[Federal Register Volume 89, Number 206 (Thursday, October 24, 2024)]
[Notices]
[Pages 84948-84960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-24641]



[[Page 84948]]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101387; File No. SR-CBOE-2024-035]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of Amendment Nos. 2 and 3 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 2 and 
3, To Permit the Listing and Trading of Options on Bitcoin Exchange-
Traded Funds

October 18, 2024.
    On August 19, 2024, Cboe Exchange, Inc. (``Cboe'' 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 the Fidelity Wise 
Origin Bitcoin Fund, the ARK21Shares Bitcoin ETF, the Invesco Galaxy 
Bitcoin ETF, the Franklin Bitcoin ETF, the VanEck Bitcoin Trust, the 
WisdomTree Bitcoin Fund, the Grayscale Bitcoin Trust BTC, the Bitwise 
Bitcoin ETF, the iShares Bitcoin Trust ETF, and the Valkyrie Bitcoin 
Fund.\3\ The proposed rule change was published for comment in the 
Federal Register on September 4, 2024.\4\ On September 27, 2024, the 
Exchange filed Amendment No. 1 to the proposed rule change. On 
September 30, 2024, the Exchange withdrew Amendment No. 1 and filed 
Amendment No. 2 to the proposal, which supersedes and replaces the 
original proposal in its entirety.\5\ On October 10, 2024, the Exchange 
filed Amendment No. 3 to the proposal.\6\ The Commission received no 
comments regarding the proposal. The Commission is publishing this 
notice to solicit comments on Amendment Nos. 2 and 3 from interested 
persons, and is approving the proposed rule change, as modified by 
Amendment Nos. 2 and 3, 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 trusts underlying 
the proposed options. 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. 100861 (Aug. 28, 
2024), 89 FR 71982.
    \5\ Amendment No. 2 narrows the scope of the proposal to the 
Fidelity Wise Origin Bitcoin Fund and the ARK 21Shares Bitcoin ETF; 
proposes new position and exercise limits for options on the funds 
and provides justification and analysis for the proposed position 
and exercise limits; provides additional discussion of surveillance 
procedures that will apply to the proposed options; and eliminates 
references to the applicability of specified Interpretations and 
Policies in Exchange Rule 8.30.
    \6\ Amendment No. 3 narrows the scope of the proposal by 
providing that options on the Fidelity Wise Origin Bitcoin Fund and 
the ARK 21Shares Bitcoin ETF will not be available for FLEX trading. 
FLEX Options are flexible exchange options. A FLEX Option on an 
equity security may be referred to as a ``FLEX Equity Option,'' and 
a FLEX Option on an index may be referred to as a ``FLEX Index 
Option.'' See Exchange Rule 1.1 The Exchange may authorize for 
trading a FLEX Option class on any equity security or index if it 
may authorize for trading a non-FLEX Option class on that equity 
security or index pursuant to Exchange Rules 4.3 and 4.10, 
respectively, even if the Exchange does not list that non-FLEX 
Option class for trading. See Exchange Rule 4.20. There are no 
position limits for FLEX Equity Options, other than as set forth in 
Exchange Rules 8.35(c)(1)(B) and (d). See Exchange Rule 
8.35(c)(1)(A). Amendment Nos. 2 and 3 are available on the 
Exchange's website at https://www.cboe.com/us/options/regulation/rule_filings/.
---------------------------------------------------------------------------

I. The Exchange's Description of the Proposed Rule Change, as Modified 
by Amendment Nos. 2 and 3

    The Exchange filed with the Commission a proposal to list and trade 
options on the Fidelity Wise Origin Bitcoin Fund and the ARK 21Shares 
Bitcoin ETF. The text of the proposed rule change is provided in 
Exhibit 5. The text of the proposed rule change is also available on 
the Exchange's website https://www.cboe.com/us/options/regulation/rule_filings/, at the Exchange's Office of the Secretary, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Rule 4.3 regarding the criteria for 
underlying securities. Specifically, the Exchange proposes to amend 
Rule 4.3, Interpretation and Policy .06(a)(4) to allow the Exchange to 
list and trade options on Units \7\ that represent interests in the 
Fidelity Wise Origin Bitcoin Fund (the ``Fidelity Fund'') and the ARK 
21Shares Bitcoin ETF (the ``ARK 21 Fund'' and, with the Fidelity Fund, 
the ``Bitcoin Funds'') \8\, designating them as ``Units'' deemed 
appropriate for options trading on the Exchange. Current Rule 4.3, 
Interpretation and Policy .06 provides that, subject to certain other 
criteria set forth in that Rule, securities deemed appropriate for 
options trading include Units that represent certain types of 
interests,\9\ including interests in certain

[[Page 84949]]

specific trusts that hold financial instruments, money market 
instruments, or precious metals (which are deemed commodities).
---------------------------------------------------------------------------

    \7\ Rule 1.1 defines a ``Unit'' (which may also be referred to 
as an ETF) as a share or other security traded on a national 
securities exchange and defined as an NMS stock as set forth in Rule 
4.3.
    \8\ See Securities Exchange Act Release No. 99306 (January 10, 
2024), 89 FR 3008, 3009 (January 17, 2024) (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; SRCboeBZX-2023-044; and SR-
CboeBZX-2023-072) (Order Granting Accelerated Approval of Proposed 
Rule Changes, as Modified by Amendments Thereto, to List and Trade 
Bitcoin-Based Commodity-Based Trust Shares and Trust Units) 
(``Bitcoin ETP Approval Order'').
    \9\ See Rule 4.3, Interpretation and Policy .06(a), which 
permits options trading on Units that represent (1) interests in 
registered investment companies (or series thereof) organized as 
open-end management investment companies, unit investment trusts or 
similar entities that hold portfolios of securities and/or financial 
instruments including, but not limited to, stock index futures 
contracts, options on futures, options on securities and indexes, 
equity caps, collars and floors, swap agreements, forward contracts, 
repurchase agreements and reverse purchase agreements (the 
``Financial Instruments''), and money market instruments, including, 
but not limited to, U.S. government securities and repurchase 
agreements (the ``Money Market Instruments'') comprising or 
otherwise based on or representing investments in indexes or 
portfolios of securities and/or Financial Instruments and Money 
Market Instruments (or that hold securities in one or more other 
registered investment companies that themselves hold such portfolios 
of securities and/or Financial Instruments and Money Market 
Instruments); (2) interests in a trust or similar entity that holds 
a specified non-U.S. currency deposited with the trust or similar 
entity when aggregated in some specified minimum number may be 
surrendered to the trust by the beneficial owner to receive the 
specified non-U.S. currency and pays the beneficial owner interest 
and other distributions on deposited non-U.S. currency, if any, 
declared and paid by the trust (``Currency Trust Shares''); (3) 
commodity pool interests principally engaged, directly or 
indirectly, in holding and/or managing portfolios or baskets of 
securities, commodity futures contracts, options on commodity 
futures contracts, swaps, forward contracts and/or options on 
physical commodities and/or non-U.S. currency (``Commodity Pool 
Units''); (4) interests in the SPDR Gold Trust, the iShares COMEX 
Gold Trust, the iShares Silver Trust, the Aberdeen Standard Physical 
Silver Trust, the Aberdeen Standard Physical Gold Trust, the 
Aberdeen Standard Physical Palladium Trust, the Aberdeen Standard 
Physical Platinum Trust, the Sprott Physical Gold Trust or the 
Goldman Sachs Physical Gold ETF; or (5) an interest in a registered 
investment company (``Investment Company'') organized as an open-end 
management investment company or similar entity, that invests in a 
portfolio of securities selected by the Investment Company's 
investment adviser consistent with the Investment Company's 
investment objectives and policies, which is issued in a specified 
aggregate minimum number in return for a deposit of a specified 
portfolio of securities and/or a cash amount with a value equal to 
the next determined net asset value (``NAV''), and when aggregated 
in the same specified minimum number, may be redeemed at a holder's 
request, which holder will be paid a specified portfolio of 
securities and/or cash with a value equal to the next determined NAV 
(``Managed Fund Share'').
---------------------------------------------------------------------------

