Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Amendment Nos. 4 and 5 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 4, and 5, To Permit the Listing and Trading of Options on the iShares Bitcoin Trust, 78942-78947 [2024-22024]
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Federal Register / Vol. 89, No. 187 / Thursday, September 26, 2024 / Notices
Nor does the Exchange Act require
that a self-regulatory organization
establish the existence of a market
failure to justify a proposed rule change.
Under Section 19(b) of the Exchange
Act, the Commission must approve a
rule change proposed by FINRA if the
Commission finds that the proposed
change is consistent with the
requirements of the Act and the rules
and regulations thereunder, including
the requirements of section 15A(b).201
For the reasons discussed above, the
Commission finds that the Proposal is
consistent with those requirements
because, among other things, it is
designed to promote just and equitable
principles of trade, 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; and is not designed to
permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Proposal also does not impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act.202
H. Consultation With the Treasury
Department
Pursuant to section 19(b)(6) of the
Act,203 the Commission has considered
the sufficiency and appropriateness of
existing laws and rules applicable to
government securities brokers,
government securities dealers, and their
associated persons in approving the
proposed rule change. Pursuant to
section 19(b)(5) of the Act,204 the
Commission consulted with and
considered the views of the Treasury
Department in determining whether to
approve the proposed rule change. The
201 15
U.S.C. 78o–3(b), 78s(b)(2)(C).
commenter’s references to the Supreme
Court’s decisions in Loper Bright Enterprises v.
Raimondo, 144 S. Ct. 2244 (2024) and Ohio v. EPA,
144 S. Ct. 2040 (2024), are similarly misplaced.
Loper Bright is inapposite because the question here
is whether FINRA’s proposed rule change is
consistent with the requirements of Section
15A(b)—in which case the Exchange Act requires
the Commission to approve it—not whether the
Commission would have statutory authority to
adopt its own market-wide rule. And Ohio is
inapposite because we explain above why
commenters’ concerns do not establish that the
Proposal is inconsistent with the requirements of
the Act.
203 15 U.S.C. 78s(b)(6).
204 15 U.S.C. 78s(b)(5) (providing that the
Commission ‘‘shall consult with and consider the
views of the Secretary of the Treasury prior to
approving a proposed rule filed by a registered
securities association that primarily concerns
conduct related to transactions in government
securities, except where the Commission
determines that an emergency exists requiring
expeditious or summary action and publishes its
reasons therefor’’).
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202 The
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Treasury Department did not object to
the proposed rule change.
IV. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,205 that the
proposed rule change (SR–FINRA–
2024–004), as modified by Partial
Amendment No. 1, be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.206
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–22027 Filed 9–25–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101128; File No. SR–ISE–
2024–03]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing of
Amendment Nos. 4 and 5 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 1, 4, and 5, To Permit
the Listing and Trading of Options on
the iShares Bitcoin Trust
September 20, 2024.
I. Introduction
On January 9, 2024, Nasdaq ISE, LLC
(‘‘ISE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and
Rule 19b–4 thereunder,2 a proposed rule
change to list and trade options on
exchange-traded product (‘‘ETP’’) shares
that represent interests in the iShares
Bitcoin Trust (‘‘IBIT’’).3 On January 11,
2024, the Exchange filed Amendment
No. 1 to the proposed rule change,
which replaced and superseded the
proposed rule change as originally filed.
205 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 On January 10, 2024, the Commission approved
proposals by NYSE Arca, Inc., The Nasdaq Stock
Market LLC, and Cboe BZX Exchange, Inc. to list
and trade the shares of 11 bitcoin-based
commodity-based trust shares and trust units,
including the iShares Bitcoin Trust, the Grayscale
Bitcoin Trust, and the Bitwise Bitcoin ETF. See
Securities Exchange Act Release No. 99306 (Jan. 10,
2024), 89 FR 3008 (Jan. 17, 2024) (order approving
File Nos. SR–NYSEARCA–2021–90; SR–
NYSEARCA–2023–44; SR–NYSEARCA–2023–58;
SR–NASDAQ–2023–016; SR–NASDAQ–2023–019;
SR–CboeBZX–2023–028; SR–CboeBZX–2023–038;
SR–CboeBZX–2023–040; SR–CboeBZX–2023–042;
SR–CboeBZX–2023–044; SR–CboeBZX–2023–072)
(‘‘Bitcoin ETP Order’’).
206 17
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On January 25, 2024, the proposed rule
change, as modified by Amendment No.
1, was published for comment in the
Federal Register.4 On March 6, 2024,
pursuant to Section 19(b)(2) of the Act,5
the Commission designated a longer
period within which to approve the
Proposal, disapprove the Proposal, or
institute proceedings to determine
whether to disapprove the Proposal.6
On April 24, 2024, the Commission
instituted proceedings under Section
19(b)(2)(B) of the Act 7 to determine
whether to approve or disapprove the
Proposal.8 On July 19, 2024, the
Commission designated a longer time
for Commission action on the Proposal.9
The Commission received comments
addressing the proposed rule change.10
On May 23, 2024, ISE submitted a letter
providing additional information
regarding IBIT and other bitcoin-based
ETPs.11 On August 21, 2024, ISE
submitted a second letter that provides
additional analysis supporting the
proposed position limit of 25,000
contracts for IBIT options.12 The
Exchange filed Amendment Nos. 2 and
3 to the Proposal on August 29, 2024,
and September 12, 2024, respectively.
On September 12, 2024, the Exchange
withdrew Amendment Nos. 2 and 3 and
filed Amendment No. 4 to the
Proposal.13 The Exchange filed
Amendment No. 5 to the Proposal on
September 19, 2024.14 The Commission
is publishing this notice to solicit
comments on Amendment Nos. 4 and 5
from interested persons, and is
approving the proposed rule change, as
4 See Securities Exchange Act Release No. 99396
(Jan. 19, 2024), 89 FR 5047 (Jan. 25, 2024) (‘‘Notice’’
or ‘‘Proposal’’).
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 99681
(Mar. 6, 2024), 89 FR 17886 (Mar. 12, 2024).
7 15 U.S.C. 78s(b)(2)(B).
8 See Securities Exchange Act Release No. 100024
(Apr. 24, 2024), 89 FR 34290 (Apr. 30, 2024)
(‘‘Order Instituting Proceedings’’).
9 See Securities Exchange Act Release No. 100567
(Jul. 19, 2024), 89 FR 60482 (Jul. 25, 2024).
10 Comment letters on the Proposal are available
at https://www.sec.gov/comments/sr-ise-2024-03/
srise202403.htm.
11 See letter from Greg Ferrari, Vice President,
U.S. Options, ISE, dated May 23, 2024 (‘‘ISE Letter
I’’).
12 See letter from Angela Dunn, Nasdaq ISE, LLC,
dated Aug. 21, 2024 (‘‘ISE Letter II’’).
13 Amendment No. 4 amends ISE Options 9,
Section 13, Supplementary Material .01 and ISE
Options 9, Section 15, Supplementary Material .01,
respectively, to establish position and exercise
limits of 25,000 contracts for the proposed IBIT
options.
14 Amendment No. 5 amends the Proposal to
describe in greater detail the surveillance
procedures that will apply to the trading of options
on IBIT. The full text of Amendment Nos. 4 and 5
is available at the Exchange’s website at https://
listingcenter.nasdaq.com/rulebook/ISE/rulefilings.
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Federal Register / Vol. 89, No. 187 / Thursday, September 26, 2024 / Notices
modified by Amendment Nos. 1, 4, and
5, on an accelerated basis.
II. Description of the Proposed Rule
Change, as Modified by Amendment
Nos. 1, 4, and 5
As described in detail in the Notice,
the Exchange proposed to amend its
rules to permit the listing and trading of
options on IBIT.15 The Exchange stated
that options on IBIT would provide
investors with a hedging and risk
management tool to manage exposure to
the price of bitcoin and bitcoin-related
products and positions.16
Options on IBIT will be physically
settled with American-style exercise.17
The Exchange stated that options on
IBIT will be subject to the Exchange’s
respective initial and continued listing
standards.18 The Exchange’s initial
listing standards require, among other
things, that the security underlying a
listed option be ‘‘characterized by a
substantial number of outstanding
shares that are widely held and actively
traded.’’ 19 The Exchange stated that
options on IBIT will trade in the same
manner as other exchange-traded fund
(‘‘ETF’’) options, and that options on
IBIT will be subject to the Exchange
rules that currently apply to the listing
and trading of all ETF options on the
Exchange, including, for example,
Exchange rules governing listing
criteria, expiration and exercise prices,
minimum increments, margin
requirements, customer accounts, and
trading halt procedures.20
As initially proposed, the position
and exercise limits for options on IBIT
would have been determined pursuant
to the Exchange’s existing rules.21
Under these rules, the position and
exercise limits applicable to an options
class depend upon the trading volume
and outstanding shares of the
underlying security. Thus, position and
exercise limits of 250,000, 200,000,
75,000, 50,000 or 25,000 contracts on
the same side of the market would have
applied to options on IBIT depending
on the six-month trading volume and
number of shares outstanding for IBIT.22
15 See
supra note 4.
Notice, 89 FR at 5051.
17 See id. at 5050.
18 See Notice, 89 FR at 5049. See also ISE Options
4, Section 3(a).
