Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices 43923 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The Trust filed a registration statement with the 

Commission on December 15, 2017. See 

Registration Statement on Form S–1, dated 

December 15, 2017 (File No. 333–222109) 

(‘‘Registration Statement’’). The Registration 

Statement ‘‘will be effective as of the date of any 

offer and sale pursuant to the Registration 

Statement.’’ Notice, infra note 5, 83 FR at 2705 n.7. 

4On August 21, 2018, the Exchange filed 

Amendment No. 1 to the proposal, and on August 

22, 2018, the Exchange filed Amendment No. 2 to 

the proposal. As discussed below, however, see 

Section III.E, infra, the Commission views these 

amendments as untimely. Furthermore, even if 

these amendments had been timely filed, they 

would not alter the Commission’s conclusion that 

the Exchange’s proposal is not consistent with the 

Exchange Act. See id. 

5See Securities Exchange Act Release No. 82484 

(Jan. 11, 2018), 83 FR 2704 (Jan. 18, 2018) 

(‘‘Notice’’). 

6 15 U.S.C. 78s(b)(2). 

7See Securities Exchange Act Release No. 82759 

(Feb. 22, 2018), 83 FR 8719 (Feb. 28, 2018). 

8 15 U.S.C. 78s(b)(2)(B). 

9See Securities Exchange Act Release No. 82995 

(Apr. 5, 2018), 83 FR 15425 (Apr. 10, 2018) (‘‘Order 

Instituting Proceedings’’). 

10See id. at 15426. 

11See Securities Exchange Act Release No. 83548 

(June 28, 2018), 83 FR 31246 (July 3, 2018). 

12See Letters from Anita Desai (Apr. 6, 2018) 

(‘‘Desai Letter’’); Ed Kaleda (Apr. 6, 2018) (‘‘Kaleda 

Letter’’); Don Krohn (Apr. 7, 2018) (‘‘Krohn Letter’’); 

Adam Malkin (Apr. 8, 2018) (‘‘Malkin Letter’’); 

Shravan Kumar (Apr. 11, 2018) (‘‘Kumar Letter’’); 

David Barnwell (Apr. 12, 2018) (‘‘Barnwell Letter’’); 

Louise Fitzgerald (Apr. 18, 2018) (‘‘Fitzgerald 

Letter’’); Sharon Brown-Hruska, Managing Director, 

and Trevor Wagener, Consultant, NERA Economic 

Consulting (May 18, 2018) (‘‘NERA Letter’’); Alex 

Hales (July 8, 2018) (‘‘Hales Letter’’); Anthony C. 

Otenyi (July 18, 2018) (‘‘Otenyi Letter’’); V.K. Bhat 

(July 28, 2018) (‘‘Bhat Letter’’); Sami Santos (Aug. 

7, 2018) (‘‘Santos Letter’’); Arthur Netto (Aug. 9, 

2018) (‘‘Netto Letter’’); Sam M. Ahn (Aug. 17, 2018) 

(‘‘Ahn Letter’’); and William Rhind, CEO, 

GraniteShares (Aug. 20, 2018) (‘‘GraniteShares 

Letter’’). All comments on the proposed rule change 

are available on the Commission’s website at: 

https://www.sec.gov/comments/sr-cboebzx-2018- 

001/cboebzx2018001.htm. 

13See 15 U.S.C. 78f(b)(5). 

14See infra notes 31–33 and accompanying text. 

15BZX Rule 14.11(f)(4) applies to Trust Issued 

Receipts that invest in ‘‘Financial Instruments.’’ 

The term ‘‘Financial Instruments,’’ as defined in 

BZX Rule 14.11(f)(4)(A)(iv), means any combination 

of investments, including cash; securities; options 

on securities and indices; futures contracts; options 

on futures contracts; forward contracts; equity caps, 

collars, and floors; and swap agreements. 

16See Notice, supra note 5, 83 FR at 2707. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.16

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–18570 Filed 8–27–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83913; File No. SR– 

CboeBZX–2018–001] 

Self-Regulatory Organizations; Cboe 

BZX Exchange, Inc.; Order 

Disapproving a Proposed Rule Change 

To List and Trade the Shares of the 

GraniteShares Bitcoin ETF and the 

GraniteShares Short Bitcoin ETF 

August 22, 2018. 

I. Introduction 

On January 5, 2018, Cboe BZX 

Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Exchange 

Act’’) 1 and Rule 19b–4 thereunder,2 a 

proposed rule change to list and trade 

the shares (‘‘Shares’’) of the 

GraniteShares Bitcoin ETF (‘‘Long 

Fund’’) and the GraniteShares Short 

Bitcoin ETF (‘‘Short Fund’’) (each a 

‘‘Fund’’ and, collectively, ‘‘Funds’’) 

issued by the GraniteShares ETP Trust 

(‘‘Trust’’) 3 under BZX Rule 14.11(f)(4).4

The proposed rule change was 

published for comment in the Federal 

Register on January 18, 2018.5 The 

comment period for the Notice of 

Proposed Rule Change closed on 

February 8, 2018. 

On February 22, 2018, pursuant to 

Section 19(b)(2) of the Exchange Act,6

the Commission designated a longer 

period within which to approve the 

proposed rule change, disapprove the 

proposed rule change, or institute 

proceedings to determine whether to 

approve or disapprove the proposed 

rule change.7 On April 5, 2018, the 

Commission instituted proceedings 

under Section 19(b)(2)(B) of the 

Exchange Act 8 to determine whether to 

approve or disapprove the proposed 

rule change.9 The comment period and 

rebuttal comment period for the Order 

Instituting Proceedings closed on May 1, 

2018, and May 15, 2018, respectively.10

Finally, on June 28, 2018, the 

Commission extended the period for 

consideration of the proposed rule 

change to September 15, 2018.11 As of 

August 21, 2018, the Commission had 

received 15 comments on the proposed 

rule change.12

This order disapproves the proposed 

rule change. Although the Commission 

is disapproving this proposed rule 

change, the Commission emphasizes 

that its disapproval does not rest on an 

evaluation of whether bitcoin, or 

blockchain technology more generally, 

has utility or value as an innovation or 

an investment. Rather, the Commission 

is disapproving this proposed rule 

change because, as discussed below, the 

Exchange has not met its burden under 

the Exchange Act and the Commission’s 

Rules of Practice to demonstrate that its 

proposal is consistent with the 

requirements of the Exchange Act 

Section 6(b)(5), in particular the 

requirement that a national securities 

exchange’s rules be designed to prevent 

fraudulent and manipulative acts and 

practices.13 Among other things, the 

Exchange has offered no record 

evidence to demonstrate that bitcoin 

futures markets are ‘‘markets of 

significant size.’’ That failure is critical 

because, as explained below, the 

Exchange has failed to establish that 

other means to prevent fraudulent and 

manipulative acts and practices will be 

sufficient, and therefore surveillancesharing with a regulated market of 

significant size related to bitcoin is 

necessary to satisfy the statutory 

requirement that the Exchange’s rules be 

designed to prevent fraudulent and 

manipulative acts and practices.14

II. Description of the Proposal 

The Exchange proposes to list and 

trade the Shares under BZX Rule 

14.11(f)(4), which governs the listing 

and trading of Trust Issued Receipts on 

the Exchange.15 Each Fund will be a 

series of the Trust, and the Trust and the 

Funds will be managed and controlled 

by GraniteShares Advisors LLC 

(‘‘Sponsor’’). Bank of New York Mellon 

will serve as administrator, custodian, 

and transfer agent for the Funds. 

Foreside Fund Services, LLC will serve 

as the distributor of the Shares 

(‘‘Distributor’’). The Trust will offer 

Shares of the Funds for sale through the 

Distributor in ‘‘Creation Units’’ in 

transactions with ‘‘Authorized 

Participants’’ who have entered into 

agreements with the Distributor.16

According to the Exchange, the Long 

Fund’s investment objective will be to 

seek results (before fees and expenses) 

that, both for a single day and over time, 

correspond to the performance of lead 

month bitcoin futures contracts listed 

and traded on the Cboe Futures 

Exchange, Inc. (‘‘CFE’’) (‘‘Benchmark 

Futures Contracts’’). Conversely, the 

Short Fund’s investment objective will 

be to seek results (before fees and 

expenses) that, on a daily basis, 

correspond to the inverse (¥1x) of the 

daily performance of the Benchmark 

Futures Contracts for a single day. Each 

Fund generally intends to invest 

substantially all of its assets in the 

Benchmark Futures Contracts and cash 

and cash equivalents (which would be 

used to collateralize the Benchmark 

Futures Contracts), but may invest in 

other U.S. exchange listed bitcoin 

futures contracts, as available (together 


daltland on DSKBBV9HB2PROD with NOTICES
43924 Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices 

17See id. at 2705–06. The Bitcoin Futures 

Contracts include the bitcoin futures contracts 

listed and traded on the Chicago Mercantile 

Exchange, Inc. (‘‘CME’’). See id. at 2705. 

18See id. at 2709 n.26. 

19See id. at 2706. 

20Notice, supra note 5, 83 FR at 2706. 

21 Id. 

22 Id. 

23 Id. at 2710. 

24 15 U.S.C. 78f(b)(5). 

25Rule 700(b)(3), Commission Rules of Practice, 

17 CFR 201.700(b)(3). 

26See id. 27See id. 28See Susquehanna Int’l Group, LLP v. Securities 

and Exchange Commission, 866 F.3d 442, 447 (D.C. 

Cir. 2017). 

29 15 U.S.C. 78f(b)(5). 

30Order Setting Aside Action by Delegated 

Authority and Disapproving a Proposed Rule 

Change, as Modified by Amendments No. 1 and 2, 

To List and Trade Shares of the Winklevoss Bitcoin 

Trust, Securities Exchange Act Release No. 83723 

(July 26, 2018), 83 FR 37579, 37580 (Aug. 1, 2018) 

(SR–BatsBZX–2018–30). 

