Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Proposed Rule Change To Increase the Position and Exercise Limits for iShares Bitcoin Trust ETF, 704-710 [2024-31771]
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704
Federal Register / Vol. 90, No. 3 / Monday, January 6, 2025 / Notices
rule change, is available on the
Exchange’s website at https://
www.cboe.com/AboutCBOE/CBOELegal
RegulatoryHome.aspx, at the principal
office of the Exchange, and on the
Commission’s website at https://
www.sec.gov/rules-regulations/selfregulatory-organization-rulemaking/
national-securities-exchanges?file_
number=SR-CboeBZX-2024-130.
II. Solicitation of Comments
khammond on DSK9W7S144PROD with NOTICES
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.5
Comments may be submitted
electronically by using the
Commission’s internet comment form
(https://www.sec.gov/rules-regulations/
self-regulatory-organizationrulemaking/national-securitiesexchanges?file_number=SR-CboeBZX2024-130) or by sending an email to
rule-comments@sec.gov. Please include
file number SR–CboeBZX–2024–130 on
the subject line. Alternatively, paper
comments may be sent to Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090. All submissions should
refer to file number SR–CboeBZX–2024–
130. 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-regulations/
self-regulatory-organizationrulemaking/national-securitiesexchanges?file_number=SR-CboeBZX2024-130). Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2024–130 and should be
submitted on or before January 27, 2025.
5 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
SRO.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024–31773 Filed 1–3–25; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–102065; File No. SR–ISE–
2024–62]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing of Proposed
Rule Change To Increase the Position
and Exercise Limits for iShares Bitcoin
Trust ETF
December 31, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
20, 2024, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by ISE. The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Options 9, Sections 13 and 15 to
propose an increase to the position and
exercise limits for iShares Bitcoin Trust
ETF (‘‘IBIT’’).
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/ise/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
6 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Options 9, Section 13, Position Limits,
and Options 9, Section 15, Exercise
Limits, to increase the position and
exercise limits for options on IBIT from
25,000 to 250,000 contracts.
IBIT is an Exchange-Traded Fund
(‘‘ETF’’) that holds bitcoin and is listed
on The Nasdaq Stock Market LLC.3 On
September 20, 2024, ISE received
approval to list options on IBIT.4 The
position and exercise limits for IBIT
options are 25,000 contracts as stated in
Options 9, Sections 13 and 15, the
lowest limit available in options.5
Per the Commission ‘‘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 positions.’’ 6 For this
reason, the Commission requires 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.’’ 7 Based on its
review of the data and analysis provided
by the Exchange, the Commission
concluded that the 25,000 contract
position limit for non-FLEX IBIT
options satisfied these objectives.8
3 Nasdaq received approval to list and trade
Bitcoin-Based Commodity-Based Trust Shares in
IBIT pursuant to Rule 5711(d) of Nasdaq. See
Securities Exchange Act Release No. 99306 (January
10, 2024), 89 FR 3008 (January 17, 2024) (SR–
NASDAQ–2023–016) (Order Granting Accelerated
Approval of Proposed Rule Changes, as Modified by
Amendments Thereto, To List and Trade BitcoinBased Commodity-Based Trust Shares and Trust
Units). IBIT started trading on January 11, 2024.
4 See Securities Exchange Act Release No. 101128
(September 20, 2024), 89 FR 78942 (September 26,
2024) (SR–ISE–2024–03) (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) (‘‘IBIT Approval Order’’). ISE
began trading IBIT options on November 19, 2024.
5 Options on Fidelity Wise Origin Bitcoin Fund,
ARK 21Shares Bitcoin ETF, Grayscale Bitcoin Trust
(BTC), Grayscale Bitcoin Mini Trust BTC, and
Bitwise Bitcoin ETF are also subject to a 25,000
contract position and exercise limit.
6 See supra note 4, IBIT Approval Order, 89 FR
78946.
7 See id.
8 See id.
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Federal Register / Vol. 90, No. 3 / Monday, January 6, 2025 / Notices
While the Exchange proposed an
aggregated 25,000 contract position
limit for IBIT options in its IBIT
Approval Order, it nonetheless believed
that evidence existed to support a much
higher position limit. Specifically, the
Commission has considered and
reviewed the Exchange’s analysis in its
IBIT Approval Order that the
exercisable risk associated with a
position limit of 25,000 contracts
represented only 0.4% of the
outstanding shares of IBIT.9 The
Commission also has considered and
reviewed the Exchange’s statement its
IBIT Approval Order 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.10 Based on
the Commission’s review of this
information and analysis, the
Commission concluded that the
proposed position and exercise limits of
25,000 contracts were 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.11
IBIT currently qualifies for a 250,000
contract position limit pursuant to the
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Market cap
statistics
25k
criteria in Options 9, Section 13(g),
which requires that, for the most recent
six-month period, trading volume for
the underlying security be at least
100,000,000 shares.12 As of November
25, 2024, the market capitalization for
IBIT was $46,783,480,800 13 with an
average daily volume (‘‘ADV’’), for the
preceding three months prior to
November 25, 2024, of 39,421,877
shares. IBIT is well above the requisite
minimum of 100,000,000 shares
necessary to qualify for the 250,000
contract position limit. Also, as of
November 25, 2024, there are
19,787,762 bitcoins in circulation.14 At
a price of $94,830,15 that equates to a
market capitalization of greater than
$1.876 trillion US. If a position limit of
250,000 contracts were considered, the
exercisable risk would represent
2.89% 16 of the outstanding shares
outstanding of IBIT. Given IBIT’s
liquidity, the current 25,000 position
limit is extremely conservative.
Position limits, and exercise limits,
are designed to limit the number of
options contracts traded on the
exchange in an underlying security that
an investor, acting alone or in concert
with others directly or indirectly, may
control. These limits, which are
described in ISE Options 9, Sections 13
and 15, are intended to address
potential manipulative schemes and
adverse market impacts surrounding the
use of options, such as disrupting the
market in the security underlying the
options. Position and exercise limits
must balance concerns regarding
mitigating potential manipulation and
50k
75k
100k–<250k
the cost of inhibiting potential hedging
activity that could be used for legitimate
economic purposes. To achieve this
balance, ISE proposes to increase IBIT’s
position and exercise limits from 25,000
to 250,000 contracts. ISE believes that
250,000 contracts is the appropriate
position and exercise limit based on its
analysis described below.
First, ISE considered IBIT’s market
capitalization and Average Daily
Volume (‘‘ADV’’), and prospective
position limit in relation to other
securities. In measuring IBIT against
other securities, ISE aggregated market
capitalization and volume data for
securities that have defined position
limits utilizing data from The Options
Clearing Corporations (‘‘OCC’’).17 This
pool of data took into consideration
3,897 options on single stock securities,
excluding broad based ETFs.18 Next, the
data was aggregated based on market
capitalization and ADV and grouped by
option symbol and position limit
utilizing statistical thresholds for ADV,
based on ninety days, 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, and 250,000).19 This
exercise was performed to demonstrate
IBIT’s position limit relative to other
options symbols in terms of market
capitalization and ADV. For reference,
the market capitalization for IBIT was
$46,783,480,800 20 with an ADV, for the
preceding three months prior to
November 25, 2024, of 39,421,877
shares.
250k–<500k
500k–1mm
>1mm
# of observations ...
average .................
median ...................
min .........................
max ........................
562
1,038,795,162
360,130,143
2,204,436
36,120,249,097
473
2,957,127,045
889,627,570
4,211,156
70,846,805,916
651
4,466,049,699
1,445,831,231
3,830,532
174,820,296,591
240
5,390,836,360
1,643,123,279
5,090,230
106,971,594,180
1934
26,286,624,063
3,535,963,213
1,616,094
3,573,884,443,220
27
67,390,777,100
27,063,940,966
2,762,394,749
733,972,714,698
10
717,540,906,097
90,047,209,478
11,786,645,969
3,358,647,600,000
IBIT % rank ....
100.00%
98.94%
98.77%
98.33%
88.57%
59.26%
20.00%
9 See id. Data represents figures from August 12,
2024.
10 See id. Data represents figures from August 12,
2024.
11 See id.
12 Options 9, Section 13(g), Equity Option
Position Limits, provides at subparagraph (i) that
the position limit shall be 250,000 contracts for
options: (a) on an underlying stock or ExchangeTraded Fund Share which had trading volume of
at least 100,000,000 shares during the most recent
six-month trading period; or (b) on an underlying
stock or Exchange-Traded Fund Share which had
trading volume of at least 75,000,000 shares during
the most recent six-month trading period and has
at least 300,000,000 shares currently outstanding.
13 The market capitalization was determined by
multiplying a settlement price of ($54.02) by the
number of shares outstanding (866,040,000). This
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figure was acquired as of November 25, 2024. See
https://www.ishares.com/us/products/333011/
ishares-bitcoin-trust-etf.
14 See https://www.coingecko.com/en/coins/
bitcoin.
15 This is the approximate price of bitcoin from
4:00pm ET on November 25, 2024.
16 This percentage is arrived at with this equation:
(250,000 contract limit * 100 shares per option/
866,040,000 shares outstanding).
17 The computations are based on OCC data from
November 25, 2024. Data displaying zero values in
market capitalization or ADV were removed.
18 IBIT has one asset and therefore is not
comparable to a broad based ETF where there are
typically multiple components.