19 See Notice, 89 FR at 5049.
20 See id. at 5050.
21 See id.
22 For an option to be eligible for the 50,000contract limit, the security underlying the option
must have most recent six-month trading volume of
at least 20,000,000 shares, or most recent six-month
trading volume of at least 15,000,000 shares and at
least 40,000,000 shares currently outstanding. For
an option to be eligible for the 75,000-contract limit,
the underlying security must have most recent six-
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16 See
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In Amendment No. 4, the Exchange
proposes to set the position and exercise
limits for options on IBIT at 25,000
contracts regardless of the trading
volume and shares outstanding for
IBIT.23 According to the Exchange, ‘‘this
position limit is the lowest position
limit available in the options industry,
is extremely conservative and more than
appropriate given the IBIT’s market
capitalization, average daily volume,
and high number of outstanding
shares.’’ 24
The Exchange represents that the
surveillance procedures that it applies
to other ETF options will apply to
options on IBIT, and that its existing
surveillance and reporting safeguards
are designed to deter and detect possible
manipulative behavior that might arise
from listing and trading options on
ETFs.25 In Amendment No. 5, the
Exchange more fully describes the
surveillance procedures that will apply
to options on IBIT. The Exchange states
that it has an adequate surveillance
program in place for options, and that
the Exchange intends to apply the same
program procedures to options on IBIT
that it applies to the Exchange’s other
options products.26 The Exchange states
that it market surveillance staff would
have access to the surveillances
conducted by The Nasdaq Stock Market
LLC (‘‘Nasdaq’’) with respect to IBIT
and would review activity in IBIT when
conducting surveillances for market
abuse or manipulation in the options on
the IBIT.27 Additionally, the Exchange
states that it is a member of the
Intermarket Surveillance Group (‘‘ISG’’)
under the Intermarket Surveillance
Group Agreement, and that ISG
month trading volume of at least 40,000,000 shares,
or most recent six-month trading volume of at least
30,000,000 shares and at least 120,000,000 shares
currently outstanding. For an option to be eligible
for the 200,000-contract limit, the underlying
security must have most recent six-month trading
volume of at least 80,000,000 shares, or most recent
six-month trading volume of at least 60,000,000
shares and at least 240,000,000 shares currently
outstanding. For an option to be eligible for the
250,000-contract limit, the security underlying the
option must have most recent six-month trading
volume of at least 100,000,000 shares, or most
recent six-month trading volume of at least
75,000,000 shares and at least 300,000,000 shares
currently outstanding. The 25,000-contract limit
applies to options on underlying securities that do
not qualify for a higher contract limit. See ISE
Options 9, Section 13. In addition, ISE Options 9,
Section 13, Supplementary Material .01 establishes
higher position limits for options on certain ETFs.
23 See Amendment 4.
24 See id.
25 See Notice, 89 FR at 5050.
26 The surveillance program includes real-time
patterns for price and volume movements and posttrade surveillance patterns (e.g., spoofing, marking
the close, pinging, phishing). See Amendment No.
5.
27 See id.
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78943
members work together to coordinate
surveillance and investigative
information sharing in the stock,
options, and futures markets.28 The
Exchange further states that it has a
Regulatory Services Agreement with the
Financial Industry Regulatory Authority
(‘‘FINRA’’) and that, pursuant to a
multi-party 17d–2 joint plan, all of the
options exchanges allocate regulatory
responsibilities to FINRA to conduct
certain options-related market
surveillance that are common to rules of
all options exchanges.29
The Exchange states that underlying
shares of spot bitcoin ETPs, including
IBIT, are also subject to safeguards
related to addressing market abuse and
manipulation.30 The Exchange notes
that the Commission stated in it its
order approving proposals by several
exchanges to list and trade shares of
spot bitcoin-based exchange-traded
products (‘‘Bitcoin ETP Order’’) 31 that:
Each Exchange has a comprehensive
surveillance-sharing agreement with the CME
via their common membership in the
Intermarket Surveillance Group. This
facilitates the sharing of information that is
available to the CME through its surveillance
of its markets, including its surveillance of
the CME bitcoin futures market.32
The Exchange states that, given the
consistently high correlation between
the CME bitcoin futures market and the
spot bitcoin market, as confirmed by the
Commission through robust correlation
analysis, the Commission was able to
conclude that such surveillance sharing
agreements could reasonably be
‘‘expected to assist in surveilling for
fraudulent and manipulative acts and
practices in the specific context of the
[Bitcoin ETPs].’’ 33
28 See
id.
29 Section
19(g)(1) of the Act, among other things,
requires every SRO registered as a national
securities exchange or national securities
association to comply with the Act, the rules and
regulations thereunder, and the SRO’s own rules,
and, absent reasonable justification or excuse,
enforce compliance by its members and persons
associated with its members. See 15 U.S.C.
78q(d)(1) and 17 CFR 240.17d–2. Section 17(d)(1)
of the Act allows the Commission to relieve an SRO
of certain responsibilities with respect to members
of the SRO who are also members of another SRO
(‘‘common members’’). Specifically, Section
17(d)(1) allows the Commission to relieve an SRO
of its responsibilities to: (i) receive regulatory
reports from such members; (ii) examine such
members for compliance with the Act and the rules
and regulations thereunder, and the rules of the
SRO; or (iii) carry out other specified regulatory
responsibilities with respect to such members. See
Amendment No. 5.
30 See Amendment No. 5.
31 See supra note 3.
32 See Amendment No. 5 (citing the Bitcoin ETP
Order, 89 FR at 3009).
33 See Amendment No. 5 (citing the Bitcoin ETP
Order, 89 FR at 3010–11).
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Federal Register / Vol. 89, No. 187 / Thursday, September 26, 2024 / Notices
In light of surveillance measures
related to both options and futures, as
well as the underlying Trust,34 the
Exchange believes that existing
surveillance procedures are designed to
deter and detect possible manipulative
behavior which might potentially arise
from listing and trading the proposed
IBIT options.35
The Exchange represents that it
believes that both it and the Options
Price Reporting Authority, LLC have the
necessary systems capacity to handle
the additional traffic associated with the
listing of new series that may result
from the introduction of options on
IBIT.36
The Proposal also amends ISE
Options 4, Section 3(h) to replace the
reference to the ‘‘ETFS Gold Trust’’ with
a reference to the Aberdeen Standard
Physical Gold Trust, the current name of
the trust. In addition, the Proposal
replaces incorrect cross-references to
‘‘Options 4, Section 3(h)(A)(i)’’ in ISE
Options 4, Section 4(g) with references
to the correct citation, ‘‘Options 4,
Section 3(h)(i).’’
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III. Discussion and Commission
Findings
After careful consideration, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities exchange,37 and, in
particular, the requirements of Section 6
of the Act.38 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,39 which requires that
an exchange have rules designed to
prevent fraudulent and manipulative
acts and practices, to remove
impediments to and perfect the
mechanism of a free and open market,
and to protect investors and the public
interest.
The Order Instituting Proceedings
sought comment on several issues raised
by the Proposal, including whether
shares in the underlying bitcoin ETPs
are ‘‘widely held and actively traded,’’
as required by ISE’s rules; whether the
proposed bitcoin ETP options should be
subject to the same position limits as
stock options, and whether the available
34 See Securities Exchange Act Release No. 99295
(Jan. 8, 2024), 89 FR 2321, 2334–35 (Jan.12, 2024)
(notice of filing of Amendment No. 1 to SR–
Nasdaq–2023–016).
35 See Amendment No. 5.
36 See Notice, 89 FR at 5050.
37 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
38 15 U.S.C. 78f.
39 15 U.S.C. 78f(b)(5).
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supply in the markets for bitcoin should
be considered in establishing position
limits for options on the bitcoin ETPs;
and the potential impact on market
quality and function that could result
from listing bitcoin ETP options.40
Several commenters supported the
Proposal, generally stating that the
proposed options would help investors
to hedge their positions and manage
crypto-related risk.41 Other commenters
raised concerns regarding the potential
risks of the proposed options to
individual investors and the financial
system.42
A. Widely Held and Actively Traded
The Exchange’s initial listing
standards require, among other things,
that the security underlying a listed
option be ‘‘characterized by a
substantial number of outstanding
shares that are widely held and actively
traded.’’ 43 The Order Instituting
Proceedings requested comment on
whether the Proposal should include
data demonstrating that the shares of the
underlying ETP are ‘‘widely held and
actively traded,’’ as required by
Exchange rules.44
One commenter stated that the
Commission should wait and evaluate
the market for spot bitcoin ETPs to
determine the extent to which they are
widely held and actively traded before
approving options on the spot bitcoin
ETPs.45 The commenter stated that data
indicated that, compared to when spot
bitcoin ETPs were launched, investor
demand for spot bitcoin ETPs had
diminished, and that one market
participant had expressed the view that
the bitcoin ETP market should ‘‘settle
and find its footing’’ before the
Commission approves the listing of
options on spot bitcoin ETPs.46 In
addition, the commenter urged the
Commission to proceed cautiously
40 In addition to the Proposal, the Order
Instituting Proceedings sought comment on several
other proposals to list and trade options on bitcoin
ETPs. See Order Instituting Proceedings, 89 FR at
34294. See also ISE Letter I.
41 See letters from John C. Pickford, Susquehanna,
dated Sept. 11, 2024; Steve Crutchfield, Head of
Business Development, CTC, LLC, dated May 17,
2024; Congressman Mike Flood and Congressman
Wiley Nickel, dated May 1, 2024; Joseph Ferrucci,
dated Feb. 28, 2024; Benjamin Pincock, CIO,
Method and Theory Capital Management, dated
Feb. 19, 2024; Derek Jerina, dated Feb. 10, 2024;
Xplorer Trading, dated Feb. 7, 2024; and an
anonymous commenter, dated Jan. 21, 2024.
42 See infra notes 45–49 and accompanying text.
43 See ISE Options 4, Section 3(a)(2).
44 See Order Instituting Proceedings, 89 FR at
34294. See also ISE Options 4, Section 3(a).
45 See letter from Benjamin L. Schiffrin, Director
of Securities Policy, Better Markets, Inc., dated May
21, 2024 (‘‘Better Markets Letter I’’) at 2.
46 Better Markets Letter I at 2 and n. 17 (quoting
Terrence Yang, managing director of Swan Bitcoin).