31 Id. (citing Amendment to Rule Filing 

Requirements for Self-Regulatory Organizations 

with Benchmark Futures Contracts, 

collectively, ‘‘Bitcoin Futures 

Contracts’’).17

The Exchange represents that no more 

than 10% of the net assets of a Fund in 

the aggregate invested in Bitcoin 

Futures Contracts shall consist of 

Bitcoin Futures Contracts whose 

principal market is neither a member of 

the Intermarket Surveillance Group nor 

a market with which the Exchange does 

not have a comprehensive surveillancesharing agreement.18 Further, according 

to the Notice, in the event that position, 

price, or accountability limits are 

reached with respect to Bitcoin Futures 

Contracts, each Fund may invest in U.S. 

listed swaps on bitcoin or the 

Benchmark Futures Contracts (‘‘Listed 

Bitcoin Swaps’’). The Notice also states 

that, in the event that position, price, or 

accountability limits are reached with 

respect to Listed Bitcoin Swaps, each 

Fund may invest in over-the-counter 

swaps on bitcoin or the Benchmark 

Futures Contracts (‘‘OTC Bitcoin 

Swaps,’’ and together with Listed 

Bitcoin Swaps, collectively, ‘‘Bitcoin 

Swaps’’).19

The Exchange asserts that ‘‘policy 

concerns related to an underlying 

reference asset and its susceptibility to 

manipulation are mitigated as it relates 

to bitcoin because the very nature of the 

bitcoin ecosystem makes manipulation 

of bitcoin difficult.’’ 20 According to the 

Exchange: 

The geographically diverse and continuous 

nature of bitcoin trading makes it difficult 

and prohibitively costly to manipulate the 

price of bitcoin and, in many instances, that 

the bitcoin market is generally less 

susceptible to manipulation than the equity, 

fixed income, and commodity futures 

markets. There are a number of reasons this 

is the case, including that there is not inside 

information about revenue, earnings, 

corporate activities, or sources of supply; it 

is generally not possible to disseminate false 

or misleading information about bitcoin in 

order to manipulate; manipulation of the 

price on any single venue would require 

manipulation of the global bitcoin price in 

order to be effective; a substantial over-thecounter market provides liquidity and shockabsorbing capacity; bitcoin’s 24/7/365 nature 

provides constant arbitrage opportunities 

across all trading venues; and it is unlikely 

that any one actor could obtain a dominant 

market share. 

Further, bitcoin is arguably less susceptible 

to manipulation than other commodities that 

underlie ETPs; there may be inside 

information relating to the supply of the 

physical commodity such as the discovery of 

new sources of supply or significant 

disruptions at mining facilities that supply 

the commodity that simply are inapplicable 

as it relates to bitcoin. Further, the Exchange 

believes that the fragmentation across bitcoin 

exchanges, the relatively slow speed of 

transactions, and the capital necessary to 

maintain a significant presence on each 

exchange make manipulation of bitcoin 

prices through continuous trading activity 

unlikely. Moreover, the linkage between the 

bitcoin markets and the presence of 

arbitrageurs in those markets means that the 

manipulation of the price of bitcoin price on 

any single venue would require manipulation 

of the global bitcoin price in order to be 

effective. Arbitrageurs must have funds 

distributed across multiple bitcoin exchanges 

in order to take advantage of temporary price 

dislocations, thereby making it unlikely that 

there will be strong concentration of funds on 

any particular bitcoin exchange. As a result, 

the potential for manipulation on a particular 

bitcoin exchange would require overcoming 

the liquidity supply of such arbitrageurs who 

are effectively eliminating any cross-market 

pricing differences. For all of these reasons, 

bitcoin is not particularly susceptible to 

manipulation, especially as compared to 

other approved ETP reference assets.21

The Notice also asserts that the 

susceptibility of the underlying futures 

contracts to manipulation is mitigated 

by the ‘‘significant liquidity that the 

Exchange expects to exist in the market 

for Bitcoin Futures Contracts.’’ 22 The 

Notice asserts that the market for bitcoin 

futures will be ‘‘sufficiently liquid to 

support numerous ETPs shortly after 

launch,’’ citing ‘‘numerous 

conversations with market participants, 

issuers, and discussions with personnel 

of CFE.’’23

III. Discussion 

A. The Applicable Standard for Review 

The Commission must consider 

whether the Exchange’s proposal is 

consistent with Exchange Act Section 

6(b)(5), which requires, in relevant part, 

that the rules of a national securities 

exchange be designed ‘‘to prevent 

fraudulent and manipulative acts and 

practices’’ and ‘‘to protect investors and 

the public interest.’’ 24 Under the 

Commission’s Rules of Practice, the 

‘‘burden to demonstrate that a proposed 

rule change is consistent with the 

Exchange Act and the rules and 

regulations issued thereunder . . . is on 

the self-regulatory organization [‘SRO’] 

that proposed the rule change.’’ 25

The description of a proposed rule 

change, its purpose and operation, its 

effect, and a legal analysis of its 

consistency with applicable 

requirements must all be sufficiently 

detailed and specific to support an 

affirmative Commission finding,26 and 

any failure of an SRO to provide this 

information may result in the 

Commission not having a sufficient 

basis to make an affirmative finding that 

a proposed rule change is consistent 

with the Exchange Act and the 

applicable rules and regulations.27

Moreover, ‘‘unquestioning reliance’’ on 

an SRO’s representations in a proposed 

rule change is not sufficient to justify 

Commission approval of a proposed rule 

change.28

B. Preventing Fraudulent and 

Manipulative Practices 

1. Applicable Legal Standard 

To approve the Exchange’s proposal 

to list the Shares, the Commission must 

be able to find that the proposal is, 

consistent with Exchange Act Section 

6(b)(5), ‘‘designed to prevent fraudulent 

and manipulative acts and practices.’’ 29

As the Commission recently explained 

in an order disapproving a listing 

proposal for the Winklevoss Bitcoin 

Trust (‘‘Winklevoss Order’’), although 

surveillance-sharing agreements are not 

the exclusive means by which an 

exchange-traded product (‘‘ETP’’) listing 

exchange can meet its obligations under 

Exchange Act Section 6(b)(5), such 

agreements are a widely used means for 

exchanges that list ETPs to meet their 

obligations, and the Commission has 

historically recognized their 

importance.30

The Commission has therefore 

determined that, if the listing exchange 

for an ETP fails to establish that other 

means to prevent fraudulent and 

manipulative acts and practices will be 

sufficient, the listing exchange must 

enter into a surveillance-sharing 

agreement with a regulated market of 

significant size because ‘‘[s]uch 

agreements provide a necessary 

deterrent to manipulation because they 

facilitate the availability of information 

needed to fully investigate a 

manipulation if it were to occur.’’ 31


daltland on DSKBBV9HB2PROD with NOTICES
Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices 43925 

Regarding New Derivative Securities Products, 

Securities Exchange Act Release No. 40761 (Dec. 8, 

1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998) 

(File No. S7–13–98)). 

32 15 U.S.C. 78f(b)(5). 

33See Winklevoss Order, supra note 30, 83 FR at 

37594. This definition is illustrative and not 

exclusive. There could be other types of ‘‘significant 

markets’’ and ‘‘markets of significant size,’’ but this 

definition is an example that will provide guidance 

to market participants. See id. 

34Securities Exchange Act Release No. 53105 

(Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006) 

(SR–Amex–2005–059). Additionally, the 

Winklevoss Order discusses the broader history and 

importance of surveillance-sharing agreements 

relating to derivative securities products, quoting 

Commission statements dating from 1990 on. See 

Winklevoss Order, supra note 30, 83 FR at 37592– 

94. 

35See, e.g., Securities Exchange Act Release No. 

53105 (Jan. 11, 2006), 71 FR 3129, 3136 (Jan. 19, 

2006) (SR–Amex–2005–059) (approval order noted 

that Amex’s ‘‘Information Sharing Agreement with 

the NYMEX and the CBOT and [Amex’s] 

Memorandum of Understanding with the LME, 

along with the Exchange’s participation in the ISG, 

in which the CBOT participates . . . create the 

basis for the Amex to monitor for fraudulent and 

manipulative practices in the trading of the 

Shares’’); Securities Exchange Act Release No. 

53582 (Mar. 31, 2006), 71 FR 17510, 17518 (Apr. 

6, 2006) (SR–Amex–2005–127) (approval order 

noted that Amex’s ‘‘comprehensive surveillance 

sharing agreements with the NYMEX and ICE 

Futures . . . create the basis for the Amex to 

monitor for fraudulent and manipulative practices 

in the trading of the Units’’ and that ‘‘[s]hould the 

USOF invest in oil derivatives traded on markets 

such as the Singapore Oil Market, the Exchange 

represents that it will file a proposed rule change 

pursuant to Section 19(b) of the [Exchange] Act, 

seeking Commission approval of [Amex’s] 

surveillance agreement with such market’’); 

Securities Exchange Act Release No. 54013 (June 

16, 2006), 71 FR 36372, 36378–79 (June 26, 2006) 

(NYSE–2006–17) (approval order noted that NYSE’s 

‘‘comprehensive surveillance sharing agreements 

with the NYMEX, the Kansas City Board of Trade, 

ICE Futures, and the LME . . . create the basis for 

the NYSE to monitor for fraudulent and 

manipulative trading practices’’ and that ‘‘all of the 

other trading venues on which current Index 

components and CERFs are traded are members of 

the ISG’’); Securities Exchange Act Release No. 

54450 (Sept. 14, 2006), 71 FR 55230, 55236 (Sept. 

21, 2006) (SR–Amex–2006–44) (approval order 

noted that ‘‘CME, where the futures contract for 

each of the current Index components is traded, is 

a member of the ISG’’ and that in the event of new 

fund investments in ‘‘foreign currency futures 

contracts traded on futures exchanges other than 

CME, [Amex] must have a CSSA with that futures 

exchange or the futures exchange must be an ISG 

member’’); Securities Exchange Act Release No. 

55029 (Dec. 29, 2006), 72 FR 806, 809–10 (Jan. 8, 

2007) (SR–Amex–2006–76) (approval order noted 

that Amex’s ‘‘Comprehensive Surveillance Sharing 

Agreement with the ICE Futures, LME, and 

NYMEX, . . . and membership in the Intermarket 

Surveillance Group (‘ISG’) creates the basis for the 

Amex to monitor fraudulent and manipulative 

practices in the trading of the Shares’’); Securities 

Exchange Act Release No. 56880 (Dec. 3, 2007), 72 

FR 69259, 69261 (Dec. 7, 2007) (SR–Amex–2006– 

96) (approval order noted that Amex has 

‘‘information sharing agreements with the 

InterContinental Exchange, the Chicago Mercantile 

Exchange, and the New York Mercantile Exchange 

and may obtain market surveillance information 

from other exchanges, including the Chicago Board 

of Trade, London Metals Exchange, and the New 

York Board of Trade through the Intermarket 

Surveillance Group’’); Securities Exchange Act 

Release No. 55632 (Apr. 13, 2007), 72 FR 19987, 

19988 (Apr. 20, 2007) (SR–Amex–2006–112) 

(approval order noted that Amex ‘‘currently has in 

place an Information Sharing Agreement with the 

NYMEX and ICE Futures’’ and that if ‘‘USNG 

invests in Natural Gas Interests traded on other 

exchanges, the Amex represented that it will seek 

to enter into Information Sharing arrangements with 

those particular exchanges’’); Securities Exchange 

Act Release No. 57456 (Mar. 7, 2008), 73 FR 13599, 

13601 (Mar. 13, 2008) (NYSEArca–2007–91) 

(approval order noted that NYSEArca ‘‘can obtain 

market surveillance information, including 

customer identity information, with respect to 

transactions occurring on the NYM, the Kansas City 

Board of Trade, ICE, and the LME, pursuant to its 

comprehensive information sharing agreements 

with each of those exchanges’’ and that ‘‘[a]ll of the 

other trading venues on which current Index 

components are traded are members of the ISG’’); 

Securities Exchange Act Release No. 57838 (May 

20, 2008), 73 FR 30649, 30652, (May 28, 2008) (SR– 

NYSEArca–2008–09) (approval order noted that 

NYSEArca ‘‘may obtain information via the ISG 

from other exchanges who are members or affiliate 

members of the ISG,’’ that NYSEArca ‘‘has an 

information sharing agreement in place with ICE 

Futures,’’ and that NYSEArca will file a proposed 

rule change ‘‘if the Fund invests in EUAs . . . that 

constitute more than 10% of the weight of the Fund 

where the principal trading market for such 

component is not a member or affiliate member of 

the ISG or where the Exchange does not have a 

comprehensive surveillance sharing agreement with 

such market’’); Securities Exchange Act Release No. 

