Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 2 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, 46478-46493 [2024-11707]
Download as PDF
<![CDATA[
46478
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
participants can determine whether or
not to connect to the Exchange based on
the value received compared to the cost
of doing so. Indeed, market participants
have numerous alternative exchanges
that they may participate on and direct
their order flow, as well as off-exchange
venues, where competitive products are
available for trading.
Nothing in the proposal burdens
intra-market competition because the
Cabinet Proximity Option program is
available to any customer under the
same fees as any other customer, and
any customer that wishes to reserve a
cabinet pursuant to the Cabinet
Proximity Option program can do so on
a non-discriminatory basis.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.17 At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is: (i)
necessary or appropriate in the public
interest; (ii) for the protection of
investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
lotter on DSK11XQN23PROD with NOTICES1
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–
GEMX–2024–11 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.
17 15
U.S.C. 78s(b)(3)(A)(ii).
VerDate Sep<11>2014
18:05 May 28, 2024
All submissions should refer to file
number SR–GEMX–2024–11. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–GEMX–2024–11 and should be
submitted on or before June 20, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–11702 Filed 5–28–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100215; File No. SR–
CboeBZX–2023–095]
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’’),9 under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares.
1 15
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
Amendment No. 2 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
May 22, 2024.
On November 17, 2023, Cboe BZX
Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
18 17
Jkt 262001
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the 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 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.
On April 2, 2024, the Commission
published notice of Amendment No. 1
to the proposed rule change.8 On May
21, 2024, the Exchange filed
Amendment No. 2 to the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. Amendment No. 2
amended and replaced the proposed
rule change, as modified by Amendment
No. 1, in its entirety. The Commission
is publishing this notice to solicit
comments on the proposed rule change,
as modified by Amendment No. 2, from
interested persons.
PO 00000
CFR 200.30–3(a)(12).
Frm 00121
Fmt 4703
Sfmt 4703
U.S.C. 78s(b)(1).
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.
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 See Securities Exchange Act Release No. 99888,
89 FR 24519 (Apr. 8, 2024).
9 The Trust was formed as a Delaware statutory
trust on October 31, 2023, and is operated as a
2 17
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Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
lotter on DSK11XQN23PROD with NOTICES1
1. Purpose
This Amendment No. 2 to SR–
CboeBZX–2023–095 amends and
replaces in its entirety the proposal as
originally submitted on November 17,
2023, and as amended by Amendment
No. 1 on March 18, 2024. The Exchange
submits this Amendment No. 2 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),10 which governs the listing
and trading of Commodity-Based Trust
Shares on the Exchange.11 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’’).12
grantor trust for U.S. federal tax purposes. The
Trust has no fixed termination date.
10 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).
11 Any of the statements or representations
regarding the index composition, the description of
the portfolio or reference assets, limitations on
portfolio holdings or reference assets, dissemination
and availability of index, reference asset, and
intraday indicative values, or the applicability of
Exchange listing rules specified in this filing to list
a series of Other Securities (collectively,
‘‘Continued Listing Representations’’) shall
constitute continued listing requirements for the
Shares listed on the Exchange.
12 On May 21, 2024, the Trust filed with the
Commission amendment no. 1 to the Registration
Statement on Form S–1, submitted to the
Commission by the Sponsor on behalf of the Trust
VerDate Sep<11>2014
18:05 May 28, 2024
Jkt 262001
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.13 With this in mind, the
Chicago Mercantile Exchange (‘‘CME)
ether futures (‘‘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’’).14 By way of background, in
(333–278249). The descriptions of the Trust, the
Shares, and the Index (as defined below) contained
herein are based, in part, on information in the
Registration Statement. The Registration Statement
is not yet effective and the Shares will not trade on
the Exchange until such time that the Registration
Statement is effective.
13 See Securities Exchange Act Release No. 78262
(July 8, 2016), 81 FR 78262 (July 14, 2016) (the
‘‘Winklevoss Proposal’’). The Winklevoss 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 ether 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.
14 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,
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
46479
2022 the Commission disapproved
proposals 15 to list Spot Bitcoin ETPs,
including a proposal sponsored by
Grayscale Investments, LLC
(‘‘Grayscale’’).16 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.17 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 (‘‘Bitcoin Futures’’) market is
highly correlated to spot bitcoin.
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.18
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
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’’).
15 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.
16 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’’).
17 See Grayscale Investments, LLC v. SEC, 82
F.4th 1239 (D.C. Cir. 2023).
18 See the Spot Bitcoin ETP Approval Order at
3011–3012.
E:\FR\FM\29MYN1.SGM
29MYN1
46480
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
regulated market of significant size and
that this proposal should be approved.
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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
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, referred to as
‘‘ether’’ or ‘‘ETH’’, which are recorded
on a distributed public recordkeeping
system or ledger known as a blockchain
(the ‘‘Ethereum Blockchain’’), and
which can be used to pay for goods and
services, including 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
VerDate Sep<11>2014
18:05 May 28, 2024
Jkt 262001
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.
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
Given the current landscape,
approving this proposal (and others like
it) and allowing Spot Ether ETPs to be
listed and traded alongside Ether
Futures ETFs and Spot Bitcoin ETPs
would establish a consistent regulatory
approach, provide U.S. investors with
choice in product structures for ether
exposure, and offer flexibility in the
means of gaining exposure to ether
through transparent, regulated, U.S.
exchange-listed vehicles.