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because ‘‘options on spot bitcoin ETPs
will expose retail investors to a
tremendous amount of risk.’’ 47 The
commenter also stated that the approval
of options on spot bitcoin ETPs could
pose risks to the broader financial
system because the Commission’s
approval of spot bitcoin ETPs had
deepened the connection between
‘‘volatile’’ cryptocurrencies and the
traditional finance system.48 The
commenter stated that options on spot
bitcoin ETPs ‘‘would further entangle
the crypto industry with traditional
finance’’ and aggravate the risks
associated with crypto assets.49
The Exchange has addressed
comments regarding whether IBIT
shares are widely held and actively
traded.50 In particular, the Exchange
represented that ‘‘on May 13, 2024,
IBIT’s total shares outstanding equaled
482,480,000. On May 13, 2024, IBIT’s
total shares comprised approximately
4% of total underlying spot BTC
liquidity. IBIT is the most liquid spot
Bitcoin ETF and the 11th most liquid
ETF in the U.S. by average volume
(34,825,921 shares) and 18th largest by
average notional ($1,246,060,738). Of
note, as of May 22, 2023, IBIT had
approximately 193,956 shareholders.’’ 51
ISE further represented that ‘‘the
market capitalization for IBIT was
19,789,068 billion [sic], with an average
daily volume (‘ADV’), for the preceding
three months prior to August 7, 2024, of
greater than 26 million shares.’’ 52 In
47 Better Markets Letter I at 1. See also letter from
Benjamin L. Schiffrin, Director of Securities Policy,
Better Markets, Inc., dated September 13, 2024
(‘‘Better Markets Letter II’’). Better Markets Letter II
reiterated the concerns that the commenter raised
in Better Markets I and provided additional
information regarding the volatility of bitcoin.
Better Markets Letter II stated, for example, that in
August 2024, bitcoin dropped 15% in a 24-hour
period, a decline that, according to the commenter,
affected more investors because of the
Commission’s approval of bitcoin-based ETPs. See
Better Markets Letter II at 2. The commenter stated
that the risks to retail investors associated with
options trading would be ‘‘compounded
exponentially’’ because of the volatility of the
crypto market and, further, that options on spot
bitcoin-based exchange-traded products exacerbate
the risks to retail investors of investing in bitcoin.
See Better Markets Letter II at 3.
48 See Better Markets Letter I at 4.
49 Better Markets Letter I at 5. See also letter from
anonymous commenter dated Apr. 15, 2024 (stating
that the introduction of derivatives tied to the price
of bitcoin would ‘‘spell disaster for the financial
system and for global markets’’).
50 See ISE Letters I and II.
51 See ISE Letter I at 2. ISE stated that it obtained
information regarding the number of shareholders
by contacting broker-dealers and combining their
reported shareholder counts. See ISE Letter I at
notes 3 and 4.
52 ISE Letter II at 3. As of September 6, 2024, IBIT
had net assets of $20,083,776,594. See https://
www.ishares.com/us/products/333011/isharesbitcoin-trust.
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addition, ISE represented that on
August 12, 2024, IBIT had 611,040,000
shares outstanding.53 The Commission
has reviewed the Exchange’s analysis
and publicly available data regarding
IBIT. Based on this review of
information provided by the Exchange
and publicly available information—
including information regarding the
number of IBIT shareholders, the
number of IBIT shares outstanding, the
ADV of IBIT, and the net assets of
IBIT—the Commission concludes that it
is reasonable for the Exchange to
determine that IBIT satisfies the
requirement of ISE Options 4, Section
3(a)(2) that an underlying be widely
held and actively traded. As stated
above, one commenter suggested that
fund outflows could indicate waning
investor demand for spot bitcoin-based
ETPs.54 The Commission agrees that
investor interest in IBIT may vary over
time.55 Nonetheless, the data discussed
above indicate that it is reasonable to
conclude that IBIT shares are widely
held and actively traded.56
With regard to comments regarding
the Proposal’s potential risks to retail
investors, including concerns regarding
the volatility of bitcoin,57 existing rules
governing broker-dealer conduct when
dealing with retail customers would
apply to the proposed IBIT options. For
example, the Exchange’s rules require
its members to ‘‘exercise due diligence
to learn the essential facts as to the
Customer and his investment objectives
and financial situation.’’ 58 In fulfilling
this obligation, the member must
consider, among other things, a
customer’s investment objectives;
employment status; estimated annual
income; estimated net worth; and
investment experience and
knowledge.59 Further, FINRA’s
heightened suitability requirements for
options trading accounts require that a
person recommending an opening
position in any option contract have ‘‘a
reasonable basis for believing, at the
time of making the recommendation,
that the customer has such knowledge
and experience in financial matters that
he may reasonably be expected to be
capable of evaluating the risks of the
recommended transaction, and is
financially able to bear the risks of the
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53 See
ISE Letter II at 5.
Better Markets Letter I at 2.
55 For example, IBIT had net assets of
$20,083,776,594 as of September 6, 2024, and net
assets of $22,672,544,214 as of September 19, 2024.
See supra note 52 and https://www.ishares.com/us/
products/333011/ishares-bitcoin-trust.
56 See supra notes 51–53 and accompanying text.
57 See Better Markets Letter II at 2–3.
58 See ISE Options 10, Section 6(b).
59 See ISE Options 10, Section 6(b)(1).
recommended position in the option
contract.’’ 60
The Commission acknowledges the
comments regarding the potential
impact of bitcoin ETP options on the
traditional financial system. Pursuant to
Section 19(b)(2) of the Exchange Act,
however, the Commission must approve
a proposed rule change filed by a
national securities exchange if it finds
that the proposed rule change is
consistent with the applicable
requirements of the Exchange Act.61 For
the reasons discussed herein, the
Commission finds that the proposed
rule change satisfies the requirements of
the Exchange Act, including the
requirements in Section 6(b)(5) that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
remove impediments to and perfect the
mechanism of a free and open market,
and to protect investors and the public
interest.
B. Position and Exercise Limits
The Order Instituting Proceedings
also requested comment on whether the
Proposal demonstrated that options on
the bitcoin ETPs should be subject to
the same position limits as options on
stock, and whether the available supply
in the markets for bitcoin should be
considered in establishing position
limits for options on the bitcoin ETPs.62
Position and exercise limits serve as
a regulatory tool designed to deter
manipulative schemes and adverse
market impact surrounding the use of
options. Since the inception of
standardized options trading, the
options exchanges have had rules
limiting the aggregate number of options
contracts that a member or customer
may hold or exercise. Options position
and exercise limits are intended to
prevent the establishment of options
positions that can be used or might
create incentives to manipulate or
disrupt the underlying market to benefit
the options position.63 In addition, such
limits serve to reduce the possibility of
disruption in the options market itself,
especially in illiquid classes.64 As the
Commission has previously recognized,
markets with active and deep trading
interest, as well as with broad public
ownership, are more difficult to
manipulate or disrupt than less active
54 See
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60 See
FINRA Rule 2360(b)(19).
Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
62 See Order Instituting Proceedings, 89 FR at
34294.
63 See Securities Exchange Act Release No. 39489
(Dec. 24, 1997), 63 FR 276, 279 (Jan 5. 1998) (order
approving File No. SR–Cboe–97–11).
64 Id.
61 See
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Sfmt 4703
78945
and deep markets with smaller public
floats.65 The Commission also has
recognized that position and exercise
limits must be sufficient to prevent
investors from disrupting the market for
the underlying security by acquiring
and exercising a number of options
contracts disproportionate to the
deliverable supply and average trading
volume of the underlying security.66 At
the same time, the Commission has
recognized that limits must not be
established at levels that are so low as
to discourage participation in the
options market by institutions and other
investors with substantial hedging
needs or to prevent specialists and
market-makers from adequately meeting
their obligations to maintain a fair and
orderly market.67
The Exchange initially proposed to
subject options on IBIT to the same
position and exercise limit levels as
other ETF options currently trading.68 In
Amendment No. 4, however, the
Exchange proposed to provide position
and exercise limits of 25,000 contracts
for options on IBIT,69 which are the
lowest position and exercise limits to
which other ETF options are subject. In
proposing these position and exercise
limits, the Exchange considered IBIT’s
market capitalization and ADV, and its
prospective position and exercise limits
in relation to other securities.70 The
Exchange stated that this analysis shows
that options symbols with similar
market capitalization and ADV to IBIT
have a position and exercise limits in
65 Id.
66 See, e.g., Securities Exchange Act Release Nos.
21907 (Mar. 29, 1985), 50 FR 13440, 13441 (Apr.
4, 1985) (order approving File Nos. SR–CBOE–84–
21, SR–Amex–84–30, SR–Phlx–84–25, and SR–
PSE–85–1); and 40875 (Dec. 31, 1998), 64 FR 1842,
1843 (Jan. 12, 1999) (order approving File Nos. SR–
CBOE–98–25; Amex–98–22; PCX–98–33; and Phlx–
98–36).
67 See id.
68 See Notice, 89 FR at 5050.
69 In Amendment No.4, the Exchange also
clarified that its analysis in ISE Letter II applies to
exercise limits as well as position limits.
70 The Exchange represented that it aggregated
market capitalization and volume data for securities
that have defined position limits utilizing data from
The Options Clearing Corporation. This pool of data
took into consideration 3,984 options on single
stock securities, excluding broad based ETFs. ISE
aggregated the data based on market capitalization
and ADV and grouped option symbols by position
limit utilizing statistical thresholds for ADV and
market capitalization that were one standard
deviation above the mean for each position limit
category (i.e., 25,000, 50,000 to 65,000, 75,000,
100,000 to less than 250,000, 250,000 to 400,000,
450,000 to 1,000,000, and greater than or equal to
1,000,000). See ISE Letter II at 3–4. ISE Options 9,
Section 13(d) establishes position limits for various
options. For example, a 25,000-contract limit
applies to options having an underlying security
that does not meet the trading volume and
outstanding shares requirements for a higher
position limit. See supra note 22.
