[Federal Register Volume 89, Number 187 (Thursday, September 26, 2024)]
[Notices]
[Pages 78942-78947]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22024]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101128; File No. SR-ISE-2024-03]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Amendment Nos. 4 and 5 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment Nos. 1, 4, and 5, To 
Permit the Listing and Trading of Options on the iShares Bitcoin Trust

September 20, 2024.

I. Introduction

    On January 9, 2024, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or 
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade options on exchange-traded product (``ETP'') 
shares that represent interests in the iShares Bitcoin Trust 
(``IBIT'').\3\ On January 11, 2024, the Exchange filed Amendment No. 1 
to the proposed rule change, which replaced and superseded the proposed 
rule change as originally filed. On January 25, 2024, the proposed rule 
change, as modified by Amendment No. 1, was published for comment in 
the Federal Register.\4\ On March 6, 2024, pursuant to Section 19(b)(2) 
of the Act,\5\ the Commission designated a longer period within which 
to approve the Proposal, disapprove the Proposal, or institute 
proceedings to determine whether to disapprove the Proposal.\6\ On 
April 24, 2024, the Commission instituted proceedings under Section 
19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the Proposal.\8\ On July 19, 2024, the Commission designated 
a longer time for Commission action on the Proposal.\9\ The Commission 
received comments addressing the proposed rule change.\10\ On May 23, 
2024, ISE submitted a letter providing additional information regarding 
IBIT and other bitcoin-based ETPs.\11\ On August 21, 2024, ISE 
submitted a second letter that provides additional analysis supporting 
the proposed position limit of 25,000 contracts for IBIT options.\12\ 
The Exchange filed Amendment Nos. 2 and 3 to the Proposal on August 29, 
2024, and September 12, 2024, respectively. On September 12, 2024, the 
Exchange withdrew Amendment Nos. 2 and 3 and filed Amendment No. 4 to 
the Proposal.\13\ The Exchange filed Amendment No. 5 to the Proposal on 
September 19, 2024.\14\ The Commission is publishing this notice to 
solicit comments on Amendment Nos. 4 and 5 from interested persons, and 
is approving the proposed rule change, as

[[Page 78943]]

modified by Amendment Nos. 1, 4, and 5, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On January 10, 2024, the Commission approved proposals by 
NYSE Arca, Inc., The Nasdaq Stock Market LLC, and Cboe BZX Exchange, 
Inc. to list and trade the shares of 11 bitcoin-based commodity-
based trust shares and trust units, including the iShares Bitcoin 
Trust, the Grayscale Bitcoin Trust, and the Bitwise Bitcoin ETF. See 
Securities Exchange Act Release No. 99306 (Jan. 10, 2024), 89 FR 
3008 (Jan. 17, 2024) (order approving File Nos. SR-NYSEARCA-2021-90; 
SR-NYSEARCA-2023-44; SR-NYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-
NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-CboeBZX-2023-038; SR-
CboeBZX-2023-040; SR-CboeBZX-2023-042; SR-CboeBZX-2023-044; SR-
CboeBZX-2023-072) (``Bitcoin ETP Order'').
    \4\ See Securities Exchange Act Release No. 99396 (Jan. 19, 
2024), 89 FR 5047 (Jan. 25, 2024) (``Notice'' or ``Proposal'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 99681 (Mar. 6, 
2024), 89 FR 17886 (Mar. 12, 2024).
    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ See Securities Exchange Act Release No. 100024 (Apr. 24, 
2024), 89 FR 34290 (Apr. 30, 2024) (``Order Instituting 
Proceedings'').
    \9\ See Securities Exchange Act Release No. 100567 (Jul. 19, 
2024), 89 FR 60482 (Jul. 25, 2024).
    \10\ Comment letters on the Proposal are available at https://www.sec.gov/comments/sr-ise-2024-03/srise202403.htm.
    \11\ See letter from Greg Ferrari, Vice President, U.S. Options, 
ISE, dated May 23, 2024 (``ISE Letter I'').
    \12\ See letter from Angela Dunn, Nasdaq ISE, LLC, dated Aug. 
21, 2024 (``ISE Letter II'').
    \13\ Amendment No. 4 amends ISE Options 9, Section 13, 
Supplementary Material .01 and ISE Options 9, Section 15, 
Supplementary Material .01, respectively, to establish position and 
exercise limits of 25,000 contracts for the proposed IBIT options.
    \14\ Amendment No. 5 amends the Proposal to describe in greater 
detail the surveillance procedures that will apply to the trading of 
options on IBIT. The full text of Amendment Nos. 4 and 5 is 
available at the Exchange's website at https://listingcenter.nasdaq.com/rulebook/ISE/rulefilings.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change, as Modified by Amendment 
Nos. 1, 4, and 5

    As described in detail in the Notice, the Exchange proposed to 
amend its rules to permit the listing and trading of options on 
IBIT.\15\ The Exchange stated that options on IBIT would provide 
investors with a hedging and risk management tool to manage exposure to 
the price of bitcoin and bitcoin-related products and positions.\16\
---------------------------------------------------------------------------