CME Ether Futures 19
CME began offering trading in CME
Ether Futures in February 2021. Each
contract represents 50 ETH and is based
on the CME CF Ether-Dollar Reference
Rate.20 The contracts trade and settle
like other cash-settled commodity
futures contracts. Most measurable
metrics related to CME Ether Futures
have generally trended up since launch,
although some metrics have slowed
recently. For example, there were
76,293 CME Ether Futures contracts
traded in July 2023 (approximately $7.3
billion) compared to 70,305 ($11.1
billion) and 158,409 ($7.5 billion)
contracts traded in July 2021, and July
2022 respectively.21
The number of large open interest
holders 22 and unique accounts trading
CME Ether Futures have both increased,
even in the face of heightened Ether
price volatility.
19 Unless otherwise noted, all data and analysis
presented in this section and referenced elsewhere
in the filing has been provided by the Sponsor.
20 The CME CF Ether-Dollar Reference Rate is
based on a publicly available calculation
methodology based on pricing sourced from several
crypto trading platforms, including Bitstamp,
Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
21 Source: CME, 7/31/23.
22 A large open interest holder in CME Ether
Futures is an entity that holds at least 25 contracts,
which is the equivalent of 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 Ether Futures.
E:\FR\FM\29MYN1.SGM
29MYN1
lotter on DSK11XQN23PROD with NOTICES1
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Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
18:05 May 28, 2024
# of Contracts
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lotter on DSK11XQN23PROD with NOTICES1
46482
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
has been as high as 30% of global ETH
spot volumes in October 2023. Since the
start of 2023, both BTC and CME Ether
Futures volumes have trended higher in
their overall volume share of global
Frm 00125
Fmt 4703
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(I)
Reference Rate related spot platforms.23
As a result, CME Ether Futures
represented an increasing amount of
ETH/USD spot and futures volumes, up
to 55% as of the end of January 2024.
futures activity and CME Ether Futures
have often represented a larger
percentage of global spot volumes
compared to the BTC CME futures.
29MYN1
25 List of platforms 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\29MYN1.SGM
24 List of platforms used to determine stated
volume can be found here: https://coverage.
coinmetrics.io/exchange-metrics-v2/volume_
reported_future_usd_1d.
PO 00000
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Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
Jkt 262001
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Furthermore, while CME Ether
Futures represent less than 3% of global
ETH futures volumes 24 these same
futures contracts represent greater than
10% of global ETH spot volumes,25 and
18:05 May 28, 2024
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volume on Chicago Mercantile
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23 The CME CF Ether-Dollar Reference Rate is
based on a publicly available calculation
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crypto trading platforms, including Bitstamp,
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VerDate Sep<11>2014
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46483
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.
(ii) the requirement that an exchange
proposal be designed, in general, to
protect investors and the public interest.
The Exchange believes that this
proposal is consistent with the
requirements of Section 6(b)(5) of the
Act and that this filing sufficiently
demonstrates that the CME Ether
Futures market represents a regulated
market of significant size and that, on
the whole, the manipulation concerns
previously articulated by the
Commission are sufficiently mitigated to
Oct·-23
l
28 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 on
any single venue would require manipulation of the
global ETH price in order to be effective.
Frm 00126
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Oct-23
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
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The Commission has approved
numerous series of Trust Issued
Receipts,26 including Commodity-Based
Trust Shares,27 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
20:42 May 28, 2024
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27 Commodity-Based Trust Shares, as described in
Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
VerDate Sep<11>2014
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46484
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
the point that they are outweighed by
quantifiable investor protection issues
that would be resolved by approving
this proposal.
(i) Designed To Prevent Fraudulent and
Manipulative Acts and Practices
In order to meet this standard in a
proposal to list and trade a series of
Commodity-Based Trust Shares, the
Commission requires that an exchange
demonstrate that there is a
comprehensive surveillance-sharing
agreement in place 29 with a regulated
market of significant size. Both the
Exchange and CME are members of the
Intermarket Surveillance Group
(‘‘ISG’’).30 The only remaining issue to
be addressed is whether the CME Ether
Futures market constitutes a market of
significant size, which both the
Exchange and the Sponsor believe that
it does. The terms ‘‘significant market’’
and ‘‘market of significant size’’ include
a market (or group of markets) as to
which: (a) there is a reasonable
likelihood that a person attempting to
manipulate the ETP would also have to
trade on that market to manipulate the
ETP, so that a surveillance-sharing
agreement would assist the listing
exchange in detecting and deterring
misconduct; and (b) it is unlikely that
trading in the ETP would be the
predominant influence on prices in that
market.31
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.32
(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 Ether Futures price. In this study,
the price of the CME Ether 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 Ether Futures are highly
correlated. The following charts
evidence these relationships.
Rolling correlation between ETH spot and CME ETH futures price
1.2
0.8
0.4
Jan202i - Jui2022
-'ia~2023
Jui2023
Jan-2024
29 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-
VerDate Sep<11>2014
20:42 May 28, 2024
Jkt 262001
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’’).
PO 00000
Frm 00127
Fmt 4703
Sfmt 4725
30 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
31 See Wilshire Phoenix Disapproval.
32 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.