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excess of 400,000 options. Thus,
according to the Exchange, this
demonstrates that ‘‘the proposed 25,000
same side position limit for options on
IBIT is extremely conservative relative
to these options symbols which are a
full standard deviation above the mean
in comparison.’’ 71
The Exchange also stated that it
reviewed IBIT’s data relative to the
market capitalization of the entire
bitcoin market in terms of exercise risk
and availability of deliverables.72
Utilizing data as of August 3, 2024,
there were 19,737,193 bitcoins in
circulation.73 Using a price of $57,000
per bitcoin, the market capitalization of
bitcoin would be greater than $1.125
trillion.74 According to the Exchange, if
a position limit of 400,000 options were
considered, ‘‘the exercisable risk would
represent only 6.6% of the outstanding
shares of IBIT.’’ 75 The Exchange also
stated that, with the proposed 25,000
position limit, the exercisable risk ‘‘only
represents 0.4% of the outstanding
shares of IBIT.’’ 76 Further, according to
the Exchange, because IBIT has a
creation and redemption process
managed through the issuer, the
exercisable risk for options on IBIT
would be less than 0.01% of the market
capitalization of all outstanding
bitcoin.77 The Exchange stated that,
assuming a scenario where all options
on IBIT shares were exercised given the
proposed 25,000 per same side position
limit, this would have a virtually
unnoticed impact on the entire bitcoin
market.78 The Exchange also stated that
‘‘[t]his analysis demonstrates that the
proposed 25,000 per same side position
limit is also ‘‘extremely conservative
and more than appropriate for options
on IBIT.’’ 79
In addition, the Exchange compared
the proposed position limit to position
limits for derivative products regulated
by the Commodity Futures Trading
Commission (‘‘CFTC’’). Specifically, the
Exchange examined the equivalent
bitcoin futures position limits, and,
specifically, the CME bitcoin futures
contract, which has a position limit of
2,000 futures.80 Based on this analysis,
the Exchange believes that a position
limit of 176,338 contracts for IBIT
options would be equivalent to the
2,000-contract notional position limit
81 The Exchange multiplied the 2,000-contract
limit by a multiplier of five, resulting in $550
million of notional value for bitcoin futures. See ISE
Letter II for a detailed description of the Exchange’s
methodology.
82 See id. at 5.
83 See id.
84 See id.
85 See supra note 19 and accompanying text.
86 See ISE Letter II at 3.
87 See supra note 66 and accompanying text.
71 See
ISE Letter II at 4.
72 See id.
73 See id.
74 Id.
75 Id.
76 See id.
77 See id.
78 See id.
79 Id.
80 See id.
VerDate Sep<11>2014
17:11 Sep 25, 2024
for CME bitcoin futures.81 Stated
another way, the Commission estimates
that the proposed position limit of
25,000 contracts for IBIT options is
roughly equivalent to a position limit of
280 bitcoin futures contracts. In
analyzing the proposed position and
exercise limits, ISE also considered the
supply of IBIT and the number of
market participants that would be
required to exercise their positions in
unison to place the underlying asset
under stress.82 ISE concluded that with
a position limit of 25,000 contracts on
the same side of the market and
611,040,000 shares of IBIT outstanding,
244 market participants would have to
simultaneously exercise their positions
to place IBIT under stress.83 ISE further
stated that, historically, from
observation, it appears that no more
than five market participants holding
positions in a security have exercised
their options at the same time.84
Option position limits are determined
based on six-month trading volume in
the underlying security or six-month
trading volume and number of shares
outstanding of the underlying
security.85 The Exchange stated that
position limits must balance concerns
regarding mitigating potential
manipulation and the cost of inhibiting
potential hedging activity that could be
used for legitimate economic purposes,
and to achieve such balance, options on
IBIT would be subject to the 25,000option contract limit.86 The
Commission finds that the proposed
position and exercise limits are
consistent with the Act, and in
particular, with the requirements in
Section 6(b)(5) that the rules of a
national securities exchange designed to
prevent fraudulent and manipulative
acts and practices and to protect
investors and the public interest. As
discussed above, the Commission has
recognized that position and exercise
limits must be sufficient to prevent
investors from disrupting the market for
the underlying security by acquiring
and exercising a number of options
contracts disproportionate to the
deliverable supply and average trading
volume of the underlying security.87 In
addition, the Commission has stated
previously that rules regarding position
Jkt 262001
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Frm 00106
Fmt 4703
Sfmt 4703
and exercise limits are intended to
prevent the establishment of options
positions that can be used or might
create incentives to manipulate or
disrupt the underlying market so as to
benefit the options position.88 Based on
its review of the data and analysis
provided by the Exchange, the
Commission concludes that the
proposed position and exercise limits
satisfy these objectives. Specifically, the
Commission has considered and
reviewed the Exchange’s analysis that
the exercisable risk associated with a
position limit of 25,000 contracts
represented only 0.4% of the
outstanding shares of IBIT.89 The
Commission also has considered and
reviewed the Exchange’s statement that
with a position limit of 25,000 contracts
on the same side of the market and
611,040,00 shares of IBIT outstanding,
244 market participants would have to
simultaneously exercise their positions
to place IBIT under stress.90 Based on
the Commission’s review of this
information and analysis, the
Commission concludes that the
proposed position and exercise limits
are designed to prevent investors from
disrupting the market for the underlying
security by acquiring and exercising a
number of options contracts
disproportionate to the deliverable
supply and average trading volume of
the underlying security, and to prevent
the establishment of options positions
that can be used or might create
incentives to manipulate or disrupt the
underlying market so as to benefit the
options position.
C. Surveillance
Lastly, in the Order Instituting
Proceedings, the Commission asked
whether the Proposal should include
information regarding how the
Exchange would obtain information
concerning trading in the bitcoin ETPs
from the exchanges where the bitcoin
ETPs trade. In its letter to the
Commission, the Exchange represented
that it ‘‘would implement any new
surveillance procedures it deemed
necessary to effectively monitor the
trading of options on Bitcoin ETPs.’’ 91
In Amendment No. 5 to the Proposal,
ISE provided additional detail regarding
the surveillance procedures that will
apply to IBIT options. As described
more fully above, the Exchange will
apply its existing options surveillance
88 See Securities Exchange Act Release No. 57352
(Feb.19, 2008), 73 FR 10076, 10080 (Feb. 25, 2008)
(order approving File No. SR–Cboe–2008–07).
89 See ISE Letter II at 4.
90 See id. at 5.
91 ISE Letter I at 7.
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procedures to IBIT options.92 The
Exchange states that it market
surveillance staff will have access to the
surveillances conducted by Nasdaq with
respect to IBIT and will review activity
in IBIT when conducting surveillances
for market abuse or manipulation in
options on IBIT.93 Additionally, the
Exchange states that it is a member of
ISG, whose members work together to
coordinate surveillance and
investigative information sharing in the
stock, options, and futures markets.94
CME also is a member of ISG. In
approving the Bitcoin ETPs, the
Commission 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—a U.S. regulated market whose bitcoin
futures market is highly correlated to spot
bitcoin—can reasonably be expected to assist
in surveilling for fraudulent and
manipulative acts and practices in the
specific context of [the Bitcoin ETPs].95
Together, these surveillance
procedures should allow the Exchange
to investigate suspected manipulations
or other trading abuses in IBIT options.
D. Additional Changes
The proposed changes to update the
name of the ETFS Gold Trust to the
Aberdeen Standard Physical Gold Trust
and to correct the cross-references in
ISE Options 4, Section 4(g) will protect
investors and the public interest by
helping to ensure that the Exchange’s
rules remain accurate and up-to-date.
khammond on DSKJM1Z7X2PROD with NOTICES
IV. Solicitation of Comments on
Amendment Nos. 4 and 5 to the
Proposed Rule Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment Nos. 4 and 5 are consistent
with the Act. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
ISE–2024–03 on the subject line.
92 The Exchange states that its surveillance
program includes real-time patterns for price and
volume movements and post-trade surveillance
patterns (e.g., spoofing, marking the close, pinging,
phishing). See Amendment No. 5.
93 See id.
94 See id.
95 See Bitcoin ETP Order, 89 FR at 3010–11.
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17:11 Sep 25, 2024
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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–ISE–2024–03. 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–ISE–2024–03 and should be
submitted on or before October 17,
2024.
V. Accelerated Approval of
Amendment Nos. 4 and 5
The Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,
for approving Amendment Nos. 4 and 5
prior to the 30th day after the date of
publication of notice of Amendment No.
3 in the Federal Register. Amendment
No. 4 amends the Proposal to establish
position and exercise limits of 25,000
contract for the proposed IBIT options,
instead of the same position and
exercise limits as other options
currently trading. The Exchange stated
that some commodity-based ETPs
currently have position and exercise
limits of 250,000 contracts.96 As
described above, ISE provided data and
96 See ISE Letter II at 6 (stating that the SPDR
Gold Shares ETF and the iShares Silver Trust ETF
have position limits of 250,000 contracts).
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78947
analysis supporting the proposed
position and exercise limits and stated,
among other things, that the proposed
position and exercise limits would
represent 0.4% of the outstanding
shares of IBIT.97 The Commission
concludes that proposed position and
exercise limits are designed to minimize
the potential for manipulations or
disruptions of the underlying market.98
Amendment No. 5 describes in greater
detail the surveillance procedures that
will apply to IBIT options. The
additional information regarding these
procedures assists the Commission in
evaluating the Proposal and determining
that the Proposal is consistent with the
Act and the rules and regulations
thereunder applicable to a national
securities exchange, as discussed above.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,99 to approve the proposed
rule change, as modified by Amendment
Nos. 4 and 5, on an accelerated basis.
