETH CME futures have often
represented a larger percentage of global spot volumes compared to the
BTC CME futures.
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\23\ List of exchanges used to determine stated volume can be
found here: https://coverage.coinmetrics.io/exchange-metrics-v2/volume_reported_future_usd_1d.
\24\ List of exchanges used to determine the stated volumes can
be found here: https://coverage.coinmetrics.io/exchange-metrics-v2/volume_reported_spot_usd_1d.
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Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\25\ including Commodity-Based Trust Shares,\26\ 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;
\27\ 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 ETH 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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\25\ See Exchange Rule 14.11(f).
\26\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\27\ 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 trading platforms 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
trading platforms 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 trading
platform 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 \28\ with a regulated market of significant size.
Both the Exchange and CME are members of the Intermarket Surveillance
Group (``ISG'').\29\ 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.\30\
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\28\ 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'').
\29\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\30\ 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.^{31 32}
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\31\ 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.
\32\ 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 ETH 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.

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[[Page 24525]]

(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 the surveilled market to manipulate the ETP, so that a
surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct.
The Sponsor examined the correlation between the ETH spot price and
the CME ETH futures price. In this study, the price of the Futures
front month contract, i.e., the contract with the nearest expiration
date, is compared to the ETH spot price. The rolling correlation
between the assets with 90 days windows shows that the futures and spot
prices are highly correlated and ranged between 0.94 and 0.998. In
addition, the daily returns for ETH spot and CME ETH futures are highly
correlated. The following charts evidence these relationships.
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Furthermore, the Sponsor examined intra-day correlations for both
price and returns using historical pricing data every hour. This study
further evidences the high correlation between the ETH/USD spot price
and CME ETH futures across six the CME CF Ether-Dollar Reference Rate
related spot exchanges \33\ with hourly return correlations above 0.98.
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\33\ The six exchanges are Bitstamp, Coinbase, Gemini, itBit,
Kraken, and LMAX Digital.

----------------------------------------------------------------------------------------------------------------
ETH Intraday price Hourly returns BTC Intraday price Hourly returns
----------------------------------------------------------------------------------------------------------------
Spot exchange Sample Sample Spot exchange Sample Sample
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Exchange 1.................... 0.985 0.985 Exchange 1...... 0.999 0.989
Exchange 2.................... 0.985 0.985 Exchange 2...... 0.999 0.988
Exchange 3.................... 0.982 0.982 Exchange 3...... 0.999 0.986
Exchange 4.................... 0.981 0.981 Exchange 4...... 0.999 0.986
Exchange 5.................... 0.985 0.985 Exchange 5...... 0.999 0.986
Exchange 6.................... 0.985 0.985 Exchange 6...... 0.999 0.987
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The Sponsor also examined the distribution of hourly returns of
spot ETH/USD to CME futures. One approach to detect potential price
manipulation involves analyzing price movements on unregulated
exchanges compared to the surveilled market. This comparison focuses on
identifying abnormal activity such as sudden price spikes or repetitive
trades on unregulated exchanges. A preliminary analysis of CME data
compared to spot exchanges revealed little to no extreme deviation in
hourly returns. The following table shows at least 97.9% cases the
hourly returns of the spot exchanges from the regulated exchange are
within 50 basis points. This suggests a high degree of similarity in
price movements between the regulated exchange and the spot exchanges
for most hours. Further analysis using Bitcoin data reveals a similar
pattern to the Ethereum (ETH) spot exchanges. The Sponsor concludes
that the manipulation in the ETP would require the manipulators to
participate in the surveilled market.

--------------------------------------------------------------------------------------------------------------------------------------------------------
Hourly return within CME's for ETH Hourly return within CME's for BTC
Spot exchange -----------------------------------------------------------------------------------------------
<200 bps (%) <100 bps (%) <50 bps (%) <200 bps (%) <100 bps (%) <50 bps (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Exchange 1.............................................. 99.98 99.92 98.63 99.96 99.94 99.46
Exchange 2.............................................. 100.00 99.83 98.51 99.96 99.92 99.38
Exchange 3.............................................. 99.96 99.69 97.89 99.96 99.85 98.99
Exchange 4.............................................. 99.98 99.81 98.32 99.98 99.88 99.27
Exchange 5.............................................. 99.92 99.71 98.32 99.94 99.85 99.25
Exchange 6.............................................. 99.98 99.86 98.51 99.98 99.92 99.28
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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 \34\ also 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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\34\ 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.\35\
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\35\ See the Spot Bitcoin ETP Approval Order at 3011-3012.