    \15\ See supra note 4.
    \16\ See Notice, 89 FR at 5051.
---------------------------------------------------------------------------

    Options on IBIT will be physically settled with American-style 
exercise.\17\ The Exchange stated that options on IBIT will be subject 
to the Exchange's respective initial and continued listing 
standards.\18\ The Exchange's initial listing standards require, among 
other things, that the security underlying a listed option be 
``characterized by a substantial number of outstanding shares that are 
widely held and actively traded.'' \19\ The Exchange stated that 
options on IBIT will trade in the same manner as other exchange-traded 
fund (``ETF'') options, and that options on IBIT will be subject to the 
Exchange rules that currently apply to the listing and trading of all 
ETF options on the Exchange, including, for example, Exchange rules 
governing listing criteria, expiration and exercise prices, minimum 
increments, margin requirements, customer accounts, and trading halt 
procedures.\20\
---------------------------------------------------------------------------

    \17\ See id. at 5050.
    \18\ See Notice, 89 FR at 5049. See also ISE Options 4, Section 
3(a).
    \19\ See Notice, 89 FR at 5049.
    \20\ See id. at 5050.
---------------------------------------------------------------------------

    As initially proposed, the position and exercise limits for options 
on IBIT would have been determined pursuant to the Exchange's existing 
rules.\21\ Under these rules, the position and exercise limits 
applicable to an options class depend upon the trading volume and 
outstanding shares of the underlying security. Thus, position and 
exercise limits of 250,000, 200,000, 75,000, 50,000 or 25,000 contracts 
on the same side of the market would have applied to options on IBIT 
depending on the six-month trading volume and number of shares 
outstanding for IBIT.\22\
---------------------------------------------------------------------------

    \21\ See id.
    \22\ For an option to be eligible for the 50,000-contract limit, 
the security underlying the option must have most recent six-month 
trading volume of at least 20,000,000 shares, or most recent six-
month trading volume of at least 15,000,000 shares and at least 
40,000,000 shares currently outstanding. For an option to be 
eligible for the 75,000-contract limit, the underlying security must 
have most recent six-month trading volume of at least 40,000,000 
shares, or most recent six-month trading volume of at least 
30,000,000 shares and at least 120,000,000 shares currently 
outstanding. For an option to be eligible for the 200,000-contract 
limit, the underlying security must have most recent six-month 
trading volume of at least 80,000,000 shares, or most recent six-
month trading volume of at least 60,000,000 shares and at least 
240,000,000 shares currently outstanding. For an option to be 
eligible for the 250,000-contract limit, the security underlying the 
option must have most recent six-month trading volume of at least 
100,000,000 shares, or most recent six-month trading volume of at 
least 75,000,000 shares and at least 300,000,000 shares currently 
outstanding. The 25,000-contract limit applies to options on 
underlying securities that do not qualify for a higher contract 
limit. See ISE Options 9, Section 13. In addition, ISE Options 9, 
Section 13, Supplementary Material .01 establishes higher position 
limits for options on certain ETFs.
---------------------------------------------------------------------------

    In Amendment No. 4, the Exchange proposes to set the position and 
exercise limits for options on IBIT at 25,000 contracts regardless of 
the trading volume and shares outstanding for IBIT.\23\ According to 
the Exchange, ``this position limit is the lowest position limit 
available in the options industry, is extremely conservative and more 
than appropriate given the IBIT's market capitalization, average daily 
volume, and high number of outstanding shares.'' \24\
---------------------------------------------------------------------------

    \23\ See Amendment 4.
    \24\ See id.
---------------------------------------------------------------------------

    The Exchange represents that the surveillance procedures that it 
applies to other ETF options will apply to options on IBIT, and that 
its existing surveillance and reporting safeguards are designed to 
deter and detect possible manipulative behavior that might arise from 
listing and trading options on ETFs.\25\ In Amendment No. 5, the 
Exchange more fully describes the surveillance procedures that will 
apply to options on IBIT. The Exchange states that it has an adequate 
surveillance program in place for options, and that the Exchange 
intends to apply the same program procedures to options on IBIT that it 
applies to the Exchange's other options products.\26\ The Exchange 
states that it market surveillance staff would have access to the 
surveillances conducted by The Nasdaq Stock Market LLC (``Nasdaq'') 
with respect to IBIT and would review activity in IBIT when conducting 
surveillances for market abuse or manipulation in the options on the 
IBIT.\27\ Additionally, the Exchange states that it is a member of the 
Intermarket Surveillance Group (``ISG'') under the Intermarket 
Surveillance Group Agreement, and that ISG members work together to 
coordinate surveillance and investigative information sharing in the 
stock, options, and futures markets.\28\ The Exchange further states 
that it has a Regulatory Services Agreement with the Financial Industry 
Regulatory Authority (``FINRA'') and that, pursuant to a multi-party 
17d-2 joint plan, all of the options exchanges allocate regulatory 
responsibilities to FINRA to conduct certain options-related market 
surveillance that are common to rules of all options exchanges.\29\
---------------------------------------------------------------------------