E:\FR\FM\29MYN1.SGM
29MYN1
EN29MY24.031</GPH>
lotter on DSK11XQN23PROD with NOTICES1
Date
46485
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
ETH spot and CME ETH futures daily returns
0.2
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0.1
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Daily CME ETH futu_res return
Furthermore, the Sponsor examined
intra-day correlations for both price and
returns using historical pricing data
every hour. This study further evidences
ETH
the high correlation between the ETH/
USD spot price and CME Ether Futures
across six the CME CF Ether-Dollar
Reference Rate related spot platforms 33
Intraday
price
Hourly
returns
Sample
Sample
BTC
Spot platform
Platform
Platform
Platform
Platform
Platform
Platform
1
2
3
4
5
6
with hourly return correlations above
0.98.
Intraday
price
Hourly
returns
Sample
Sample
Spot platform
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
The Sponsor also examined the
distribution of hourly returns of spot
ETH/USD to CME Ether Futures. One
approach to detect potential price
manipulation involves analyzing price
movements on unregulated platforms
compared to the surveilled market. This
comparison focuses on identifying
abnormal activity such as sudden price
0.985
0.985
0.982
0.981
0.985
0.985
0.985
0.985
0.982
0.981
0.985
0.985
Platform
Platform
Platform
Platform
Platform
Platform
1
2
3
4
5
6
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
spikes or repetitive trades on
unregulated platforms. A preliminary
analysis of CME data compared to spot
platforms revealed little to no extreme
deviation in hourly returns. The
following table shows at least 97.9%
cases the hourly returns of the spot
platforms from the regulated exchange
are within 50 basis points. This suggests
0.999
0.999
0.999
0.999
0.999
0.999
0.989
0.988
0.986
0.986
0.986
0.987
a high degree of similarity in price
movements between the regulated
exchange and the spot platforms for
most hours. Further analysis using
Bitcoin data reveals a similar pattern to
the ether spot platforms. 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 platform
1
2
3
4
5
6
.................................................................................................
.................................................................................................
.................................................................................................
.................................................................................................
.................................................................................................
.................................................................................................
<100 bps
(%)
99.98
100.00
99.96
99.98
99.92
99.98
99.92
99.83
99.69
99.81
99.71
99.86
<50 bps
(%)
<200 bps
(%)
<100 bps
(%)
99.96
99.96
99.96
99.98
99.94
99.98
99.94
99.92
99.85
99.88
99.85
99.92
98.63
98.51
97.89
98.32
98.32
98.51
33 The six platforms are Bitstamp, Coinbase,
Gemini, itBit, Kraken, and LMAX Digital.
VerDate Sep<11>2014
19:14 May 28, 2024
Jkt 262001
PO 00000
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Fmt 4703
Sfmt 4703
E:\FR\FM\29MYN1.SGM
29MYN1
<50 bps
(%)
99.46
99.38
98.99
99.27
99.25
99.28
EN29MY24.032</GPH>
lotter on DSK11XQN23PROD with NOTICES1
Platform
Platform
Platform
Platform
Platform
Platform
<200 bps
(%)
46486
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
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:
. . . 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
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.
lotter on DSK11XQN23PROD with NOTICES1
(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.36 The Sponsor
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 U.S. Court of Appeals
for the D.C. Circuit on its review of the Grayscale
VerDate Sep<11>2014
18:05 May 28, 2024
Jkt 262001
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 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 U.S.
Court of Appeals for the D.C. Circuit
found in its review of 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 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 over-the-counter ether
funds (‘‘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
Order at 17–18. See Grayscale Investments, LLC v.
SEC, 82 F. 4th 1239 (D.C. Cir. 2023). 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.
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
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.
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’’). State
Street and Trust Company the (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.
E:\FR\FM\29MYN1.SGM
29MYN1
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
According to the Registration
Statement, the Trust is neither an
investment company registered under
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.
Neither the Trust, nor the Sponsor,
nor the Custodian, nor any other person
associated with the Trust will, directly
or indirectly, engage in action where
any portion of the Trust’s ETH becomes
subject to the Ethereum proof-of-stake
validation or is used to earn additional
ETH or generate income or other
earnings. The Trust will not acquire and
will disclaim any incidental right (‘‘IR’’)
or IR asset received, for example as a
result of forks or airdrops, and such
assets will not be taken into account for
purposes of determining NAV.
lotter on DSK11XQN23PROD with NOTICES1
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
39 15
U.S.C. 80a–1.
Sponsor’s affiliates have an ownership
interest in Coin Metrics, Inc.
40 The
VerDate Sep<11>2014
18:05 May 28, 2024
Jkt 262001
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
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.
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.
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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
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 per Share and the reported BZX
Official Closing Price; 42 (b) the BZX
Official Closing Price in relation to the
NAV per Share as of the time the NAV
is calculated and a calculation of the
premium or discount of such price
against such NAV per Share; (c) data in
chart form displaying the frequency
distribution of discounts and premiums
of the BZX Official Closing Price against
the NAV per Share, 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
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.
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.
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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.
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 BZX Official Closing
Price and trading volume information
for the Shares will be published daily in
the financial section of newspapers.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the CTA.
43 Blockstream provides cryptocurrency data
feeds delivering real-time and historical trade data
from the world’s leading cryptocurrency venues.
See blockstream.com/cryptofeed.
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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
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
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.
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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 based on 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 quantity of ether associated with a
Creation Basket 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.
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The procedures by which an
authorized participant can redeem one
or more Creation Baskets mirror the
procedures for the creation of Creation
Baskets.
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.
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
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.