VI. Conclusion
For the reasons set forth above, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 1, 4, and 5, is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
applicable to a national securities
exchange and, in particular, the
requirements of Section 6(b)(5) of the
Act.100
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,101 that the
proposed rule change (SR–ISE–2024–
03), as modified by Amendment Nos. 1,
4, and 5, be, and is hereby, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.102
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024–22024 Filed 9–25–24; 8:45 am]
BILLING CODE 8011–01–P
97 See
ISE Letter II at 4.
Commission recognizes that position limits
should not be established at levels that are so low
as to discourage participation in the options market
by institutions and other investors with substantial
hedging needs or to prevent specialists and market
makers from adequately meeting their obligations to
maintain a fair and orderly market. See, e.g.,
Securities Exchange Act Release Nos. 21907 (Mar.
29, 1985), 50 FR 13440 (Apr. 4, 1985) (order
approving File Nos. SR–CBOE–84–21, SR–Amex–
84–30, SR–Phlx–84–25, and SR–PSE–85–1); 40875
(Dec. 31, 1998), 64 FR 1842, 1843 (Jan. 12, 1999)
(order approving File Nos. SR–CBOE–98–25;
Amex–98–22; PCX–98–33; and Phlx–98–36). The
Commission finds that the proposed position and
exercise limits are consistent with these objectives.
99 15 U.S.C. 78s(b)(2).
100 15 U.S.C. 78f(b)(5).
101 15 U.S.C. 78s(b)(2).
102 17 CFR 200.30–3(a)(12).
98 The
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]]>Agencies
[Federal Register Volume 89, Number 187 (Thursday, September 26, 2024)]
[Notices]
[Pages 78942-78947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22024]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101128; File No. SR-ISE-2024-03]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
of Amendment Nos. 4 and 5 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment Nos. 1, 4, and 5, To
Permit the Listing and Trading of Options on the iShares Bitcoin Trust
September 20, 2024.
I. Introduction
On January 9, 2024, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade options on exchange-traded product (``ETP'')
shares that represent interests in the iShares Bitcoin Trust
(``IBIT'').\3\ On January 11, 2024, the Exchange filed Amendment No. 1
to the proposed rule change, which replaced and superseded the proposed
rule change as originally filed. On January 25, 2024, the proposed rule
change, as modified by Amendment No. 1, was published for comment in
the Federal Register.\4\ On March 6, 2024, pursuant to Section 19(b)(2)
of the Act,\5\ the Commission designated a longer period within which
to approve the Proposal, disapprove the Proposal, or institute
proceedings to determine whether to disapprove the Proposal.\6\ On
April 24, 2024, the Commission instituted proceedings under Section
19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the Proposal.\8\ On July 19, 2024, the Commission designated
a longer time for Commission action on the Proposal.\9\ The Commission
received comments addressing the proposed rule change.\10\ On May 23,
2024, ISE submitted a letter providing additional information regarding
IBIT and other bitcoin-based ETPs.\11\ On August 21, 2024, ISE
submitted a second letter that provides additional analysis supporting
the proposed position limit of 25,000 contracts for IBIT options.\12\
The Exchange filed Amendment Nos. 2 and 3 to the Proposal on August 29,
2024, and September 12, 2024, respectively. On September 12, 2024, the
Exchange withdrew Amendment Nos. 2 and 3 and filed Amendment No. 4 to
the Proposal.\13\ The Exchange filed Amendment No. 5 to the Proposal on
September 19, 2024.\14\ The Commission is publishing this notice to
solicit comments on Amendment Nos. 4 and 5 from interested persons, and
is approving the proposed rule change, as
[[Page 78943]]
modified by Amendment Nos. 1, 4, and 5, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On January 10, 2024, the Commission approved proposals by
NYSE Arca, Inc., The Nasdaq Stock Market LLC, and Cboe BZX Exchange,
Inc. to list and trade the shares of 11 bitcoin-based commodity-
based trust shares and trust units, including the iShares Bitcoin
Trust, the Grayscale Bitcoin Trust, and the Bitwise Bitcoin ETF. See
Securities Exchange Act Release No. 99306 (Jan. 10, 2024), 89 FR
3008 (Jan. 17, 2024) (order approving File Nos. SR-NYSEARCA-2021-90;
SR-NYSEARCA-2023-44; SR-NYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-
NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-CboeBZX-2023-038; SR-
CboeBZX-2023-040; SR-CboeBZX-2023-042; SR-CboeBZX-2023-044; SR-
CboeBZX-2023-072) (``Bitcoin ETP Order'').
\4\ See Securities Exchange Act Release No. 99396 (Jan. 19,
2024), 89 FR 5047 (Jan. 25, 2024) (``Notice'' or ``Proposal'').
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 99681 (Mar. 6,
2024), 89 FR 17886 (Mar. 12, 2024).
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See Securities Exchange Act Release No. 100024 (Apr. 24,
2024), 89 FR 34290 (Apr. 30, 2024) (``Order Instituting
Proceedings'').
\9\ See Securities Exchange Act Release No. 100567 (Jul. 19,
2024), 89 FR 60482 (Jul. 25, 2024).
\10\ Comment letters on the Proposal are available at https://www.sec.gov/comments/sr-ise-2024-03/srise202403.htm.
\11\ See letter from Greg Ferrari, Vice President, U.S. Options,
ISE, dated May 23, 2024 (``ISE Letter I'').
\12\ See letter from Angela Dunn, Nasdaq ISE, LLC, dated Aug.
21, 2024 (``ISE Letter II'').
\13\ Amendment No. 4 amends ISE Options 9, Section 13,
Supplementary Material .01 and ISE Options 9, Section 15,
Supplementary Material .01, respectively, to establish position and
exercise limits of 25,000 contracts for the proposed IBIT options.
\14\ Amendment No. 5 amends the Proposal to describe in greater
detail the surveillance procedures that will apply to the trading of
options on IBIT. The full text of Amendment Nos. 4 and 5 is
available at the Exchange's website at https://listingcenter.nasdaq.com/rulebook/ISE/rulefilings.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
Nos. 1, 4, and 5
As described in detail in the Notice, the Exchange proposed to
amend its rules to permit the listing and trading of options on
IBIT.\15\ The Exchange stated that options on IBIT would provide
investors with a hedging and risk management tool to manage exposure to
the price of bitcoin and bitcoin-related products and positions.\16\
---------------------------------------------------------------------------
\15\ See supra note 4.
\16\ See Notice, 89 FR at 5051.
---------------------------------------------------------------------------
Options on IBIT will be physically settled with American-style
exercise.\17\ The Exchange stated that options on IBIT will be subject
to the Exchange's respective initial and continued listing
standards.\18\ The Exchange's initial listing standards require, among
other things, that the security underlying a listed option be
``characterized by a substantial number of outstanding shares that are
widely held and actively traded.'' \19\ The Exchange stated that
options on IBIT will trade in the same manner as other exchange-traded
fund (``ETF'') options, and that options on IBIT will be subject to the
Exchange rules that currently apply to the listing and trading of all
ETF options on the Exchange, including, for example, Exchange rules
governing listing criteria, expiration and exercise prices, minimum
increments, margin requirements, customer accounts, and trading halt
procedures.\20\
---------------------------------------------------------------------------
\17\ See id. at 5050.
\18\ See Notice, 89 FR at 5049. See also ISE Options 4, Section
3(a).
\19\ See Notice, 89 FR at 5049.
\20\ See id. at 5050.
---------------------------------------------------------------------------
As initially proposed, the position and exercise limits for options
on IBIT would have been determined pursuant to the Exchange's existing
rules.\21\ Under these rules, the position and exercise limits
applicable to an options class depend upon the trading volume and
outstanding shares of the underlying security. Thus, position and
exercise limits of 250,000, 200,000, 75,000, 50,000 or 25,000 contracts
on the same side of the market would have applied to options on IBIT
depending on the six-month trading volume and number of shares
outstanding for IBIT.\22\
---------------------------------------------------------------------------
\21\ See id.
\22\ For an option to be eligible for the 50,000-contract limit,
the security underlying the option must have most recent six-month
trading volume of at least 20,000,000 shares, or most recent six-
month trading volume of at least 15,000,000 shares and at least
40,000,000 shares currently outstanding. For an option to be
eligible for the 75,000-contract limit, the underlying security must
have most recent six-month trading volume of at least 40,000,000
shares, or most recent six-month trading volume of at least
30,000,000 shares and at least 120,000,000 shares currently
outstanding. For an option to be eligible for the 200,000-contract
limit, the underlying security must have most recent six-month
trading volume of at least 80,000,000 shares, or most recent six-
month trading volume of at least 60,000,000 shares and at least
240,000,000 shares currently outstanding. For an option to be
eligible for the 250,000-contract limit, the security underlying the
option must have most recent six-month trading volume of at least
100,000,000 shares, or most recent six-month trading volume of at
least 75,000,000 shares and at least 300,000,000 shares currently
outstanding. The 25,000-contract limit applies to options on
underlying securities that do not qualify for a higher contract
limit. See ISE Options 9, Section 13. In addition, ISE Options 9,
Section 13, Supplementary Material .01 establishes higher position
limits for options on certain ETFs.
---------------------------------------------------------------------------
In Amendment No. 4, the Exchange proposes to set the position and
exercise limits for options on IBIT at 25,000 contracts regardless of
the trading volume and shares outstanding for IBIT.\23\ According to
the Exchange, ``this position limit is the lowest position limit
available in the options industry, is extremely conservative and more
than appropriate given the IBIT's market capitalization, average daily
volume, and high number of outstanding shares.'' \24\
---------------------------------------------------------------------------
\23\ See Amendment 4.
\24\ See id.