    \25\ See Notice, 89 FR at 5050.
    \26\ The surveillance program includes real-time patterns for 
price and volume movements and post-trade surveillance patterns 
(e.g., spoofing, marking the close, pinging, phishing). See 
Amendment No. 5.
    \27\ See id.
    \28\ See id.
    \29\ Section 19(g)(1) of the Act, among other things, requires 
every SRO registered as a national securities exchange or national 
securities association to comply with the Act, the rules and 
regulations thereunder, and the SRO's own rules, and, absent 
reasonable justification or excuse, enforce compliance by its 
members and persons associated with its members. See 15 U.S.C. 
78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the Act allows 
the Commission to relieve an SRO of certain responsibilities with 
respect to members of the SRO who are also members of another SRO 
(``common members''). Specifically, Section 17(d)(1) allows the 
Commission to relieve an SRO of its responsibilities to: (i) receive 
regulatory reports from such members; (ii) examine such members for 
compliance with the Act and the rules and regulations thereunder, 
and the rules of the SRO; or (iii) carry out other specified 
regulatory responsibilities with respect to such members. See 
Amendment No. 5.
---------------------------------------------------------------------------

    The Exchange states that underlying shares of spot bitcoin ETPs, 
including IBIT, are also subject to safeguards related to addressing 
market abuse and manipulation.\30\ The Exchange notes that the 
Commission stated in it its order approving proposals by several 
exchanges to list and trade shares of spot bitcoin-based exchange-
traded products (``Bitcoin ETP Order'') \31\ that:
---------------------------------------------------------------------------

    \30\ See Amendment No. 5.
    \31\ See supra note 3.

    Each Exchange has a comprehensive surveillance-sharing agreement 
with the CME via their common membership in the Intermarket 
Surveillance Group. This facilitates the sharing of information that 
is available to the CME through its surveillance of its markets, 
including its surveillance of the CME bitcoin futures market.\32\
---------------------------------------------------------------------------

    \32\ See Amendment No. 5 (citing the Bitcoin ETP Order, 89 FR at 
3009).

    The Exchange states that, given the consistently high correlation 
between the CME bitcoin futures market and the spot bitcoin market, as 
confirmed by the Commission through robust correlation analysis, the 
Commission was able to conclude that such surveillance sharing 
agreements could reasonably be ``expected to assist in surveilling for 
fraudulent and manipulative acts and practices in the specific context 
of the [Bitcoin ETPs].'' \33\
---------------------------------------------------------------------------

    \33\ See Amendment No. 5 (citing the Bitcoin ETP Order, 89 FR at 
3010-11).

---------------------------------------------------------------------------

[[Page 78944]]

    In light of surveillance measures related to both options and 
futures, as well as the underlying Trust,\34\ the Exchange believes 
that existing surveillance procedures are designed to deter and detect 
possible manipulative behavior which might potentially arise from 
listing and trading the proposed IBIT options.\35\
---------------------------------------------------------------------------

    \34\ See Securities Exchange Act Release No. 99295 (Jan. 8, 
2024), 89 FR 2321, 2334-35 (Jan.12, 2024) (notice of filing of 
Amendment No. 1 to SR-Nasdaq-2023-016).
    \35\ See Amendment No. 5.
---------------------------------------------------------------------------

    The Exchange represents that it believes that both it and the 
Options Price Reporting Authority, LLC have the necessary systems 
capacity to handle the additional traffic associated with the listing 
of new series that may result from the introduction of options on 
IBIT.\36\
---------------------------------------------------------------------------

    \36\ See Notice, 89 FR at 5050.
---------------------------------------------------------------------------

    The Proposal also amends ISE Options 4, Section 3(h) to replace the 
reference to the ``ETFS Gold Trust'' with a reference to the Aberdeen 
Standard Physical Gold Trust, the current name of the trust. In 
addition, the Proposal replaces incorrect cross-references to ``Options 
4, Section 3(h)(A)(i)'' in ISE Options 4, Section 4(g) with references 
to the correct citation, ``Options 4, Section 3(h)(i).''

III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange,\37\ and, in particular, the requirements of Section 6 of the 
Act.\38\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\39\ which 
requires that an exchange have rules designed to prevent fraudulent and 
manipulative acts and practices, to remove impediments to and perfect 
the mechanism of a free and open market, and to protect investors and 
the public interest.
---------------------------------------------------------------------------

    \37\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \38\ 15 U.S.C. 78f.
    \39\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Order Instituting Proceedings sought comment on several issues 
raised by the Proposal, including whether shares in the underlying 
bitcoin ETPs are ``widely held and actively traded,'' as required by 
ISE's rules; whether the proposed bitcoin ETP options should be subject 
to the same position limits as stock options, and whether the available 
supply in the markets for bitcoin should be considered in establishing 
position limits for options on the bitcoin ETPs; and the potential 
impact on market quality and function that could result from listing 
bitcoin ETP options.\40\ Several commenters supported the Proposal, 
generally stating that the proposed options would help investors to 
hedge their positions and manage crypto-related risk.\41\ Other 
commenters raised concerns regarding the potential risks of the 
proposed options to individual investors and the financial system.\42\
---------------------------------------------------------------------------