    The Bitcoin Funds are Bitcoin-backed commodity ETFs structured as 
trusts. Similar to any Unit currently deemed appropriate for options 
trading under Rule 4.3, Interpretation and Policy .06, the investment 
objective of each Bitcoin Fund is for its shares to reflect the 
performance of Bitcoin (less the expenses of the trust's operations), 
offering investors an opportunity to gain exposure to Bitcoin without 
the complexities of Bitcoin delivery. As is the case for Units 
currently deemed appropriate for options trading, a Bitcoin Fund's 
shares represent units of fractional undivided beneficial interest in 
the trust, the assets of which consist principally of Bitcoin and are 
designed to track Bitcoin or the performance of the price of Bitcoin 
and offer access to the Bitcoin market.\10\ The Bitcoin Funds provide 
investors with cost-efficient alternatives that allow a level of 
participation in the Bitcoin market through the securities market. The 
primary substantive difference between Bitcoin Funds and Units 
currently deemed appropriate for options trading are that Units may 
hold securities, certain financial instruments, and specified precious 
metals (which are deemed commodities), while Bitcoin Funds hold Bitcoin 
(which is also deemed a commodity).
---------------------------------------------------------------------------

    \10\ The trust may include minimal cash.
---------------------------------------------------------------------------

    The Exchange believes each Bitcoin Fund satisfies the Exchange's 
initial listing standards for Units on which the Exchange may list 
options. Specifically, each Bitcoin Fund satisfies the initial listing 
standards set forth in Rule 4.3, Interpretation and Policy .06(b), as 
is the case for other Units on which the Exchange lists options 
(including trusts that hold commodities). Rule 4.3, Interpretation and 
Policy .06 requires that Units must either (1) meet the criteria and 
standards set forth in Rule 4.3, Interpretation and Policy .01(a),\11\ 
or (2) be available for creation or redemption each business day from 
or through the issuer in cash or in kind at a price related to net 
asset value, and the issuer must be obligated to issue Units in a 
specified aggregate number even if some or all of the investment assets 
required to be deposited have not been received by the issuer, subject 
to the condition that the person obligated to deposit the investments 
has undertaken to deliver the investment assets as soon as possible and 
such undertaking is secured by the delivery and maintenance of 
collateral consisting of cash or cash equivalents satisfactory to the 
issuer, as provided in the respective prospectus. Each Bitcoin Fund 
satisfies Rule 4.3, Interpretation and Policy .06(b)(2), as each is 
subject to this creation and redemption process.
---------------------------------------------------------------------------

    \11\ Rule 4.3, Interpretation and Policy .01 provides for 
guidelines to be by the Exchange when evaluating potential 
underlying securities for Exchange option transactions.
---------------------------------------------------------------------------

    While not required by the Rules for purposes of options listings, 
the Exchange believes each Bitcoin Fund satisfies the criteria and 
guidelines set forth in Rule 4.3, Interpretation and Policy .01. 
Pursuant to Rule 4.3(a), a security (which includes a Unit) on which 
options may be listed and traded on the Exchange must be duly 
registered (with the Commission) and be an NMS stock (as defined in 
Rule 600 of Regulation NMS under the Securities Exchange Act of 1934, 
as amended (the ``Act'')), and be characterized by a substantial number 
of outstanding shares that are widely held and actively traded.\12\ 
Each Bitcoin Fund is an NMS Stock as defined in Rule 600 of Regulation 
NMS under the Act.\13\ The Exchange believes each Bitcoin Fund is 
characterized by a substantial number of outstanding shares that are 
widely held and actively traded.
---------------------------------------------------------------------------

    \12\ The criteria and guidelines for a security to be considered 
widely held and actively traded are set forth in Rule 4.3, 
Interpretation and Policy .01, subject to exceptions.
    \13\ An ``NMS stock'' means any NMS security other than an 
option, and an ``NMS security'' means any security or class of 
securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting 
plan (or an effective national market system plan for reporting 
transaction in listed options). See 17 CFR 242.600(b)(64) 
(definition of ``NMS security'') and (65) (definition of ``NMS 
stock'').
---------------------------------------------------------------------------

    As of August 7, 2024, the Bitcoin Funds had the following number of 
shares outstanding:

------------------------------------------------------------------------
                                                              Shares
                      Bitcoin Fund                          outstanding
------------------------------------------------------------------------
Fidelity Fund...........................................     201,100,100
ARK 21 Fund.............................................      45,495,000
------------------------------------------------------------------------

Each Bitcoin Fund had significantly more than 7,000,000 shares 
outstanding (approximately 29 and 6.5 times that amount, respectively), 
which is the minimum number of shares of a corporate stock that the 
Exchange generally requires to list options on that stock pursuant to 
Rule 4.3, Interpretation and Policy .01(a)(1). The Exchange believes 
this demonstrates that each Bitcoin Fund is characterized by a 
substantial number of outstanding shares.
    Further, the below table contains information regarding the number 
of beneficial holders of the Bitcoin Funds as of the specified dates:

------------------------------------------------------------------------
                                                 Beneficial
                 Bitcoin Fund                     holders        Date
------------------------------------------------------------------------
Fidelity Fund.................................      279,656    6/27/2024
ARK 21 Fund...................................       69,425    6/26/2024
------------------------------------------------------------------------

As this table shows, each Bitcoin Fund has significantly more than 
2,000 beneficial holders (approximately 140 and 35 times more, 
respectively), which is the minimum number of holders the Exchange 
generally requires for corporate stock in order to list options on that 
stock pursuant to Rule 4.3, Interpretation and Policy .01(a)(2). 
Therefore, the Exchange believes the shares of each Bitcoin Fund are 
widely held.\14\
---------------------------------------------------------------------------

    \14\ The Exchange continues to believe assets under management 
(``AUM''), rather than shares outstanding and number of holders, is 
a better measure of investable capacity of ETFs and a more 
appropriate figure for determining position and exercise limits of 
ETFs and looks forward to further discussions with the Commission 
staff on this topic.

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

[[Page 84950]]

    The Exchange also believes the shares of each Bitcoin Fund are 
actively traded. As of August 7, 2024, the total trading volume (by 
shares) for each fund for the six-month period of February 8 through 
August 7, 2024 and the approximate average daily volume (``ADV'') (in 
shares and notional) over the 30-day period of July 9 through August 7, 
2024 for each Bitcoin Fund was as follows:

----------------------------------------------------------------------------------------------------------------
                                                         6-Month  trading volume    30-Day ADV      30-Day ADV
                      Bitcoin Fund                               (shares)            (shares)      (notional $)
----------------------------------------------------------------------------------------------------------------
Fidelity Fund..........................................            1,112,861,581       6,014,335     250,354,755
ARK 21 Fund............................................              297,360,739       1,893,335      90,484,307
----------------------------------------------------------------------------------------------------------------

As demonstrated above, despite the fact that the Bitcoin Funds had been 
trading for approximately seven months \15\ only as of August 7, 2024, 
the six-month trading volume for each as of that date was substantially 
higher than 2,400,000 shares (approximately 464 and 124 times that 
amount, respectively), which is the minimum 12-month volume the 
Exchange generally requires for a corporate stock in order to list 
options on that security as set forth in Rule 4.3, Interpretation and 
Policy .01. Additionally, as of August 7, 2024, the trading volume for 
each Bitcoin Fund was in the top 5% of all ETFs that are currently 
trading. The Exchange believes this data demonstrates each Bitcoin Fund 
is characterized as having shares that are actively traded.
---------------------------------------------------------------------------

    \15\ The Bitcoin Funds began trading on January 11, 2024.
---------------------------------------------------------------------------

    Options on the Bitcoin Funds will be subject to the Exchange's 
continued listing standards set forth in Rule 4.4, Interpretation and 
Policy .06 for Units deemed appropriate for options trading pursuant to 
Rule 4.3, Interpretation and Policy .06. Specifically, Rule 4.4, 
Interpretation and Policy .06 provides that Units that were initially 
approved for options trading pursuant to Rule 4.3, Interpretation and 
Policy .06 shall be deemed not to meet the requirements for continued 
approval, and the Exchange shall not open for trading any additional 
series of option contracts of the class covering that such Units, if 
the Units cease to be an NMS stock or the Units are halted from trading 
in their primary market. Additionally, options on Units may be subject 
to the suspension of opening transactions in any of the following 
circumstances: (1) in the case of options covering Units approved for 
trading under Rule 4.3, Interpretation and Policy .06(b)(1), in 
accordance with the terms of paragraphs (a), (b), and (c) of Rule 4.4, 
Interpretation and Policy .01; (2) in the case of options covering 
Units approved for trading under Rule 4.3 Interpretation and Policy 
.06(b)(2) (as is the case for the Bitcoin Funds), following the initial 
twelve-month period beginning upon the commencement of trading in the 
Units on a national securities exchange and are defined as an NMS 
stock, there are fewer than 50 record and/or beneficial holders of such 
Units for 30 or more consecutive trading days; (3) the value of the 
index or portfolio of securities, non-U.S. currency, or portfolio of 
commodities including commodity futures contracts, options on commodity 
futures contracts, swaps, forward contracts and/or options on physical 
commodities and/or financial instruments and money market instruments 
on which the Units are based is no longer calculated or available; or 
(4) such other event shall occur or condition exist that in the opinion 
of the Exchange makes further dealing in such options on the Exchange 
inadvisable.
    Options on each Bitcoin Fund will be physically settled contracts 
with American-style exercise.\16\ Consistent with current Rule 4.5, 
which governs the opening of options series on a specific underlying 
security (including Units), the Exchange will open at least one 
expiration month for options on each Bitcoin Fund \17\ at the 
commencement of trading on the Exchange and may also list series of 
options on a Bitcoin Fund for trading on a weekly,\18\ monthly,\19\ or 
quarterly \20\ basis. The Exchange may also list long-term equity 
option series (``LEAPS'') that expire from 12 to 180 months from the 
time they are listed.
---------------------------------------------------------------------------

    \16\ See Rule 4.2, which provides that the rights and 
obligations of holders and writers are set forth in the Rules of the 
Options Clearing Corporation (``OCC''); and Equity Options Product 
Specifications January 3, 2024), available at Equity Options 
Specifications (cboe.com); see also OCC Rules, Chapters VIII (which 
governs exercise and assignment) and Chapter IX (which governs the 
discharge of delivery and payment obligations arising out of the 
exercise of physically settled stock option contracts).
    \17\ See Rule 4.5(b). The monthly expirations are subject to 
certain listing criteria for underlying securities described within 
Rule 4.3. Monthly listings expire the third Friday of the month. The 
term ``expiration date'' (unless separately defined elsewhere in the 
OCC By-Laws), when used in respect of an option contract (subject to 
certain exceptions), means the third Friday of the expiration month 
of such option contract, or if such Friday is a day on which the 
exchange on which such option is listed is not open for business, 
the preceding day on which such exchange is open for business. See 
OCC By-Laws Article I, Section 1. Pursuant to Rule 4.5(c), 
additional series of options of the same class may be opened for 
trading on the Exchange when the Exchange deems it necessary to 
maintain an orderly market, to meet customer demand or when the 
market price of the underlying stock moves more than five strike 
prices from the initial exercise price or prices. New series of 
options on an individual stock may be added until the beginning of 
the month in which the options contract will expire. Due to unusual 
market conditions, the Exchange, in its discretion, may add a new 
series of options on an individual stock until the close of trading 
on the business day prior to expiration.
    \18\ See Rule 4.5(d).
    \19\ See Rule 4.5(g).
    \20\ See Rule 4.5(e).
---------------------------------------------------------------------------