---------------------------------------------------------------------------
The Exchange represents that the surveillance procedures that it
applies to other ETF options will apply to options on IBIT, and that
its existing surveillance and reporting safeguards are designed to
deter and detect possible manipulative behavior that might arise from
listing and trading options on ETFs.\25\ In Amendment No. 5, the
Exchange more fully describes the surveillance procedures that will
apply to options on IBIT. The Exchange states that it has an adequate
surveillance program in place for options, and that the Exchange
intends to apply the same program procedures to options on IBIT that it
applies to the Exchange's other options products.\26\ The Exchange
states that it market surveillance staff would have access to the
surveillances conducted by The Nasdaq Stock Market LLC (``Nasdaq'')
with respect to IBIT and would review activity in IBIT when conducting
surveillances for market abuse or manipulation in the options on the
IBIT.\27\ Additionally, the Exchange states that it is a member of the
Intermarket Surveillance Group (``ISG'') under the Intermarket
Surveillance Group Agreement, and that ISG members work together to
coordinate surveillance and investigative information sharing in the
stock, options, and futures markets.\28\ The Exchange further states
that it has a Regulatory Services Agreement with the Financial Industry
Regulatory Authority (``FINRA'') and that, pursuant to a multi-party
17d-2 joint plan, all of the options exchanges allocate regulatory
responsibilities to FINRA to conduct certain options-related market
surveillance that are common to rules of all options exchanges.\29\
---------------------------------------------------------------------------
\25\ See Notice, 89 FR at 5050.
\26\ The surveillance program includes real-time patterns for
price and volume movements and post-trade surveillance patterns
(e.g., spoofing, marking the close, pinging, phishing). See
Amendment No. 5.
\27\ See id.
\28\ See id.
\29\ Section 19(g)(1) of the Act, among other things, requires
every SRO registered as a national securities exchange or national
securities association to comply with the Act, the rules and
regulations thereunder, and the SRO's own rules, and, absent
reasonable justification or excuse, enforce compliance by its
members and persons associated with its members. See 15 U.S.C.
78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the Act allows
the Commission to relieve an SRO of certain responsibilities with
respect to members of the SRO who are also members of another SRO
(``common members''). Specifically, Section 17(d)(1) allows the
Commission to relieve an SRO of its responsibilities to: (i) receive
regulatory reports from such members; (ii) examine such members for
compliance with the Act and the rules and regulations thereunder,
and the rules of the SRO; or (iii) carry out other specified
regulatory responsibilities with respect to such members. See
Amendment No. 5.
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The Exchange states that underlying shares of spot bitcoin ETPs,
including IBIT, are also subject to safeguards related to addressing
market abuse and manipulation.\30\ The Exchange notes that the
Commission stated in it its order approving proposals by several
exchanges to list and trade shares of spot bitcoin-based exchange-
traded products (``Bitcoin ETP Order'') \31\ that:
---------------------------------------------------------------------------
\30\ See Amendment No. 5.
\31\ See supra note 3.
Each Exchange has a comprehensive surveillance-sharing agreement
with the CME via their common membership in the Intermarket
Surveillance Group. This facilitates the sharing of information that
is available to the CME through its surveillance of its markets,
including its surveillance of the CME bitcoin futures market.\32\
---------------------------------------------------------------------------
\32\ See Amendment No. 5 (citing the Bitcoin ETP Order, 89 FR at
3009).
The Exchange states that, given the consistently high correlation
between the CME bitcoin futures market and the spot bitcoin market, as
confirmed by the Commission through robust correlation analysis, the
Commission was able to conclude that such surveillance sharing
agreements could reasonably be ``expected to assist in surveilling for
fraudulent and manipulative acts and practices in the specific context
of the [Bitcoin ETPs].'' \33\
---------------------------------------------------------------------------
\33\ See Amendment No. 5 (citing the Bitcoin ETP Order, 89 FR at
3010-11).
---------------------------------------------------------------------------
[[Page 78944]]
In light of surveillance measures related to both options and
futures, as well as the underlying Trust,\34\ the Exchange believes
that existing surveillance procedures are designed to deter and detect
possible manipulative behavior which might potentially arise from
listing and trading the proposed IBIT options.\35\
---------------------------------------------------------------------------
\34\ See Securities Exchange Act Release No. 99295 (Jan. 8,
2024), 89 FR 2321, 2334-35 (Jan.12, 2024) (notice of filing of
Amendment No. 1 to SR-Nasdaq-2023-016).
\35\ See Amendment No. 5.
---------------------------------------------------------------------------
The Exchange represents that it believes that both it and the
Options Price Reporting Authority, LLC have the necessary systems
capacity to handle the additional traffic associated with the listing
of new series that may result from the introduction of options on
IBIT.\36\
---------------------------------------------------------------------------
\36\ See Notice, 89 FR at 5050.
---------------------------------------------------------------------------
The Proposal also amends ISE Options 4, Section 3(h) to replace the
reference to the ``ETFS Gold Trust'' with a reference to the Aberdeen
Standard Physical Gold Trust, the current name of the trust. In
addition, the Proposal replaces incorrect cross-references to ``Options
4, Section 3(h)(A)(i)'' in ISE Options 4, Section 4(g) with references
to the correct citation, ``Options 4, Section 3(h)(i).''
III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange,\37\ and, in particular, the requirements of Section 6 of the
Act.\38\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(5) of the Act,\39\ which
requires that an exchange have rules designed to prevent fraudulent and
manipulative acts and practices, to remove impediments to and perfect
the mechanism of a free and open market, and to protect investors and
the public interest.
---------------------------------------------------------------------------
\37\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\38\ 15 U.S.C. 78f.
\39\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Order Instituting Proceedings sought comment on several issues
raised by the Proposal, including whether shares in the underlying
bitcoin ETPs are ``widely held and actively traded,'' as required by
ISE's rules; whether the proposed bitcoin ETP options should be subject
to the same position limits as stock options, and whether the available
supply in the markets for bitcoin should be considered in establishing
position limits for options on the bitcoin ETPs; and the potential
impact on market quality and function that could result from listing
bitcoin ETP options.\40\ Several commenters supported the Proposal,
generally stating that the proposed options would help investors to
hedge their positions and manage crypto-related risk.\41\ Other
commenters raised concerns regarding the potential risks of the
proposed options to individual investors and the financial system.\42\
---------------------------------------------------------------------------
\40\ In addition to the Proposal, the Order Instituting
Proceedings sought comment on several other proposals to list and
trade options on bitcoin ETPs. See Order Instituting Proceedings, 89
FR at 34294. See also ISE Letter I.
\41\ See letters from John C. Pickford, Susquehanna, dated Sept.
11, 2024; Steve Crutchfield, Head of Business Development, CTC, LLC,
dated May 17, 2024; Congressman Mike Flood and Congressman Wiley
Nickel, dated May 1, 2024; Joseph Ferrucci, dated Feb. 28, 2024;
Benjamin Pincock, CIO, Method and Theory Capital Management, dated
Feb. 19, 2024; Derek Jerina, dated Feb. 10, 2024; Xplorer Trading,
dated Feb. 7, 2024; and an anonymous commenter, dated Jan. 21, 2024.
\42\ See infra notes 45-49 and accompanying text.
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A. Widely Held and Actively Traded
The Exchange's initial listing standards require, among other
things, that the security underlying a listed option be ``characterized
by a substantial number of outstanding shares that are widely held and
actively traded.'' \43\ The Order Instituting Proceedings requested
comment on whether the Proposal should include data demonstrating that
the shares of the underlying ETP are ``widely held and actively
traded,'' as required by Exchange rules.\44\
---------------------------------------------------------------------------
\43\ See ISE Options 4, Section 3(a)(2).
\44\ See Order Instituting Proceedings, 89 FR at 34294. See also
ISE Options 4, Section 3(a).
---------------------------------------------------------------------------
One commenter stated that the Commission should wait and evaluate
the market for spot bitcoin ETPs to determine the extent to which they
are widely held and actively traded before approving options on the
spot bitcoin ETPs.\45\ The commenter stated that data indicated that,
compared to when spot bitcoin ETPs were launched, investor demand for
spot bitcoin ETPs had diminished, and that one market participant had
expressed the view that the bitcoin ETP market should ``settle and find
its footing'' before the Commission approves the listing of options on
spot bitcoin ETPs.\46\ In addition, the commenter urged the Commission
to proceed cautiously because ``options on spot bitcoin ETPs will
expose retail investors to a tremendous amount of risk.'' \47\ The
commenter also stated that the approval of options on spot bitcoin ETPs
could pose risks to the broader financial system because the
Commission's approval of spot bitcoin ETPs had deepened the connection
between ``volatile'' cryptocurrencies and the traditional finance
system.\48\ The commenter stated that options on spot bitcoin ETPs
``would further entangle the crypto industry with traditional finance''
and aggravate the risks associated with crypto assets.\49\
---------------------------------------------------------------------------
\45\ See letter from Benjamin L. Schiffrin, Director of
Securities Policy, Better Markets, Inc., dated May 21, 2024
(``Better Markets Letter I'') at 2.
\46\ Better Markets Letter I at 2 and n. 17 (quoting Terrence
Yang, managing director of Swan Bitcoin).
\47\ Better Markets Letter I at 1. See also letter from Benjamin
L. Schiffrin, Director of Securities Policy, Better Markets, Inc.,
dated September 13, 2024 (``Better Markets Letter II''). Better
Markets Letter II reiterated the concerns that the commenter raised
in Better Markets I and provided additional information regarding
the volatility of bitcoin. Better Markets Letter II stated, for
example, that in August 2024, bitcoin dropped 15% in a 24-hour
period, a decline that, according to the commenter, affected more
investors because of the Commission's approval of bitcoin-based
ETPs. See Better Markets Letter II at 2. The commenter stated that
the risks to retail investors associated with options trading would
be ``compounded exponentially'' because of the volatility of the
crypto market and, further, that options on spot bitcoin-based
exchange-traded products exacerbate the risks to retail investors of
investing in bitcoin. See Better Markets Letter II at 3.