[[Page 24527]]

market even in its most aggressive projections for the Trust's assets
and, thus, the Trust would not have an impact on the spot market and
therefore could not be the predominant force on prices in the CME ETH
Futures market. Second, much like the CME Bitcoin Futures market, the
CME ETH 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 ETH and CME ETH
Futures markets.
---------------------------------------------------------------------------

\36\ 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.''
\37\ Source: TokenTerminal.
---------------------------------------------------------------------------

(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ether through OTC ETH Funds has grown into the
tens of billions of dollars and more than a billion dollars of exposure
through Ether Futures ETFs. With that growth, so too has grown the
quantifiable investor protection issues to U.S. investors through roll
costs for Ether Futures ETFs and premium/discount volatility and
management fees for OTC ETH Funds. The Exchange believes that the
concerns related to the prevention of fraudulent and manipulative acts
and practices have been sufficiently addressed to be consistent with
the Act and, to the extent that the Commission disagrees with that
assertion, also believes that such concerns are now outweighed by these
investor protection concerns. As such, the Exchange believes that
approving this proposal (and comparable proposals) provides the
Commission with the opportunity to allow U.S. investors with access to
ether in a regulated and transparent exchange-traded vehicle that would
act to limit risk to U.S. investors by: (i) reducing premium and
discount volatility; (ii) reducing management fees through meaningful
competition; (iii) reducing risks and costs associated with investing
in Ether Futures ETFs and operating companies that are imperfect
proxies for ether exposure; and (iv) providing an alternative to
custodying spot ether.
Fidelity Ethereum Fund
The Registration Statement includes the following description of
the Trust and its operations. The Trust will issue Shares that
represent fractional undivided beneficial interests in and ownership of
the Trust. The Trust is a Delaware statutory trust that operates
pursuant to the Declaration of Trust and Trust Agreement (the ``Trust
Agreement''), between Sponsor and Delaware Trust Company, the Delaware
trustee of the Trust (the ``Trustee''). Sponsor manages the Trust and
is responsible for the ongoing registration of the Shares. The Trust
will engage Fidelity Service Company, Inc. (``FSC''), a Sponsor
affiliate, to be the administrator (``Administrator''). The transfer
agent and cash custodian (the ``Transfer Agent'' and ``Cash
Custodian'') will facilitate the issuance and redemption of Shares of
the Trust and respond to correspondence by Trust shareholders and
others relating to its duties, maintain shareholder accounts, and make
periodic reports to the Trust. Another affiliate of Sponsor, Fidelity
Distributors Company LLC, will be the distributor (``Distributor'') in
connection with the creation and redemption of ``Creation Baskets'' of
Shares. The Sponsor will provide assistance in the marketing of the
Shares. Fidelity Digital Asset Services, LLC (``FDAS''), another
Sponsor affiliate, will serve as the Custodian.
According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the Trust. The Trust's
assets will only consist of ether, cash, and cash equivalents.\38\
Except for cash temporarily held to pay Trust expenses, facilitate
redemption transactions, or received in creation transactions, the
Trust will only invest in ETH.
---------------------------------------------------------------------------

\38\ Cash equivalents are short-term instruments with maturities
of less than 3 months.
---------------------------------------------------------------------------

According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended (the ``1940 Act''),\39\ 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.
---------------------------------------------------------------------------

\39\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

According to the Registration Statement, the Sponsor may, from time
to time, stake a portion of the Fund's assets through one or more
trusted staking providers, which may include an affiliate of the
Sponsor (``Staking Providers''). In consideration for any staking
activity in which the Fund may engage, the Fund would receive certain
network rewards of ether tokens, which may be treated as income to the
Fund as compensation for services provided.
Investment Objective
According to the Registration Statement, the investment objective
of the Trust is to seek to track the performance of ETH, as measured by
the performance of the Fidelity Ethereum Reference Rate (the
``Index''), less the Trust's expenses and other liabilities. In seeking
to achieve its investment objective, the Trust will hold ETH, cash, and
cash equivalents and will value its Shares daily as of 4:00 p.m.
Eastern time using the Index price to value the ether and process all
creations and redemptions in transactions in cash transactions with
authorized participants. The Trust is not actively managed.
The Index
The Index is designed to reflect the performance of ETH in U.S.
dollars. The current digital trading platform composition of the Index
is Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital. The
Index methodology was developed by Fidelity Product Services, LLC (the
``Index Provider'') and is administered by the Fidelity Index
Committee. Coin Metrics, Inc. is the third-party calculation agent for
the Index.\40\
---------------------------------------------------------------------------