    Pursuant to Rule 4.5, Interpretation and Policy .07, which governs 
strike prices of series of options on Units, the interval of strikes 
prices for series of options on Bitcoin Funds will be $1 or greater 
when the strike price is $200 or less and $5 or greater where the 
strike price is over $200.\21\ Additionally, the Exchange may list 
series of options pursuant to the $1 Strike Price Interval Program,\22\ 
the $0.50 Strike Program,\23\ the $2.50 Strike Price Program,\24\ and 
the $5 Strike Program.\25\ Pursuant to Rule 5.4, where the price of a 
series of a Bitcoin Fund option is less than $3.00, the minimum 
increment will be $0.05, and where the price is $3.00 or higher, the 
minimum increment will be $0.10.\26\ Any and all new series of Bitcoin 
Fund options that the Exchange lists will be consistent and comply with 
the expirations, strike prices, and minimum

[[Page 84951]]

increments set forth in Rules 4.5 and 5.4, as applicable.
---------------------------------------------------------------------------

    \21\ The Exchange notes that for options listed pursuant to the 
Short Term Option Series Program, the Monthly Options Series 
Program, and the Quarterly Options Series Program, Rules 4.5(d), 
(e), and (g) specifically sets forth intervals between strike prices 
on Quarterly Options Series, Short Term Option Series, and Monthly 
Options Series, respectively.
    \22\ See Rule 4.5, Interpretation and Policy .01(a).
    \23\ See Rule 4.5, Interpretation and Policy .01(b).
    \24\ See Rule 4.5, Interpretation and Policy .04.
    \25\ See Rule 4.5, Interpretation and Policy .01(f).
    \26\ If options on a Bitcoin Fund are eligible to participate in 
the Penny Interval Program, the minimum increment will be $0.01 for 
series with a price below $3.00 and $0.05 for series with a price at 
or above $3.00. See 5.4(d) (which describes the requirements for the 
Penny Interval Program).
---------------------------------------------------------------------------

    Rule 4.20 currently permits the Exchange to authorize for trading a 
FLEX option class on any equity security if it may authorize for a 
trading a non-FLEX option class on that equity security pursuant to 
Rule 4.3. The proposed rule change amends Rule 4.20 to exclude the 
Bitcoin Funds from this provision.\27\
---------------------------------------------------------------------------

    \27\ See Amendment No. 3 at 3.
---------------------------------------------------------------------------

    Bitcoin Fund options will trade in the same manner as any other 
Unit options on the Exchange. The Exchange Rules that currently apply 
to the listing and trading of all Unit options on the Exchange, 
including, for example, Rules that govern listing criteria, 
expirations, exercise prices, minimum increments, margin requirements, 
customer accounts, and trading halt procedures will apply to the 
listing and trading of Bitcoin Funds options on the Exchange in the 
same manner as they apply to other options on all other Units that are 
listed and traded on the Exchange, including the precious-metal backed 
commodity Units already deemed appropriate for options trading on the 
Exchange pursuant to current Rule 4.3, Interpretation and Policy 
.06(a)(4).
    The Exchange also proposes to amend Rules 8.30 and 8.42. 
Specifically, the Exchange proposes to adopt Rule 8.30, Interpretation 
and Policy .10 to provide a position limit of 25,000 same side option 
contracts for each Bitcoin Fund option. Additionally, pursuant to the 
proposed change to Rule 8.42, Interpretation and Policy .02, the 
exercise limits for options on each Bitcoin Fund will be equivalent to 
this proposed position limit.\28\
---------------------------------------------------------------------------

    \28\ The Exchange also proposes to amend the last sentence of 
Rule 8.30 by deleting the references to Interpretations and Policies 
.02 and .04. Therefore, the rule as proposed would state that limits 
shall be determined in the manner described in the Interpretations 
and Policies in that Rule. The Exchange believes all the 
Interpretations and Policies to Rule 8.30 are relevant for 
determining position limits pursuant to Rule 8.30, not just the two 
currently specified ones.
---------------------------------------------------------------------------

    The Exchange determined these proposed position and exercise limits 
considering, among other things, the approximate six-month average 
daily volume (``ADV'') and outstanding shares of each underlying 
Bitcoin Fund (which as discussed above demonstrate that each Bitcoin 
Fund is widely held and actively traded and thus justify these 
conservatively proposed position limits), as set forth below, along 
with market capitalization (as of August 7, 2024):

----------------------------------------------------------------------------------------------------------------
                                                     Six-month ADV       Outstanding      Market capitalization
             Underlying Bitcoin Fund                    (shares)            shares                 ($)
----------------------------------------------------------------------------------------------------------------
Fidelity Fund....................................          8,902,893        201,100,100           14,217,013,188
ARK 21 Fund......................................          2,378,886         45,495,000            2,487,666,600
----------------------------------------------------------------------------------------------------------------

    The Exchange then compared the number of outstanding shares of the 
Bitcoin Funds to those of other ETFs.\29\ The following table provides 
the approximate average position (and exercise limit) of ETF options 
with similar outstanding shares (as of August 27, 2024), compared to 
the proposed position and exercise limit for the Bitcoin Fund options: 
\30\
---------------------------------------------------------------------------

    \29\ Over 80% of the ETFs used for comparison have a limit of at 
least 200,000, and more than half have a limit of 250,000. 
Additionally, the three-month ADV of the majority of the ETFs used 
for comparison was lower than the Fidelity Fund three-month ADV of 
5,665,027 shares.
    \30\ Nearly 80% of the ETFs used for comparison have a limit of 
at least 75,000 (and up to 250,000). Additionally, the three-month 
ADV of the majority of ETFs used for comparison was lower (many more 
than four times lower) than the ARK 21 Fund three-month ADV of 
1,737,327 shares.