19 ISE Options 9, Section 13(d) sets out position
limits for various contracts. For example, a 25,000
PO 00000
Frm 00123
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contract limit applies to those options having an
underlying security that does not meet the
requirements for a higher options contract limit.
The Exchange notes that position limits may also
be higher due to corporate actions in the underlying
equities, such as a stock split. See https://
www.theocc.com/market-data/market-data-reports/
series-and-trading-data/position-limits. As a result,
the Exchange’s pool of data considered higher
position limits than 250,000 contracts, where
applicable.
20 The market capitalization was determined by
multiplying a settlement price of ($54.02) by the
number of shares outstanding (866,040,000). This
figure was acquired as of November 25, 2024. See
https://www.ishares.com/us/products/333011/
ishares-bitcoin-trust-etf.
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Federal Register / Vol. 90, No. 3 / Monday, January 6, 2025 / Notices
90-Day ADV
statistics
25k
50k
75k
100k–<250k
250k–<500k
500k–1mm
>1mm
# of observations ...
average .................
median ...................
min .........................
max ........................
562
76,586
67,231
4,791
244,499
473
213,419
206,402
10,084
564,451
651
425,542
409,177
18,191
989,341
240
623,888
625,882
105,713
1,339,553
1934
3,510,784
1,620,931
16,276
88,351,060
27
5,930,607
4,724,248
1,207,242
22,397,311
10
44,610,385
18,017,607
1,771,544
271,230,790
IBIT % rank ....
100.00%
100.00%
100.00%
100.00%
99.43%
100.00%
80.00%
Based on the above table, if IBIT were
compared to the 1,934 stocks that have
position limits of 250,000 contracts to
less than 500,000 contracts it would
rank in the 88th percentile for market
capitalization and the 99th percentile
for ADV.
The Exchange also analyzed the
position limits for IBIT by regressing the
market capitalization figures and 90-day
ADV of all non-ETF equities, against
their respective position limit figures.
From this regression, the Exchange was
able to determine the implied
coefficients to create a formulaic
method for determining an appropriate
position limit.21 In this case, the
modeled position limit is 565,796
contracts.22 The results of the study are
below.
REGRESSION STATISTICS
Multiple R ..........................
R Square ..........................
Adjusted R Square ...........
Standard Error ..................
Observations .....................
0.496800597
0.246810833
0.246361643
202227.4271
3905
ANOVA
df
SS
F
Regression .......................................................................................................
Residual ...........................................................................................................
2
3903
5.2304E+13
1.5962E+14
2.6152E+13
4.0896E+10
639.482566
........................
Total ..........................................................................................................
3905
2.1192E+14
........................
........................
t Stat
P-value
Coefficients
Intercept ...........................................................................................................
Market Cap ......................................................................................................
90-day ADV .....................................................................................................
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MS
0
0.0000002630
0.0140402219
Standard error
#N/A
3.3371E–08
0.00055818
#N/A
7.88130564
25.1533643
#N/A
4.1699E–15
1.613E–129
Based on the aforementioned analysis,
the Exchange believes that the proposed
250,000 contracts for position and
exercise limits is appropriate.
Second, ISE reviewed IBIT’s data
relative to the market capitalization of
the entire bitcoin market in terms of
exercise risk and availability of
deliverables. As of November 25, 2024,
there are 19,787,762 bitcoins in
circulation.23 At a price of $94,830,24
that equates to a market capitalization of
greater than $1.876 trillion US. If a
position limit of 250,000 contracts were
considered, the exercisable risk would
represent 2.89% 25 of the outstanding
shares outstanding of IBIT. Since IBIT
has a creation and redemption process
managed through the issuer, the
position limit can be compared to the
total market capitalization of the entire
bitcoin market and in that case, the
exercisable risk for options on IBIT
would represent less than .072% of all
bitcoin outstanding.26 Assuming a
scenario where all options on IBIT
shares were exercised given the
proposed 250,000 contract position
limit (and exercise limit), this would
have a virtually unnoticed impact on
the entire bitcoin market. This analysis
demonstrates that the proposed 250,000
per same side position and exercise
limit is appropriate for options on IBIT
given its liquidity.
Third, ISE reviewed the proposed
position limit by comparing it to
position limits for derivative products
regulated by the Commodity Futures
Trading Commission (‘‘CFTC’’). While
the CFTC, through the relevant
Designated Contract Markets, only
regulates options positions based upon
delta equivalents (creating a less
stringent standard), ISE examined
equivalent bitcoin futures position
limits. In particular, ISE looked to the
CME bitcoin futures contract 27 that has
a position limit of 8,000 futures.28 On
October 22, 2024, CME bitcoin futures
settled at $94,945.29 On October 22,
2024, IBIT settled at $54.02, which
would equate to greater than 17,557,898
shares of IBIT if the CME notional
position limit was utilized. Since
substantial portions of any distributed
options portfolio is likely to be out of
the money on expiration, an options
position limit equivalent to the CME
position limit for bitcoin futures
(considering that all options deltas are
<=1.00) should be a bit higher than the
CME implied 175,578 limit. Of note,
unlike options contracts, CME position
limits are calculated on a net futuresequivalent basis by contract and include
contracts that aggregate into one or more
base contracts according to an
aggregation ratio(s).30 Therefore, if a
21 The Exchange utilized Excel’s Data Analysis
Package to model the position limit.
22 The Exchange utilized this formula to arrive at
the number of contracts: ((46,783,380,800 mkt cap
* 0.0000002630 market cap coefficient) +
(39,421,877 ADV * 0.0140402219 ADV coefficient)).
23 See https://www.coingecko.com/en/coins/
bitcoin.
24 This is the approximate price of bitcoin from
4:00 pm ET on November 25, 2024.
25 This percentage is arrived at with this equation:
(250,000 contract limit * 100 shares per option/
866,040,000 shares outstanding).
26 This number was arrived at with this
calculation: ((250,000 limit * 100 shares per option
* $54.02 settle) / (19,787,762 BTC outstanding *
$94,830 BTC price)).
27 CME Bitcoin Futures are described in Chapter
350 of CME’s Rulebook.
28 See the Position Accountability and Reportable
Level Table in the Interpretations & Special Notices
Section of Chapter 5 of CME’s Rulebook.
29 2,000 futures at a 5 bitcoin multiplier (per the
contract specifications) equates to $949,450,000
(2000 contracts * 5 BTC per contract * $94,945
price of November BTC future) of notional value.
30 See https://www.cmegroup.com/education/
courses/market-regulation/position-limits/positionlimits-aggregation-of-contracts-and-table.htm.
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portfolio includes positions in options
on futures, CME would aggregate those
positions into the underlying futures
contracts in accordance with a table
published by CME on a delta equivalent
value for the relevant spot month,
subsequent spot month, single month
and all month position limits.31 If a
position exceeds position limits because
of an option assignment, CME permits
market participants to liquidate the
excess position within one business day
without being considered in violation of
its rules. Additionally, if at the close of
trading, a position that includes options
exceeds position limits for futures
contracts, when evaluated using the
delta factors as of that day’s close of
trading, but does not exceed the limits
when evaluated using the previous
day’s delta factors, then the position
shall not constitute a position limit
violation. Based on the aforementioned
analysis, the Exchange believes that the
proposed 250,000 contracts for position
and exercise limits is appropriate.
Fourth, ISE analyzed a position and
exercise limit of 250,000 for IBIT against
other options on ETFs with an
underling commodity, namely SPDR
Gold Shares (‘‘GLD’’), iShares Silver
Trust (‘‘SLV’’), and ProShares Bitcoin
ETF (‘‘BITO’’).32 GLD has a float of
306.1 million shares 33 and a position
limit of 250,000 contract. SLV has a
float of 520.7 million shares,34 and a
position limit of 250,000 contracts.
Finally, BITO has 107.65 million shares
outstanding 35 and a position limit of
250,000 contracts. As previously noted,
position and exercise limits are
designed to limit the number of options
contracts traded on the exchange in an
underlying security that an investor,
acting alone or in concert with others
directly or indirectly, may control. A
position limit exercise in GLD would
represent 8.17% of the float of GLD; a
position limit exercise in SLV would
represent 4.8% of the float of SLV, and
a position limit exercise of BITO would
represent 23.22% of the float of BITO.
In comparison, a 250,000 contract
position limit in IBIT would represent
2.89% of the float of IBIT.
Consequently, the 250,000 proposed
IBIT options position and exercise limit
is more conservative than the standard
applied to GLD, SLV and BITO, and
appropriate. Additionally, the Exchange
31 Id.
32 GLD, SLV and BITO each hold one asset in
trust similar to IBIT.
33 See https://www.ssga.com/us/en/intermediary/
etfs/spdr-gold-shares-gld.
34 See https://www.ishares.com/us/products/
239855/ishares-silver-trust-fund.
35 See https://www.marketwatch.com/investing/
fund/bito.
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Jkt 265001
notes that the Cboe Bitcoin U.S. ETF
Index Options (CBTX) and the Cboe
Mini Bitcoin U.S. ETF Index Options
(MBTX),36 which trade exclusively on
Cboe, are comprised of multiple bitcoin
ETFs of which IBIT is the highest
weighted (at 20%) in the index
composition.37 These indices currently
trade pursuant to a 24,000 contract
position and exercise limit.38
Fifth, ISE notes that IBIT is likely to
trade in penny increments as of January
2, 2025, provided it is able to meet the
applicable criteria.39 The Commission
noted that evidence contained in both
the Exchanges’ Report and the
Cornerstone analysis demonstrates that
the Penny Pilot has benefitted investors
and other market participants in the
form of narrower spreads.40 The most
36 MBTX is based on 1/10th the value of the Cboe
Bitcoin U.S. ETF Index.