63635 (Jan. 3, 2011), 76 FR 1489, 1491 (Jan. 10, 

2011) (NYSEArca–2010–103) (approval order noted 

that ‘‘with respect to Fund components traded on 

exchanges, not more than 10% of the weight of such 

components in the aggregate will consist of 

components whose principal trading market is not 

a member of the Intermarket Surveillance Group or 

is a market with which [NYSEArca] does not have 

a comprehensive surveillance sharing agreement’’); 

Securities Exchange Act Release No. 66553 (Mar. 9, 

2012), 77 FR 15440, 15444 (Mar. 15, 2012) (SR– 

NYSEArca–2012–04) (approval order noted that 

NYSEArca ‘‘can obtain market surveillance 

information, including customer identity 

information, from ICE [Futures] and CME, which 

are members of the Intermarket Surveillance 

Group’’); Securities Exchange Act Release No. 

67223 (June 20, 2012), 77 FR 38117, 38124 (June 26, 

2012) (NYSEAmex–2012–24) (approval order noted 

that NYSEAmex ‘‘can obtain market surveillance 

information, including customer identity 

information, with respect to transactions occurring 

on exchanges that are members of ISG, including 

CME, CBOT, COMEX, NYMEX . . . and ICE 

Futures US,’’ that NYSEAmex ‘‘currently has in 

place a comprehensive surveillance sharing 

agreement with each of CME, NYMEX, ICE Futures 

Europe, and KCBOT,’’ and that ‘‘while the Fund 

may invest in futures contracts or options on 

futures contracts which trade on markets that are 

not members of ISG or with which [NYSEAmex] 

does not have in place a comprehensive 

surveillance sharing agreement, such instruments 

will never represent more than 10% of the Fund’s 

holdings’’); Securities Exchange Act Release No. 

73561 (Nov. 7, 2014), 79 FR 68329, 68330 (Nov. 14, 

2014) (NYSEArca–2014–102) (approval order noted 

that ‘‘FINRA may obtain trading information 

regarding trading in the Shares and Coal Futures 

from such markets and other entities that are 

members of ISG or with which [NYSEArca] has in 

place a comprehensive surveillance sharing 

agreement’’ and that ‘‘CME is a member of the 

ISG’’); Securities Exchange Act Release No. 82390 

(Dec. 22, 2017), 82 FR 61625, 61631, 61634 (Dec. 

28, 2017) (NYSEArca–2017–107) (approval order 

noted that NYSEArca ‘‘may obtain information 

regarding trading in the Shares and Freight Futures 

from markets and other entities that are members 

of ISG or with which [NYSEArca] has in place a 

CSSA’’ and that ‘‘not more than 10% of the net 

assets of the Fund in the aggregate invested in 

Freight Futures or options on Freight Futures shall 

consist of derivatives whose principal market is not 

a member of the ISG or is a market with which 

[NYSEArca] does not have a CSSA’’). 

Accordingly, a surveillance-sharing 

agreement with a regulated market of 

significant size is required to ensure 

that, in compliance with the Exchange 

Act, the proposal is ‘‘designed to 

prevent fraudulent and manipulative 

acts and practices.’’ 32 In this context, 

the Commission has interpreted the 

terms ‘‘significant market’’ and ‘‘market 

of significant size’’ to include a market 

(or group of markets) as to which (a) 

there is a reasonable likelihood that a 

person attempting to manipulate the 

ETP would also have to trade on that 

market to successfully manipulate the 

ETP, so that a surveillance-sharing 

agreement would assist the ETP listing 

market in detecting and deterring 

misconduct, and (b) it is unlikely that 

trading in the ETP would be the 

predominant influence on prices in that 

market.33 Thus, a surveillance-sharing 

agreement must be entered into with a 

‘‘significant market’’ to assist in 

detecting and deterring manipulation of 

the ETP, because someone attempting to 

manipulate the ETP is reasonably likely 

to also engage in trading activity on that 

‘‘significant market.’’ 

Although the Winklevoss Order 

applied these standards to a commoditytrust ETP based on bitcoin, the 

Commission believes that these 

standards are also appropriate for an 

ETP based on bitcoin futures. When 

approving the first commodity-futures 

ETP, the Commission specifically noted 

that ‘‘[i]nformation sharing agreements 

with primary markets trading index 

components underlying a derivative 

product are an important part of a selfregulatory organization’s ability to 

monitor for trading abuses in derivative 

products.’’ 34 And the Commission’s 

approval orders for commodity-futures 

ETPs consistently note the ability of an 

ETP listing exchange to share 

surveillance information either through 

surveillance-sharing agreements or 

through membership by the listing 

exchange and the relevant futures 

exchanges in the Intermarket 

Surveillance Group.35 While the 

Commission in those orders did not 

explicitly undertake an analysis of 

whether the related futures markets 

were of ‘‘significant size,’’ the exchanges 

proposing commodity-futures ETPs on a 

single reference asset or benchmark 

generally made representations 

regarding the trading volume of the 


daltland on DSKBBV9HB2PROD with NOTICES
43926 Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices 

36See, e.g., Securities Exchange Act Release No. 

62213 (June 3, 2010), 75 FR 32828 (June 9, 2010) 

(SR–NYSEArca–2010–22) (notice of proposed rule 

change included NYSE Arca’s representations that: 

(i) Corn futures volume on Chicago Board of Trade 

(‘‘CBOT’’) for 2008 and 2009 (through November 30, 

2009) was 59,934,739 contracts and 47,754,866 

contracts, respectively, and as of March 16, 2010, 

CBOT open interest for corn futures was 1,118,103 

contracts, and open interest for near month futures 

was 447,554 contracts; (ii) the corn futures contract 

price was $18,337.50 ($3.6675 per bushel and 5,000 

bushels per contract), and the approximate value of 

all outstanding contracts was $20.5 billion; (iii) as 

of March 16, 2010, open interest in corn swaps 

cleared on CBOT was approximately 2,100 

contracts, with an approximate value of $38.5 

million; and (iv) the position limits for all months 

is 22,000 corn contracts, and the total value of 

contracts if position limits were reached would be 

approximately $403.5 million (based on the 

$18,337.50 contract price), Securities Exchange Act 

Release No. 61954 (Apr. 21, 2010), 75 FR 22663, 

22664 n.10 (Apr. 29, 2010)); Securities Exchange 

Act Release No. 63610 (Dec. 27, 2010), 76 FR 199 

(Jan. 3, 2011) (SR–NYSEArca–2010–101) (notice of 

proposed rule change included NYSE Arca’s 

representations that: (i) As of June 14, 2010, there 

was VIX futures contracts open interest on CFE of 

88,366 contracts, with a contract price of $25.55 

and value of open interest of $2,257,751,300; (ii) 

total CFE trading volume in 2009 in VIX futures 

contracts was 1,143,612 contracts, with average 

daily volume of 4,538 contracts; and (iii) total 

volume year-to-date (through May 31, 2010) was 

1,399,709 contracts, with average daily volume of 

13,458 contracts, Securities Exchange Act Release 

No. 63317 (Nov. 16, 2010), 75 FR 71158, 71159 n.9 

(Nov. 22, 2010)); Securities Exchange Act Release 

No. 63753 (Jan. 21, 2011), 76 FR 4963 (Jan. 27, 

2011) (SR–NYSEArca–2010–110) (notice of 

proposed rule change included NYSE Arca’s 

representations that: (i) Natural gas futures volume 

on New York Mercantile Exchange (‘‘NYMEX’’) for 

2009 and 2010 (through October 29, 2010) was 

47,864,639 contracts and 52,490,180 contracts, 

respectively; (ii) as of October 29, 2010, NYMEX 

open interest for natural gas futures was 794,741 

contracts, and open interest for near month futures 

was 47,313 contracts; (iii) the contract price was 

$40,380 ($4.038 per MMBtu and 10,000 MMBtu per 

contract), and the approximate value of all 

outstanding contracts was $32.1 billion; (iv) the 

position limits for all months is 12,000 natural gas 

contracts and the total value of contracts if position 

limits were reached would be approximately 

$484.56 million (based on the $40,380 contract 

price); and (v) as of October 29, 2010, open interest 

in natural gas swaps cleared on NYMEX was 

approximately 2,618,092 contracts, with an 

approximate value of $26.4 billion ($4.038 per 

MMBtu and 2,500 MMBtu per contract), Securities 

Exchange Act Release No. 63493 (Dec. 9, 2010), 75 

FR 78290, 78291 n.11 (Dec. 15, 2010)); Securities 

Exchange Act Release No. 63869 (Feb. 8, 2011), 76 

FR 8799 (Feb. 15, 2011) (SR–NYSEArca–2010–119) 

(notice of proposed rule change included NYSE 

Arca’s representations that: (i) WTI crude oil futures 

volume on NYMEX for 2009 and 2010 (through 

November 30, 2010) was 137,352,118 contracts and 

156,155,620 contracts, respectively; (ii) as of 

November 30, 2010, NYMEX open interest for WTI 

crude oil was 1,342,325 contracts, and open interest 

for near month futures was 323,184 contracts; (iii) 

the position limits for all months is 20,000 WTI 

crude oil contracts and the total value of contracts 

if position limits were reached would be 

approximately $1.68 billion (based on the $84.11 

contract price); and (iv) the contract price was 

$84,110 ($84.11 USD per barrel and 1,000 barrels 

per contract), and the approximate value of all 

outstanding contracts was $112.9 billion, Securities 

Exchange Act Release No. 63625 (Dec. 30, 2010), 76 

FR 807, 808 n.11 (Jan. 6, 2011)); Securities 

Exchange Act Release No. 65134 (Aug. 15, 2011), 

76 FR 52034 (Aug. 19, 2011) (SR–NYSEArca–2011– 

23) (notice of proposed rule change included NYSE 

Arca’s representations that: (i) As of January 31, 

2011, there was VIX futures contracts open interest 

on CFE of 163,396 contracts with a value of open 

interest of $3,461,984,900; (ii) total CFE trading 

volume in 2010 in VIX futures contracts was 

4,402,616 contracts, with average daily volume of 

17,741 contracts; and (iii) total volume year-to-date 

(through January 31, 2011) was 779,493 contracts, 

with average daily volume of 38,975 contracts, 

Securities Exchange Act Release No. 64470 (May 

11, 2011), 76 FR 28493, 28494 n.12 (May 17, 2011)); 

Securities Exchange Act Release No. 65136 (Aug. 