------------------------------------------------------------------------
                                                  Average
                                                  Limit of     Proposed
           Underlying  Bitcoin Fund              other  ETF     limit
                                                  options    (contracts)
                                                (contracts)
------------------------------------------------------------------------
Fidelity Fund.................................      188,110       25,000
ARK 21 Fund...................................      108,696       25,000
------------------------------------------------------------------------

    The Exchange considered current position and exercise limits of 
options on ETFs with outstanding shares comparable to those of each 
Bitcoin Fund, with the proposed limit significantly lower (between two 
and ten times lower) than the average limits of the options on the 
other ETFs. As discussed above, the Bitcoin Funds are actively held and 
widely traded: (1) each Bitcoin Fund (as of August 7, 2024) had 
significantly more than 7,000,000 shares outstanding, which is the 
minimum number of shares of a corporate stock that the Exchange 
generally requires to list options on that stock pursuant to Rule 4.3, 
Interpretation and Policy .01(a)(1); (2) each Bitcoin Fund (as of the 
dates listed above) had significantly more than 2,000 beneficial 
holders, which is the minimum number of holders the Exchange generally 
requires for corporate stock in order to list options on that stock 
pursuant to Rule 4.3, Interpretation and Policy .01(a)(2); and (3) each 
Bitcoin Fund had a six-month trading volume substantially higher than 
2,400,000 shares, which is the minimum 12-month volume the Exchange 
generally requires for a security in order to list options on that 
security as set forth in Rule 4.3, Interpretation and Policy .01.
    With respect to outstanding shares, if a market participant held 
the maximum number of positions possible pursuant to the proposed 
position and exercise limits, the equivalent shares represented by the 
proposed position/exercise limit would represent the following 
approximate percentage of current outstanding shares:

----------------------------------------------------------------------------------------------------------------
                                                     Proposed  position/                         Percentage of
             Underlying Bitcoin Fund                 exercise limit  (in       Outstanding        outstanding
                                                      equivalent shares)          shares             shares
----------------------------------------------------------------------------------------------------------------
Fidelity Fund....................................                2,500,000        201,100,100                1.2
ARK 21 Fund......................................                2,500,000         45,495,000                5.5
----------------------------------------------------------------------------------------------------------------

As this table demonstrates, if a market participant held the maximum 
permissible options positions in one of the Bitcoin Fund options and 
exercised all of them at the same time, that market participant would 
control a small percentage of the outstanding shares of the underlying 
Bitcoin Fund.
    Cboe Options Rule 8.30, Interpretation and Policy .02, provides two 
methods of qualifying for a position limit tier above 25,000 option 
contracts.

[[Page 84952]]

The first method is based on six-month trading volume in the underlying 
security, and the second method is based on slightly lower six-month 
trading volume and number of shares outstanding in the underlying 
security. An underlying stock or ETF that qualifies for method two 
based on trading volume and number of shares outstanding would be 
required to have the minimum number of outstanding shares as shown in 
middle column of the table below.
    The table, which provides the equivalent shares of the position 
limits applicable to equity options, including ETFs, further represents 
the percentages of the minimum number of outstanding shares that an 
underlying stock or ETF must have to qualify for that position limit 
(under the second method described above), all of which are higher than 
the percentages for the Bitcoin Funds.\31\
---------------------------------------------------------------------------

    \31\ In the ``Minimum Shares Outstanding'' column in the chart 
below, 6,300,000 shares is the minimum number of outstanding shares 
an underlying security must have for the Exchange to continue to 
list options on that security, so this would be the smallest number 
of outstanding shares permissible for any corporate option that 
would have a position limit of 25,000 contract. See Rule 4.5, 
Interpretation and Policy .01. This rule applies to corporate stock 
options but not ETF options, which currently have no requirement 
regarding outstanding shares of the underlying ETF for the Exchange 
to continue listing options on that ETF. Therefore, there may be ETF 
options trading for which the 25,000 contract position limits 
represents [sic] an even larger percentage of outstanding shares of 
the underlying ETF than set forth above.

------------------------------------------------------------------------
                                              Minimum     Percentage of
  Position/exercise  limit (in equivalent   outstanding    outstanding
                  shares)                      shares         shares
------------------------------------------------------------------------
2,500,000.................................    6,300,000             40.0
5,000,000.................................   40,000,000             12.5
7,500,000.................................  120,000,000              6.3
20,000,000................................  240,000,000              8.3
25,000,000................................  300,000,000              8.3
------------------------------------------------------------------------

The equivalent shares represented by the proposed position and exercise 
limits for each Bitcoin Fund as a percentage of outstanding shares of 
the underlying Bitcoin Fund is significantly lower than the percentage 
for the lowest possible position limit for equity options of 25,000 
(under 6% compared to 40%) and is lower than that percentage for each 
current position limit bucket.\32\
---------------------------------------------------------------------------

    \32\ As these percentages are based on the minimum number of 
outstanding shares an underlying security must have to qualify for 
the applicable position limit, these are the highest possible 
percentages that would apply to any option subject to that position 
and exercise limit.
---------------------------------------------------------------------------

    Further, the proposed position and exercise limits for each Bitcoin 
Fund option are significantly below the limits that would otherwise 
apply pursuant to current Rule 8.30. These position and exercise limits 
are the lowest position and exercise limits available in the options 
industry, are extremely conservative and more than appropriate given 
the market capitalization, average daily volume, and high number of 
outstanding shares of the Bitcoin Funds.
    All of the above information demonstrates that the proposed 
position and exercise limits for the Bitcoin Fund options are more than 
reasonable and appropriate. The trading volume, ADV, and outstanding 
shares of each Bitcoin Fund demonstrate that these funds are actively 
traded and widely held, and proposed position and exercise limits are 
well below those of other ETFs with similar market characteristics. The 
proposed position and exercise limits are the lowest position and 
exercise limits available for equity options in the industry, are 
extremely conservative, and are more than appropriate given each 
Bitcoin Fund's market capitalization, ADV, and high number of 
outstanding shares.
    Today, the Exchange has an adequate surveillance program in place 
for options. Cboe intends to apply those same program procedures to 
options on the Bitcoin Funds that it applies to the Exchange's other 
options products.\33\ Cboe's market surveillance staff would have 
access to the surveillances conducted by Cboe BZX Exchange, Inc.\34\ 
with respect to the Bitcoin Funds and would review activity in the 
underlying Bitcoin Funds when conducting surveillances for market abuse 
or manipulation in the options on the Bitcoin Funds. Additionally, the 
Exchange is a member of the Intermarket Surveillance Group (``ISG'') 
under the Intermarket Surveillance Group Agreement. ISG members work 
together to coordinate surveillance and investigative information 
sharing in the stock, options, and futures markets. In addition, Cboe 
has a Regulatory Services Agreement with the Financial Industry 
Regulatory Authority (``FINRA'') for certain market surveillance, 
investigation and examinations functions. Pursuant to a multi-party 
17d-2 joint plan, all options exchanges allocate amongst themselves and 
FINRA responsibilities to conduct certain options-related market 
surveillance that are common to rules of all options exchanges.\35\
---------------------------------------------------------------------------