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the Trust in connection with issuance of
Commodity-Based Trust Shares;
resulting from any negligent act or
omission by the Exchange, or any agent
of the Exchange, or any act, condition or
cause beyond the reasonable control of
the Exchange, its agent, including, but
not limited to, an act of God; fire; flood;
extraordinary weather conditions; war;
insurrection; riot; strike; accident;
action of government; communications
or power failure; equipment or software
malfunction; or any error, omission or
delay in the reports of transactions in an
underlying commodity. Finally, as
required in Rule 14.11(e)(4)(G), the
Exchange notes that any registered
market maker (‘‘Market Maker’’) in the
Shares must file with the Exchange in
a manner prescribed by the Exchange
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, CME
Ether Futures contracts, options on CME
Ether 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
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46489
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
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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, CME Ether
Futures, or any other ether derivative
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, CME Ether Futures, or any other
ether derivative from such markets and
other entities.46 The Exchange may
obtain information regarding trading in
the Shares, CME Ether Futures, or any
other ether derivative 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 Sponsor 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
46 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
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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
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 CME Ether Futures
contracts and options on CME Ether
Futures contracts.
In addition, the Information Circular
will advise members, prior to the
commencement of trading, of the
prospectus delivery requirements
applicable to the Shares. Members
purchasing the Shares for resale to
investors will deliver a prospectus to
such investors. The Information Circular
will also discuss any exemptive, noaction and interpretive relief granted by
the Commission from any rules under
the Act.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act 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.
47 Regular Trading Hours is the time between 9:30
a.m. and 4:00 p.m. Eastern Time.
48 15 U.S.C. 78f.
49 15 U.S.C. 78f(b)(5).
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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 Ether 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.
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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 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 CME
Ether Futures market constitutes a
market of significant size, which both
the Exchange and the Sponsor believe
that it does. The terms ‘‘significant
market’’ and ‘‘market of significant size’’
include a market (or group of markets)
as to which: (a) there is a reasonable
likelihood that a person attempting to
manipulate the ETP would also have to
trade on that market to manipulate the
ETP, so that a surveillance-sharing
agreement would assist the listing
exchange in detecting and deterring
misconduct; and (b) it is unlikely that
trading in the ETP would be the
predominant influence on prices in that
market.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
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
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
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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 also
indicates that this test is satisfied for
this proposal. As noted above, in the
Spot Bitcoin ETP Approval Order, the
SEC concluded that:
. . . fraud or manipulation that impacts
prices in spot bitcoin markets would likely
similarly impact CME bitcoin futures prices.
And because the CME’s surveillance can
assist in detecting those impacts on CME
bitcoin futures prices, the Exchanges’
comprehensive surveillance-sharing
agreement with the CME . . . can be
reasonably expected to assist in surveilling
for fraudulent and manipulative acts and
practices in the specific context of the
[p]roposals.55
The assumptions from this statement
are also true for CME Ether Futures.
CME Ether Futures pricing is based on
pricing from spot ether markets. The
statement from the Spot Bitcoin ETP
Approval Order that the surveillancesharing agreement with the CME ‘‘can
be reasonably expected to assist in
surveilling for fraudulent and
manipulative acts and practices in the
specific context of the [p]roposals’’
makes clear that the Commission
believes that CME’s surveillance can
capture the effects of trading on the
relevant spot markets on the pricing of
CME Bitcoin Futures. This same logic
would extend to CME Ether Futures
markets where CME’s surveillance
would be able to capture the effects of
trading on the relevant spot markets on
the pricing of CME Ether Futures.
(b) Predominant Influence on Prices in
Spot and ETH Futures
The Exchange and Sponsor also
believe that trading in the Shares would
not be the predominant force on prices
in the CME Ether Futures market for a
number of reasons. First, because the
Trust would not hold CME Ether
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 the Spot Bitcoin ETP Approval Order at
3011–3012.
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Sfmt 4703
46491
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.56 The Sponsor
notes that ether total 24-hour spot
trading volume has averaged $9.4
billion over the year ending September
1, 2023.57 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 U.S.
Court of Appeals for the D.C. Circuit
found in its review of 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
56 This logic is reflected by the U.S. Court of
Appeals for the D.C. Circuit on its review of the
Grayscale Order at 17–18court in the Grayscale
Order at 17–18. See Grayscale Investments, LLC v.
SEC, 82 F. 4th 1239 (D.C. Cir. 2023). 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.’’
57 Source: TokenTerminal.
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lotter on DSK11XQN23PROD with NOTICES1
manipulative acts and practices have
been sufficiently addressed to be
consistent with the Act and, to the
extent that the Commission disagrees
with that assertion, also believes that
such concerns are now outweighed by
these investor protection concerns. As
such, the Exchange believes that
approving this proposal (and
comparable proposals) provides the
Commission with the opportunity to
allow U.S. investors with access to ether
in a regulated and transparent exchangetraded vehicle that would act to limit
risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii)
reducing management fees through
meaningful competition; (iii) reducing
risks and costs associated with investing
in Ether Futures ETFs and operating
companies that are imperfect proxies for
ether exposure; and (iv) providing an
alternative to custodying spot ether.
Commodity-Based Trust Shares—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
VerDate Sep<11>2014
18:05 May 28, 2024
Jkt 262001
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 per Share and
the reported BZX Official Closing Price;
(b) the BZX Official Closing Price in
relation to the NAV per Share as of the
time the NAV is calculated and a
calculation of the premium or discount
of such price against such NAV per
Share; (c) data in chart form displaying
the frequency distribution of discounts
and premiums of the BZX Official
Closing Price against the NAV per
Share, 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 IIV per
Share updated every 15 seconds, as
calculated by the Exchange or a thirdparty 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 CTA and
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 58 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
58 Blockstream provides cryptocurrency data
feeds delivering real-time and historical trade data
from the world’s leading cryptocurrency venues.