    \40\ In addition to the Proposal, the Order Instituting 
Proceedings sought comment on several other proposals to list and 
trade options on bitcoin ETPs. See Order Instituting Proceedings, 89 
FR at 34294. See also ISE Letter I.
    \41\ See letters from John C. Pickford, Susquehanna, dated Sept. 
11, 2024; Steve Crutchfield, Head of Business Development, CTC, LLC, 
dated May 17, 2024; Congressman Mike Flood and Congressman Wiley 
Nickel, dated May 1, 2024; Joseph Ferrucci, dated Feb. 28, 2024; 
Benjamin Pincock, CIO, Method and Theory Capital Management, dated 
Feb. 19, 2024; Derek Jerina, dated Feb. 10, 2024; Xplorer Trading, 
dated Feb. 7, 2024; and an anonymous commenter, dated Jan. 21, 2024.
    \42\ See infra notes 45-49 and accompanying text.
---------------------------------------------------------------------------

A. Widely Held and Actively Traded

    The Exchange's initial listing standards require, among other 
things, that the security underlying a listed option be ``characterized 
by a substantial number of outstanding shares that are widely held and 
actively traded.'' \43\ The Order Instituting Proceedings requested 
comment on whether the Proposal should include data demonstrating that 
the shares of the underlying ETP are ``widely held and actively 
traded,'' as required by Exchange rules.\44\
---------------------------------------------------------------------------

    \43\ See ISE Options 4, Section 3(a)(2).
    \44\ See Order Instituting Proceedings, 89 FR at 34294. See also 
ISE Options 4, Section 3(a).
---------------------------------------------------------------------------

    One commenter stated that the Commission should wait and evaluate 
the market for spot bitcoin ETPs to determine the extent to which they 
are widely held and actively traded before approving options on the 
spot bitcoin ETPs.\45\ The commenter stated that data indicated that, 
compared to when spot bitcoin ETPs were launched, investor demand for 
spot bitcoin ETPs had diminished, and that one market participant had 
expressed the view that the bitcoin ETP market should ``settle and find 
its footing'' before the Commission approves the listing of options on 
spot bitcoin ETPs.\46\ In addition, the commenter urged the Commission 
to proceed cautiously because ``options on spot bitcoin ETPs will 
expose retail investors to a tremendous amount of risk.'' \47\ The 
commenter also stated that the approval of options on spot bitcoin ETPs 
could pose risks to the broader financial system because the 
Commission's approval of spot bitcoin ETPs had deepened the connection 
between ``volatile'' cryptocurrencies and the traditional finance 
system.\48\ The commenter stated that options on spot bitcoin ETPs 
``would further entangle the crypto industry with traditional finance'' 
and aggravate the risks associated with crypto assets.\49\
---------------------------------------------------------------------------

    \45\ See letter from Benjamin L. Schiffrin, Director of 
Securities Policy, Better Markets, Inc., dated May 21, 2024 
(``Better Markets Letter I'') at 2.
    \46\ Better Markets Letter I at 2 and n. 17 (quoting Terrence 
Yang, managing director of Swan Bitcoin).
    \47\ Better Markets Letter I at 1. See also letter from Benjamin 
L. Schiffrin, Director of Securities Policy, Better Markets, Inc., 
dated September 13, 2024 (``Better Markets Letter II''). Better 
Markets Letter II reiterated the concerns that the commenter raised 
in Better Markets I and provided additional information regarding 
the volatility of bitcoin. Better Markets Letter II stated, for 
example, that in August 2024, bitcoin dropped 15% in a 24-hour 
period, a decline that, according to the commenter, affected more 
investors because of the Commission's approval of bitcoin-based 
ETPs. See Better Markets Letter II at 2. The commenter stated that 
the risks to retail investors associated with options trading would 
be ``compounded exponentially'' because of the volatility of the 
crypto market and, further, that options on spot bitcoin-based 
exchange-traded products exacerbate the risks to retail investors of 
investing in bitcoin. See Better Markets Letter II at 3.
    \48\ See Better Markets Letter I at 4.
    \49\ Better Markets Letter I at 5. See also letter from 
anonymous commenter dated Apr. 15, 2024 (stating that the 
introduction of derivatives tied to the price of bitcoin would 
``spell disaster for the financial system and for global markets'').
---------------------------------------------------------------------------

    The Exchange has addressed comments regarding whether IBIT shares 
are widely held and actively traded.\50\ In particular, the Exchange 
represented that ``on May 13, 2024, IBIT's total shares outstanding 
equaled 482,480,000. On May 13, 2024, IBIT's total shares comprised 
approximately 4% of total underlying spot BTC liquidity. IBIT is the 
most liquid spot Bitcoin ETF and the 11th most liquid ETF in the U.S. 
by average volume (34,825,921 shares) and 18th largest by average 
notional ($1,246,060,738). Of note, as of May 22, 2023, IBIT had 
approximately 193,956 shareholders.'' \51\
---------------------------------------------------------------------------