    \33\ The surveillance program includes surveillance patterns for 
price and volume movements as well as patterns for potential 
manipulation (e.g., spoofing and marking the close).
    \34\ Cboe BZX Exchange, Inc. is an affiliated market of the 
Exchange.
    \35\ Section 19(g)(1) of the Act, among other things, requires 
every self-regulatory organization (``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.
---------------------------------------------------------------------------

    The underlying shares of spot bitcoin exchange-traded products 
(``ETPs''), including the Bitcoin Funds, are also subject to safeguards 
related to addressing market abuse and manipulation. As the Commission 
stated in its order approving proposals of several exchanges to list 
and trade shares of spot bitcoin-based ETPs, ``[e]ach 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.\36\ 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

[[Page 84953]]

``expected to assist in surveilling for fraudulent and manipulative 
acts and practices in the specific context of the [Bitcoin ETPs].'' 
\37\ In light of surveillance measures related to both options and 
futures as well as the underlying Bitcoin Funds,\38\ 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 options on the Bitcoin Funds. 
Further, the Exchange will implement any new surveillance procedures it 
deems necessary to effectively monitor the trading of options on 
Bitcoin ETPs.
---------------------------------------------------------------------------

    \36\ See Bitcoin ETP Approval Order.
    \37\ See Bitcoin ETP Approval Order, 89 FR at 3010-11.
    \38\ See Securities Exchange Act Release Nos. 99290 (January 8, 
2024), 89 FR 2338, 2343, 2347-2348 (January 12, 2024) (SR-CboeBZX-
2023-044) Notice of Filing of Amendment No. 3 to a Proposed Rule 
Change to List and Trade Shares of the Fidelity Wise Origin Bitcoin 
Fund Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares); and 
99288 (January 8, 2024), 89 FR 2387, 2392, 2399-2400 (January 12, 
2024) (SR-CboeBZX-2023-028) (Notice of Filing of Amendment No. 5 to 
a Proposed Rule Change To List and Trade Shares of the ARK 21Shares 
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares). See also Securities Exchange Act Release No. 99306 (January 
10, 2024), 89 FR 3008, 3009 (January 17, 2024) (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; SRCboeBZX-2023-044; and SR-
CboeBZX-2023-072) (Order Granting Accelerated Approval of Proposed 
Rule Changes, as Modified by Amendments Thereto, to List and Trade 
Bitcoin-Based Commodity-Based Trust Shares and Trust Units) 
(``Bitcoin ETP Approval Order'').
---------------------------------------------------------------------------

    The Exchange has also analyzed its capacity and represents that it 
believes the Exchange and OPRA 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 Bitcoin Funds up to 
the number of expirations currently permissible under the Rules. 
Because the proposal is limited to two classes, the Exchange believes 
any additional traffic that may be generated from the introduction of 
Bitcoin Fund options will be manageable.
    The Exchange believes that offering options on Bitcoin Funds will 
benefit investors by providing them with an additional, relatively 
lower cost investing tool to gain exposure to the price of Bitcoin and 
hedging vehicle to meet their investment needs in connection with 
Bitcoin-related products and positions. The Exchange expects investors 
will transact in options on Bitcoin Funds in the unregulated over-the-
counter (``OTC'') options market,\39\ but may prefer to trade such 
options in a listed environment to receive the benefits of trading 
listing options, including (1) enhanced efficiency in initiating and 
closing out positions; (2) increased market transparency; and (3) 
heightened contra-party creditworthiness due to the role of OCC as 
issuer and guarantor of all listed options. The Exchange believes that 
listing Bitcoin Fund options may cause investors to bring this 
liquidity to the Exchange, would increase market transparency and 
enhance the process of price discovery conducted on the Exchange 
through increased order flow. The Units that hold financial 
instruments, money market instruments, or precious metal commodities on 
which the Exchange may already list and trade options are trusts 
structured in substantially the same manner as Bitcoin Funds and 
essentially offer the same objectives and benefits to investors, just 
with respect to different assets. The Exchange notes that it has not 
identified any issues with the continued listing and trading of any 
Unit options, including Units that hold commodities (i.e., precious 
metals) that it currently lists and trades on the Exchange.
---------------------------------------------------------------------------

    \39\ The Exchange understands from customers that investors have 
historically transacted in options on Units in the OTC options 
market if such options were not available for trading in a listed 
environment.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\40\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \41\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \42\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78f(b).
    \41\ 15 U.S.C. 78f(b)(5).
    \42\ Id.
---------------------------------------------------------------------------

    In particular, the Exchange believes that the proposal to list and 
trade options on the Bitcoin Funds will remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system and, in general, protect investors because offering options on 
the Bitcoin Funds will provide investors with an opportunity to realize 
the benefits of utilizing options on a Bitcoin Fund, including cost 
efficiencies and increased hedging strategies. The Exchange believes 
that offering Bitcoin Fund options will benefit investors by providing 
them with a relatively lower-cost risk management tool, which will 
allow them to manage their positions and associated risk in their 
portfolios more easily in connection with exposure to the price of 
Bitcoin and with Bitcoin-related products and positions. Additionally, 
the Exchange's offering of Bitcoin Fund options will provide investors 
with the ability to transact in such options in a listed market 
environment as opposed to in the unregulated OTC options market, which 
would increase market transparency and enhance the process of price 
discovery conducted on the Exchange through increased order flow to the 
benefit of all investors. The Exchange also notes that it already lists 
options on other commodity-based Units,\43\ which, as described above, 
are trusts structured in substantially the same manner as Bitcoin Funds 
and essentially offer the same objectives and benefits to investors, 
just with respect to a different commodity (i.e., Bitcoin rather than 
precious metals) and for which the Exchange has not identified any 
issues with the continued listing and trading of commodity-backed Unit 
options it currently lists for trading.
---------------------------------------------------------------------------

    \43\ See Rule 4.3, Interpretation and Policy .06(a)(4).
---------------------------------------------------------------------------

    The Exchange also believes the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, because it is consistent with current 
Exchange Rules previously filed with the Commission. Options on the 
Bitcoin Funds satisfy the initial listing standards and continued 
listing standards currently in the Exchange Rules applicable to options 
on all Units, including Units that hold other commodities already 
deemed appropriate for options trading on the Exchange. Additionally, 
as demonstrated above, each Bitcoin Fund is characterized by a 
substantial number