\40\ The Sponsor's affiliates have an ownership interest in Coin
Metrics, Inc.
---------------------------------------------------------------------------

The Index is constructed using ETH price feeds from eligible ETH
spot markets and a volume-weighted median price (``VWMP'') methodology,
calculated every 15 seconds based on VWMP spot market data over rolling
sixty-minute increments to develop an ETH price composite. The Index
market value is the volume-weighted median price of ETH in U.S. dollars
over the previous sixty minutes, which is calculated by (1) ordering
all individual transactions on eligible spot markets over the previous
sixty minutes by price, and then (2) selecting the price associated
with the 50th percentile of total volume. Using rolling sixty-minute
segments means malicious actors would need to sustain efforts to
manipulate the market over an extended period of time, or such
malicious actors would need to replicate efforts multiple times across
eligible ETH spot markets, 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

[[Page 24528]]

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
sixty-minute window to have any influence on the NAV.
Index data and the description of the Index are based on
information made publicly available by the Index Provider on its
website at i.fidelity.com/indices.
Net Asset Value
As described in the Registration Statement, for purposes of
calculating the Trust's NAV per Share, the Trust's holdings of ETH will
be valued using the Index value as of 4:00 p.m. Eastern time. NAV means
the total assets of the Trust which will include only ETH, cash, and
cash equivalents, if any, less total liabilities of the Trust, each
determined on the basis of generally accepted accounting principles.
The Administrator calculates the NAV of the Trust once each Exchange
trading day. The NAV for a normal trading day will be released after
4:00 p.m. Eastern time. Trading during the core trading session on the
Exchange typically closes at 4:00 p.m. Eastern time. However, NAVs are
not officially struck until later in the day (often by 5:30 p.m.
Eastern time and almost always by 8:00 p.m. Eastern time). The pause
between 4:00 p.m. Eastern time and 5:30 p.m. Eastern time (or later)
provides an opportunity to algorithmically detect, flag, investigate,
and correct unusual pricing should it occur.
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. If the Sponsor determines in good faith that the Index does
not reflect an accurate ETH price, then the Trust will cause to be
employed an alternative method to determine the fair value of the
Trust's assets as reviewed and approved by the Sponsor's valuation
committee.\41\
---------------------------------------------------------------------------

\41\ Such alternative method will only be employed on an ad hoc
basis. Any permanent change to the calculation of the NAV would
require a proposed rule change under Rule 19b-4.
---------------------------------------------------------------------------

Availability of Information
In addition to the price transparency of the Index, 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 \42\ 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 other applicable quantitative information. The Trust
will also disseminate its holdings on a daily basis on its website. The
aforementioned information will be published as of the close of
business and available on the Sponsor's website at www.fidelity.com, or
any successor thereto.
---------------------------------------------------------------------------

\42\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

The Trust will provide an Intraday Indicative Value (``IIV'') per
Share updated every 15 seconds, as calculated by the Exchange or a
third-party financial data provider during the Exchange's Regular
Trading Hours (9:30 a.m. to 4:00 p.m. Eastern time). 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 IIV
calculation agent will use the Trust's ETH holdings and cash and cash
equivalents expected to comprise that day's NAV calculation to
calculate the IIV. The calculation agent currently uses the Blockstream
Crypto Data Feed Streaming Level 1 \43\ as the pricing source for the
spot ETH, which will be used to update the IIV. 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.
---------------------------------------------------------------------------

\43\ Blockstream provides cryptocurrency data feeds delivering
real-time and historical trade data from the world's leading
cryptocurrency venues. See blockstream.com/cryptofeed.
---------------------------------------------------------------------------