15, 2011), 76 FR 52037 (Aug. 19, 2011) (SR– 

NYSEArca–2011–24) (notice of proposed rule 

change included NYSE Arca’s representations that: 

(i) Natural gas futures volume on NYMEX for 2009 

and 2010 (through December 31, 2010) was 

47,864,639 contracts and 64,350,673 contracts, 

respectively; (ii) as of December 31, 2010, NYMEX 

open interest for all natural gas futures was 772,104 

contracts, and the approximate value of all 

outstanding contracts was $35,664,257,310 billion 

[sic]; (iii) open interest as of December 31, 2010 for 

the near month contract was 166,757 contracts and 

the near month contract value was $7,345,645,850 

($4.405 per MMBtu and 10,000 MMBtu per 

contract); (iv) the position accountability limits for 

all months is 12,000 natural gas contracts and the 

total value of contracts if position accountability 

limits were reached would be approximately 

$528,600,000 million (based on the $4.405 contract 

price); and (v) as of December 31, 2010, open 

interest in natural gas swaps cleared on NYMEX 

was approximately 1,493,013 contracts, with an 

approximate value of $16,463,384,003 ($4.411 per 

MMBtu and 2,500 MMBtu per contract), Securities 

Exchange Act Release No. 64464 (May 11, 2011), 76 

FR 28483, 28484 n.11 (May 17, 2011)); Securities 

Exchange Act Release No. 65344 (Sept. 15, 2011), 

76 FR 58549 (Sept. 21, 2011) (SR–NYSEArca–2011– 

48) (notice of proposed rule change included NYSE 

Arca’s representations that: (i) Wheat futures 

volume on CBOT for 2010 and 2011 (through April 

29, 2011) was 23,058,783 contracts and 8,860,135 

contracts, respectively; (ii) as of April 29, 2011, 

open interest for wheat futures was 456,851 

contracts; (iii) the wheat contract price was 

$40,062.50 (801.25 cents per bushel and 5,000 

bushels per contract), and the approximate value of 

all outstanding contracts was $18.3 billion; (iv) the 

position limits for all months was 6,500 wheat 

contracts and the total value of contracts if position 

limits were reached would be approximately $260.4 

million (based on the $40,062.50 contract price); (v) 

soybean futures volume on CBOT for 2010 and 2011 

(through April 29, 2011) was 36,962,868 contracts 

and 16,197,385 contracts, respectively; (vi) as of 

April 29, 2011, open interest for soybean futures 

was 572,959 contracts; (vii) the soybean contract 

price was $69,700.00 (1394 cents per bushel and 

5,000 bushels per contract), and the approximate 

value of all outstanding contracts was $39.9 billion; 

(viii) the position limits for all months is 6,500 

soybean contracts and the total value of contracts 

if position limits were reached would be 

approximately $453 million (based on the 

$69,700.00 contract price); (ix) sugar futures volume 

on ICE Futures for 2010 and 2011 (through April 

29, 2011) was 27,848,391 contracts and 9,045,069 

contracts, respectively; (x) as of April 29, 2011, 

open interest for sugar futures was 570,948 

contracts; (xi) the sugar contract price was 

$24,920.00 (22.25 cents per pound and 112,000 

pounds per contract), and the approximate value of 

all outstanding contracts was $14.2 billion; and (xii) 

the position limits for all months is 15,000 sugar 

contracts and the total value of contracts if position 

limits were reached would be approximately $373.8 

million (based on the $24,920.00 contract price), 

Securities Exchange Act Release No. 64967 (July 26, 

2011), 76 FR 45885, 45886 n.10, 45888 n.20, 45890 

n.24 (Aug. 1, 2011)); Securities Exchange Act 

Release No. 66553 (Mar. 9, 2012), 77 FR 15440 

(Mar. 15, 2012) (SR–NYSEArca–2012–04) (notice of 

proposed rule change included NYSE Arca’s 

representations that: (i) As of December 30, 2011, 

open interest in AUD/USD futures contracts traded 

on CME was $11.56 billion, and AUD/USD futures 

contracts had an average daily trading volume in 

2011 of 123,006 contracts; (ii) as of December 30, 

2011, open interest in CAD/USD futures contracts 

traded on CME was $11.66 billion, and CAD/USD 

futures contracts had an average daily trading 

volume in 2011 of 89,667 contracts; (iii) as of 

December 30, 2011, open interest in CHF/USD 

futures contracts traded on CME was $4.99 billion, 

and CHF/USD futures contracts had an average 

daily trading volume in 2011 of 40,955 contracts; 

(iv) futures contracts based on the U.S. Dollar Index 

(‘‘USDX’’) were listed on November 20, 1985, and 

options on the USDX futures contracts began 

trading on September 3, 1986; (v) as of December 

30, 2011, open interest in USDX futures contracts 

traded on ICE Futures was $5.44 billion, and USDX 

futures contracts had an average daily trading 

volume in 2011 of 30,341 contracts; (vi) as of 

December 30, 2011, open interest in EUR/USD 

futures contracts traded on CME was $46.12 billion, 

and EUR/USD futures contracts had an average 

daily trading volume in 2011 of 336,947 contracts; 

and (vii) as of December 30, 2011, open interest in 

JPY/USD futures contracts traded on CME was 

$25.75 billion, and JPY/USD futures contracts had 

an average daily trading volume in 2011 of 113,476 

contracts, Securities Exchange Act Release No. 

66180 (Jan. 18, 2012), 77 FR 3532, 3534–35 (Jan. 24, 

2012)); Securities Exchange Act Release No. 68165 

(Nov. 6, 2012), 77 FR 67707 (Nov. 13, 2012) (SR– 

NYSEArca–2012–102) (notice of proposed rule 

change included NYSE Arca’s representations that: 

(i) Gold and silver futures contracts traded on 

Commodity Exchange, Inc. (‘‘COMEX’’) are the 

global benchmark contracts and most liquid futures 

contracts in the world for each respective 

commodity; (ii) as of March 15, 2012, open interest 

in gold futures contracts and silver futures contracts 

traded on CME was $23.7 billion and $8.5 billion, 

respectively; (iii) gold futures contracts and silver 

futures contracts had an average daily trading 

volume in 2011 of 138,964 contracts and 63,913 

contracts, respectively; (iv) CME constitutes the 

largest regulated foreign exchange marketplace in 

the world, with over $100 billion in daily liquidity; 

(v) as of March 15, 2012, open interest in Euro 

futures contracts and Yen futures contracts traded 

on CME and, for Dollar futures contracts, on ICE 

Futures, were $42.7 billion, $20.8 billion, and $4.8 

billion, respectively; and (vi) Euro futures contracts, 

Yen futures contracts, and Dollar futures contracts 

had an average daily trading volume in 2011 of 

325,103, 106,824, and 27,258 contracts, 

respectively, Securities Exchange Act Release No. 

67882 (Sept. 18, 2012), 77 FR 58881, 58883 n.10, 

58883 n.14 (Sept. 24, 2012)); Securities Exchange 

Act Release No. 81686 (Sept. 22, 2017), 82 FR 

45643, 45646 (Sept. 29, 2017) (SR–NYSEArca– 

2017–05) (order approving the listing and trading of 

the Direxion Daily Crude Oil Bull 3x Shares and 

Direxion Daily Crude Oil Bear 3x Shares, citing to 

NYSE Arca’s representations that: (i) The oil 

contract market was of significant size and 

liquidity, and had average daily volume of 650,000 

contracts and daily open interest of 450,000 

contracts; (ii) the Sponsor is registered as a 

commodity pool operator with the CFTC and is a 

member of the National Futures Association, and 

(iii) the CFTC has regulatory jurisdiction over the 

trading of futures contracts traded on U.S. markets); 

Securities Exchange Act Release No. 82390 (Dec. 

22, 2017), 82 FR 61625 (Dec. 28, 2017) (SR– 

NYSEArca–2017–107) (notice of proposed rule 

change included NYSE Arca’s representations that: 

(i) Freight futures liquidity has remained relatively 

constant, in lot terms, over the last five years with 

underlying futures markets,36 and the 


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Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices 43927 

approximately 1.1 million lots trading annually; (ii) 

open interest currently stood at approximately 

290,000 lots across all asset classes representing an 

estimated value of more than $3 billion, and, of 

such open interest, Capesize contracts accounted 

for approximately 50%, Panamax for approximately 

40%, and Handymax for approximately 10%, 

Securities Exchange Act Release No. 81681 (Sept. 

22, 2017), 82 FR 45342, 45345 (Sept. 28, 2017)). See 

also Securities Exchange Act Release No. 53582 

(Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006) (SR– 

Amex–2005–127) (notice of proposed rule change 

included Amex’s representations that: (i) WTI light, 

sweet crude oil contract, listed and traded at 

NYMEX, trades in units of 42,000 gallons (1,000 

barrels), and annual daily contract volume on 

NYMEX from 2001 through October 2005 was 

149,028, 182,718, 181,748, 212,382 and 242,262, 

respectively; (ii) annual daily contract volume on 

ICE Futures for Brent crude contracts from 2001 

through October 2005 was 74,011, 86,499, 96,767, 

102,361 and 120,695 respectively; (iii) annual daily 

contract volume on NYMEX for heating oil futures 

from 2001 through October 2005 was 41,710, 

42,781, 46,327, 51,745 and 52,334, respectively; (iv) 

annual daily contract volume on NYMEX for 

natural gas contracts from 2001 through October 

2005 was 47,457, 97,431, 76,148, 70,048 and 

77,149, respectively; and (v) annual daily contract 

volume on NYMEX for gasoline contracts from 2001 

through October 2005 was 38,033, 43,919, 44,688, 

51,315 and 53,577, respectively, Securities 

Exchange Act Release No. 53324 (Feb. 16, 2006), 71 

FR 9614, 9618 (Feb. 24, 2006)); Securities Exchange 

Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987 

(Apr. 20, 2007) (SR–Amex–2006–112) (notice of 

proposed rule change included Amex’s 

representations that annual daily contract volume 

on NYMEX for natural gas contracts from 2001 

through October 2006 was 47,457, 97,431, 76,148, 

70,048, 76,265, and 102,097, respectively, 

Securities Exchange Act Release No. 55372 (Feb. 28, 

2007), 72 FR 10267, 10268 (Mar. 7, 2007)). 

37For example, corn futures began trading in 

1877, see https://www.cmegroup.com/media-room/ 

historical-first-trade-dates.html, and the first ETP 

based on corn futures was approved for listing and 

trading in 2010. See Securities Exchange Act 

Release No. 62213 (June 3, 2010), 75 FR 32828 (June 

9, 2010) (SR–NYSEArca–2010–22). VIX futures 

began trading in 2004, see http://cfe.cboe.com/cfeproducts/vx-cboe-volatility-index-vix-futures/ 

contract-specifications, and the first ETPs based on 

VIX futures were approved for listing and trading 

in 2010. See Securities Exchange Act Release No. 