    \50\ See ISE Letters I and II.
    \51\ See ISE Letter I at 2. ISE stated that it obtained 
information regarding the number of shareholders by contacting 
broker-dealers and combining their reported shareholder counts. See 
ISE Letter I at notes 3 and 4.
---------------------------------------------------------------------------

    ISE further represented that ``the market capitalization for IBIT 
was 19,789,068 billion [sic], with an average daily volume (`ADV'), for 
the preceding three months prior to August 7, 2024, of greater than 26 
million shares.'' \52\ In

[[Page 78945]]

addition, ISE represented that on August 12, 2024, IBIT had 611,040,000 
shares outstanding.\53\ The Commission has reviewed the Exchange's 
analysis and publicly available data regarding IBIT. Based on this 
review of information provided by the Exchange and publicly available 
information--including information regarding the number of IBIT 
shareholders, the number of IBIT shares outstanding, the ADV of IBIT, 
and the net assets of IBIT--the Commission concludes that it is 
reasonable for the Exchange to determine that IBIT satisfies the 
requirement of ISE Options 4, Section 3(a)(2) that an underlying be 
widely held and actively traded. As stated above, one commenter 
suggested that fund outflows could indicate waning investor demand for 
spot bitcoin-based ETPs.\54\ The Commission agrees that investor 
interest in IBIT may vary over time.\55\ Nonetheless, the data 
discussed above indicate that it is reasonable to conclude that IBIT 
shares are widely held and actively traded.\56\
---------------------------------------------------------------------------

    \52\ ISE Letter II at 3. As of September 6, 2024, IBIT had net 
assets of $20,083,776,594. See https://www.ishares.com/us/products/333011/ishares-bitcoin-trust.
    \53\ See ISE Letter II at 5.
    \54\ See Better Markets Letter I at 2.
    \55\ For example, IBIT had net assets of $20,083,776,594 as of 
September 6, 2024, and net assets of $22,672,544,214 as of September 
19, 2024. See supra note 52 and https://www.ishares.com/us/products/333011/ishares-bitcoin-trust.
    \56\ See supra notes 51-53 and accompanying text.
---------------------------------------------------------------------------

    With regard to comments regarding the Proposal's potential risks to 
retail investors, including concerns regarding the volatility of 
bitcoin,\57\ existing rules governing broker-dealer conduct when 
dealing with retail customers would apply to the proposed IBIT options. 
For example, the Exchange's rules require its members to ``exercise due 
diligence to learn the essential facts as to the Customer and his 
investment objectives and financial situation.'' \58\ In fulfilling 
this obligation, the member must consider, among other things, a 
customer's investment objectives; employment status; estimated annual 
income; estimated net worth; and investment experience and 
knowledge.\59\ Further, FINRA's heightened suitability requirements for 
options trading accounts require that a person recommending an opening 
position in any option contract have ``a reasonable basis for 
believing, at the time of making the recommendation, that the customer 
has such knowledge and experience in financial matters that he may 
reasonably be expected to be capable of evaluating the risks of the 
recommended transaction, and is financially able to bear the risks of 
the recommended position in the option contract.'' \60\
---------------------------------------------------------------------------

    \57\ See Better Markets Letter II at 2-3.
    \58\ See ISE Options 10, Section 6(b).
    \59\ See ISE Options 10, Section 6(b)(1).
    \60\ See FINRA Rule 2360(b)(19).
---------------------------------------------------------------------------

    The Commission acknowledges the comments regarding the potential 
impact of bitcoin ETP options on the traditional financial system. 
Pursuant to Section 19(b)(2) of the Exchange Act, however, the 
Commission must approve a proposed rule change filed by a national 
securities exchange if it finds that the proposed rule change is 
consistent with the applicable requirements of the Exchange Act.\61\ 
For the reasons discussed herein, the Commission finds that the 
proposed rule change satisfies the requirements of the Exchange Act, 
including the requirements in Section 6(b)(5) that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to remove impediments to and perfect 
the mechanism of a free and open market, and to protect investors and 
the public interest.
---------------------------------------------------------------------------

    \61\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
---------------------------------------------------------------------------

B. Position and Exercise Limits

    The Order Instituting Proceedings also requested comment on whether 
the Proposal demonstrated that options on the bitcoin ETPs should be 
subject to the same position limits as options on stock, and whether 
the available supply in the markets for bitcoin should be considered in 
establishing position limits for options on the bitcoin ETPs.\62\
---------------------------------------------------------------------------

    \62\ See Order Instituting Proceedings, 89 FR at 34294.
---------------------------------------------------------------------------