The price of ETH will be made available by one or more major market
data vendors, updated at least every 15 seconds during Regular Trading
Hours.
The value of the Index will be made available by one or more major
market data vendors, updated at least every 15 seconds during Regular
Trading Hours.
As noted above, the Index is calculated every day and is
constructed using ETH price feeds from eligible ETH spot markets and a
VWMP methodology, calculated every 15 seconds based on VWMP spot market
data over rolling sixty-minute increments. Information about the Index
and Index value, including key elements of how the Index is calculated,
will be publicly available at i.fidelity.com/indices.
Quotation and last sale information for ETH 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 ETH is available from major market data vendors and
from the trading platforms on which ETH are traded. Depth of book
information is also available from ETH trading platforms. The normal
trading hours for ETH trading platforms are 24 hours per day, 365 days
per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last-sale information regarding
the Shares will be disseminated through the facilities of the
Consolidated Tape Association (``CTA'').
The ETH Custodian
The Sponsor has selected FDAS to be the Trust's Custodian. FDAS is
a New York state limited liability trust \44\ that serves as ETH
custodian to institutional and individual investors. The Custodian
maintains a substantial portion of the private keys associated with the
Trust's ETH in ``cold storage'' or similarly secure technology. Cold
storage is a safeguarding method with multiple

[[Page 24529]]

layers of protections and protocols, by which the private key(s)
corresponding to the Trust's ETH is (are) generated and stored in an
offline manner. Private keys are generated in offline computers that
are not connected to the internet so that they are resistant to being
hacked. Cold storage of private keys may involve keeping such keys on a
non-networked computer or electronic device or storing the public key
and private keys on a storage device or printed medium and deleting the
keys from all computers.
---------------------------------------------------------------------------

\44\ New York state trust companies are subject to rigorous
oversight similar to other types of entities, such as nationally
chartered banking entities, that hold customer assets. Like national
banks, they must obtain specific approval of their primary regulator
for the exercise of their fiduciary powers. Moreover, limited
purpose trust companies engaged in the custody of digital assets are
subject to even more stringent requirements than national banks
which, following initial approval of trust powers, generally can
exercise those powers broadly without further approval of the OCC.
In contrast, NYDFS requires in their approval orders that limited
purpose trust companies obtain separate approval for all material
changes in business.
---------------------------------------------------------------------------

The Custodian may receive deposits of ETH but may not send ETH
without use of the corresponding private keys. In order to send ETH
when the private keys are kept in cold storage, either the private keys
must be retrieved from cold storage and entered into a software program
to sign the transaction, or the unsigned transaction must be sent to
the ``cold'' server in which the private keys are held for signature by
the private keys. At that point, the Custodian can transfer the ETH.
The Trust's Transfer Agent will facilitate the settlement of Shares in
response to the placement of creation orders and redemption orders from
authorized participants. The Trust will only hold ETH, cash and cash
equivalents. The Trust will enter into a cash custody agreement with
the Cash Custodian as custodian of the Trust's cash and cash
equivalents.
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 (a ``Creation Basket'') that
are based on the amount of ETH 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 close
of Regular Trading Hours on the Exchange or an earlier time as
determined and communicated by the Sponsor and its agent. The day on
which an order is received is considered the purchase order date. The
total deposit of cash required is an amount of cash sufficient to
purchase such amount of ETH, the amount of which is equal to the
combined NAV of the number of Shares included in the Creation Baskets
being created determined as of 4:00 p.m. ET on the date the order to
purchase is properly received. The Administrator determines the
required deposit for a given day by dividing the number of ETH held by
the Trust as of the opening of business on that business day, adjusted
for the amount of ETH 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 aggregation of Shares associated
with a Creation Basket. The procedures by which an authorized
participant can redeem one or more Creation Baskets mirror the
procedures for the creation of Creation Baskets.
The authorized participants will deliver only cash to create shares
and will receive only cash when redeeming shares. Further, authorized
participants will not directly or indirectly purchase, hold, deliver,
or receive ETH 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 ETH as part of the creation or
redemption process.
The Trust will create shares by receiving ETH 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
deliver the ETH. Further, the third party will not be acting as an
agent of the authorized participant with respect to the delivery of the
ETH to the Trust or acting at the direction of the authorized
participant with respect to the delivery of the ETH to the Trust. The
Trust will redeem shares by delivering ETH to a third party that is not
the authorized participant and the Trust--not the authorized
participant--is responsible for selecting the third party to receive
the ETH. Further, the third party will not be acting as an agent of the
authorized participant with respect to the receipt of the ETH from the
Trust or acting at the direction of the authorized participant with
respect to the receipt of the ETH 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 ETH to create Shares
or withdraw and sell ETH for cash to redeem Shares, on behalf of the
Trust.
The Sponsor will maintain ownership and control of ETH 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 \45\ 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.
---------------------------------------------------------------------------

\45\ For purposes of Rule 14.11(e)(4), the term commodity takes
on the definition of the term as provided in the Commodity Exchange
Act.
---------------------------------------------------------------------------