See https://blockstream.com/cryptofeed/.
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Fmt 4703
Sfmt 4703
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 BZX Official Closing
Price and trading volume information
for the Shares will be published daily in
the financial section of newspapers.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the CTA.
In sum, the Exchange believes that
this proposal is consistent with the
requirements of Section 6(b)(5) of the
Act, that this filing sufficiently
demonstrates that the CME Ether
Futures market represents a regulated
market of significant size, and that on
the whole the manipulation concerns
previously articulated by the
Commission are sufficiently mitigated to
the point that they are outweighed by
investor protection issues that would be
resolved by approving this proposal. 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
E:\FR\FM\29MYN1.SGM
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Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
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.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.59
J. Matthew DeLesDernier,
Deputy Secretary.
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:
lotter on DSK11XQN23PROD with NOTICES1
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
VerDate Sep<11>2014
18:05 May 28, 2024
Jkt 262001
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2023–095 and should be
submitted on or before June 20, 2024.
[FR Doc. 2024–11707 Filed 5–28–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100211; File No. SR–BX–
2024–016]
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Adopt an OTTO
Protocol
May 22, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 8,
2024, Nasdaq BX, Inc. (‘‘BX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt a
new protocol, ‘‘Ouch to Trade Options’’
or ‘‘OTTO’’ and establish pricing for this
new protocol.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
59 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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46493
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
BX proposes to offer a new order
entry protocol called OTTO. Today, BX
Participants may enter orders into the
Exchange through the ‘‘Financial
Information eXchange’’ or ‘‘FIX.’’ 3 The
proposed new OTTO protocol is
identical to the OTTO protocol offered
today on 3 Nasdaq affiliated exchanges,
Nasdaq ISE, LLC (‘‘ISE’’), Nasdaq
GEMX, LLC (‘‘GEMX’’) and Nasdaq
MRX, LLC (‘‘MRX’’).
The OTTO protocol is a proprietary
protocol of Nasdaq, Inc. The Exchange
continues to innovate and modernize
technology so that it may continue to
compete among options markets. The
ability to continue to innovate with
technology and offer new products to
market participants allows BX to remain
competitive in the options space which
currently has seventeen options markets
and potential new entrants.
OTTO Protocol
As proposed, OTTO would allow
Participants and their Sponsored
Customers 4 to connect, send, and
receive messages related to orders,
auction orders, and auction responses to
the Exchange. OTTO features would
3 FIX is an interface that allows Participants and
their Sponsored Customers to connect, send, and
receive messages related to orders and auction
orders and responses to and from the Exchange.
Features include the following: (1) execution
messages; (2) order messages; and (3) risk protection
triggers and cancel notifications. In addition, a BX
Participant may elect to utilize FIX to send a
message and PRISM Order, as defined within
Options 3, Section 13, to all BX Participants that
opt in to receive Requests for PRISM requesting that
it submit the sender’s PRISM Order with
responder’s Initiating Order, as defined within
Options 3, Section 13, into the Price Improvement
Auction (‘‘PRISM’’) mechanism, pursuant to
Options 3, Section 13 (‘‘Request for PRISM’’). See
Options 3, Section 7(e)(1)(A).
4 General 2, Section 22 describes Sponsored
Access arrangements.
E:\FR\FM\29MYN1.SGM
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]]>Agencies
[Federal Register Volume 89, Number 104 (Wednesday, May 29, 2024)]
[Notices]
[Pages 46478-46493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-11707]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100215; File No. SR-CboeBZX-2023-095]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment No. 2 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
May 22, 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 (``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\ 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. On
April 2, 2024, the Commission published notice of Amendment No. 1 to
the proposed rule change.\8\ On May 21, 2024, the Exchange filed
Amendment No. 2 to the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. Amendment No.
2 amended and replaced the proposed rule change, as modified by
Amendment No. 1, in its entirety. The Commission is publishing this
notice to solicit comments on the proposed rule change, as modified by
Amendment No. 2, from interested persons.
---------------------------------------------------------------------------
\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.
\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\ See Securities Exchange Act Release No. 99888, 89 FR 24519
(Apr. 8, 2024).
---------------------------------------------------------------------------
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''),\9\ under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares.
---------------------------------------------------------------------------
\9\ 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.
---------------------------------------------------------------------------
[[Page 46479]]
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
This Amendment No. 2 to SR-CboeBZX-2023-095 amends and replaces in
its entirety the proposal as originally submitted on November 17, 2023,
and as amended by Amendment No. 1 on March 18, 2024. The Exchange
submits this Amendment No. 2 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),\10\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\11\ 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'').\12\
---------------------------------------------------------------------------
\10\ 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).
\11\ Any of the statements or representations regarding the
index composition, the description of the portfolio or reference
assets, limitations on portfolio holdings or reference assets,
dissemination and availability of index, reference asset, and
intraday indicative values, or the applicability of Exchange listing
rules specified in this filing to list a series of Other Securities
(collectively, ``Continued Listing Representations'') shall
constitute continued listing requirements for the Shares listed on
the Exchange.
\12\ On May 21, 2024, the Trust filed with the Commission
amendment no. 1 to the Registration Statement on Form S-1, submitted
to the Commission by the Sponsor on behalf of the Trust (333-
278249). The descriptions of the Trust, the Shares, and the Index
(as defined below) contained herein are based, in part, on
information in the Registration Statement. The Registration
Statement is not yet effective and the Shares will not trade on the
Exchange until such time that the Registration Statement is
effective.