37 See https://www.cboe.com/tradable_products/
bitcoin-etf-index-options?utm_source=mcae&utm_
medium=email&utm_campaign=bitcoin_eft_
options_launch. Cboe’s website provides a product
comparison chart indicating that CBTX and MBTX
are permitted to trade FLEX as compared to spot
bitcoin ETF options. See https://cdn.cboe.com/
resources/membership/Cboe_Bitcoin_US_ETF_
Options_Comparative_Overview.pdf?_
gl=1*1xmm04c*_up*MQ..*_ga*MTc0MjU1NzU1Ni
4xNzM0NTU2NTky*_ga_
5Q99WB9X71*MTczNDU1NjU5MC4xL
jAuMTczNDU1NjU5MC4wLjAuMA.
38 See Cboe Rule 8.32(a). The Exchange notes that
given the multiplier and notional value of CBTX,
the index has a position and exercise limit that
equates to 1,000,000 contracts of in kind exposure
to IBIT, which is more than 40 times greater than
the exposure for options on IBIT at the current
25,000 contract position and exercise limit.
39 The Exchange may add to the Penny Program
a newly listed option class provided that (i) it is
among the 300 most actively traded multiply listed
option classes, as ranked by National Cleared
Volume at OCC, in its first full calendar month of
trading and (ii) the underlying security is priced
below $200 or the underlying index is at an index
level below $200. Any option class added under
this provision will be added on the first trading day
of the month after it qualifies and will remain in
the Penny Program for one full calendar year, after
which it will be subject to the Annual Review
described in Supplementary Material .01(b) to
Options 3, Section 3. The Exchange may add any
option class to the Penny Program, provided that (i)
it is among the 75 most actively traded multiply
listed option classes, as ranked by National Cleared
Volume at OCC, in the past six full calendar months
of trading and (ii) the underlying security is priced
below $200 or the underlying index is at an index
level below $200. Any option class added under
this provision will be added on the first trading day
of the second full month after it qualifies and will
remain in the Penny Program for the rest of the
calendar year, after which it will be subject to the
Annual Review as described in Supplementary
Material .01(b) to Options 3, Section 3. See
Supplementary Material .01 to ISE Options 3,
Section 3.
40 See Securities Exchange Act Release No. 88532
(April 1, 2020), 67 FR 19545, 19548 (April 7, 2020)
(File No. 4–443) (Joint Industry Plan; Order
Approving Amendment No. 5 to the Plan for the
Purpose of Developing and Implementing
Procedures Designed To Facilitate the Listing and
Trading of Standardized Options To Adopt a Penny
Interval Program) (‘‘Penny Approval Order’’).
PO 00000
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707
actively traded options classes are
included in the Penny Program based on
certain objective criteria (trading
volume thresholds and initial price
tests). As noted in the Penny Approval
Order, the Penny Program reflects a
certain level of trading interest (either
because the class is newly listed or a
class that experience a significant
growth in investor interest) to quote in
finer trading increments, which in turn
should benefit market participants by
reducing the cost of trading such
options.41 If IBIT options were to enter
the Penny Program, it will be among a
select group of products that have
achieved a certain level of liquidity that
have garnered it the ability to trade in
finer increments. The Exchange believes
that if IBIT options were to trade in
penny increments, failing to increase
position and exercise limits once it
started trading in finer increments, may
artificially inhibit liquidity and create
price inefficiency.
The Exchange believes that IBIT
options has demonstrated that it has
more than sufficient liquidity to garner
an increased position and exercise limit
of 250,000 contracts. The Exchange
believes that any concerns related to
manipulation and protection of
investors are mollified by the significant
liquidity provision in IBIT. The
Exchange states that, as a general
principle, increases in active trading
volume and deep liquidity of the
underlying securities do not lead to
manipulation and/or disruption.
The Exchange believes that increasing
the position (and exercise) limits for
IBIT options would lead to a more
liquid and competitive market
environment for IBIT options, which
will benefit customers that trade these
options. Further, the reporting
requirement for such options would
remain unchanged. Thus, the Exchange
will still require that each member
organization that maintains positions in
impacted options on the same side of
the market, for its own account or for
the account of a customer, report certain
information to the Exchange. This
information includes, but would not be
limited to, the options’ positions,
whether such positions are hedged and,
if so, a description of the hedge(s).
Market-Makers would continue to be
exempt from this reporting requirement,
however, the Exchange may access
Market-Maker position information.42
41 Id.
at 19548.
Options Clearing Corporation (‘‘OCC’’)
through the Large option Position Reporting
(‘‘LOPR’’) system acts as a centralized service
provider for TPH compliance with position
reporting requirements by collecting data from each
42 The
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708
Federal Register / Vol. 90, No. 3 / Monday, January 6, 2025 / Notices
Moreover, the Exchange’s requirement
that member organizations file reports
with the Exchange for any customer
who held aggregate large long or short
positions on the same side of the market
of 200 or more option contracts of any
single class for the previous day will
remain at this level and will continue to
serve as an important part of the
Exchange’s surveillance efforts.43
The Exchange also has no reason to
believe that the growth in trading
volume in IBIT will not continue.
Rather, the Exchange expects continued
options volume growth in IBIT as
opportunities for investors to participate
in the options markets increase and
evolve. The Exchange believes that the
current position and exercise limits in
IBIT options are restrictive and will
hamper the listed options markets from
being able to compete fairly and
effectively with the over-the-counter
(‘‘OTC’’) markets. OTC transactions
occur through bilateral agreements, the
terms of which are not publicly
disclosed to the marketplace. As such,
OTC transactions do not contribute to
the price discovery process on a public
exchange or other lit markets. The
Exchange believes that without the
proposed changes to position and
exercise limits for IBIT, market
participants will find the 25,000
contract position limit an impediment
to their business and investment
objectives as well as an impediment to
efficient pricing. As such, market
participants may find the less
transparent OTC markets a more
attractive alternative to achieve their
investment and hedging objectives,
leading to a retreat from the listed
options markets, where trades are
subject to reporting requirements and
daily surveillance.
The Exchange believes that the
existing surveillance procedures and
reporting requirements at the Exchange
are capable of properly identifying
disruptive and/or manipulative trading
activity. The Exchange also represents
that it has adequate surveillances in
place to detect potential manipulation,
as well as reviews in place to identify
continued compliance with the
Exchange’s listing standards. These
procedures monitor market activity via
automated surveillance techniques to
identify unusual activity in both options
and the underlyings, as applicable. The
Exchange also notes that large stock
TPH or TPH organization, consolidating the
information, and ultimately providing detailed
listings of each TPH’s report to the Exchange, as
well as Financial Industry Regulatory Authority,
Inc. (‘‘FINRA’’), acting as its agent pursuant to a
regulatory services agreement (‘‘RSA’’).
43 See Options 9, Section 16.
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holdings must be disclosed to the
Commission by way of Schedules 13D
or 13G,44 which are used to report
ownership of stock which exceeds 5%
of a company’s total stock issue and
may assist in providing information in
monitoring for any potential
manipulative schemes. Further, the
Exchange believes that the current
financial requirements imposed by the
Exchange and by the Commission
adequately address concerns regarding
potentially large, unhedged positions in
equity options. Current margin and riskbased haircut methodologies serve to
limit the size of positions maintained by
any one account by increasing the
margin and/or capital that a member
organization must maintain for a large
position held by itself or by its
customer.45 In addition, Rule 15c3–1 46
imposes a capital charge on member
organizations to the extent of any
margin deficiency resulting from the
higher margin requirement.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,47 in general, and furthers the
objectives of Section 6(b)(5) of the Act,48
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section (6)(b)(5) 49 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange believes increasing the
position (and exercise limits) for IBIT
options from 25,000 to 250,000
contracts will remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, protect
investors and the public interest,
because it will provide market
participants with the ability to more
effectively execute their trading and
hedging activities. Also, increasing the
44 17
CFR 240.13d–1.
Options 9, Section 3 regarding margin
requirements.
46 17 CFR 240.15c3–1.
47 15 U.S.C. 78f(b).
48 15 U.S.C. 78f(b)(5).
49 15 U.S.C. 78(f)(b)(5).
45 See
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position (and exercise) limits for IBIT
options may allow Market-Makers to
maintain their liquidity in these options
in amounts commensurate with the
continued high consumer demand in
IBIT options market. The proposed
higher position and exercise limit may
also encourage other liquidity providers
to continue to trade on the Exchange
rather than shift their volume to OTC
markets, which will enhance the
process of price discovery conducted on
the Exchange through increased order
flow. The Exchange notes that a higher
position and exercise limit would
further allow institutional investors to
utilize IBIT options for prudent risk
management purposes.