[[Page 84954]]

of shares that are widely held and actively traded. Bitcoin Fund 
options will trade in the same manner as any other Unit options--the 
same Exchange Rules that currently govern the listing and trading of 
all Unit options, including permissible expirations, strike prices and 
minimum increments, and applicable margin requirements, will govern the 
listing and trading of options on Bitcoin Funds in the same manner.
    The Exchange believes the proposed rule change to exclude the 
Bitcoin Funds from being eligible for trading as FLEX options is 
consistent with the Act, because it will permit the Exchange to 
continue to participate in ongoing discussions with the Commission 
regarding appropriate position limits for ETF options.\44\
---------------------------------------------------------------------------

    \44\ The Exchange will submit a separate rule filing that would 
permit the Exchange to authorize for trading FLEX options on the 
Bitcoin Funds (which filing may propose changes to existing FLEX 
option position limits for such options if appropriate). See 
Amendment No. 3 at 4.
---------------------------------------------------------------------------

    The Exchange believes the proposed position and exercise limits are 
designed to prevent fraudulent and manipulative acts and practices and 
promote just and equitable principles of trade, as they are designed to 
address potential manipulative schemes and adverse market impacts 
surrounding the use of options, such as disrupting the market in the 
security underlying the options. The proposed position and exercise 
limits in this Amendment No. 2 for the Bitcoin Fund options are 25,000 
contracts, which is currently the lowest limit applicable to any equity 
options (including ETF options).\45\ The Exchange believes the proposed 
position and exercise limits are extremely conservative for each 
Bitcoin Fund option given the trading volume and outstanding shares for 
each. The information above demonstrates that the average position and 
exercise limits of options on ETFs with comparable outstanding shares 
and trading volume to those of the Bitcoin Funds are significantly 
higher than the proposed position and exercise limits for Bitcoin Fund 
options. Therefore, the proposed position and exercise limits for the 
Bitcoin Fund options are conservative relative to options on ETFs with 
comparable market characteristics.
---------------------------------------------------------------------------

    \45\ See Rule 8.30. The Exchange notes in the initial Rule 
Filing, the position and exercise limit for each Bitcoin Fund option 
would have been 25,000 contracts once the options began trading 
(pursuant to Rule 8.30, no Bitcoin Fund option would have a higher 
position and exercise limit until the next time the Exchange 
conducted the review of limits). Therefore, this Amendment No. 2 is 
proposing to adopt the same or lower position and exercise limits as 
were practically proposed in the initial Rule Filing.
---------------------------------------------------------------------------

    Further, given that the issuer of each Bitcoin Fund may create and 
redeem shares that represent an interest in Bitcoin, the Exchange 
believes it is relevant to compare the size of a position limit to the 
market capitalization of the Bitcoin market. As of August 27, 2024, the 
global supply of Bitcoin was 19,745,940, and the price of one Bitcoin 
was approximately $59,466.82,\46\ which equates to a market 
capitalization of approximately $1.165 trillion. Consider the proposed 
position and exercise limit of 25,000 option contracts for each Bitcoin 
Fund option. A position and exercise limit of 25,000 same side 
contracts effectively restricts a market participant from holding 
positions that could result in the receipt of no more than 2,500,000 of 
Fidelity Fund shares or ARK 21 Fund shares, as applicable (if that 
market participant exercised all its options. The following table shows 
the share price of each Bitcoin Fund on August 27, 2024, the value of 
2,500,000 shares of the Bitcoin Fund at that price, and the approximate 
percentage of that value of the size of the Bitcoin market:
---------------------------------------------------------------------------

    \46\ See Blockchain.com [verbar] Charts--Total Circulating 
Bitcoin.

----------------------------------------------------------------------------------------------------------------
                                                                        Value of  2,500,000
                Bitcoin Fund                  August 27, 2024  share  shares of  Bitcoin Fund    Percentage of
                                                    price ($)                   ($)              bitcoin market
----------------------------------------------------------------------------------------------------------------
Fidelity Fund..............................                    54.33              135,825,000              0.01%
ARK 21 Fund................................                    62.08              155,200,000              0.01%
----------------------------------------------------------------------------------------------------------------

    Therefore, if a market participant with the maximum 25,000 same 
side contracts in either Fidelity Fund options or ARK 21 Fund options 
exercised all positions at one time, such an event would have no 
practical impact on the Bitcoin market.
    The Exchange also believes the proposed limits are appropriate 
given position limits for Bitcoin futures. For example, the Chicago 
Mercantile Exchange (``CME'') imposes a position limit of 2,000 futures 
(for the initial spot month) on its Bitcoin futures contract.\47\ On 
August 28, 2024, CME Aug 24 Bitcoin Futures settled at $58,950. A 
position of 2,000 CME Bitcoin futures, therefore, would have a notional 
value of $589,500,000. The following table shows the share price of 
each Bitcoin Fund on August 28, 2024 and the approximate number of 
option contracts that equates to that notional value:
---------------------------------------------------------------------------

    \47\ See CME Rulebook Chapter 350 (description of CME Bitcoin 
Futures) and Chapter 5, Position Limit, Position Accountability and 
Reportable Level Table in the Interpretations & Special Notices. 
Each CME Bitcoin futures contract is valued at five Bitcoins as 
defined by the CME CF Bitcoin Reference Rate (``BRR''). See CME Rule 
35001.

------------------------------------------------------------------------
                                                 August 28,   Number  of
                 Bitcoin Fund                   2024  Share     option
                                                 price  ($)   contracts
------------------------------------------------------------------------
Fidelity Fund.................................        51.47      114,532
ARK 21 Fund...................................        58.83      100,203
------------------------------------------------------------------------

    The approximate number of option contracts for each Bitcoin Fund 
that equate to the notional value of CME Bitcoin futures is 
significantly higher than the proposed limit of 25,000 options contract 
for each Bitcoin Fund option. The fact that many options ultimately 
expire out-of-the-money and thus are not exercised for shares of the 
underlying, while the delta of a Bitcoin Future is 1, further 
demonstrates how conservative the proposed limits of 25,000 options 
contracts are for the Bitcoin Fund options.
    The Exchange notes, unlike options contracts, CME position limits 
are calculated on a net futures-equivalent basis by contract and 
include contracts that aggregate into one or more base contracts 
according to an aggregation ratio(s).\48\ Therefore, if a portfolio 
includes positions in options on futures, CME would aggregate those 
positions into the underlying futures contracts in accordance with a 
table published by CME on a delta equivalent value for the relevant 
spot month, subsequent spot month, single month and all month position 
limits.\49\ If a position exceeds position limits because of an option 
assignment, CME permits market participants to liquidate the excess