    Position and exercise limits serve as a regulatory tool designed to 
deter manipulative schemes and adverse market impact surrounding the 
use of options. Since the inception of standardized options trading, 
the options exchanges have had rules limiting the aggregate number of 
options contracts that a member or customer may hold or exercise. 
Options position and exercise limits are intended to prevent the 
establishment of options positions that can be used or might create 
incentives to manipulate or disrupt the underlying market to benefit 
the options position.\63\ In addition, such limits serve to reduce the 
possibility of disruption in the options market itself, especially in 
illiquid classes.\64\ As the Commission has previously recognized, 
markets with active and deep trading interest, as well as with broad 
public ownership, are more difficult to manipulate or disrupt than less 
active and deep markets with smaller public floats.\65\ The Commission 
also has recognized that position and exercise limits must be 
sufficient to prevent investors from disrupting the market for the 
underlying security by acquiring and exercising a number of options 
contracts disproportionate to the deliverable supply and average 
trading volume of the underlying security.\66\ At the same time, the 
Commission has recognized that limits must not be established at levels 
that are so low as to discourage participation in the options market by 
institutions and other investors with substantial hedging needs or to 
prevent specialists and market-makers from adequately meeting their 
obligations to maintain a fair and orderly market.\67\
---------------------------------------------------------------------------

    \63\ See Securities Exchange Act Release No. 39489 (Dec. 24, 
1997), 63 FR 276, 279 (Jan 5. 1998) (order approving File No. SR-
Cboe-97-11).
    \64\ Id.
    \65\ Id.
    \66\ See, e.g., Securities Exchange Act Release Nos. 21907 (Mar. 
29, 1985), 50 FR 13440, 13441 (Apr. 4, 1985) (order approving File 
Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-25, and SR-PSE-85-1); 
and 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan. 12, 1999) (order 
approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-98-33; and Phlx-
98-36).
    \67\ See id.
---------------------------------------------------------------------------

    The Exchange initially proposed to subject options on IBIT to the 
same position and exercise limit levels as other ETF options currently 
trading.\68\ In Amendment No. 4, however, the Exchange proposed to 
provide position and exercise limits of 25,000 contracts for options on 
IBIT,\69\ which are the lowest position and exercise limits to which 
other ETF options are subject. In proposing these position and exercise 
limits, the Exchange considered IBIT's market capitalization and ADV, 
and its prospective position and exercise limits in relation to other 
securities.\70\ The Exchange stated that this analysis shows that 
options symbols with similar market capitalization and ADV to IBIT have 
a position and exercise limits in

[[Page 78946]]

excess of 400,000 options. Thus, according to the Exchange, this 
demonstrates that ``the proposed 25,000 same side position limit for 
options on IBIT is extremely conservative relative to these options 
symbols which are a full standard deviation above the mean in 
comparison.'' \71\
---------------------------------------------------------------------------

    \68\ See Notice, 89 FR at 5050.
    \69\ In Amendment No.4, the Exchange also clarified that its 
analysis in ISE Letter II applies to exercise limits as well as 
position limits.
    \70\ The Exchange represented that it aggregated market 
capitalization and volume data for securities that have defined 
position limits utilizing data from The Options Clearing 
Corporation. This pool of data took into consideration 3,984 options 
on single stock securities, excluding broad based ETFs. ISE 
aggregated the data based on market capitalization and ADV and 
grouped option symbols by position limit utilizing statistical 
thresholds for ADV and market capitalization that were one standard 
deviation above the mean for each position limit category (i.e., 
25,000, 50,000 to 65,000, 75,000, 100,000 to less than 250,000, 
250,000 to 400,000, 450,000 to 1,000,000, and greater than or equal 
to 1,000,000). See ISE Letter II at 3-4. ISE Options 9, Section 
13(d) establishes position limits for various options. For example, 
a 25,000-contract limit applies to options having an underlying 
security that does not meet the trading volume and outstanding 
shares requirements for a higher position limit. See supra note 22.
    \71\ See ISE Letter II at 4.
---------------------------------------------------------------------------

    The Exchange also stated that it reviewed IBIT's data relative to 
the market capitalization of the entire bitcoin market in terms of 
exercise risk and availability of deliverables.\72\ Utilizing data as 
of August 3, 2024, there were 19,737,193 bitcoins in circulation.\73\ 
Using a price of $57,000 per bitcoin, the market capitalization of 
bitcoin would be greater than $1.125 trillion.\74\ According to the 
Exchange, if a position limit of 400,000 options were considered, ``the 
exercisable risk would represent only 6.6% of the outstanding shares of 
IBIT.'' \75\ The Exchange also stated that, with the proposed 25,000 
position limit, the exercisable risk ``only represents 0.4% of the 
outstanding shares of IBIT.'' \76\ Further, according to the Exchange, 
because IBIT has a creation and redemption process managed through the 
issuer, the exercisable risk for options on IBIT would be less than 
0.01% of the market capitalization of all outstanding bitcoin.\77\ The 
Exchange stated that, assuming a scenario where all options on IBIT 
shares were exercised given the proposed 25,000 per same side position 
limit, this would have a virtually unnoticed impact on the entire 
bitcoin market.\78\ The Exchange also stated that ``[t]his analysis 
demonstrates that the proposed 25,000 per same side position limit is 
also ``extremely conservative and more than appropriate for options on 
IBIT.'' \79\
---------------------------------------------------------------------------

    \72\ See id.
    \73\ See id.
    \74\ Id.
    \75\ Id.
    \76\ See id.
    \77\ See id.
    \78\ See id.
    \79\ Id.
---------------------------------------------------------------------------