In addition, the Exchange believes
that the current liquidity in shares of
and options on IBIT will mitigate
concerns regarding potential
manipulation of IBIT and/or disruption
of IBIT upon increasing the position
limit. ISE’s proposed position and
exercise limit of 250,000 contracts on
IBIT options is appropriate given the
market capitalization and ADV of IBIT
and designed to prevent fraudulent and
manipulative acts and practices. If IBIT
were compared to the 1,934 stocks that
have position limits of 250,000 contracts
to less than 500,000 contracts it would
rank in the 88th percentile for market
capitalization and the 99th percentile
for ADV.
Additionally, the regression model
performed by ISE demonstrates that the
proposed position limit is half of the
modeled limit given the liquidity of
IBIT. Comparing IBIT’s data relative to
the market capitalization of the entire
bitcoin market in terms of exercise risk
and availability of deliverables, the
Exchange was able to conclude that if a
position limit of 250,000 contracts were
considered, the exercisable risk would
represent 2.89% 50 of the shares
outstanding of IBIT. Since IBIT has a
creation and redemption process
managed through the issuer (whereby
Bitcoin is used to create IBIT shares),
the position limit can be compared to
the total market capitalization of the
entire bitcoin market and in that case,
the exercisable risk for options on IBIT
would represent less than .072% of all
bitcoin outstanding.51 Comparing the
proposed position limit to position
limits for equivalent bitcoin futures
position limits, the analysis
demonstrated that the proposed 250,000
50 This percentage is arrived at with this equation:
(250,000 contract limit * 100 shares per option/
866,040,000 shares outstanding).
51 This number was arrived at with this
calculation: ((250,000 limit * 100 shares per option
* $54.02 settle) / (19,787,762 BTC outstanding *
$94,830 BTC price)).
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Federal Register / Vol. 90, No. 3 / Monday, January 6, 2025 / Notices
contracts for position and exercise
limits is appropriate.
Comparing a position limit of 250,000
for IBIT against other options on ETFs
with an underling commodity, namely
GLD, SLV and BITO, a position limit
exercise in GLD represents 8.17% of the
float of GLD, a position limit exercise in
SLV represents 4.8% of the float of SLV,
and a position limit exercise of BITO
represents 23.22% of the float of BITO.
In comparison, a 250,000 contract
position limit in IBIT would represent
2.89% of the float of IBIT.
Consequently, the 250,000 proposed
IBIT options position limit is more
conservative than the standard applied
to GLD, SLV and BITO, and appropriate.
Also, the Exchange notes that Cboe’s
proprietary CBTX and MBTX indices
weight IBIT the highest (at 20%) in its
index composition among the other
ETFs that comprise the index.52 The
Exchange notes that today, these
indexes have a position of 24,000
contracts which is much higher than the
current position limits for IBIT options
when considering the notional value of
the indices.53 These indexes are already
trading with position and exercise limits
that are higher than the lowest position
limit for an industry index option.54
ISE notes that IBIT is likely to trade
in penny increments in January 2025,
provided it is able to meet the
applicable criteria.55 The Commission
khammond on DSK9W7S144PROD with NOTICES
52 See
https://www.cboe.com/tradable_products/
bitcoin-etf-index-options?utm_source=mcae&utm_
medium=email&utm_campaign=bitcoin_eft_
options_launch.
53 See Cboe Rule 8.32(a). The Exchange notes that
given the multiplier and notional value of CBTX,
the index has a position and exercise limit that
equates to 1,000,000 contracts of in kind exposure
to IBIT, which is more than 40 times greater than
the exposure for options on IBIT at the current
25,000 contract position and exercise limit.
54 18,000 contracts is the lowest position limit for
industry index options if the Exchange determines,
at the time of a review conducted pursuant to
subparagraph (2) of this paragraph (a), that any
single underlying stock accounted, on average, for
thirty percent (30%) or more of the index value
during the thirty (30) -day period immediately
preceding the review. See ISE Options 4A, Section
7. Further, Cboe Rule 8.32(a)(3) permits a limit of
31,500 contracts if the Exchange determines that the
conditions specified in Rule 8.32(a)(1) and (2),
which would require the establishment of a lower
limit, have not occurred.
55 The Exchange may add to the Penny Program
a newly listed option class provided that (i) it is
among the 300 most actively traded multiply listed
option classes, as ranked by National Cleared
Volume at OCC, in its first full calendar month of
trading and (ii) the underlying security is priced
below $200 or the underlying index is at an index
level below $200. Any option class added under
this provision will be added on the first trading day
of the month after it qualifies and will remain in
the Penny Program for one full calendar year, after
which it will be subject to the Annual Review
described in Supplementary Material .01(b) to
Options 3, Section 3. The Exchange may add any
option class to the Penny Program, provided that (i)
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19:04 Jan 03, 2025
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noted that evidence contained in both
the Exchanges’ Report and the
Cornerstone analysis demonstrates that
the Penny Pilot has benefitted investors
and other market participants in the
form of narrower spreads.56 The most
actively traded options classes are
included in the Penny Program based on
certain objective criteria (trading
volume thresholds and initial price
tests). As noted in the Penny Approval
Order, the Penny Program reflects a
certain level of trading interest (either
because the class is newly listed or a
class that experience a significant
growth in investor interest) to quote in
finer trading increments, which in turn
should benefit market participants by
reducing the cost of trading such
options.57 If IBIT options were to enter
the Penny Program, it will be among a
select group of products that have
achieved a certain level of liquidity that
have garnered it the ability to trade in
finer increments. The Exchange believes
that if IBIT options were to trade in
penny increments, failing to increase
position and exercise limits once it
started trading in finer increments, may
artificially inhibit liquidity and create
price inefficiency.
Finally, as discussed above, the
Exchange’s surveillance and reporting
safeguards continue to be designed to
deter and detect possible manipulative
behavior that might arise from
increasing or eliminating position and
exercise limits in certain classes. The
Exchange believes that the current
financial requirements imposed by the
Exchange and by the Commission
adequately address concerns regarding
potentially large, unhedged positions in
the options on the underlying securities,
further promoting just and equitable
principles of trading, the maintenance
of a fair and orderly market, and the
protection of investors.
it is among the 75 most actively traded multiply
listed option classes, as ranked by National Cleared
Volume at OCC, in the past six full calendar months
of trading and (ii) the underlying security is priced
below $200 or the underlying index is at an index
level below $200. Any option class added under
this provision will be added on the first trading day
of the second full month after it qualifies and will
remain in the Penny Program for the rest of the
calendar year, after which it will be subject to the
Annual Review as described in Supplementary
Material .01(b) to Options 3, Section 3. See
Supplementary Material .01 to ISE Options 3,
Section 3.
56 See Securities Exchange Act Release No. 88532
(April 1, 2020), 85 FR 19545, 19548 (April 7, 2020)
(File No. 4–443) (Joint Industry Plan; Order
Approving Amendment No. 5 to the Plan for the
Purpose of Developing and Implementing
Procedures Designed To Facilitate the Listing and
Trading of Standardized Options To Adopt a Penny
Interval Program) (‘‘Penny Approval Order’’).
57 Id. at 19548.
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709
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
The Exchange’s proposal does not
burden intra-market competition
because all Members would be
permitted to trade IBIT options pursuant
to the proposed position and exercise
limit of 250,000 contracts. The
Exchange believes that the proposed
rule change will also provide additional
opportunities for market participants to
continue to efficiently achieve their
investment and trading objectives for
equity options on the Exchange.
The Exchange does not believe that
the proposed rule change will impose
any burden on inter-market competition
as the proposal is not competitive in
nature. The Exchange expects that all
option exchanges will adopt
substantively similar proposals for
adopting the additional position limit
tiers, such that the Exchange’s proposal
would benefit competition. For these
reasons, the Exchange does not believe
that the proposed rule change will
impose any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Federal Register / Vol. 90, No. 3 / Monday, January 6, 2025 / Notices
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–2024–62 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.
khammond on DSK9W7S144PROD with NOTICES
All submissions should refer to file
number SR–ISE–2024–62. 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–2024–62 and should be
submitted on or before January 27, 2025.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.58
Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024–31771 Filed 1–3–25; 8:45 am]
BILLING CODE 8011–01–P
58 17
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–102057; File No. SR–OCC–
2024–014]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Granting Approval of Proposed Rule
Change, as Modified by Partial
Amendment No. 1, by The Options
Clearing Corporation Concerning Its
Process for Adjusting Certain
Parameters in Its Proprietary System
for Calculating Margin Requirements
During Periods When the Products It
Clears and the Markets It Serves
Experience High Volatility
December 30, 2024.
I. Introduction
On October 1, 2024, the Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–OCC–2024–
014, pursuant to Section 19(b) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4 2
thereunder, to codify OCC’s process for
adjusting certain parameters in its
proprietary system for calculating
margin requirements during periods
when the products OCC clears and the
markets it serves experience high
volatility.3 The proposed rule change, as
modified by Partial Amendment No. 1
(hereinafter, the ‘‘Proposed Rule
Change’’) was published for public
comment in the Federal Register on
October 9, 2024.4 The Commission has
received no comments regarding the
Proposed Rule Change.
On November 21, 2024, pursuant to
Section 19(b)(2) of the Exchange Act,5
the Commission designated a longer
period within which to approve,
disapprove, or institute proceedings to
determine whether to disapprove the
Proposed Rule Change.6 For the reasons
discussed below, the Commission is
approving the Proposed Rule Change.
II. Background 7
OCC is a central counterparty
(‘‘CCP’’), which means that as part of its
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Notice of Filing infra note 4, at 89 FR 81958.