63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR– 

NYSEArca–2010–10). Natural gas futures began 

trading in 1990, see https://www.cmegroup.com/ 

media-room/historical-first-trade-dates.html, and 

the first ETP based on natural gas was approved for 

listing and trading in 2007. See Securities Exchange 

Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987 

(Apr. 20, 2007) (SR–Amex–2006–112). Crude oil 

futures began trading in 1983, see https://

www.cmegroup.com/media-room/historical-firsttrade-dates.html, and the first ETP based on crude 

oil futures was approved for listing and trading in 

2006. See Securities Exchange Act Release No. 

53582 (Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006) 

(SR–Amex–2005–127). Wheat futures, sugar futures, 

and soybean futures began trading in 1877, 1914, 

and 1936, respectively, see https://

www.cmegroup.com/media-room/historical-firsttrade-dates.html and https://www.theice.com/ 

publicdocs/ICE_Sugar_Brochure.pdf, and the first 

ETPs based on each of these commodity futures 

were approved for listing and trading in 2011. See 

Securities Exchange Act Release No. 65344 (Sept. 

15, 2011), 76 FR 58549 (Sept. 21, 2011) (SR– 

NYSEArca–2011–48). U.S. Dollar Index futures 

began trading in 1985, https://www.theice.com/ 

publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf, 

and the first ETPs based on U.S. Dollar Index 

futures was approved for listing and trading in 

2007. See Securities Exchange Act Release No. 

55292 (Feb. 14, 2007), 72 FR 8406 (Feb. 26, 2007) 

(SR–Amex–2006–86). Australian Dollar futures and 

Euro futures began trading in 1987 and 1999, 

respectively, and Canadian Dollar futures, Swiss 

Franc futures, and Yen futures began trading in 

2002, see https://www.cmegroup.com/media-room/ 

historical-first-trade-dates.html, and the first ETPs 

based on each of these individual currency futures 

were approved for listing and trading in 2012. See 

Securities Exchange Act Release No. 66553 (Mar. 9, 

2012), 77 FR 15440 (Mar. 15, 2012) (SR–NYSEArca– 

2012–04). Silver futures and gold futures began 

trading in 1933 and 1974, respectively, see https:// 

www.cmegroup.com/media-room/historical-firsttrade-dates.html, and the first ETPs based on each 

of these commodity futures were approved for 

listing and trading in 2006. See Securities Exchange 

Act Release No. 55029 (Dec. 29, 2006), 72 FR 806 

(Jan. 8, 2007) (SR–Amex–2006–76). Freight futures 

have been cleared since 2005, and the first ETP 

based on freight futures was approved for listing 

and trading in 2017. See Securities Exchange Act 

Release No. 82390 (Dec. 22, 2017), 82 FR 61625, 

61626 n.6 (Dec. 28, 2017) (SR–NYSEArca–2017– 

107) (noting that ‘‘Freight Futures have been cleared 

since 2005’’). 

38The Exchange filed its proposal less than one 

month after bitcoin futures began trading on either 

CME or CFE. 

39At issue were futures on an index comprising 

futures on crude oil, Brent crude oil, natural gas, 

heating oil, gasoline, gas oil, live cattle, wheat, 

aluminum, corn, copper, soybeans, lean hogs, gold, 

sugar, cotton, red wheat, coffee, standard lead, 

feeder cattle, zinc, primary nickel, cocoa, and silver. 

See Securities Exchange Act Release No. 53659 

(Apr. 17, 2006), 71 FR 21074, 21080 (Apr. 24, 2006) 

(SR–NYSE–2006–17) (notice of proposed rule 

change to list shares of iShares GSCI CommodityIndexed Trust). The Commission concluded that 

requirements of Exchange Act Section 6(b)(5) had 

been met because concerns about manipulation 

would be addressed by the arbitrage relationship 

between the new index futures and the existing 

component futures, as well as the ETP listing 

exchange’s comprehensive surveillance-sharing 

agreements not only with the market for the index 

futures, but also with the markets for the 

component futures. See Securities Exchange Act 

Release No. 54013 (June 16, 2006), 71 FR 36372, 

36379 (June 26, 2006) (SR–NYSE–2006–17) (order 

approving listing of shares of iShares GSCI 

Commodity-Indexed Trust). Additionally, the 

approval order for the ETP noted that, if the volume 

in any futures contract that was part of the reference 

index fell below a specified multiple of production 

of the underlying commodity, that contract’s weight 

in the index would decrease. See id. at 36374. 

40See Malkin Letter, supra note 12, at 1–2. 

41See Desai Letter, supra note 12, at 1. 

42See NERA Letter, supra note 12, at 2. 

43See id. 

44See Desai Letter, supra note 12, at 1; Fitzgerald 

Letter, supra note 12, at 1; Kumar Letter, supra note 

12; Krohn Letter, supra note 12; Barnwell Letter, 

supra note 12, at 2; Bhat Letter, supra note 12. 

Commission was in each of those cases 

dealing with a large futures market that 

had been trading for a number of years 

before an exchange proposed an ETP 

based on those futures.37 And where the 

Commission has considered a proposed 

ETP based on futures that had only 

recently begun trading,38 the 

Commission specifically addressed 

whether the futures on which the ETP 

was based—which were futures on an 

index of well-established commodity 

futures—were illiquid or susceptible to 

manipulation.39

Accordingly, the Commission 

examines below whether the 

representations by the Exchange, and 

the comments received from the public, 

support a finding that the Exchange has 

entered into a surveillance-sharing 

agreement with a market of significant 

size relating to bitcoin, the asset 

underlying the proposed ETPs, or that 

alternative means of preventing fraud 

and manipulation would be sufficient to 

satisfy the requirement of Exchange Act 

Section 6(b)(5) that the proposed rule 

change be designed to prevent 

fraudulent and manipulative acts and 

practices. 

2. Comments Received 

One commenter asserts that data on a 

week’s activity on the Gemini exchange, 

which provides a critical input for the 

CFE bitcoin futures, show substantial 

quantities of bitcoin are bought and sold 

all at once. The commenter believes that 

this behavior does not appear to be the 

result of natural trading and in the long 

run would prevent true price 

discovery.40

One commenter states that 

commencing an ETP without allowing 

the market to adjust to the cash-settled 

futures products would be akin to 

‘‘putting the cart before the horse’’ and 

seems to be an attempt to appease 

institutional investors.41

One commenter states that the market 

for bitcoin derivatives other than bitcoin 

exchange-traded futures appears to be 

developing and that financial 

institutions are reportedly moving 

toward launching bitcoin-related trading 

desks and other operations. This 

commenter believes that the proposed 

offering of both long and short ETPs 

raises the possibility that market makers 

in bitcoin-related derivatives could 

make two-sided markets if interest in 

the long and short ETPs is similar in 

magnitude. The commenter further 

believes that interest outside of the 

bitcoin ETPs may be sufficient to 

motivate market makers to maintain 

bitcoin derivatives desks.42 In addition, 

the commenter suggests that questions 

about bitcoin derivatives markets can be 

addressed through market depth 

analyses, discussions with potential 

bitcoin derivatives liquidity providers, 

and analyses of order and trade data 

across CME and CFE to determine the 

plausibility of simultaneous liquidity 

collapses on both bitcoin future 

markets.43

Six commenters assert that there is 

manipulation in the bitcoin market.44

One commenter states that it is widely 

known in the cryptocurrency 


daltland on DSKBBV9HB2PROD with NOTICES
43928 Federal Register / Vol. 83, No. 167 / Tuesday, August 28, 2018 / Notices 

45See Barnwell Letter, supra note 12, at 2. 

46See Kumar Letter, supra note 12. 

47See Fitzgerald Letter, supra note 12, at 1–2. 

48See id. at 2. 

49See id. 

50See NERA Letter, supra note 12, at 4–5. 

51See id. at 5. 

52See id. 

53See Krohn Letter, supra note 12. 

54See GraniteShares Letter, supra note 12, at 1– 

2. The Commission notes that the Sponsor did not 

submit its comment letter until 97 days after the 

close of the comment period under the Order 

Instituting Proceedings. 

55See id. at 2 & n.2, 6. 

56See id. at 8. 

57See id. at 6, 8. 

58See id. at 2–3, 8–9. 

59See id. at 3. 

60See id. at 8–9. 