---------------------------------------------------------------------------
The Commission has historically approved or disapproved exchange
filings to list and trade series of Trust Issued Receipts, including
spot-based Commodity-Based Trust Shares, on the basis of whether the
listing exchange has in place a comprehensive surveillance sharing
agreement with a regulated market of significant size related to the
underlying commodity to be held.\13\ With this in mind, the Chicago
Mercantile Exchange (``CME) ether futures (``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.
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 78262 (July 8,
2016), 81 FR 78262 (July 14, 2016) (the ``Winklevoss Proposal'').
The Winklevoss 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 ether market be regulated in order for the Commission to
approve this proposal, and precedent makes clear that an underlying
market for a spot commodity or currency being a regulated market
would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to
surveillance sharing agreements with the underlying futures market
in order to determine whether such products were consistent with the
Act.
---------------------------------------------------------------------------
Recently, the Commission issued an order granting approval for
proposals to list bitcoin-based commodity trust and bitcoin-based trust
issued receipts (these proposed funds are nearly identical to the
Trust, but proposed to hold bitcoin instead of ether) (``Spot Bitcoin
ETPs'').\14\ By way of background, in 2022 the Commission disapproved
proposals \15\ to list Spot Bitcoin ETPs, including a proposal
sponsored by Grayscale Investments, LLC (``Grayscale'').\16\ 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.\17\ 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 (``Bitcoin Futures'')
market is highly correlated to spot bitcoin. Specifically, the
Commission stated:
---------------------------------------------------------------------------
\14\ 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'').
\15\ 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.
\16\ 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'').
\17\ 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.\18\
---------------------------------------------------------------------------
\18\ 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
[[Page 46480]]
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 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, referred to as
``ether'' or ``ETH'', which are recorded on a distributed public
recordkeeping system or ledger known as a blockchain (the ``Ethereum
Blockchain''), and which can be used to pay for goods and services,
including 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 Ether Futures \19\
---------------------------------------------------------------------------
\19\ Unless otherwise noted, all data and analysis presented in
this section and referenced elsewhere in the filing has been
provided by the Sponsor.
---------------------------------------------------------------------------
CME began offering trading in CME Ether Futures in February 2021.
Each contract represents 50 ETH and is based on the CME CF Ether-Dollar
Reference Rate.\20\ The contracts trade and settle like other cash-
settled commodity futures contracts. Most measurable metrics related to
CME Ether Futures have generally trended up since launch, although some
metrics have slowed recently. For example, there were 76,293 CME Ether
Futures contracts traded in July 2023 (approximately $7.3 billion)
compared to 70,305 ($11.1 billion) and 158,409 ($7.5 billion) contracts
traded in July 2021, and July 2022 respectively.\21\
---------------------------------------------------------------------------
\20\ The CME CF Ether-Dollar Reference Rate is based on a
publicly available calculation methodology based on pricing sourced
from several crypto trading platforms, including Bitstamp, Coinbase,
Gemini, itBit, Kraken, and LMAX Digital.
\21\ Source: CME, 7/31/23.
---------------------------------------------------------------------------
The number of large open interest holders \22\ and unique accounts
trading CME Ether Futures have both increased, even in the face of
heightened Ether price volatility.
---------------------------------------------------------------------------
\22\ A large open interest holder in CME Ether Futures is an
entity that holds at least 25 contracts, which is the equivalent of
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 Ether Futures.
---------------------------------------------------------------------------
[[Page 46481]]
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[GRAPHIC] [TIFF OMITTED] TN29MY24.025
[GRAPHIC] [TIFF OMITTED] TN29MY24.026
[[Page 46482]]
[GRAPHIC] [TIFF OMITTED] TN29MY24.027
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 platforms.\23\ As a result,
CME Ether Futures represented an increasing amount of ETH/USD spot and
futures volumes, up to 55% as of the end of January 2024.
---------------------------------------------------------------------------
\23\ 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.
[GRAPHIC] [TIFF OMITTED] TN29MY24.028
Furthermore, while CME Ether Futures represent less than 3% of
global ETH futures volumes \24\ these same futures contracts represent
greater than 10% of global ETH spot volumes,\25\ and has been as high
as 30% of global ETH spot volumes in October 2023. Since the start of
2023, both BTC and CME Ether Futures volumes have trended higher in
their overall volume share of global futures activity and CME Ether
Futures have often represented a larger percentage of global spot
volumes compared to the BTC CME futures.
---------------------------------------------------------------------------
\24\ List of platforms used to determine stated volume can be
found here: https://coverage.coinmetrics.io/exchange-metrics-v2/volume_reported_future_usd_1d.
\25\ List of platforms used to determine the stated volumes can
be found here: https://coverage.coinmetrics.io/exchange-metrics-v2/volume_reported_spot_usd_1d.
---------------------------------------------------------------------------
[[Page 46483]]
[GRAPHIC] [TIFF OMITTED] TN29MY24.029
[GRAPHIC] [TIFF OMITTED] TN29MY24.030
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\26\ including Commodity-Based Trust Shares,\27\ 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;
\28\ 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
---------------------------------------------------------------------------
\26\ See Exchange Rule 14.11(f).
\27\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\28\ 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 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.