4 See Securities Exchange Act Release No. 101246
(Oct. 3, 2024), 89 FR 81958 (Oct. 9, 2024) (File No.
SR–OCC–2024–014) (‘‘Notice of Filing’’).
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 101684
(Nov. 21, 2024), 89 FR 93693 (Nov. 27, 2024) (File
No. SR–OCC–2024–014).
7 Capitalized terms used but not defined herein
have the meanings specified in OCC’s Rules and ByLaws, available at https://www.theocc.com/about/
publications/bylaws.jsp.
2 17
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function as a clearing agency, it
interposes itself as the buyer to every
seller and the seller to every buyer for
financial transactions. As the CCP for
the listed options markets and for
certain futures in the United States,
OCC is exposed to the risk that one or
more of its Clearing Members may fail
to make a payment or to deliver
securities. OCC addresses such risk
exposure, in part, by requiring its
Clearing Members to provide collateral,
including margin collateral. Margin is
the collateral that CCPs collect to cover
potential changes in a member’s
positions over a set period of time.
Typically, margin is designed to cover
such exposures during normal market
conditions, which means that margin
collateral should be sufficient to cover
exposures at least 99 out of 100 days.8
OCC’s methodology for calculating
margin collateral—including daily and
intra-day margin requirements for
Clearing Members—is a collection of
margin models collectively called the
System for Theoretical Analysis and
Numerical Simulations (‘‘STANS’’). The
STANS Methodology Description is a
document that comprehensively
describes the material aspects of OCC’s
risk-based margin system, including its
approach for calculating daily and intraday margin requirements for its Clearing
Members.9
As a collection of models, STANS is
subject to assumptions and limitations
that are incorporated into STANS as
margin model parameters. For example,
OCC has a price return model that
employs bounds, or ‘‘control sets’’ that
are implemented under either regular or
high volatility settings, for certain
parameters that are calculated daily
based on current market data.10 OCC
maintains authority under its rules to
adjust member margin requirements to
protect the respective interests of OCC,
its Clearing Members, and the public.
OCC has established an exception
process for implementing, changing,
and terminating certain of these margin
model parameters in STANS to control
margin requirements where such
parameters cause STANS to produce
inappropriate margin requirements
8 See Securities Exchange Act Release No. 78961
(Sep. 28, 2016), 81 FR 70786, 70819 (Oct. 13, 2016)
(‘‘Standards for Covered Clearing Agencies’’)
(stating that a covered clearing agency generally
should consider, among other things, ‘‘whether
initial margin meets an established single-tailed
confidence level of at least 99 percent with respect
to the estimated distribution of future exposure[.]’’).
9 See Securities Exchange Act Release No. 91079
(Feb. 8, 2021), 86 FR 9410 (Feb. 12, 2021) (File No.
SR–OCC–2020–016) (‘‘STANS Methodology
Approval’’).
10 See Notice of Filing, notes 25–28 (describing
the parameters to which bounds are applied).
E:\FR\FM\06JAN1.SGM
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]]>Agencies
[Federal Register Volume 90, Number 3 (Monday, January 6, 2025)]
[Notices]
[Pages 704-710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31771]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102065; File No. SR-ISE-2024-62]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
of Proposed Rule Change To Increase the Position and Exercise Limits
for iShares Bitcoin Trust ETF
December 31, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 20, 2024, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by ISE. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Options 9, Sections 13 and 15 to
propose an increase to the position and exercise limits for iShares
Bitcoin Trust ETF (``IBIT'').
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/ise/rules, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Options 9, Section 13, Position
Limits, and Options 9, Section 15, Exercise Limits, to increase the
position and exercise limits for options on IBIT from 25,000 to 250,000
contracts.
IBIT is an Exchange-Traded Fund (``ETF'') that holds bitcoin and is
listed on The Nasdaq Stock Market LLC.\3\ On September 20, 2024, ISE
received approval to list options on IBIT.\4\ The position and exercise
limits for IBIT options are 25,000 contracts as stated in Options 9,
Sections 13 and 15, the lowest limit available in options.\5\
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\3\ Nasdaq received approval to list and trade Bitcoin-Based
Commodity-Based Trust Shares in IBIT pursuant to Rule 5711(d) of
Nasdaq. See Securities Exchange Act Release No. 99306 (January 10,
2024), 89 FR 3008 (January 17, 2024) (SR-NASDAQ-2023-016) (Order
Granting Accelerated Approval of Proposed Rule Changes, as Modified
by Amendments Thereto, To List and Trade Bitcoin-Based Commodity-
Based Trust Shares and Trust Units). IBIT started trading on January
11, 2024.
\4\ See Securities Exchange Act Release No. 101128 (September
20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03) (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) (``IBIT Approval Order''). ISE began trading
IBIT options on November 19, 2024.
\5\ Options on Fidelity Wise Origin Bitcoin Fund, ARK 21Shares
Bitcoin ETF, Grayscale Bitcoin Trust (BTC), Grayscale Bitcoin Mini
Trust BTC, and Bitwise Bitcoin ETF are also subject to a 25,000
contract position and exercise limit.
---------------------------------------------------------------------------
Per the Commission ``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 positions.'' \6\ For
this reason, the Commission requires 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.'' \7\ Based on its
review of the data and analysis provided by the Exchange, the
Commission concluded that the 25,000 contract position limit for non-
FLEX IBIT options satisfied these objectives.\8\
---------------------------------------------------------------------------
\6\ See supra note 4, IBIT Approval Order, 89 FR 78946.
\7\ See id.
\8\ See id.
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[[Page 705]]
While the Exchange proposed an aggregated 25,000 contract position
limit for IBIT options in its IBIT Approval Order, it nonetheless
believed that evidence existed to support a much higher position limit.
Specifically, the Commission has considered and reviewed the Exchange's
analysis in its IBIT Approval Order that the exercisable risk
associated with a position limit of 25,000 contracts represented only
0.4% of the outstanding shares of IBIT.\9\ The Commission also has
considered and reviewed the Exchange's statement its IBIT Approval
Order 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.\10\ Based on the Commission's review of this
information and analysis, the Commission concluded that the proposed
position and exercise limits of 25,000 contracts were 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.\11\
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\9\ See id. Data represents figures from August 12, 2024.
\10\ See id. Data represents figures from August 12, 2024.
\11\ See id.
---------------------------------------------------------------------------
IBIT currently qualifies for a 250,000 contract position limit
pursuant to the criteria in Options 9, Section 13(g), which requires
that, for the most recent six-month period, trading volume for the
underlying security be at least 100,000,000 shares.\12\ As of November
25, 2024, the market capitalization for IBIT was $46,783,480,800 \13\
with an average daily volume (``ADV''), for the preceding three months
prior to November 25, 2024, of 39,421,877 shares. IBIT is well above
the requisite minimum of 100,000,000 shares necessary to qualify for
the 250,000 contract position limit. Also, as of November 25, 2024,
there are 19,787,762 bitcoins in circulation.\14\ At a price of
$94,830,\15\ that equates to a market capitalization of greater than
$1.876 trillion US. If a position limit of 250,000 contracts were
considered, the exercisable risk would represent 2.89% \16\ of the
outstanding shares outstanding of IBIT. Given IBIT's liquidity, the
current 25,000 position limit is extremely conservative.
---------------------------------------------------------------------------
\12\ Options 9, Section 13(g), Equity Option Position Limits,
provides at subparagraph (i) that the position limit shall be
250,000 contracts for options: (a) on an underlying stock or
Exchange-Traded Fund Share which had trading volume of at least
100,000,000 shares during the most recent six-month trading period;
or (b) on an underlying stock or Exchange-Traded Fund Share which
had trading volume of at least 75,000,000 shares during the most
recent six-month trading period and has at least 300,000,000 shares
currently outstanding.
\13\ The market capitalization was determined by multiplying a
settlement price of ($54.02) by the number of shares outstanding
(866,040,000). This figure was acquired as of November 25, 2024. See
https://www.ishares.com/us/products/333011/ishares-bitcoin-trust-etf.
\14\ See https://www.coingecko.com/en/coins/bitcoin.
\15\ This is the approximate price of bitcoin from 4:00pm ET on
November 25, 2024.
\16\ This percentage is arrived at with this equation: (250,000
contract limit * 100 shares per option/866,040,000 shares
outstanding).
---------------------------------------------------------------------------
Position limits, and exercise limits, are designed to limit the
number of options contracts traded on the exchange in an underlying
security that an investor, acting alone or in concert with others
directly or indirectly, may control. These limits, which are described
in ISE Options 9, Sections 13 and 15, are intended to address potential
manipulative schemes and adverse market impacts surrounding the use of
options, such as disrupting the market in the security underlying the
options. Position and exercise limits must balance concerns regarding
mitigating potential manipulation and the cost of inhibiting potential
hedging activity that could be used for legitimate economic purposes.
To achieve this balance, ISE proposes to increase IBIT's position and
exercise limits from 25,000 to 250,000 contracts. ISE believes that
250,000 contracts is the appropriate position and exercise limit based
on its analysis described below.