\48\ See Better Markets Letter I at 4.
\49\ Better Markets Letter I at 5. See also letter from
anonymous commenter dated Apr. 15, 2024 (stating that the
introduction of derivatives tied to the price of bitcoin would
``spell disaster for the financial system and for global markets'').
---------------------------------------------------------------------------
The Exchange has addressed comments regarding whether IBIT shares
are widely held and actively traded.\50\ In particular, the Exchange
represented that ``on May 13, 2024, IBIT's total shares outstanding
equaled 482,480,000. On May 13, 2024, IBIT's total shares comprised
approximately 4% of total underlying spot BTC liquidity. IBIT is the
most liquid spot Bitcoin ETF and the 11th most liquid ETF in the U.S.
by average volume (34,825,921 shares) and 18th largest by average
notional ($1,246,060,738). Of note, as of May 22, 2023, IBIT had
approximately 193,956 shareholders.'' \51\
---------------------------------------------------------------------------
\50\ See ISE Letters I and II.
\51\ See ISE Letter I at 2. ISE stated that it obtained
information regarding the number of shareholders by contacting
broker-dealers and combining their reported shareholder counts. See
ISE Letter I at notes 3 and 4.
---------------------------------------------------------------------------
ISE further represented that ``the market capitalization for IBIT
was 19,789,068 billion [sic], with an average daily volume (`ADV'), for
the preceding three months prior to August 7, 2024, of greater than 26
million shares.'' \52\ In
[[Page 78945]]
addition, ISE represented that on August 12, 2024, IBIT had 611,040,000
shares outstanding.\53\ The Commission has reviewed the Exchange's
analysis and publicly available data regarding IBIT. Based on this
review of information provided by the Exchange and publicly available
information--including information regarding the number of IBIT
shareholders, the number of IBIT shares outstanding, the ADV of IBIT,
and the net assets of IBIT--the Commission concludes that it is
reasonable for the Exchange to determine that IBIT satisfies the
requirement of ISE Options 4, Section 3(a)(2) that an underlying be
widely held and actively traded. As stated above, one commenter
suggested that fund outflows could indicate waning investor demand for
spot bitcoin-based ETPs.\54\ The Commission agrees that investor
interest in IBIT may vary over time.\55\ Nonetheless, the data
discussed above indicate that it is reasonable to conclude that IBIT
shares are widely held and actively traded.\56\
---------------------------------------------------------------------------
\52\ ISE Letter II at 3. As of September 6, 2024, IBIT had net
assets of $20,083,776,594. See https://www.ishares.com/us/products/333011/ishares-bitcoin-trust.
\53\ See ISE Letter II at 5.
\54\ See Better Markets Letter I at 2.
\55\ For example, IBIT had net assets of $20,083,776,594 as of
September 6, 2024, and net assets of $22,672,544,214 as of September
19, 2024. See supra note 52 and https://www.ishares.com/us/products/333011/ishares-bitcoin-trust.
\56\ See supra notes 51-53 and accompanying text.
---------------------------------------------------------------------------
With regard to comments regarding the Proposal's potential risks to
retail investors, including concerns regarding the volatility of
bitcoin,\57\ existing rules governing broker-dealer conduct when
dealing with retail customers would apply to the proposed IBIT options.
For example, the Exchange's rules require its members to ``exercise due
diligence to learn the essential facts as to the Customer and his
investment objectives and financial situation.'' \58\ In fulfilling
this obligation, the member must consider, among other things, a
customer's investment objectives; employment status; estimated annual
income; estimated net worth; and investment experience and
knowledge.\59\ Further, FINRA's heightened suitability requirements for
options trading accounts require that a person recommending an opening
position in any option contract have ``a reasonable basis for
believing, at the time of making the recommendation, that the customer
has such knowledge and experience in financial matters that he may
reasonably be expected to be capable of evaluating the risks of the
recommended transaction, and is financially able to bear the risks of
the recommended position in the option contract.'' \60\
---------------------------------------------------------------------------
\57\ See Better Markets Letter II at 2-3.
\58\ See ISE Options 10, Section 6(b).
\59\ See ISE Options 10, Section 6(b)(1).
\60\ See FINRA Rule 2360(b)(19).
---------------------------------------------------------------------------
The Commission acknowledges the comments regarding the potential
impact of bitcoin ETP options on the traditional financial system.
Pursuant to Section 19(b)(2) of the Exchange Act, however, the
Commission must approve a proposed rule change filed by a national
securities exchange if it finds that the proposed rule change is
consistent with the applicable requirements of the Exchange Act.\61\
For the reasons discussed herein, the Commission finds that the
proposed rule change satisfies the requirements of the Exchange Act,
including the requirements in Section 6(b)(5) that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to remove impediments to and perfect
the mechanism of a free and open market, and to protect investors and
the public interest.
---------------------------------------------------------------------------
\61\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
---------------------------------------------------------------------------
B. Position and Exercise Limits
The Order Instituting Proceedings also requested comment on whether
the Proposal demonstrated that options on the bitcoin ETPs should be
subject to the same position limits as options on stock, and whether
the available supply in the markets for bitcoin should be considered in
establishing position limits for options on the bitcoin ETPs.\62\
---------------------------------------------------------------------------
\62\ See Order Instituting Proceedings, 89 FR at 34294.
---------------------------------------------------------------------------
Position and exercise limits serve as a regulatory tool designed to
deter manipulative schemes and adverse market impact surrounding the
use of options. Since the inception of standardized options trading,
the options exchanges have had rules limiting the aggregate number of
options contracts that a member or customer may hold or exercise.
Options position and exercise limits are intended to prevent the
establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market to benefit
the options position.\63\ In addition, such limits serve to reduce the
possibility of disruption in the options market itself, especially in
illiquid classes.\64\ As the Commission has previously recognized,
markets with active and deep trading interest, as well as with broad
public ownership, are more difficult to manipulate or disrupt than less
active and deep markets with smaller public floats.\65\ The Commission
also has recognized that position and exercise limits must be
sufficient to prevent investors from disrupting the market for the
underlying security by acquiring and exercising a number of options
contracts disproportionate to the deliverable supply and average
trading volume of the underlying security.\66\ At the same time, the
Commission has recognized that limits must not be established at levels
that are so low as to discourage participation in the options market by
institutions and other investors with substantial hedging needs or to
prevent specialists and market-makers from adequately meeting their
obligations to maintain a fair and orderly market.\67\
---------------------------------------------------------------------------
\63\ See Securities Exchange Act Release No. 39489 (Dec. 24,
1997), 63 FR 276, 279 (Jan 5. 1998) (order approving File No. SR-
Cboe-97-11).
\64\ Id.
\65\ Id.
\66\ See, e.g., Securities Exchange Act Release Nos. 21907 (Mar.
29, 1985), 50 FR 13440, 13441 (Apr. 4, 1985) (order approving File
Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-25, and SR-PSE-85-1);
and 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan. 12, 1999) (order
approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-98-33; and Phlx-
98-36).
\67\ See id.
---------------------------------------------------------------------------
The Exchange initially proposed to subject options on IBIT to the
same position and exercise limit levels as other ETF options currently
trading.\68\ In Amendment No. 4, however, the Exchange proposed to
provide position and exercise limits of 25,000 contracts for options on
IBIT,\69\ which are the lowest position and exercise limits to which
other ETF options are subject. In proposing these position and exercise
limits, the Exchange considered IBIT's market capitalization and ADV,
and its prospective position and exercise limits in relation to other
securities.\70\ The Exchange stated that this analysis shows that
options symbols with similar market capitalization and ADV to IBIT have
a position and exercise limits in
[[Page 78946]]
excess of 400,000 options. Thus, according to the Exchange, this
demonstrates that ``the proposed 25,000 same side position limit for
options on IBIT is extremely conservative relative to these options
symbols which are a full standard deviation above the mean in
comparison.'' \71\
---------------------------------------------------------------------------
\68\ See Notice, 89 FR at 5050.
\69\ In Amendment No.4, the Exchange also clarified that its
analysis in ISE Letter II applies to exercise limits as well as
position limits.
\70\ The Exchange represented that it aggregated market
capitalization and volume data for securities that have defined
position limits utilizing data from The Options Clearing
Corporation. This pool of data took into consideration 3,984 options
on single stock securities, excluding broad based ETFs. ISE
aggregated the data based on market capitalization and ADV and
grouped option symbols by position limit utilizing statistical
thresholds for ADV and market capitalization that were one standard
deviation above the mean for each position limit category (i.e.,
25,000, 50,000 to 65,000, 75,000, 100,000 to less than 250,000,
250,000 to 400,000, 450,000 to 1,000,000, and greater than or equal
to 1,000,000). See ISE Letter II at 3-4. ISE Options 9, Section
13(d) establishes position limits for various options. For example,
a 25,000-contract limit applies to options having an underlying
security that does not meet the trading volume and outstanding
shares requirements for a higher position limit. See supra note 22.
\71\ See ISE Letter II at 4.