community that volatility in the bitcoin 

market is the result of manipulation 

through the coordinated use of highfrequency trading across multiple 

exchanges.45 Another commenter 

asserts that it is common knowledge 

that the bitcoin market is being 

manipulated and asserts that 

BitConnect, which was recently shut 

down and had promised risk-free 

annual returns of up to 120%, is an 

example of Ponzi and multi-level 

marketing schemes that are too 

common. This commenter argues that 

the Commission should not send the 

wrong signal to bitcoin manipulators— 

who, the commenter asserts, currently 

operate with impunity—by approving a 

bitcoin ETP.46

One commenter asserts that, in an 

unregulated market, a small minority 

can manipulate the price of bitcoin and 

other ‘‘altcoins’’ and that bitcoin and 

other cryptocurrencies are freely 

manipulated by players who hold a 

disproportionate amount of 

cryptocurrencies or access to fiat 

currencies. This commenter cites data 

showing that 4.11% of bitcoin addresses 

own 96.53% of all the bitcoin in 

circulation, that the top four addresses 

control 3.13% of all bitcoin currently in 

distribution (worth over $4 billion), and 

that 115 individuals control bitcoin 

worth over $24 billion.47

One commenter asserts that 

widespread pump-and-dump schemes 

organized through the messaging 

platform ‘‘Telegram’’ are evidence of 

manipulation.48 This commenter further 

cites an inquiry by then-New York 

Attorney General Eric Schneiderman 

into cryptocurrency exchanges and the 

use of trading ‘‘bots’’ on those 

exchanges to manipulate the market, 

and asserts that such activity can drive 

prices above fair market value by over 

300%. The commenter notes the Kraken 

exchange’s refusal to cooperate with this 

inquiry and believes that this refusal 

should pose serious questions for 

investors and the Commission about the 

Kraken exchange’s operations, 

particularly after the Kraken exchange 

recently exited the Japanese market due 

to regulatory requirements.49

One commenter states that a 

commonly cited factor mitigating 

possible susceptibility to manipulation 

is the securities exchanges’ own 

surveillance procedures, in addition to 

the futures exchanges’ surveillance 

procedures and market surveillance and 

oversight by the Commodity Futures 

Trading Commission (‘‘CFTC’’). This 

commenter cites statements by the 

CFTC that it has the legal authority and 

means to police certain spot markets for 

fraud and manipulation through 

‘‘heightened review’’ collaboration with 

exchanges, that exchanges will provide 

the CFTC surveillance team with trade 

settlement data upon request, and that 

the exchanges will enter into 

information-sharing agreements with 

spot market platforms and monitor 

trading activity on the spot markets. The 

commenter also states that the Gemini 

exchange has announced that it would 

use Nasdaq’s market surveillance 

system to monitor its marketplace.50

This commenter further asserts that 

market surveillance is generally a 

prerequisite to identifying potential 

market manipulation and discourages 

market manipulation. The commenter 

believes that the emergence of 

institutionalized market surveillance on 

both futures and spot markets is a 

positive sign for the long-term future of 

bitcoin markets.51 The commenter 

suggests that the Commission, in 

coordination with the CFTC, selfregulatory organizations, bitcoin futures 

exchanges, and bitcoin spot market 

platforms, could gather market 

surveillance data to conduct an 

independent analysis of trade and 

settlement patterns and determine 

whether potentially manipulative 

trading practices occur on bitcoin spot 

and futures markets.52

A commenter asserts that bitcoin 

ETPs should be structured in such a 

way that the funds own bitcoin directly, 

because this commenter believes that 

cryptocurrency ETPs that are based on 

futures or other derivatives would invite 

manipulation of prices. A bitcoin ETP 

that holds the underlying 

cryptocurrency directly, this commenter 

states, would be simpler, more 

transparent, and less subject to complex 

and destabilizing trading strategies.53

The Sponsor asserts that the operation 

of, and risks posed by, an ETP that seeks 

to track the performance of a bitcoin 

futures contract, are relatively 

straightforward and similar to the 

operation and risks involved with many 

existing commodity-futures-based ETPs, 

and that the Commission has not raised 

concerns about the risk of market 

manipulation in the underlying 

commodity markets, even when the risk 

is disclosed in the offering document for 

a commodity-futures-based ETP, or 

when the production of the underlying 

commodity is dominated by relatively 

few players operating under a common 

organization.54 The Sponsor also asserts 

that CFE and CME surveil their markets 

to ensure that they are free from 

manipulation, other price distortion, or 

disorderly trading or expiration of 

futures contracts and that it is not 

necessary for the Exchange to enter into 

surveillance-sharing agreements with 

the underlying bitcoin spot markets.55

The Sponsor states that investors should 

only consider the price of the Bitcoin 

Futures Contracts, rather than the price 

of bitcoin itself,56 but also concedes 

that, to the extent price manipulation is 

possible in the underlying market and 

affects the price of the futures contracts, 

the NAV of the Funds would be affected 

as well.57

The Sponsor asserts that CFE and 

CME have specific and well-established 

trading and clearing rules to maintain 

an orderly and continuous market for 

bitcoin futures contracts that is 

supported by market makers providing 

continuous two-sided markets 

throughout the day.58 The Sponsor 

concedes that bitcoin futures contracts 

have limited operating histories, but 

asserts that the market infrastructure for 

these contracts is at least as advanced as 

that underlying the futures contracts 

used by a previously approved ETP that 

invests in freight futures contracts, 

noting that bitcoin futures trade with an 

electronic order book, while freight 

futures trade by voice orders, and 

asserting that the daily dollar volume in 

bitcoin futures contracts over a twomonth period exceeds that of freight 

futures contracts.59 The Sponsor asserts 

that CFE and CME are significant 

markets based on the existing market as 

well as the trading infrastructure.60 The 

Sponsor further concedes that, if the 

Funds hit position limits in Bitcoin 

Futures Contracts, this would 

potentially affect the trading and 

liquidity of the Shares, but asserts that 

this risk is disclosed to investors in the 

Registration Statement, that other 

commodity-futures-based ETPs face 

similar risks, and that interest from 

investors in the Shares would support 


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61See id. at 7. 62See supra notes 20–21 and accompanying text. 

63See Winklevoss Order, supra note 30, 83 FR at 

37582–84 (Section III.B.1(a) of the order). 

64See id. at 37584–87 (Section III.B.1(b) of the 

order). 

65See id. at 37584. 

66See supra note 28 and accompanying text 

(discussing the holding of Susquehanna Int’l 

Group, LLP v. Securities and Exchange 

Commission). Additionally, the Trust’s Registration 

Statement acknowledges that bitcoin spot markets 

have been the subject of fraud and security 

breaches, that the ‘‘nature of the assets held at 

Bitcoin Exchanges make them appealing targets for 

hackers,’’ and that the bitcoin spot markets’ 

exposure to ‘‘fraud and security breaches . . . could 

have a negative impact on the Bitcoin Futures 

Contracts in which the Funds invest.’’ See 

Registration Statement, supra note 3, at 9. 

67See supra note 57 and accompanying text. 

68See supra note 54 and accompanying text. 

69See Winklevoss Order, supra note 30, 83 FR at 

37582. 

70See id. The Sponsor argues that it is not 

necessary for the Exchange to enter into a 

surveillance-sharing agreement with an underlying 

bitcoin trading venue, but the Commission has not 

asserted that such a surveillance-sharing agreement 

is necessary. Instead, the Commission has held in 

the Winklevoss Order ‘‘that—when the spot market 

is unregulated—the requirement of preventing 

fraudulent and manipulative acts may possibly be 

satisfied by showing that the ETP listing market has 

entered into a surveillance-sharing agreement with 

a regulated market of significant size in derivatives 

related to the underlying asset.’’ Id. at 37600 

(emphasis added). 

71See Notice, supra note 5, 83 FR at 2709. 

72See supra notes 50–51 and accompanying text. 

This commenter also suggests that the 

Commission—in coordination with the CFTC, 

SROs, futures markets, and bitcoin spot platforms— 

could gather market surveillance data to 

independently analyze whether manipulative 

practices occur on bitcoin spot and futures 

platforms. See supra note 52 and accompanying 

text. As noted above, however, it is the Exchange 

that bears the burden to demonstrate that its 

proposal is designed to ‘‘prevent fraudulent and 

manipulative acts and practices.’’ See supra notes 

25–28 and accompanying text. 

73See Notice, supra note 5, 83 FR at 2709 (‘‘In 

addition to the existing obligations under Exchange 

rules regarding the production of books and records 

. . ., the registered Market Maker in Trust Issued 

Receipts shall make available to the Exchange such 

books, records or other information pertaining to 

transactions by such entity or registered or nonregistered employee affiliated with such entity for 

its or their own accounts for trading the underlying 

physical commodity, related commodity futures or 

options on commodity futures, or any other related 

commodity derivatives, as may be requested by the 

Exchange.’’). 

74Winklevoss Order, supra note 30, 83 FR at 

37580. 

75See id. at 37591 (finding that ‘‘traditional 

means’’ of surveillance were not sufficient in the 

absence of a surveillance-sharing agreement with a 

regulated market of significant size related to the 

underlying asset). 

76See supra note 35 and accompanying text 

(noting previous commodity-futures ETPs where 

surveillance sharing in place between ETP listing 

exchange and underlying futures exchanges). 

77Winklevoss Order, supra note 30, 83 FR at 

37580 (quoting Amendment to Rule Filing 

Requirements for Self-Regulatory Organizations 

Regarding New Derivative Securities Products, 

Securities Exchange Act Release No. 40761 (Dec. 8, 

1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998) 

(File No. S7–13–98)). 

78See https://www.isgportal.org/isgPortal/public/ 

members.htm (listing the current members and 

affiliate members of the Intermarket Surveillance 

Group). 

79See supra note 55 and accompanying text. 

80See supra notes 59–60 and accompanying text. 

81See Order Instituting Proceedings, supra note 9, 

83 FR at 15427. 

development of the bitcoin futures 

market.61

3. Analysis 

The Exchange asserts that the price of 

bitcoin is inherently resistant to 

manipulation,62 offering, in summary 

fashion, a list of arguments that are 

exactly the same as arguments that it or 

commenters already raised with respect 

to previous proposals for bitcoin-based 

ETPs.63 The Commission 

comprehensively addressed each of 

these arguments in the Winklevoss 

Order, finding in each case that the 

Exchange had failed to carry its burden 

to demonstrate that the argument was 

correct,64 and finding overall that the 

Exchange ‘‘ha[d] not demonstrated that 

the structure of the spot market for 

bitcoin is uniquely resistant to 

manipulation.’’ 65 Given that the 

Exchange has merely repeated these 

arguments, providing no elaboration or 

support, the Commission would have no 

basis—other than ‘‘unquestioning 

reliance’’ on the Exchange’s 

representations—on which to come to a 

different conclusion here.66

The Sponsor concedes that 

manipulation of the underlying bitcoin 

markets may affect the value of the 

Shares,67 but argues that the risk of 

manipulation has been disclosed to 

investors and that the Commission has 

not raised similar concerns in 

connection with previously approved 

commodity-futures ETPs, even when the 

risk of manipulation has been disclosed 

to investors or when the underlying 

commodity market was controlled by 

relatively few players.68 But the 

Commission, as it stated in the 

Winklevoss Order, is not applying a 

‘‘cannot be manipulated’’ standard to 

ETPs.69 Rather, the Commission has 

held that—absent a showing that the 

underlying assets for an ETP are 

inherently resistant to manipulation, or 

that other means of surveillance will 

suffice—a listing exchange must 

demonstrate that it has entered into a 

surveillance-sharing agreement with a 

regulated market of significant size 

relating to the underlying asset.70

The Exchange asserts that its existing 

surveillance procedures and its ability 

to share surveillance information with 

U.S. futures exchanges are sufficient to 

meet the requirements of Exchange Act 

Section 6(b)(5).71 One commenter also 

asserts that the exchange’s own 

surveillance procedures, along with 

market surveillance and oversight by the 

CFTC, can mitigate manipulation.72

While the Exchange would, pursuant 

to its listing rules, be able to obtain 

certain information regarding trading in 

the Shares and in the underlying bitcoin 

or any bitcoin derivative through 

registered market makers,73 this trade 

information would be limited to the 

activities of market participants who 

trade on the Exchange. Furthermore, 

neither the Exchange’s ability to surveil 

trading in the Shares nor its ability to 

share surveillance information with 

other securities exchanges trading the 

Shares would give the Exchange insight 

into the activity and identity of market 

participants who trade in bitcoin futures 

contracts or other bitcoin derivatives or 

who trade in the underlying bitcoin spot 

markets, where a substantial majority of 

trading, the Commission concluded in 

the Winklevoss Order, ‘‘occurs on 

unregulated venues overseas that are 

relatively new and that, generally, 

appear to trade only digital assets.’’ 74

Thus, consistent with its determination 

in the Winklevoss Order,75 and with the 

Commission’s previous orders 

approving commodity-futures ETPs,76

the Commission believes that the 

Exchange must demonstrate that it has 

in place a surveillance-sharing 

agreement with a regulated market of 

significant size related to bitcoin, 

because ‘‘[s]uch agreements provide a 

necessary deterrent to manipulation 

because they facilitate the availability of 

information needed to fully investigate 

a manipulation if it were to occur.’’ 77

The Exchange represents that it is able 

to share surveillance information with 

CME and CFE, which are bitcoin futures 

markets regulated by the CFTC, through 

membership in the Intermarket 

Surveillance Group.78 And the Sponsor 

asserts that CFE and CME surveil their 

markets to ensure that they are free from 

manipulation, other price distortion, or 

disorderly trading,79 and that CFE and 

CME are ‘‘significant markets’’ based on 

their structure and volume.80

Nonetheless, the Commission must 

disapprove the proposal, because the 

evidence in the record does not support 

a conclusion that CME’s and CFE’s 

bitcoin futures markets are markets of 

significant size. 