First, ISE considered IBIT's market capitalization and Average
Daily Volume (``ADV''), and prospective position limit in relation to
other securities. In measuring IBIT against other securities, ISE
aggregated market capitalization and volume data for securities that
have defined position limits utilizing data from The Options Clearing
Corporations (``OCC'').\17\ This pool of data took into consideration
3,897 options on single stock securities, excluding broad based
ETFs.\18\ Next, the data was aggregated based on market capitalization
and ADV and grouped by option symbol and position limit utilizing
statistical thresholds for ADV, based on ninety days, 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, and 250,000).\19\ This exercise was
performed to demonstrate IBIT's position limit relative to other
options symbols in terms of market capitalization and ADV. For
reference, the market capitalization for IBIT was $46,783,480,800 \20\
with an ADV, for the preceding three months prior to November 25, 2024,
of 39,421,877 shares.
---------------------------------------------------------------------------
\17\ The computations are based on OCC data from November 25,
2024. Data displaying zero values in market capitalization or ADV
were removed.
\18\ IBIT has one asset and therefore is not comparable to a
broad based ETF where there are typically multiple components.
\19\ ISE Options 9, Section 13(d) sets out position limits for
various contracts. For example, a 25,000 contract limit applies to
those options having an underlying security that does not meet the
requirements for a higher options contract limit. The Exchange notes
that position limits may also be higher due to corporate actions in
the underlying equities, such as a stock split. See https://www.theocc.com/market-data/market-data-reports/series-and-trading-data/position-limits. As a result, the Exchange's pool of data
considered higher position limits than 250,000 contracts, where
applicable.
\20\ The market capitalization was determined by multiplying a
settlement price of ($54.02) by the number of shares outstanding
(866,040,000). This figure was acquired as of November 25, 2024. See
https://www.ishares.com/us/products/333011/ishares-bitcoin-trust-etf.
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Market cap statistics 25k 50k 75k 100k-<250k 250k-<500k 500k-1mm >1mm
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
# of observations........................................... 562 473 651 240 1934 27 10
average..................................................... 1,038,795,162 2,957,127,045 4,466,049,699 5,390,836,360 26,286,624,063 67,390,777,100 717,540,906,097
median...................................................... 360,130,143 889,627,570 1,445,831,231 1,643,123,279 3,535,963,213 27,063,940,966 90,047,209,478
min......................................................... 2,204,436 4,211,156 3,830,532 5,090,230 1,616,094 2,762,394,749 11,786,645,969
max......................................................... 36,120,249,097 70,846,805,916 174,820,296,591 106,971,594,180 3,573,884,443,220 733,972,714,698 3,358,647,600,000
-----------------------------------------------------------------------------------------------------------------------------------
IBIT % rank............................................. 100.00% 98.94% 98.77% 98.33% 88.57% 59.26% 20.00%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 706]]
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90-Day ADV statistics 25k 50k 75k 100k-<250k 250k-<500k 500k-1mm >1mm
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
# of observations........................................... 562 473 651 240 1934 27 10
average..................................................... 76,586 213,419 425,542 623,888 3,510,784 5,930,607 44,610,385
median...................................................... 67,231 206,402 409,177 625,882 1,620,931 4,724,248 18,017,607
min......................................................... 4,791 10,084 18,191 105,713 16,276 1,207,242 1,771,544
max......................................................... 244,499 564,451 989,341 1,339,553 88,351,060 22,397,311 271,230,790
-----------------------------------------------------------------------------------------------------------------------------------
IBIT % rank............................................. 100.00% 100.00% 100.00% 100.00% 99.43% 100.00% 80.00%
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Based on the above table, if IBIT were compared to the 1,934 stocks
that have position limits of 250,000 contracts to less than 500,000
contracts it would rank in the 88th percentile for market
capitalization and the 99th percentile for ADV.
The Exchange also analyzed the position limits for IBIT by
regressing the market capitalization figures and 90-day ADV of all non-
ETF equities, against their respective position limit figures. From
this regression, the Exchange was able to determine the implied
coefficients to create a formulaic method for determining an
appropriate position limit.\21\ In this case, the modeled position
limit is 565,796 contracts.\22\ The results of the study are below.
---------------------------------------------------------------------------
\21\ The Exchange utilized Excel's Data Analysis Package to
model the position limit.
\22\ The Exchange utilized this formula to arrive at the number
of contracts: ((46,783,380,800 mkt cap * 0.0000002630 market cap
coefficient) + (39,421,877 ADV * 0.0140402219 ADV coefficient)).
Regression Statistics
------------------------------------------------------------------------
------------------------------------------------------------------------
Multiple R............................................ 0.496800597
R Square.............................................. 0.246810833
Adjusted R Square..................................... 0.246361643
Standard Error........................................ 202227.4271
Observations.......................................... 3905
------------------------------------------------------------------------
ANOVA
----------------------------------------------------------------------------------------------------------------
df SS MS F
----------------------------------------------------------------------------------------------------------------
Regression...................................... 2 5.2304E+13 2.6152E+13 639.482566
Residual........................................ 3903 1.5962E+14 4.0896E+10 ..............
---------------------------------------------------------------
Total....................................... 3905 2.1192E+14 .............. ..............
----------------------------------------------------------------------------------------------------------------
Coefficients Standard error t Stat P-value
----------------------------------------------------------------------------------------------------------------
Intercept....................................... 0 #N/A #N/A #N/A
Market Cap...................................... 0.0000002630 3.3371E-08 7.88130564 4.1699E-15
90-day ADV...................................... 0.0140402219 0.00055818 25.1533643 1.613E-129
----------------------------------------------------------------------------------------------------------------
Based on the aforementioned analysis, the Exchange believes that
the proposed 250,000 contracts for position and exercise limits is
appropriate.
Second, ISE reviewed IBIT's data relative to the market
capitalization of the entire bitcoin market in terms of exercise risk
and availability of deliverables. As of November 25, 2024, there are
19,787,762 bitcoins in circulation.\23\ At a price of $94,830,\24\ that
equates to a market capitalization of greater than $1.876 trillion US.
If a position limit of 250,000 contracts were considered, the
exercisable risk would represent 2.89% \25\ of the outstanding shares
outstanding of IBIT. Since IBIT has a creation and redemption process
managed through the issuer, the position limit can be compared to the
total market capitalization of the entire bitcoin market and in that
case, the exercisable risk for options on IBIT would represent less
than .072% of all bitcoin outstanding.\26\ Assuming a scenario where
all options on IBIT shares were exercised given the proposed 250,000
contract position limit (and exercise limit), this would have a
virtually unnoticed impact on the entire bitcoin market. This analysis
demonstrates that the proposed 250,000 per same side position and
exercise limit is appropriate for options on IBIT given its liquidity.
---------------------------------------------------------------------------
\23\ See https://www.coingecko.com/en/coins/bitcoin.
\24\ This is the approximate price of bitcoin from 4:00 pm ET on
November 25, 2024.
\25\ This percentage is arrived at with this equation: (250,000
contract limit * 100 shares per option/866,040,000 shares
outstanding).
\26\ This number was arrived at with this calculation: ((250,000
limit * 100 shares per option * $54.02 settle) / (19,787,762 BTC
outstanding * $94,830 BTC price)).
---------------------------------------------------------------------------
Third, ISE reviewed the proposed position limit by comparing it to
position limits for derivative products regulated by the Commodity
Futures Trading Commission (``CFTC''). While the CFTC, through the
relevant Designated Contract Markets, only regulates options positions
based upon delta equivalents (creating a less stringent standard), ISE
examined equivalent bitcoin futures position limits. In particular, ISE
looked to the CME bitcoin futures contract \27\ that has a position
limit of 8,000 futures.\28\ On October 22, 2024, CME bitcoin futures
settled at $94,945.\29\ On October 22, 2024, IBIT settled at $54.02,
which would equate to greater than 17,557,898 shares of IBIT if the CME
notional position limit was utilized. Since substantial portions of any
distributed options portfolio is likely to be out of the money on
expiration, an options position limit equivalent to the CME position
limit for bitcoin futures (considering that all options deltas are
<=1.00) should be a bit higher than the CME implied 175,578 limit. Of
note, unlike options contracts, CME position limits are calculated on a
net futures-equivalent basis by contract and include contracts that
aggregate into one or more base contracts according to an aggregation
ratio(s).\30\ Therefore, if a
[[Page 707]]
portfolio includes positions in options on futures, CME would aggregate
those positions into the underlying futures contracts in accordance
with a table published by CME on a delta equivalent value for the
relevant spot month, subsequent spot month, single month and all month
position limits.\31\ If a position exceeds position limits because of
an option assignment, CME permits market participants to liquidate the
excess position within one business day without being considered in
violation of its rules. Additionally, if at the close of trading, a
position that includes options exceeds position limits for futures
contracts, when evaluated using the delta factors as of that day's
close of trading, but does not exceed the limits when evaluated using
the previous day's delta factors, then the position shall not
constitute a position limit violation. Based on the aforementioned
analysis, the Exchange believes that the proposed 250,000 contracts for
position and exercise limits is appropriate.
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\27\ CME Bitcoin Futures are described in Chapter 350 of CME's
Rulebook.
\28\ See the Position Accountability and Reportable Level Table
in the Interpretations & Special Notices Section of Chapter 5 of
CME's Rulebook.
\29\ 2,000 futures at a 5 bitcoin multiplier (per the contract
specifications) equates to $949,450,000 (2000 contracts * 5 BTC per
contract * $94,945 price of November BTC future) of notional value.