Upon termination of the 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

[[Page 24530]]

Shares must file with the Exchange in a manner prescribed by the
Exchange and keep current a list identifying all accounts for trading
in an underlying commodity, related commodity futures or options on
commodity futures, or any other related commodity derivatives, which
the registered Market Maker may have or over which it may exercise
investment discretion. No registered Market Maker shall trade in an
underlying commodity, related commodity futures or options on commodity
futures, or any other related commodity derivatives, in an account in
which a registered Market Maker, directly or indirectly, controls
trading activities, or has a direct interest in the profits or losses
thereof, which has not been reported to the Exchange as required by
this Rule. In addition to the existing obligations under Exchange rules
regarding the production of books and records (see, e.g., Rule 4.2),
the registered Market Maker in Commodity-Based Trust Shares shall make
available to the Exchange such books, records or other information
pertaining to 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 ETH, ETH Futures contracts, options on ETH
Futures, or any other ETH 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 ETH underlying
the Shares; or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present. Trading in the Shares also will be subject to Rule
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading
in the Shares may be halted.
If the IIV or the value of the Index is not being disseminated as
required, the Exchange may halt trading during the day in which the
interruption to the dissemination of the IIV or the value of the Index
occurs. If the interruption to the dissemination of the IIV or the
value of the Index persists past the trading day in which it occurred,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption.
In addition, if the Exchange becomes aware that the NAV with
respect to the Shares is not disseminated to all market participants at
the same time, it will halt trading in the Shares until such time as
the NAV is available to all market participants.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. BZX will allow
trading in the Shares during all trading sessions on the Exchange. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BZX Rule 11.11(a) the
minimum price variation for quoting and entry of orders in securities
traded on the Exchange is $0.01 where the price is greater than $1.00
per share or $0.0001 where the price is less than $1.00 per share. The
Shares of the 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 ETH 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 ETH Futures
from such markets and other entities.\46\ 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.
---------------------------------------------------------------------------

\46\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the 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
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 \47\ when an updated IIV will not be calculated or
publicly disseminated; (v) the requirement that members deliver a

[[Page 24531]]

prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; and (vi) trading
information. The Information Circular will also reference the fact that
there is no regulated source of last sale information regarding ETH,
that the Commission has no jurisdiction over the trading of ETH as a
commodity, and that the CFTC has regulatory jurisdiction over the
trading of ETH Futures contracts and options on ETH Futures contracts.
---------------------------------------------------------------------------

\47\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------

In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Shares. Members purchasing the Shares for resale to
investors will deliver a prospectus to such investors. The Information
Circular will also discuss any exemptive, no-action and interpretive
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
The Exchange believes that the proposal is consistent with section
6(b) of the Act \48\ in general and section 6(b)(5) of the Act \49\ 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.
---------------------------------------------------------------------------

\48\ 15 U.S.C. 78f.
\49\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Commission has approved numerous series of Trust Issued
Receipts, including Commodity-Based Trust Shares, 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; \50\ 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 and, as described and discussed above, the Sponsor's analysis
demonstrates that the Exchange has satisfied the requirements under the
Act that the CME ETH Futures Market (i) is a regulated market, (ii) has
a comprehensive surveillance-sharing agreement with the Exchange; and
(iii) satisfies the Commission's ``significant market'' definition.''
In addition, the Exchange believes that this proposal is consistent
with the requirements of section 6(b)(5) of the Act because this filing
sufficiently demonstrates that the standard that has previously been
articulated by the Commission applicable to Commodity-Based Trust
Shares has been met as outlined below.
---------------------------------------------------------------------------

\50\ 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 trading platforms 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
trading platforms 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 trading
platform or OTC platform. As a result, the potential for
manipulation on a trading platform would require overcoming the
liquidity supply of such arbitrageurs who are effectively
eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place \51\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\52\ As such, 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.\53\
---------------------------------------------------------------------------

\51\ 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.
\52\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\53\ 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.\54\
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\54\ 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.
---------------------------------------------------------------------------

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
\55\ also

[[Page 24532]]

indicates that this test is satisfied for this proposal. As noted
above, in the Spot Bitcoin ETP Approval Order, the SEC concluded that:
---------------------------------------------------------------------------

\55\ 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.\56\
---------------------------------------------------------------------------