---------------------------------------------------------------------------
The Exchange also stated that it reviewed IBIT's data relative to
the market capitalization of the entire bitcoin market in terms of
exercise risk and availability of deliverables.\72\ Utilizing data as
of August 3, 2024, there were 19,737,193 bitcoins in circulation.\73\
Using a price of $57,000 per bitcoin, the market capitalization of
bitcoin would be greater than $1.125 trillion.\74\ According to the
Exchange, if a position limit of 400,000 options were considered, ``the
exercisable risk would represent only 6.6% of the outstanding shares of
IBIT.'' \75\ The Exchange also stated that, with the proposed 25,000
position limit, the exercisable risk ``only represents 0.4% of the
outstanding shares of IBIT.'' \76\ Further, according to the Exchange,
because IBIT has a creation and redemption process managed through the
issuer, the exercisable risk for options on IBIT would be less than
0.01% of the market capitalization of all outstanding bitcoin.\77\ The
Exchange stated that, assuming a scenario where all options on IBIT
shares were exercised given the proposed 25,000 per same side position
limit, this would have a virtually unnoticed impact on the entire
bitcoin market.\78\ The Exchange also stated that ``[t]his analysis
demonstrates that the proposed 25,000 per same side position limit is
also ``extremely conservative and more than appropriate for options on
IBIT.'' \79\
---------------------------------------------------------------------------
\72\ See id.
\73\ See id.
\74\ Id.
\75\ Id.
\76\ See id.
\77\ See id.
\78\ See id.
\79\ Id.
---------------------------------------------------------------------------
In addition, the Exchange compared the proposed position limit to
position limits for derivative products regulated by the Commodity
Futures Trading Commission (``CFTC''). Specifically, the Exchange
examined the equivalent bitcoin futures position limits, and,
specifically, the CME bitcoin futures contract, which has a position
limit of 2,000 futures.\80\ Based on this analysis, the Exchange
believes that a position limit of 176,338 contracts for IBIT options
would be equivalent to the 2,000-contract notional position limit for
CME bitcoin futures.\81\ Stated another way, the Commission estimates
that the proposed position limit of 25,000 contracts for IBIT options
is roughly equivalent to a position limit of 280 bitcoin futures
contracts. In analyzing the proposed position and exercise limits, ISE
also considered the supply of IBIT and the number of market
participants that would be required to exercise their positions in
unison to place the underlying asset under stress.\82\ ISE concluded
that with a position limit of 25,000 contracts on the same side of the
market and 611,040,000 shares of IBIT outstanding, 244 market
participants would have to simultaneously exercise their positions to
place IBIT under stress.\83\ ISE further stated that, historically,
from observation, it appears that no more than five market participants
holding positions in a security have exercised their options at the
same time.\84\
---------------------------------------------------------------------------
\80\ See id.
\81\ The Exchange multiplied the 2,000-contract limit by a
multiplier of five, resulting in $550 million of notional value for
bitcoin futures. See ISE Letter II for a detailed description of the
Exchange's methodology.
\82\ See id. at 5.
\83\ See id.
\84\ See id.
---------------------------------------------------------------------------
Option position limits are determined based on six-month trading
volume in the underlying security or six-month trading volume and
number of shares outstanding of the underlying security.\85\ The
Exchange stated that position limits must balance concerns regarding
mitigating potential manipulation and the cost of inhibiting potential
hedging activity that could be used for legitimate economic purposes,
and to achieve such balance, options on IBIT would be subject to the
25,000-option contract limit.\86\ The Commission finds that the
proposed position and exercise limits are consistent with the Act, and
in particular, with the requirements in Section 6(b)(5) that the rules
of a national securities exchange designed to prevent fraudulent and
manipulative acts and practices and to protect investors and the public
interest. As discussed above, the Commission has recognized that
position and exercise limits must be sufficient to prevent investors
from disrupting the market for the underlying security by acquiring and
exercising a number of options contracts disproportionate to the
deliverable supply and average trading volume of the underlying
security.\87\ In addition, the Commission has stated previously that
rules regarding position and exercise limits are intended to prevent
the establishment of options positions that can be used or might create
incentives to manipulate or disrupt the underlying market so as to
benefit the options position.\88\ Based on its review of the data and
analysis provided by the Exchange, the Commission concludes that the
proposed position and exercise limits satisfy these objectives.
Specifically, the Commission has considered and reviewed the Exchange's
analysis that the exercisable risk associated with a position limit of
25,000 contracts represented only 0.4% of the outstanding shares of
IBIT.\89\ The Commission also has considered and reviewed the
Exchange's statement that with a position limit of 25,000 contracts on
the same side of the market and 611,040,00 shares of IBIT outstanding,
244 market participants would have to simultaneously exercise their
positions to place IBIT under stress.\90\ Based on the Commission's
review of this information and analysis, the Commission concludes that
the proposed position and exercise limits are designed to prevent
investors from disrupting the market for the underlying security by
acquiring and exercising a number of options contracts disproportionate
to the deliverable supply and average trading volume of the underlying
security, and to prevent the establishment of options positions that
can be used or might create incentives to manipulate or disrupt the
underlying market so as to benefit the options position.
---------------------------------------------------------------------------
\85\ See supra note 19 and accompanying text.
\86\ See ISE Letter II at 3.
\87\ See supra note 66 and accompanying text.
\88\ See Securities Exchange Act Release No. 57352 (Feb.19,
2008), 73 FR 10076, 10080 (Feb. 25, 2008) (order approving File No.
SR-Cboe-2008-07).
\89\ See ISE Letter II at 4.
\90\ See id. at 5.
---------------------------------------------------------------------------
C. Surveillance
Lastly, in the Order Instituting Proceedings, the Commission asked
whether the Proposal should include information regarding how the
Exchange would obtain information concerning trading in the bitcoin
ETPs from the exchanges where the bitcoin ETPs trade. In its letter to
the Commission, the Exchange represented that it ``would implement any
new surveillance procedures it deemed necessary to effectively monitor
the trading of options on Bitcoin ETPs.'' \91\ In Amendment No. 5 to
the Proposal, ISE provided additional detail regarding the surveillance
procedures that will apply to IBIT options. As described more fully
above, the Exchange will apply its existing options surveillance
[[Page 78947]]
procedures to IBIT options.\92\ The Exchange states that it market
surveillance staff will have access to the surveillances conducted by
Nasdaq with respect to IBIT and will review activity in IBIT when
conducting surveillances for market abuse or manipulation in options on
IBIT.\93\ Additionally, the Exchange states that it is a member of ISG,
whose members work together to coordinate surveillance and
investigative information sharing in the stock, options, and futures
markets.\94\ CME also is a member of ISG. In approving the Bitcoin
ETPs, the Commission concluded that:
---------------------------------------------------------------------------
\91\ ISE Letter I at 7.
\92\ The Exchange states that its surveillance program includes
real-time patterns for price and volume movements and post-trade
surveillance patterns (e.g., spoofing, marking the close, pinging,
phishing). See Amendment No. 5.
\93\ See id.
\94\ See id.
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 highly correlated to spot bitcoin--
can reasonably be expected to assist in surveilling for fraudulent
and manipulative acts and practices in the specific context of [the
Bitcoin ETPs].\95\
---------------------------------------------------------------------------
\95\ See Bitcoin ETP Order, 89 FR at 3010-11.
Together, these surveillance procedures should allow the Exchange
to investigate suspected manipulations or other trading abuses in IBIT
options.
D. Additional Changes
The proposed changes to update the name of the ETFS Gold Trust to
the Aberdeen Standard Physical Gold Trust and to correct the cross-
references in ISE Options 4, Section 4(g) will protect investors and
the public interest by helping to ensure that the Exchange's rules
remain accurate and up-to-date.
IV. Solicitation of Comments on Amendment Nos. 4 and 5 to the Proposed
Rule Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment Nos. 4 and 5 are 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-ISE-2024-03 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-ISE-2024-03. 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-ISE-2024-03 and should be
submitted on or before October 17, 2024.
V. Accelerated Approval of Amendment Nos. 4 and 5
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, for approving Amendment Nos. 4 and 5 prior to the 30th day
after the date of publication of notice of Amendment No. 3 in the
Federal Register. Amendment No. 4 amends the Proposal to establish
position and exercise limits of 25,000 contract for the proposed IBIT
options, instead of the same position and exercise limits as other
options currently trading. The Exchange stated that some commodity-
based ETPs currently have position and exercise limits of 250,000
contracts.\96\ As described above, ISE provided data and analysis
supporting the proposed position and exercise limits and stated, among
other things, that the proposed position and exercise limits would
represent 0.4% of the outstanding shares of IBIT.\97\ The Commission
concludes that proposed position and exercise limits are designed to
minimize the potential for manipulations or disruptions of the
underlying market.\98\ Amendment No. 5 describes in greater detail the
surveillance procedures that will apply to IBIT options. The additional
information regarding these procedures assists the Commission in
evaluating the Proposal and determining that the Proposal is consistent
with the Act and the rules and regulations thereunder applicable to a
national securities exchange, as discussed above. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\99\ to approve the proposed rule change, as modified by Amendment
Nos. 4 and 5, on an accelerated basis.
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\96\ See ISE Letter II at 6 (stating that the SPDR Gold Shares
ETF and the iShares Silver Trust ETF have position limits of 250,000
contracts).
\97\ See ISE Letter II at 4.
\98\ The Commission recognizes that position limits should not
be established at levels that are so low as to discourage
participation in the options market by institutions and other
investors with substantial hedging needs or to prevent specialists
and market makers from adequately meeting their obligations to
maintain a fair and orderly market. See, e.g., Securities Exchange
Act Release Nos. 21907 (Mar. 29, 1985), 50 FR 13440 (Apr. 4, 1985)
(order approving File Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-
25, and SR-PSE-85-1); 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan.
12, 1999) (order approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-
98-33; and Phlx-98-36). The Commission finds that the proposed
position and exercise limits are consistent with these objectives.
\99\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change, as modified by Amendment Nos. 1, 4, and 5, is
consistent with the requirements of the Exchange Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, the requirements of Section 6(b)(5) of the
Act.\100\
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\100\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\101\ that the proposed rule change (SR-ISE-2024-03), as modified
by Amendment Nos. 1, 4, and 5, be, and is hereby, approved.
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\101\ 15 U.S.C. 78s(b)(2).
\102\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\102\
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-22024 Filed 9-25-24; 8:45 am]
BILLING CODE 8011-01-P