---------------------------------------------------------------------------
demonstrates that the CME Ether Futures market represents a regulated
market of significant size and that, on the whole, the manipulation
concerns previously articulated by the Commission are sufficiently
mitigated to
[[Page 46484]]
the point that they are outweighed by quantifiable investor protection
issues that would be resolved by approving this proposal.
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place \29\ with a regulated market of significant size.
Both the Exchange and CME are members of the Intermarket Surveillance
Group (``ISG'').\30\ The only remaining issue to be addressed is
whether the CME Ether Futures market constitutes a market of
significant size, which both the Exchange and the Sponsor believe that
it does. The terms ``significant market'' and ``market of significant
size'' include a market (or group of markets) as to which: (a) there is
a reasonable likelihood that a person attempting to manipulate the ETP
would also have to trade on that market to manipulate the ETP, so that
a surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct; and (b) it is unlikely that trading
in the ETP would be the predominant influence on prices in that
market.\31\
---------------------------------------------------------------------------
\29\ 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'').
\30\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\31\ 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.\32\
---------------------------------------------------------------------------
\32\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
---------------------------------------------------------------------------
(a) Manipulation of the ETP
The significant market test requires that there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on 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 Ether Futures price. In this study, the price of the CME Ether
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 Ether
Futures are highly correlated. The following charts evidence these
relationships.
[GRAPHIC] [TIFF OMITTED] TN29MY24.031
[[Page 46485]]
[GRAPHIC] [TIFF OMITTED] TN29MY24.032
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 Ether Futures across six the CME CF Ether-Dollar Reference Rate
related spot platforms \33\ with hourly return correlations above 0.98.
---------------------------------------------------------------------------
\33\ The six platforms are Bitstamp, Coinbase, Gemini, itBit,
Kraken, and LMAX Digital.
----------------------------------------------------------------------------------------------------------------
ETH Intraday Hourly BTC Intraday Hourly
----------------------------------------- price returns ---------------------------- price returns
---------------------- ---------------------
----------------------------------------- Sample Sample ---------------------------- Sample Sample
---------------------- ---------------------
Spot platform Spot platform
----------------------------------------------------------------------------------------------------------------
Platform 1.............................. 0.985 0.985 Platform 1................ 0.999 0.989
Platform 2.............................. 0.985 0.985 Platform 2................ 0.999 0.988
Platform 3.............................. 0.982 0.982 Platform 3................ 0.999 0.986
Platform 4.............................. 0.981 0.981 Platform 4................ 0.999 0.986
Platform 5.............................. 0.985 0.985 Platform 5................ 0.999 0.986
Platform 6.............................. 0.985 0.985 Platform 6................ 0.999 0.987
----------------------------------------------------------------------------------------------------------------
The Sponsor also examined the distribution of hourly returns of
spot ETH/USD to CME Ether Futures. One approach to detect potential
price manipulation involves analyzing price movements on unregulated
platforms compared to the surveilled market. This comparison focuses on
identifying abnormal activity such as sudden price spikes or repetitive
trades on unregulated platforms. A preliminary analysis of CME data
compared to spot platforms revealed little to no extreme deviation in
hourly returns. The following table shows at least 97.9% cases the
hourly returns of the spot platforms 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 platforms
for most hours. Further analysis using Bitcoin data reveals a similar
pattern to the ether spot platforms. 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 Hourly return within CME's for
ETH BTC
Spot platform -----------------------------------------------------------------
<200 bps <100 bps <50 bps <200 bps <100 bps <50 bps
(%) (%) (%) (%) (%) (%)
----------------------------------------------------------------------------------------------------------------
Platform 1.................................... 99.98 99.92 98.63 99.96 99.94 99.46
Platform 2.................................... 100.00 99.83 98.51 99.96 99.92 99.38
Platform 3.................................... 99.96 99.69 97.89 99.96 99.85 98.99
Platform 4.................................... 99.98 99.81 98.32 99.98 99.88 99.27
Platform 5.................................... 99.92 99.71 98.32 99.94 99.85 99.25
Platform 6.................................... 99.98 99.86 98.51 99.98 99.92 99.28
----------------------------------------------------------------------------------------------------------------
[[Page 46486]]
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:
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\35\ 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.\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 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 U.S. Court of Appeals for the D.C.
Circuit found in its review of 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 Ether Futures markets.
---------------------------------------------------------------------------
\36\ This logic is reflected by U.S. Court of Appeals for the
D.C. Circuit on its review of the Grayscale Order at 17-18. See
Grayscale Investments, LLC v. SEC, 82 F. 4th 1239 (D.C. Cir. 2023).
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 over-the-counter ether funds (``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''). State Street
and Trust Company the (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.
---------------------------------------------------------------------------
[[Page 46487]]
According to the Registration Statement, the Trust is neither an
investment company registered under 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.
---------------------------------------------------------------------------
Neither the Trust, nor the Sponsor, nor the Custodian, nor any
other person associated with the Trust will, directly or indirectly,
engage in action where any portion of the Trust's ETH becomes subject
to the Ethereum proof-of-stake validation or is used to earn additional
ETH or generate income or other earnings. The Trust will not acquire
and will disclaim any incidental right (``IR'') or IR asset received,
for example as a result of forks or airdrops, and such assets will not
be taken into account for purposes of determining NAV.
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 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 per Share and the reported BZX Official Closing Price; \42\
(b) the BZX Official Closing Price in relation to the NAV per Share as
of the time the NAV is calculated and a calculation of the premium or
discount of such price against such NAV per Share; (c) data in chart
form displaying the frequency distribution of discounts and premiums of
the BZX Official Closing Price against the NAV per Share, 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.