\56\ 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.\57\ The Sponsor notes
that ether total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\58\ 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, thus, the Trust would not have an impact on
the spot market and therefore could not be the predominant force on
prices in the CME Ether Futures market. Second, much like the CME
Bitcoin Futures market, the CME Ether Futures market has progressed and
matured significantly. As the court found in the Grayscale Order,
``Because the spot market is deeper and more liquid than the futures
market, manipulation should be more difficult, not less.'' The Exchange
and Sponsor agree with this sentiment and believe it applies equally to
the spot ether and CME Ether Futures markets.
---------------------------------------------------------------------------

\57\ 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.''
\58\ Source: TokenTerminal.
---------------------------------------------------------------------------

(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ether through OTC ETH Funds has grown into the
tens of billions of dollars and more than a billion dollars of exposure
through Ether Futures ETFs. With that growth, so too has grown the
quantifiable investor protection issues to U.S. investors through roll
costs for Ether Futures ETFs and premium/discount volatility and
management fees for OTC ETH Funds. The Exchange believes that the
concerns related to the prevention of fraudulent and manipulative acts
and practices have been sufficiently addressed to be consistent with
the Act and, to the extent that the Commission disagrees with that
assertion, also believes that such concerns are now outweighed by these
investor protection concerns. As such, the Exchange believes that
approving this proposal (and comparable proposals) provides the
Commission with the opportunity to allow U.S. investors with access to
ether in a regulated and transparent exchange-traded vehicle that would
act to limit risk to U.S. investors by: (i) reducing premium and
discount volatility; (ii) reducing management fees through meaningful
competition; (iii) reducing risks and costs associated with investing
in Ether Futures ETFs and operating companies that are imperfect
proxies for ether exposure; and (iv) providing an alternative to
custodying spot ether.
Commodity-Based Trust Shares--Rule 14.11(e)(4)
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 ETH
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
The Exchange also believes that the proposal promotes market
transparency in that a large amount of information is currently
available about ETH and will be available regarding the Trust and the
Shares. In addition to the price transparency of the Index, 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

[[Page 24533]]

Official Closing Price \59\ 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 other applicable quantitative information. The
Trust will also disseminate its holdings on a daily basis on its
website. The aforementioned information will be published as of the
close of business and available on the Sponsor's website at
www.fidelity.com, or any successor thereto.
---------------------------------------------------------------------------

\59\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

The Trust will provide an Intraday Indicative Value (``IIV'') per
Share updated every 15 seconds, as calculated by the Exchange or a
third-party financial data provider during the Exchange's Regular
Trading Hours (9:30 a.m. to 4:00 p.m. Eastern time). 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 IIV
calculation agent will use the Trust's ETH holdings and cash and cash
equivalents expected to comprise that day's NAV calculation to
calculate the IIV. The calculation agent currently uses the Blockstream
Crypto Data Feed Streaming Level 1 \60\ as the pricing source for the
spot ETH, which will be used to update the IIV. 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.
---------------------------------------------------------------------------

\60\ Blockstream provides cryptocurrency data feeds delivering
real-time and historical trade data from the world's leading
cryptocurrency venues. See blockstream.com/cryptofeed.
---------------------------------------------------------------------------

The price of ETH will be made available by one or more major market
data vendors, updated at least every 15 seconds during Regular Trading
Hours.
The value of the Index will be made available by one or more major
market data vendors, updated at least every 15 seconds during Regular
Trading Hours.
As noted above, the Index is calculated every day and is
constructed using ETH price feeds from eligible ETH spot markets and a
VWMP methodology, calculated every 15 seconds based on VWMP spot market
data over rolling sixty-minute increments. Information about the Index
and Index value, including key elements of how the Index is calculated,
will be publicly available at i.fidelity.com/indices.
Quotation and last sale information for ETH 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 ETH is available from major market data vendors and
from the trading platforms on which ETH are traded. Depth of book
information is also available from ETH trading platforms. The normal
trading hours for ETH trading platforms are 24 hours per day, 365 days
per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last-sale information regarding
the Shares will be disseminated through the facilities of the
Consolidated Tape Association (``CTA'').
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 ETH 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. 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 neither solicited nor received comments on the
proposed rule change.

III. Solicitation of Comments

Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CboeBZX-2023-095 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-2023-095. 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

[[Page 24534]]

SR-CboeBZX-2023-095 and should be submitted on or before April 29,
2024.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\61\
---------------------------------------------------------------------------

\61\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-07334 Filed 4-5-24; 8:45 am]
BILLING CODE 8011-01-P

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