\30\ See https://www.cmegroup.com/education/courses/market-regulation/position-limits/position-limits-aggregation-of-contracts-and-table.htm.
\31\ Id.
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Fourth, ISE analyzed a position and exercise limit of 250,000 for
IBIT against other options on ETFs with an underling commodity, namely
SPDR Gold Shares (``GLD''), iShares Silver Trust (``SLV''), and
ProShares Bitcoin ETF (``BITO'').\32\ GLD has a float of 306.1 million
shares \33\ and a position limit of 250,000 contract. SLV has a float
of 520.7 million shares,\34\ and a position limit of 250,000 contracts.
Finally, BITO has 107.65 million shares outstanding \35\ and a position
limit of 250,000 contracts. As previously noted, position and exercise
limits are designed to limit the number of options contracts traded on
the exchange in an underlying security that an investor, acting alone
or in concert with others directly or indirectly, may control. A
position limit exercise in GLD would represent 8.17% of the float of
GLD; a position limit exercise in SLV would represent 4.8% of the float
of SLV, and a position limit exercise of BITO would represent 23.22% of
the float of BITO. In comparison, a 250,000 contract position limit in
IBIT would represent 2.89% of the float of IBIT. Consequently, the
250,000 proposed IBIT options position and exercise limit is more
conservative than the standard applied to GLD, SLV and BITO, and
appropriate. Additionally, the Exchange notes that the Cboe Bitcoin
U.S. ETF Index Options (CBTX) and the Cboe Mini Bitcoin U.S. ETF Index
Options (MBTX),\36\ which trade exclusively on Cboe, are comprised of
multiple bitcoin ETFs of which IBIT is the highest weighted (at 20%) in
the index composition.\37\ These indices currently trade pursuant to a
24,000 contract position and exercise limit.\38\
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\32\ GLD, SLV and BITO each hold one asset in trust similar to
IBIT.
\33\ See https://www.ssga.com/us/en/intermediary/etfs/spdr-gold-shares-gld.
\34\ See https://www.ishares.com/us/products/239855/ishares-silver-trust-fund.
\35\ See https://www.marketwatch.com/investing/fund/bito.
\36\ MBTX is based on 1/10th the value of the Cboe Bitcoin U.S.
ETF Index.
\37\ See https://www.cboe.com/tradable_products/bitcoin-etf-index-options?utm_source=mcae&utm_medium=email&utm_campaign=bitcoin_eft_options_launch. Cboe's website provides a product comparison chart
indicating that CBTX and MBTX are permitted to trade FLEX as
compared to spot bitcoin ETF options. See https://cdn.cboe.com/resources/membership/Cboe_Bitcoin_US_ETF_Options_Comparative_Overview.pdf?_gl=1*1xmm04c*_up*MQ..*_ga*MTc0MjU1NzU1Ni4xNzM0NTU2NTky*_ga_5Q99WB9X71*MTczNDU1NjU5MC4xLjAuMTczNDU1NjU5MC4wLjAuMA.
\38\ See Cboe Rule 8.32(a). The Exchange notes that given the
multiplier and notional value of CBTX, the index has a position and
exercise limit that equates to 1,000,000 contracts of in kind
exposure to IBIT, which is more than 40 times greater than the
exposure for options on IBIT at the current 25,000 contract position
and exercise limit.
---------------------------------------------------------------------------
Fifth, ISE notes that IBIT is likely to trade in penny increments
as of January 2, 2025, provided it is able to meet the applicable
criteria.\39\ The Commission noted that evidence contained in both the
Exchanges' Report and the Cornerstone analysis demonstrates that the
Penny Pilot has benefitted investors and other market participants in
the form of narrower spreads.\40\ The most actively traded options
classes are included in the Penny Program based on certain objective
criteria (trading volume thresholds and initial price tests). As noted
in the Penny Approval Order, the Penny Program reflects a certain level
of trading interest (either because the class is newly listed or a
class that experience a significant growth in investor interest) to
quote in finer trading increments, which in turn should benefit market
participants by reducing the cost of trading such options.\41\ If IBIT
options were to enter the Penny Program, it will be among a select
group of products that have achieved a certain level of liquidity that
have garnered it the ability to trade in finer increments. The Exchange
believes that if IBIT options were to trade in penny increments,
failing to increase position and exercise limits once it started
trading in finer increments, may artificially inhibit liquidity and
create price inefficiency.
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\39\ The Exchange may add to the Penny Program a newly listed
option class provided that (i) it is among the 300 most actively
traded multiply listed option classes, as ranked by National Cleared
Volume at OCC, in its first full calendar month of trading and (ii)
the underlying security is priced below $200 or the underlying index
is at an index level below $200. Any option class added under this
provision will be added on the first trading day of the month after
it qualifies and will remain in the Penny Program for one full
calendar year, after which it will be subject to the Annual Review
described in Supplementary Material .01(b) to Options 3, Section 3.
The Exchange may add any option class to the Penny Program, provided
that (i) it is among the 75 most actively traded multiply listed
option classes, as ranked by National Cleared Volume at OCC, in the
past six full calendar months of trading and (ii) the underlying
security is priced below $200 or the underlying index is at an index
level below $200. Any option class added under this provision will
be added on the first trading day of the second full month after it
qualifies and will remain in the Penny Program for the rest of the
calendar year, after which it will be subject to the Annual Review
as described in Supplementary Material .01(b) to Options 3, Section
3. See Supplementary Material .01 to ISE Options 3, Section 3.
\40\ See Securities Exchange Act Release No. 88532 (April 1,
2020), 67 FR 19545, 19548 (April 7, 2020) (File No. 4-443) (Joint
Industry Plan; Order Approving Amendment No. 5 to the Plan for the
Purpose of Developing and Implementing Procedures Designed To
Facilitate the Listing and Trading of Standardized Options To Adopt
a Penny Interval Program) (``Penny Approval Order'').
\41\ Id. at 19548.
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The Exchange believes that IBIT options has demonstrated that it
has more than sufficient liquidity to garner an increased position and
exercise limit of 250,000 contracts. The Exchange believes that any
concerns related to manipulation and protection of investors are
mollified by the significant liquidity provision in IBIT. The Exchange
states that, as a general principle, increases in active trading volume
and deep liquidity of the underlying securities do not lead to
manipulation and/or disruption.
The Exchange believes that increasing the position (and exercise)
limits for IBIT options would lead to a more liquid and competitive
market environment for IBIT options, which will benefit customers that
trade these options. Further, the reporting requirement for such
options would remain unchanged. Thus, the Exchange will still require
that each member organization that maintains positions in impacted
options on the same side of the market, for its own account or for the
account of a customer, report certain information to the Exchange. This
information includes, but would not be limited to, the options'
positions, whether such positions are hedged and, if so, a description
of the hedge(s). Market-Makers would continue to be exempt from this
reporting requirement, however, the Exchange may access Market-Maker
position information.\42\
[[Page 708]]
Moreover, the Exchange's requirement that member organizations file
reports with the Exchange for any customer who held aggregate large
long or short positions on the same side of the market of 200 or more
option contracts of any single class for the previous day will remain
at this level and will continue to serve as an important part of the
Exchange's surveillance efforts.\43\
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\42\ The Options Clearing Corporation (``OCC'') through the
Large option Position Reporting (``LOPR'') system acts as a
centralized service provider for TPH compliance with position
reporting requirements by collecting data from each TPH or TPH
organization, consolidating the information, and ultimately
providing detailed listings of each TPH's report to the Exchange, as
well as Financial Industry Regulatory Authority, Inc. (``FINRA''),
acting as its agent pursuant to a regulatory services agreement
(``RSA'').
\43\ See Options 9, Section 16.
---------------------------------------------------------------------------
The Exchange also has no reason to believe that the growth in
trading volume in IBIT will not continue. Rather, the Exchange expects
continued options volume growth in IBIT as opportunities for investors
to participate in the options markets increase and evolve. The Exchange
believes that the current position and exercise limits in IBIT options
are restrictive and will hamper the listed options markets from being
able to compete fairly and effectively with the over-the-counter
(``OTC'') markets. OTC transactions occur through bilateral agreements,
the terms of which are not publicly disclosed to the marketplace. As
such, OTC transactions do not contribute to the price discovery process
on a public exchange or other lit markets. The Exchange believes that
without the proposed changes to position and exercise limits for IBIT,
market participants will find the 25,000 contract position limit an
impediment to their business and investment objectives as well as an
impediment to efficient pricing. As such, market participants may find
the less transparent OTC markets a more attractive alternative to
achieve their investment and hedging objectives, leading to a retreat
from the listed options markets, where trades are subject to reporting
requirements and daily surveillance.
The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange are capable of properly
identifying disruptive and/or manipulative trading activity. The
Exchange also represents that it has adequate surveillances in place to
detect potential manipulation, as well as reviews in place to identify
continued compliance with the Exchange's listing standards. These
procedures monitor market activity via automated surveillance
techniques to identify unusual activity in both options and the
underlyings, as applicable. The Exchange also notes that large stock
holdings must be disclosed to the Commission by way of Schedules 13D or
13G,\44\ which are used to report ownership of stock which exceeds 5%
of a company's total stock issue and may assist in providing
information in monitoring for any potential manipulative schemes.