    In addition, the Exchange compared the proposed position limit to 
position limits for derivative products regulated by the Commodity 
Futures Trading Commission (``CFTC''). Specifically, the Exchange 
examined the equivalent bitcoin futures position limits, and, 
specifically, the CME bitcoin futures contract, which has a position 
limit of 2,000 futures.\80\ Based on this analysis, the Exchange 
believes that a position limit of 176,338 contracts for IBIT options 
would be equivalent to the 2,000-contract notional position limit for 
CME bitcoin futures.\81\ Stated another way, the Commission estimates 
that the proposed position limit of 25,000 contracts for IBIT options 
is roughly equivalent to a position limit of 280 bitcoin futures 
contracts. In analyzing the proposed position and exercise limits, ISE 
also considered the supply of IBIT and the number of market 
participants that would be required to exercise their positions in 
unison to place the underlying asset under stress.\82\ ISE concluded 
that with a position limit of 25,000 contracts on the same side of the 
market and 611,040,000 shares of IBIT outstanding, 244 market 
participants would have to simultaneously exercise their positions to 
place IBIT under stress.\83\ ISE further stated that, historically, 
from observation, it appears that no more than five market participants 
holding positions in a security have exercised their options at the 
same time.\84\
---------------------------------------------------------------------------

    \80\ See id.
    \81\ The Exchange multiplied the 2,000-contract limit by a 
multiplier of five, resulting in $550 million of notional value for 
bitcoin futures. See ISE Letter II for a detailed description of the 
Exchange's methodology.
    \82\ See id. at 5.
    \83\ See id.
    \84\ See id.
---------------------------------------------------------------------------

    Option position limits are determined based on six-month trading 
volume in the underlying security or six-month trading volume and 
number of shares outstanding of the underlying security.\85\ The 
Exchange stated that position limits must balance concerns regarding 
mitigating potential manipulation and the cost of inhibiting potential 
hedging activity that could be used for legitimate economic purposes, 
and to achieve such balance, options on IBIT would be subject to the 
25,000-option contract limit.\86\ The Commission finds that the 
proposed position and exercise limits are consistent with the Act, and 
in particular, with the requirements in Section 6(b)(5) that the rules 
of a national securities exchange designed to prevent fraudulent and 
manipulative acts and practices and to protect investors and the public 
interest. As discussed above, the Commission has recognized that 
position and exercise limits must be sufficient to prevent investors 
from disrupting the market for the underlying security by acquiring and 
exercising a number of options contracts disproportionate to the 
deliverable supply and average trading volume of the underlying 
security.\87\ In addition, the Commission has stated previously that 
rules regarding position and exercise limits are intended to prevent 
the establishment of options positions that can be used or might create 
incentives to manipulate or disrupt the underlying market so as to 
benefit the options position.\88\ Based on its review of the data and 
analysis provided by the Exchange, the Commission concludes that the 
proposed position and exercise limits satisfy these objectives. 
Specifically, the Commission has considered and reviewed the Exchange's 
analysis that the exercisable risk associated with a position limit of 
25,000 contracts represented only 0.4% of the outstanding shares of 
IBIT.\89\ The Commission also has considered and reviewed the 
Exchange's statement that with a position limit of 25,000 contracts on 
the same side of the market and 611,040,00 shares of IBIT outstanding, 
244 market participants would have to simultaneously exercise their 
positions to place IBIT under stress.\90\ Based on the Commission's 
review of this information and analysis, the Commission concludes that 
the proposed position and exercise limits are designed to prevent 
investors from disrupting the market for the underlying security by 
acquiring and exercising a number of options contracts disproportionate 
to the deliverable supply and average trading volume of the underlying 
security, and to prevent the establishment of options positions that 
can be used or might create incentives to manipulate or disrupt the 
underlying market so as to benefit the options position.
---------------------------------------------------------------------------

    \85\ See supra note 19 and accompanying text.
    \86\ See ISE Letter II at 3.
    \87\ See supra note 66 and accompanying text.
    \88\ See Securities Exchange Act Release No. 57352 (Feb.19, 
2008), 73 FR 10076, 10080 (Feb. 25, 2008) (order approving File No. 
SR-Cboe-2008-07).
    \89\ See ISE Letter II at 4.
    \90\ See id. at 5.
---------------------------------------------------------------------------

C. Surveillance

    Lastly, in the Order Instituting Proceedings, the Commission asked 
whether the Proposal should include information regarding how the 
Exchange would obtain information concerning trading in the bitcoin 
ETPs from the exchanges where the bitcoin ETPs trade. In its letter to 
the Commission, the Exchange represented that it ``would implement any 
new surveillance procedures it deemed necessary to effectively monitor 
the trading of options on Bitcoin ETPs.'' \91\ In Amendment No. 5 to 
the Proposal, ISE provided additional detail regarding the surveillance 
procedures that will apply to IBIT options. As described more fully 
above, the Exchange will apply its existing options surveillance