The Order Instituting Proceedings 

sought comment on whether the CME 

and CFE bitcoin futures markets are 

markets of significant size,81 but the 

Exchange has not responded to any of 

the questions in the Order Instituting 

Proceedings, and the only analysis of 


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82Notice, supra note 5, 83 FR at 2710; see also 

supra note 23 and accompanying text. The 

Exchange sought to remove this representation from 

its proposal in Amendment No. 2. See infra note 

128. 

83See supra notes 59–60 and accompanying text. 

84See supra note 61 and accompanying text. 

85See supra note 33 and accompanying text 

(quoting Winklevoss Order, supra note 30, 83 FR at 

37594). 

86See Notice, supra note 5 (proposing two 

GraniteShares bitcoin-futures ETPs); Securities 

Exchange Act Release No. 82350 (Dec. 19, 2017), 82 

FR 61100 (Dec. 26, 2017) (SR–NYSEArca–2017– 

139) (proposing two ProShares bitcoin-futures 

ETPS); Securities Exchange Act Release No. 82532 

(Jan. 18, 2018), 83 FR 3380 (Jan. 24, 2018) (SR– 

NYSEArca–2018–02) (proposing five Direxion 

bitcoin-futures ETPs). 

87With respect to the Sponsor’s argument that 

daily volume in the Bitcoin Futures Contracts over 

a two-month period exceeds that of futures 

contracts underlying a previously approved 

commodity-futures ETP, the Breakwave Dry Bulk 

Shipping ETF, the Commission notes that the 

futures in question had been trading for at least a 

dozen years before the ETP was proposed, see supra 

note 37 (SR–NYSEArca–2017–107), and that the 

exchange proposing that ETP had provided not just 

daily volume figures, but had provided statistics on 

open interest, yearly volume, and distribution of 

open interest across contract types and had 

represented that liquidity had remained relatively 

constant over a five-year period. See supra note 36. 

Moreover, in approving the Breakwave Dry Bulk 

Shipping ETF, the Commission noted that the 

listing exchange had represented that ‘‘the Freight 

Futures trade on well-established, regulated 

markets that are members of the ISG’’ and found 

that the exchange would be able to ‘‘share 

surveillance information with a significant 

regulated market for trading futures on dry bulk 

freight.’’ Securities Exchange Act Release No. 

82390, supra note 35, 82 FR at 61633. 

88These volume figures were calculated by 

Commission staff using data published by CME and 

CFE on their websites. 

89See Winklevoss Order, supra note 30, 83 FR at 

37601. 

90CFTC Chairman Giancarlo testified: ‘‘It is 

important to put the new Bitcoin futures market in 

perspective. It is quite small with open interest at 

the CME of 6,695 bitcoin and at Cboe Futures 

Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2, 

2018). At a price of approximately $7,700 per 

Bitcoin, this represents a notional amount of about 

$94 million. In comparison, the notional amount of 

the open interest in CME’s WTI crude oil futures 

was more than one thousand times greater, about 

$170 billion (2,600,000 contracts) as of Feb[.] 2, 

2018 and the notional amount represented by the 

open interest of Comex gold futures was about $74 

billion (549,000 contracts).’’ See Written Testimony 

of J. Christopher Giancarlo, Chairman, Commodity 

Futures Trading Commission, Before the Senate 

Banking Committee at text accompanying nn. 14– 

15 (Feb. 6, 2018). See also Winklevoss Order, supra 

note 30, 83 FR at 37601 (citing Giancarlo 

testimony). 

91Letter from Chris Concannon, President and 

COO, Cboe Global Markets, to Dalia Blass, Director, 

Division of Investment Management, Commission, 

at 5 (Mar. 23, 2018), available at https://

www.sec.gov/divisions/investment/cboe-globalmarkets-innovation-cryptocurrency.pdf. 

92See supra note 18 and accompanying text. 

93See Notice, supra note 5, 83 FR 2706; see also 

supra note 19 and accompanying text. 

the underlying futures markets the 

Notice provides is the generic statement 

that, ‘‘based on numerous conversations 

with market participants, issuers, and 

discussions with personnel of CFE,’’ the 

Exchange ‘‘expects that the market for 

Bitcoin Futures Contracts will be 

sufficiently liquid to support numerous 

ETPs shortly after launch.’’ 82 The 

Sponsor argues that the daily volume in 

the Bitcoin Futures Contracts, based on 

a two-month sample period, exceeds 

that of the futures contracts underlying 

a previously approved commodityfutures ETP investing in freight futures, 

adding that the Bitcoin Futures 

Contracts trade on an electronic order 

book, whereas the freight futures trade 

by voice, and that the trading 

infrastructure of the CME and CFE 

makes them significant markets.83 The 

Sponsor further asserts that, if the 

Funds hit position limits in the Bitcoin 

Futures Contracts, although it could 

impact trading and liquidity in the 

Shares, the interest in the Shares would 

support further development of the 

bitcoin futures market.84

Whether an underlying market is a 

‘‘market of significant size,’’ however, 

does not depend on whether a market 

operates by electronic or voice trading, 

and it does not depend solely on trading 

volume in isolation from the broader 

context of the underlying market. 

Moreover, to the extent that isolated 

trading volume is relevant, the 

Commission does not believe that a twomonth sample is sufficient to establish 

that a market is of significant size. 

Instead, as noted above and stated in the 

Winklevoss Order, the Commission 

interprets a ‘‘significant market’’ or 

‘‘market of significant size’’ to be ‘‘a 

market (or group of markets) as to which 

(a) there is a reasonable likelihood that 

a person attempting to manipulate the 

ETP would also have to trade on that 

market to successfully manipulate the 

ETP, so that a surveillance-sharing 

agreement would assist the ETP listing 

market in detecting and deterring 

misconduct, and (b) it is unlikely that 

trading in the ETP would be the 

predominant influence on prices in that 

market.’’ 85 Neither the Exchange nor 

the Sponsor has provided an analysis of 

whether the CME or CFE meets this 

standard, and the Sponsor’s assertion 

that the bitcoin futures markets will 

grow to accommodate demand for the 

Funds (which are two of nine recently 

proposed bitcoin futures ETPs),86 this 

speculative statement does not provide 

a basis for the Commission to conclude 

that CME and CFE are currently markets 

of significant size.87 Thus, there is no 

basis in the record on which the 

Commission can conclude that the 

bitcoin futures markets are markets of 

significant size. 

Publicly available data show that the 

median daily notional trading volume, 

from inception through August 10, 

2018, has been 14,185 bitcoins on CME 

and 5,184 bitcoins on CFE, and that the 

median daily notional value of open 

interest on CME and CFE during the 

same period has been 10,145 bitcoins 

and 5,601 bitcoins, respectively.88 But 

while these futures contract figures are 

readily available, meaningful analysis of 

the size of the CME or CFE markets 

relative to the underlying bitcoin spot 

market is challenging, because reliable 

data about the spot market, including its 

overall size, are unavailable.89

The Commission also notes that in 

recent testimony CFTC Chairman 

Giancarlo characterized the volume of 

the bitcoin futures markets as ‘‘quite 

small.’’ 90 Additionally, the President 

and COO of CFE, recently 

acknowledged in a letter to the 

Commission staff that ‘‘the current 

bitcoin futures trading volumes on Cboe 

Futures Exchange and CME may not 

currently be sufficient to support ETPs 

seeking 100% long or short exposure to 

bitcoin.’’ 91 These statements reinforce 

the Commission’s conclusion that there 

is insufficient evidence to determine 

that the CME and CFE bitcoin futures 

markets are markets of significant size. 

Although this conclusion is 

dispositive with respect to the 

Exchange’s proposal, the Commission 

will also address the Exchange’s 

representation that no more than 10% of 

the net assets of a Fund in the aggregate 

invested in bitcoin futures contracts will 

be invested in contracts whose principal 

market is neither a member of the 

Intermarket Surveillance Group nor a 

market with whom the Exchange has a 

comprehensive surveillance-sharing 

agreement.92 The Commission does not 

believe that this representation would 

function as a meaningful limitation 

when, according to the Notice, there is 

no minimum amount of a Fund that 

must be invested in such contracts. 

According to the Notice, in the event 

position, price, or accountability limits 

are reached with respect to bitcoin 

futures contracts, each Fund may invest 

in listed and OTC swaps on bitcoin or 

the Benchmark Futures Contracts.93 The 

Notice does not establish any limit on 

the Funds’ holdings of these other 

bitcoin-related derivatives; it provides 

no analysis of the size and liquidity of 

markets for those derivatives; and it 

does not discuss whether the Exchange 

has the ability to share surveillance 

information with the markets for these 

derivatives. Thus, as to what might be 

a substantial proportion of the Funds’ 

portfolios under the Notice, the 


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94As discussed below, see Section III.E, infra the 

exchange has filed two untimely amendments to the 

proposal, each of which would have limited the 

Funds’ investments to the Bitcoin Futures 

Contracts. Even if these amendments had been 

timely, however, the Commission would still 

determine that the proposal was not consistent with 

the Exchange Act. See id. 

95See supra notes 42–43 and accompanying text. 

96See 15 U.S.C. 78f(b)(5). 

97See Fitzgerald Letter, supra note 12, at 2. 

98See NERA Letter, supra note 12, at 5–6. 

99See Desai Letter, supra note 12, at 1; Kumar 

Letter, supra note 12; Malkin Letter, supra note 12, 

at 2. 

100See Desai Letter, supra note 12, at 1. 

101See Desai Letter, supra note 12, at 1, 2; Kumar 

Letter, supra note 12; Malkin Letter, supra note 12, 

at 2. 

102See Notice, supra note 5, 83 FR at 2710–11. 

103See id. at 2710. 

104See supra note 97 and accompanying text. 

105See supra note 98 and accompanying text. 

106See supra notes 99–101 and accompanying 

text. 

Commission cannot conclude that 

surveillance-sharing would be available, 

that the related markets would be 

regulated, or that the related markets 

would be of significant size.94

Additionally, while one commenter 

suggests that the market for bitcoin 

derivatives other than exchange-traded 

futures appears to be developing—and 

that the offering of long and short 

bitcoin ETPs ‘‘raises the possibility that 

market makers in Bitcoin derivatives 

could make two-sided markets if 

interest in the long and short ETFs is 

similar in magnitude’’ 95—these 

speculative statements do not provide a 

basis for the Commission to conclude 

that the non-exchange-traded bitcoin 

derivatives market is now, or may 

eventually be, of significant size. 

The Commission therefore concludes 

that Exchange has not demonstrated that 

it has entered into a surveillancesharing agreement with a regulated 

market of significant size related to 

bitcoin, or that, given the current 

absence of such an agreement, the 

exchange’s own surveillance procedures 

described above would, by themselves, 

be sufficient to satisfy the requirement 

of Exchange Act Section 6(b)(5) that an 

exchange’s rules be designed to prevent 

fraudulent and manipulative acts and 

practices.96 While CME and CFE are 

regulated markets for bitcoin 

derivatives, there is no basis in the 

record for the Commission to conclude 

that these markets are of significant size. 

Additionally, because bitcoin futures 

have been trading on CME and CFE only 

since December 2017, the Commission 

has no basis on which to predict how 

these markets may grow or develop over 

time, or whether or when they may 

reach significant size. 