Further, the Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns regarding potentially large, unhedged positions in equity
options. Current margin and risk-based haircut methodologies serve to
limit the size of positions maintained by any one account by increasing
the margin and/or capital that a member organization must maintain for
a large position held by itself or by its customer.\45\ In addition,
Rule 15c3-1 \46\ imposes a capital charge on member organizations to
the extent of any margin deficiency resulting from the higher margin
requirement.
---------------------------------------------------------------------------
\44\ 17 CFR 240.13d-1.
\45\ See Options 9, Section 3 regarding margin requirements.
\46\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\47\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\48\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. Additionally, the Exchange
believes the proposed rule change is consistent with the Section
(6)(b)(5) \49\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
---------------------------------------------------------------------------
\47\ 15 U.S.C. 78f(b).
\48\ 15 U.S.C. 78f(b)(5).
\49\ 15 U.S.C. 78(f)(b)(5).
---------------------------------------------------------------------------
The Exchange believes increasing the position (and exercise limits)
for IBIT options from 25,000 to 250,000 contracts will remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, protect investors and the
public interest, because it will provide market participants with the
ability to more effectively execute their trading and hedging
activities. Also, increasing the position (and exercise) limits for
IBIT options may allow Market-Makers to maintain their liquidity in
these options in amounts commensurate with the continued high consumer
demand in IBIT options market. The proposed higher position and
exercise limit may also encourage other liquidity providers to continue
to trade on the Exchange rather than shift their volume to OTC markets,
which will enhance the process of price discovery conducted on the
Exchange through increased order flow. The Exchange notes that a higher
position and exercise limit would further allow institutional investors
to utilize IBIT options for prudent risk management purposes.
In addition, the Exchange believes that the current liquidity in
shares of and options on IBIT will mitigate concerns regarding
potential manipulation of IBIT and/or disruption of IBIT upon
increasing the position limit. ISE's proposed position and exercise
limit of 250,000 contracts on IBIT options is appropriate given the
market capitalization and ADV of IBIT and designed to prevent
fraudulent and manipulative acts and practices. If IBIT were compared
to the 1,934 stocks that have position limits of 250,000 contracts to
less than 500,000 contracts it would rank in the 88th percentile for
market capitalization and the 99th percentile for ADV.
Additionally, the regression model performed by ISE demonstrates
that the proposed position limit is half of the modeled limit given the
liquidity of IBIT. Comparing IBIT's data relative to the market
capitalization of the entire bitcoin market in terms of exercise risk
and availability of deliverables, the Exchange was able to conclude
that if a position limit of 250,000 contracts were considered, the
exercisable risk would represent 2.89% \50\ of the shares outstanding
of IBIT. Since IBIT has a creation and redemption process managed
through the issuer (whereby Bitcoin is used to create IBIT shares), the
position limit can be compared to the total market capitalization of
the entire bitcoin market and in that case, the exercisable risk for
options on IBIT would represent less than .072% of all bitcoin
outstanding.\51\ Comparing the proposed position limit to position
limits for equivalent bitcoin futures position limits, the analysis
demonstrated that the proposed 250,000
[[Page 709]]
contracts for position and exercise limits is appropriate.
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\50\ This percentage is arrived at with this equation: (250,000
contract limit * 100 shares per option/866,040,000 shares
outstanding).
\51\ This number was arrived at with this calculation: ((250,000
limit * 100 shares per option * $54.02 settle) / (19,787,762 BTC
outstanding * $94,830 BTC price)).
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Comparing a position limit of 250,000 for IBIT against other
options on ETFs with an underling commodity, namely GLD, SLV and BITO,
a position limit exercise in GLD represents 8.17% of the float of GLD,
a position limit exercise in SLV represents 4.8% of the float of SLV,
and a position limit exercise of BITO represents 23.22% of the float of
BITO. In comparison, a 250,000 contract position limit in IBIT would
represent 2.89% of the float of IBIT. Consequently, the 250,000
proposed IBIT options position limit is more conservative than the
standard applied to GLD, SLV and BITO, and appropriate. Also, the
Exchange notes that Cboe's proprietary CBTX and MBTX indices weight
IBIT the highest (at 20%) in its index composition among the other ETFs
that comprise the index.\52\ The Exchange notes that today, these
indexes have a position of 24,000 contracts which is much higher than
the current position limits for IBIT options when considering the
notional value of the indices.\53\ These indexes are already trading
with position and exercise limits that are higher than the lowest
position limit for an industry index option.\54\
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\52\ See https://www.cboe.com/tradable_products/bitcoin-etf-index-options?utm_source=mcae&utm_medium=email&utm_campaign=bitcoin_eft_options_launch.
\53\ See Cboe Rule 8.32(a). The Exchange notes that given the
multiplier and notional value of CBTX, the index has a position and
exercise limit that equates to 1,000,000 contracts of in kind
exposure to IBIT, which is more than 40 times greater than the
exposure for options on IBIT at the current 25,000 contract position
and exercise limit.
\54\ 18,000 contracts is the lowest position limit for industry
index options if the Exchange determines, at the time of a review
conducted pursuant to subparagraph (2) of this paragraph (a), that
any single underlying stock accounted, on average, for thirty
percent (30%) or more of the index value during the thirty (30) -day
period immediately preceding the review. See ISE Options 4A, Section
7. Further, Cboe Rule 8.32(a)(3) permits a limit of 31,500 contracts
if the Exchange determines that the conditions specified in Rule
8.32(a)(1) and (2), which would require the establishment of a lower
limit, have not occurred.
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ISE notes that IBIT is likely to trade in penny increments in
January 2025, provided it is able to meet the applicable criteria.\55\
The Commission noted that evidence contained in both the Exchanges'
Report and the Cornerstone analysis demonstrates that the Penny Pilot
has benefitted investors and other market participants in the form of
narrower spreads.\56\ The most actively traded options classes are
included in the Penny Program based on certain objective criteria
(trading volume thresholds and initial price tests). As noted in the
Penny Approval Order, the Penny Program reflects a certain level of
trading interest (either because the class is newly listed or a class
that experience a significant growth in investor interest) to quote in
finer trading increments, which in turn should benefit market
participants by reducing the cost of trading such options.\57\ If IBIT
options were to enter the Penny Program, it will be among a select
group of products that have achieved a certain level of liquidity that
have garnered it the ability to trade in finer increments. The Exchange
believes that if IBIT options were to trade in penny increments,
failing to increase position and exercise limits once it started
trading in finer increments, may artificially inhibit liquidity and
create price inefficiency.
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\55\ The Exchange may add to the Penny Program a newly listed
option class provided that (i) it is among the 300 most actively
traded multiply listed option classes, as ranked by National Cleared
Volume at OCC, in its first full calendar month of trading and (ii)
the underlying security is priced below $200 or the underlying index
is at an index level below $200. Any option class added under this
provision will be added on the first trading day of the month after
it qualifies and will remain in the Penny Program for one full
calendar year, after which it will be subject to the Annual Review
described in Supplementary Material .01(b) to Options 3, Section 3.
The Exchange may add any option class to the Penny Program, provided
that (i) it is among the 75 most actively traded multiply listed
option classes, as ranked by National Cleared Volume at OCC, in the
past six full calendar months of trading and (ii) the underlying
security is priced below $200 or the underlying index is at an index
level below $200. Any option class added under this provision will
be added on the first trading day of the second full month after it
qualifies and will remain in the Penny Program for the rest of the
calendar year, after which it will be subject to the Annual Review
as described in Supplementary Material .01(b) to Options 3, Section
3. See Supplementary Material .01 to ISE Options 3, Section 3.
\56\ See Securities Exchange Act Release No. 88532 (April 1,
2020), 85 FR 19545, 19548 (April 7, 2020) (File No. 4-443) (Joint
Industry Plan; Order Approving Amendment No. 5 to the Plan for the
Purpose of Developing and Implementing Procedures Designed To
Facilitate the Listing and Trading of Standardized Options To Adopt
a Penny Interval Program) (``Penny Approval Order'').
\57\ Id. at 19548.
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Finally, as discussed above, the Exchange's surveillance and
reporting safeguards continue to be designed to deter and detect
possible manipulative behavior that might arise from increasing or
eliminating position and exercise limits in certain classes. The
Exchange believes that the current financial requirements imposed by
the Exchange and by the Commission adequately address concerns
regarding potentially large, unhedged positions in the options on the
underlying securities, further promoting just and equitable principles
of trading, the maintenance of a fair and orderly market, and the
protection of investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
The Exchange's proposal does not burden intra-market competition
because all Members would be permitted to trade IBIT options pursuant
to the proposed position and exercise limit of 250,000 contracts. The
Exchange believes that the proposed rule change will also provide
additional opportunities for market participants to continue to
efficiently achieve their investment and trading objectives for equity
options on the Exchange.
The Exchange does not believe that the proposed rule change will
impose any burden on inter-market competition as the proposal is not
competitive in nature. The Exchange expects that all option exchanges
will adopt substantively similar proposals for adopting the additional
position limit tiers, such that the Exchange's proposal would benefit
competition. For these reasons, the Exchange does not believe that the
proposed rule change will impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
[[Page 710]]
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-2024-62 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-2024-62. 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-2024-62 and should be
submitted on or before January 27, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\58\
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\58\ 17 CFR 200.30-3(a)(12).
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Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024-31771 Filed 1-3-25; 8:45 am]
BILLING CODE 8011-01-P