[[Page 78947]]

procedures to IBIT options.\92\ The Exchange states that it market 
surveillance staff will have access to the surveillances conducted by 
Nasdaq with respect to IBIT and will review activity in IBIT when 
conducting surveillances for market abuse or manipulation in options on 
IBIT.\93\ Additionally, the Exchange states that it is a member of ISG, 
whose members work together to coordinate surveillance and 
investigative information sharing in the stock, options, and futures 
markets.\94\ CME also is a member of ISG. In approving the Bitcoin 
ETPs, the Commission concluded that:
---------------------------------------------------------------------------

    \91\ ISE Letter I at 7.
    \92\ The Exchange states that its surveillance program includes 
real-time patterns for price and volume movements and post-trade 
surveillance patterns (e.g., spoofing, marking the close, pinging, 
phishing). See Amendment No. 5.
    \93\ See id.
    \94\ See id.

fraud or manipulation that impacts prices in spot bitcoin markets 
would likely similarly impact CME bitcoin futures prices. And 
because the CME's surveillance can assist in detecting those impacts 
on CME bitcoin futures prices, the Exchanges' comprehensive 
surveillance-sharing agreement with the CME--a U.S. regulated market 
whose bitcoin futures market is highly correlated to spot bitcoin--
can reasonably be expected to assist in surveilling for fraudulent 
and manipulative acts and practices in the specific context of [the 
Bitcoin ETPs].\95\
---------------------------------------------------------------------------

    \95\ See Bitcoin ETP Order, 89 FR at 3010-11.

    Together, these surveillance procedures should allow the Exchange 
to investigate suspected manipulations or other trading abuses in IBIT 
options.

D. Additional Changes

    The proposed changes to update the name of the ETFS Gold Trust to 
the Aberdeen Standard Physical Gold Trust and to correct the cross-
references in ISE Options 4, Section 4(g) will protect investors and 
the public interest by helping to ensure that the Exchange's rules 
remain accurate and up-to-date.

IV. Solicitation of Comments on Amendment Nos. 4 and 5 to the Proposed 
Rule Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment Nos. 4 and 5 are consistent with 
the Act. Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#0b797e676e26686466666e657f784b786e68256c647d"><span class="__cf_email__" data-cfemail="3d4f485158105e5250505853494e7d4e585e135a524b">[email protected]</span></a>. Please include 
file number SR-ISE-2024-03 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-ISE-2024-03. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-ISE-2024-03 and should be 
submitted on or before October 17, 2024.

V. Accelerated Approval of Amendment Nos. 4 and 5

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act, for approving Amendment Nos. 4 and 5 prior to the 30th day 
after the date of publication of notice of Amendment No. 3 in the 
Federal Register. Amendment No. 4 amends the Proposal to establish 
position and exercise limits of 25,000 contract for the proposed IBIT 
options, instead of the same position and exercise limits as other 
options currently trading. The Exchange stated that some commodity-
based ETPs currently have position and exercise limits of 250,000 
contracts.\96\ As described above, ISE provided data and analysis 
supporting the proposed position and exercise limits and stated, among 
other things, that the proposed position and exercise limits would 
represent 0.4% of the outstanding shares of IBIT.\97\ The Commission 
concludes that proposed position and exercise limits are designed to 
minimize the potential for manipulations or disruptions of the 
underlying market.\98\ Amendment No. 5 describes in greater detail the 
surveillance procedures that will apply to IBIT options. The additional 
information regarding these procedures assists the Commission in 
evaluating the Proposal and determining that the Proposal is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange, as discussed above. Accordingly, the 
Commission finds good cause, pursuant to Section 19(b)(2) of the 
Act,\99\ to approve the proposed rule change, as modified by Amendment 
Nos. 4 and 5, on an accelerated basis.
---------------------------------------------------------------------------

    \96\ See ISE Letter II at 6 (stating that the SPDR Gold Shares 
ETF and the iShares Silver Trust ETF have position limits of 250,000 
contracts).
    \97\ See ISE Letter II at 4.
    \98\ The Commission recognizes that position limits should not 
be established at levels that are so low as to discourage 
participation in the options market by institutions and other 
investors with substantial hedging needs or to prevent specialists 
and market makers from adequately meeting their obligations to 
maintain a fair and orderly market. See, e.g., Securities Exchange 
Act Release Nos. 21907 (Mar. 29, 1985), 50 FR 13440 (Apr. 4, 1985) 
(order approving File Nos. SR-CBOE-84-21, SR-Amex-84-30, SR-Phlx-84-
25, and SR-PSE-85-1); 40875 (Dec. 31, 1998), 64 FR 1842, 1843 (Jan. 
12, 1999) (order approving File Nos. SR-CBOE-98-25; Amex-98-22; PCX-
98-33; and Phlx-98-36). The Commission finds that the proposed 
position and exercise limits are consistent with these objectives.
    \99\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VI. Conclusion

    For the reasons set forth above, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 1, 4, and 5, is 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, the requirements of Section 6(b)(5) of the 
Act.\100\
---------------------------------------------------------------------------

    \100\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\101\ that the proposed rule change (SR-ISE-2024-03), as modified 
by Amendment Nos. 1, 4, and 5, be, and is hereby, approved.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78s(b)(2).
    \102\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\102\
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-22024 Filed 9-25-24; 8:45 am]
BILLING CODE 8011-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>