Although the Exchange has not 

demonstrated that a regulated bitcoin 

futures market of significant size 

currently exists, the Commission is not 

suggesting that the development of such 

a market would automatically require 

approval of a proposed rule change 

seeking to list and trade shares of an 

ETP holding bitcoins as an asset. The 

Commission would need to analyze the 

facts and circumstances of any 

particular proposal and examine 

whether any unique features of a bitcoin 

futures market would warrant further 

analysis before approval. 

C. Protecting Investors and the Public 

Interest 

1. Comments Received 

One commenter believes that, while 

the Commission should deny the 

proposed ETPs, it should regulate this 

environment to stop individual 

consumers from coming to financial 

harm.97

One commenter suggests that the 

Commission could address some of its 

concerns about the proposed ETPs by 

working with self-regulatory 

organizations, and in particular FINRA, 

to create bitcoin and cryptocurrencyrelated asset suitability requirements. In 

addition, this commenter suggests that 

targeted disclosure requirements could 

make investors aware of volatility, 

discourage retail investors from 

investing more than a small portion of 

their portfolio in cryptocurrency-related 

assets, and present historical scenarios 

to retail investors to demonstrate how 

an instrument such as a particular 

bitcoin ETP would have performed over 

time. This commenter believes that 

suitability requirements are less 

prescriptive than an effective ban on a 

class of product and that they could 

balance the Commission’s interest in 

protecting retail investors against its 

interest in allowing cryptocurrencyrelated asset markets to continue to 

develop in regulated markets where the 

Commission can observe their 

performance closely.98

Several commenters assert that the 

Commission should deny the proposed 

ETPs to help protect the public from 

exposure to financial risk from an 

unregulated market.99 One commenter 

asserts that, while the risk posed by the 

cash-settled futures products is mostly 

contained, a bitcoin ETP would expose 

the public to significant financial risk 

due to a highly volatile, unregulated, 

and manipulated market in bitcoin as 

well as cryptocurrencies in general.100

Several commenters further believe that 

before the Commission approves a 

bitcoin ETP, there should be a proper 

legal and regulatory framework put in 

place by a suitable governmental body 

to prevent manipulation and protect the 

public.101

2. Analysis 

The Exchange asserts that approval of 

the proposal would enhance 

competition among market participants, 

to the benefit of investors and that it 

would protect investors by permitting 

them to seek exposure to bitcoin 

through efficient and transparent 

ETPs.102 The Exchange also states that 

the Funds would enhance the security 

afforded to investors as compared to a 

direct investment in bitcoin.103 Other 

commenters suggest that the 

Commission should either seek to 

regulate the underlying bitcoin 

markets,104 or should seek to protect 

investors through disclosure 

requirements or suitability standards, 

rather than disapproving a bitcoin-ETP 

proposal.105 Several other commenters, 

however, assert that approval of a 

bitcoin-based ETP would expose 

investors to risks from unregulated 

bitcoin markets.106

The Commission acknowledges that, 

compared to trading in unregulated 

bitcoin spot markets, trading a bitcoinbased ETP on a national securities 

exchange may provide some additional 

protection to investors, but the 

Commission must consider this 

potential benefit in the broader context 

of whether the proposal meets each of 

the applicable requirements of the 

Exchange Act. Pursuant to Section 

19(b)(2) of the Exchange Act, the 

Commission must disapprove a 

proposed rule change filed by a national 

securities exchange if it does not find 

that the proposed rule change is 

consistent with the applicable 

requirements of the Exchange Act— 

including the requirement under 

Section 6(b)(5) that the rules of a 

national securities exchange be 

designed to prevent fraudulent and 

manipulative acts and practices. 

Thus, even if a proposed rule change 

would provide certain benefits to 

investors and the markets, the proposed 

rule change may still fail to meet other 

requirements under the Exchange Act. 

For the reasons discussed above, the 

Exchange has not met its burden of 

demonstrating an adequate basis in the 

record for the Commission to find that 

the proposal is consistent with 

Exchange Act Section 6(b)(5), and, 

accordingly, the Commission must 

disapprove the proposal. 


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107See Kaleda Letter, supra note 12; Santos 

Letter, supra note 12; Netto Letter, supra note 12. 

108See Desai Letter, supra note 12, at 1; Kumar 

Letter, supra note 12. 

109See Kumar Letter, supra note 12; Malkin 

Letter, supra note 12; Bhat Letter, supra note 12; 

GraniteShares Letter, supra note 12, at 6–7, 10–11. 

110See Ahn Letter, supra note 12. 

111See Otenyi Letter, supra note 12; Desai Letter, 

supra note 12, at 1. 

112See Desai Letter, supra note 12, at 1; Malkin 

Letter, supra note 12, at 1; Bhat Letter, supra note 

12. 

113See Barnwell Letter, supra note 12, at 2; Desai 

Letter, supra note 12, at 1; Fitzgerald Letter, supra 

note 12, at 1; Kumar Letter, supra note 12; Malkin 

Letter, supra note 12, at 1. 

114See NERA Letter, supra note 12, at 1–3, 5; 

GraniteShares Letter, supra note 12, at 3, 5–6. 

115See GraniteShares Letter, supra note 12, at 8. 

116See id. at 7. 

117See id. at 3. 

118See id. at 6. 

119See Krohn Letter, supra note 12; Hales Letter, 

supra note 12; Santos Letter, supra note 12. 

120See Hales Letter, supra note 12. 

121See Otenyi Letter, supra note 12. 

122See Desai Letter, supra note 12, at 1, 2; Kumar 

Letter, supra note 12; Santos Letter, supra note 12. 

123See supra note 10 and accompanying text. 

124The Sponsor also represents in its August 20, 

2018, comment letter that the Funds would invest 

only in Bitcoin Futures Contracts. See 

GraniteShares Letter, supra note 12, at 5. 

125See supra notes 78–91 and accompanying text. 

126Additionally, even though the Exchange’s 

amendments would have removed the 

representation in the Notice that the Exchange 

expects significant liquidity to exist in the market 

for Bitcoin Futures Contracts, based on numerous 

conversations with market participants, issuers, and 

discussions with personnel of CFE, see supra notes 

23 & 82 and accompanying text, the elimination of 

this representation would not alter the 

Commission’s conclusion that the Exchange has not 

met its burden to demonstrate that CFE and CME 

are markets ‘‘of significant size.’’ 

127 In disapproving the proposed rule change, the 

Commission has considered its impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

128 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

D. Other Comments 

Comment letters also addressed the 

following topics: 

• The desire of investors to gain 

access to bitcoin through an ETP; 107

• investor understanding about 

bitcoin; 108

• the valuation of bitcoin and price 

differentials across bitcoin trading 

venues; 109

• the intrinsic value of bitcoin; 110

• the reliability of bitcoin as a store 

of value; 111

• the volatility of bitcoin prices; 112

• the regulation of bitcoin spot 

markets; 113

• the operation and valuation of the 

proposed ETPs; 114

• arbitrage between the price of the 

Shares and the underlying portfolio 

instruments; 115

• the ability of the Funds to meet 

redemption orders; 116

• the custody of the assets of the 

Funds; 117

• the effect on the Funds of a fork in 

the bitcoin blockchain; 118

• the potential impact of Commission 

approval of the proposed ETP on the 

price of bitcoin and on the U.S. 

economy; 119

• the leadership role that the United 

States might play in the cryptocurrency 

space if the Commission were to 

approve the proposed ETP; 120

• the utility of a bitcoin ETP as a 

global tool for wealth distribution; 121

and 

• the legitimacy that Commission 

approval of the proposed ETP might 

confer upon bitcoin as a digital asset.122

Ultimately, however, additional 

discussion of these tangential topics is 

unnecessary, as they do not bear on the 

basis for the Commission’s decision to 

disapprove the proposal. 

E. The Exchange’s Untimely 

Amendments to the Proposal 

As noted above, the deadline for 

rebuttal comments in response to the 

Order Instituting Proceedings was May 

15, 2018.123 On August 21, 2018, 

however, the Exchange filed 

Amendment No. 1 with the 

Commission, stating that the 

amendment ‘‘amends and replaces in its 

entirety the proposal as originally 

submitted on January 5, 2018.’’ Then, on 

August 22, 2018, the Exchange filed 

Amendment No. 2 with the 

Commission, stating that the 

amendment ‘‘amends and replaces in its 

entirety Amendment No. 1 as submitted 

on August 21, 2018, which amended 

and replaced in its entirety the proposal 

as originally submitted on January 5, 

2018.’’ Because these amendments were 

filed months after the deadline for 

comments on the proposed rule change, 

the Commission deems Amendment No. 

1 and Amendment No. 2 to have been 

untimely filed. 

Even if these amendments had been 

timely filed, however, the Commission 

would still conclude that the Exchange 

had not met its burden to demonstrate 

that its proposal is consistent with 

Exchange Act Section 6(b)(5). The 

change that the amendments made to 

the proposal was to limit the 

investments of the Funds to Bitcoin 

Futures Contracts, which trade on CFE 

and CME, eliminating the Funds’ ability 

to invest in listed or unlisted swaps on 

bitcoin or on the Benchmark Futures 

Contracts.124 Although CFE and CME 

are ‘‘regulated markets,’’ the record, as 

discussed above, does not provide a 

basis for the Commission to conclude 

that CFE and CME are regulated markets 

‘‘of significant size’’ in Bitcoin Futures 

Contracts.125 Therefore, even if the 

Exchange’s amendments were timely 

filed, the Commission would be unable 

to find, based on the record, that the 

Exchange had entered into a 

surveillance-sharing agreement with a 

regulated market of significant size 

related to bitcoin.126

F. Basis for Disapproval 

The record before the Commission 

does not provide a basis for the 

Commission to conclude that the 

Exchange has met its burden under the 

Exchange Act and the Commission’s 

Rules of Practice to demonstrate that its 

proposed rule change is consistent with 

Exchange Act Section 6(b)(5).127

IV. Conclusion 

For the reasons set forth above, the 

Commission does not find, pursuant to 

Section 19(b)(2) of the Exchange Act, 

that the proposed rule change is 

consistent with the requirements of the 

Exchange Act and the rules and 

regulations thereunder applicable to a 

national securities exchange, and in 

particular, with Section 6(b)(5) of the 

Exchange Act. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act, 

that proposed rule change SR– 

CboeBZX–2018–001 is disapproved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.128

Brent J. Fields, 

Secretary. 

[FR Doc. 2018–18578 Filed 8–27–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83908; File No. SR– 

CboeBZX–2018–064] 

Self-Regulatory Organizations; Cboe 

BZX Exchange, Inc.; Notice of Filing 

and Immediate Effectiveness of a 

Proposed Rule Change To Amend 

Certain Representations Relating to 

the Listing and Trading of Shares of 

the Innovator S&P 500 Buffer ETFs 

August 22, 2018. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on August 

16, 2018, Cboe BZX Exchange, Inc. (the 

‘‘Exchange’’ or ‘‘BZX’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 


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