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\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.
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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
[[Page 46488]]
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.
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\43\ Blockstream provides cryptocurrency data feeds delivering
real-time and historical trade data from the world's leading
cryptocurrency venues. See blockstream.com/cryptofeed.
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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 BZX Official Closing Price and trading
volume information for the Shares will be published daily in the
financial section of newspapers. Quotation and last-sale information
regarding the Shares will be disseminated through the facilities of the
CTA.
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 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.
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\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.
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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 based on 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 quantity of ether
associated with a Creation Basket 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.
[[Page 46489]]
The procedures by which an authorized participant can redeem one or
more Creation Baskets mirror the procedures for the creation of
Creation Baskets.
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.
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\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.
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Upon termination of the Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust Company, is a trust company having
substantial capital and surplus and the experience and facilities for
handling corporate trust business, as required under Rule
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee
without prior notice to and approval of the Exchange. The Exchange also
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor
any agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions or delays in
calculating or disseminating any underlying commodity value, the
current value of the underlying commodity required to be deposited to
the Trust in connection with issuance of Commodity-Based Trust Shares;
resulting from any negligent act or omission by the Exchange, or any
agent of the Exchange, or any act, condition or cause beyond the
reasonable control of the Exchange, its agent, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission or delay in the reports of
transactions in an underlying commodity. Finally, as required in Rule
14.11(e)(4)(G), the Exchange notes that any registered market maker
(``Market Maker'') in the Shares must file with the Exchange in a
manner prescribed by the Exchange 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, CME Ether Futures contracts, options on
CME Ether 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
[[Page 46490]]
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, CME Ether
Futures, or any other ether derivative 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, CME Ether Futures, or any other ether
derivative from such markets and other entities.\46\ The Exchange may
obtain information regarding trading in the Shares, CME Ether Futures,
or any other ether derivative via ISG, from other exchanges who are
members or affiliates of the ISG, or with which the Exchange has
entered into a comprehensive surveillance sharing agreement.
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\46\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
The Sponsor 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
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 CME Ether Futures contracts and options on CME Ether 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.
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\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 Ether 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.
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\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.
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[[Page 46491]]
(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 CME Ether Futures market
constitutes a market of significant size, which both the Exchange and
the Sponsor believe that it does. The terms ``significant market'' and
``market of significant size'' include a market (or group of markets)
as to which: (a) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to manipulate the ETP, so that a surveillance-sharing agreement
would assist the listing exchange in detecting and deterring
misconduct; and (b) it is unlikely that trading in the ETP would be the
predominant influence on prices in that market.\53\
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\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.
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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.\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.
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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
also indicates that this test is satisfied for this proposal. As noted
above, in the Spot Bitcoin ETP Approval Order, the SEC concluded that:
. . . fraud or manipulation that impacts prices in spot bitcoin
markets would likely similarly impact CME bitcoin futures prices.
And because the CME's surveillance can assist in detecting those
impacts on CME bitcoin futures prices, the Exchanges' comprehensive
surveillance-sharing agreement with the CME . . . can be reasonably
expected to assist in surveilling for fraudulent and manipulative
acts and practices in the specific context of the [p]roposals.\55\
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\55\ 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.\56\ The Sponsor notes
that ether total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\57\ 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 U.S. Court of Appeals for the D.C.
Circuit found in its review of the Grayscale Order, ``Because the spot
market is deeper and more liquid than the futures market, manipulation
should be more difficult, not less.'' The Exchange and Sponsor agree
with this sentiment and believe it applies equally to the spot ether
and CME Ether Futures markets.
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\56\ This logic is reflected by the U.S. Court of Appeals for
the D.C. Circuit on its review of the Grayscale Order at 17-18court
in the Grayscale Order at 17-18. See Grayscale Investments, LLC v.
SEC, 82 F. 4th 1239 (D.C. Cir. 2023). 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.''
\57\ Source: TokenTerminal.
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(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ether through OTC ETH Funds has grown 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
[[Page 46492]]
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 per Share and the reported BZX Official Closing Price; (b)
the BZX Official Closing Price in relation to the NAV per Share as of
the time the NAV is calculated and a calculation of the premium or
discount of such price against such NAV per Share; (c) data in chart
form displaying the frequency distribution of discounts and premiums of
the BZX Official Closing Price against the NAV per Share, 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 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 CTA and 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 \58\
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.
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\58\ Blockstream provides cryptocurrency data feeds delivering
real-time and historical trade data from the world's leading
cryptocurrency venues. See https://blockstream.com/cryptofeed/.
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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 BZX Official Closing Price and trading
volume information for the Shares will be published daily in the
financial section of newspapers. Quotation and last-sale information
regarding the Shares will be disseminated through the facilities of the
CTA.
In sum, the Exchange believes that this proposal is consistent with
the requirements of Section 6(b)(5) of the Act, that this filing
sufficiently demonstrates that the CME Ether Futures market represents
a regulated market of significant size, and that on the whole the
manipulation concerns previously articulated by the Commission are
sufficiently mitigated to the point that they are outweighed by
investor protection issues that would be resolved by approving this
proposal. 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
[[Page 46493]]
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 SR-CboeBZX-2023-095 and should
be submitted on or before June 20, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
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\59\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-11707 Filed 5-28-24; 8:45 am]
BILLING CODE 8011-01-P