[[Page 84955]]

position within one business day without being considered in violation 
of its rules. Additionally, if at the close of trading, a position that 
includes options exceeds position limits for futures contracts, when 
evaluated using the delta factors as of that day's close of trading but 
does not exceed the limits when evaluated using the previous day's 
delta factors, then the position shall not constitute a position limit 
violation. Considering CME's position limits on futures for Bitcoin, 
the Exchange believes that that the proposed same side position limits 
are more than appropriate for the Bitcoin Fund options.
---------------------------------------------------------------------------

    \48\ See CME Rulebook Chapter 5, Position Limit, Position 
Accountability and Reportable Level Table in the Interpretations & 
Special Notices.
    \49\ Id.
---------------------------------------------------------------------------

    The Exchange believes the proposed position and exercise limits in 
this Amendment No. 2 will have no material impact to the supply of 
Bitcoin. For example, consider again the proposed position limit of 
25,000 option contracts for each Bitcoin Fund option. As noted above, a 
position limit of 25,000 same side contracts effectively restricts a 
market participant from holding positions that could result in the 
receipt of no more than 2,500,000 shares of the applicable Bitcoin Fund 
(if that market participant exercised all its options). As of August 7, 
2024, the Bitcoin Funds had the number of shares outstanding set forth 
in the table below. The table below also sets forth the approximate 
number of market participants that could hold the maximum of 25,000 
same side positions in each Bitcoin Fund that would equate to the 
number of shares outstanding of that Bitcoin Fund:

------------------------------------------------------------------------
                                                             Number of
                                                              market
                                                Shares     participants
                Bitcoin Fund                 outstanding    with 25,000
                                                             same side
                                                             positions
------------------------------------------------------------------------
Fidelity Fund..............................  201,100,100              80
ARK 21 Fund................................   45,495,000              18
------------------------------------------------------------------------

    This means if 80 market participants had 25,000 same side positions 
in Fidelity Fund options, each of them would have to simultaneously 
exercise all of those options to create a scenario that may put the 
underlying security under stress. Similarly, this means if 18 market 
participants had 25,000 same side positions in ARK 21 Fund options, 
each of them would have to simultaneously exercise all of those options 
to create a scenario that may put the underlying security under stress. 
The Exchange believes it is highly unlikely for either such event to 
occur; however, even if either such event did occur, the Exchange would 
not expect either Bitcoin Fund to be under stress because such an event 
would merely induce the creation of more shares through the trust's 
creation and redemption process.
    As of August 7, 2024, the global supply of Bitcoin was 
approximately 19,736,528.\50\ Based on the $47.88 price of a Fidelity 
Fund share on August 7, 2024, a market participant could have redeemed 
one Bitcoin for approximately 1,149 Fidelity Fund shares. Another 
22,677,270,672 Fidelity Fund shares could be created before the supply 
of Bitcoin was exhausted. As a result, 9,070 market participants would 
have to simultaneously exercise 25,000 same side positions in Fidelity 
Fund options to receive shares of the Fidelity Fund holding the entire 
global supply of Bitcoin. Similarly, based on the $54.68 price of an 
ARK 21 Fund share on August 7, 2024, a market participant could have 
redeemed one Bitcoin for approximately 1,006 ARK 21 Fund Shares. 
Another 19,855 ARK 21 Fund shares could be created before the supply of 
Bitcoin were exhausted. As a result, 7,941 market participants would 
have to simultaneously exercise 25,000 same side positions in ARK 21 
Fund options to receive shares of the ARK 21 Fund holding the entire 
global supply of Bitcoin. Unlike the Bitcoin Funds, the number of 
shares that corporations may issue is limited. However, like 
corporations, which authorize additional shares, repurchase shares, or 
split their shares, the Bitcoin Funds may create, redeem, or split 
shares in response to demand. While the supply of Bitcoin is limited to 
21,000,000, it is believed that it will take more than 100 years to 
fully mine the remaining Bitcoin.\51\ The supply of Bitcoin is larger 
than the available supply of most securities.\52\ Given the significant 
unlikelihood of any of these events ever occurring, the Exchange does 
not believe options on the Bitcoin Funds should be subject to position 
and exercise limits even lower than those proposed (which are already 
equal to the lowest available limit for equity options in the industry) 
to protect the supply of Bitcoin.\53\
---------------------------------------------------------------------------

    \50\ See Blockchain.com [verbar] Charts--Total Circulating 
Bitcoin (which also shows the price of one Bitcoin equal to 
$55,033.47).
    \51\ See Pre-Effective Amendment No. 5 to Form S-1 Registration 
Statement No. 333-254652, Fidelity Fund, filed January 9, 2024, at 
53-54; and Amendment No. 8 to Form S-1 Registration Statement No. 
333-257474, ARK 21 Fund, filed January 9, 2024, at 15.
    \52\ The market capitalization of Bitcoin would rank in the top 
10 among securities. See https://companiesmarketcap.com/usa/largest-companies-in-the-usa-by-market-cap/.
    \53\ This would be even more unlikely with respect to the 
Bitcoin Funds for which the Exchange proposes lower position limits.
---------------------------------------------------------------------------

    The Exchange believes the available supply of Bitcoin is not 
relevant to the determination of position and exercise limits for 
options overlying the Bitcoin Funds.\54\ Position and exercise limits 
are not a tool that should be used to address a potential limited 
supply of the underlying of an underlying. Position and exercise limits 
do not limit the total number of options that may be held, but rather 
they limit the number of positions a single customer may hold or 
exercise at one time.\55\ ``Since the inception of standardized options 
trading, the options exchanges have had rules imposing limits on the 
aggregate number of options contracts that a member or customer could 
hold or exercise.'' \56\ Position and exercise limit rules 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. In particular, position and 
exercise limits are designed to minimize the potential for mini-
manipulations and for corners or squeezes of the underlying market. In 
addition, such limits serve to reduce the possibility for

[[Page 84956]]

disruption of the options market itself, especially in illiquid options 
classes.'' \57\
---------------------------------------------------------------------------

    \54\ The Exchange is unaware of any proposed rule change related 
to position and exercise limits for any equity option (including 
commodity ETF options) for which the Commission required 
consideration of whether the available supply of an underlying 
(whether it be a corporate stock or an ETF) or the contents of an 
ETF (commodity or otherwise) should be considered when an exchange 
proposed to establish those limits. See, e.g., Securities Exchange 
Act Release No. 57894 (May 30, 2008), 73 FR 32061 (June 5, 2008) 
(SR-CBOE-2005-11) (approval order in which the Commission stated 
that the ``listing and trading of Gold Trust Options will be subject 
to the exchanges' rules pertaining to position and exercise limits 
and margin''). The Exchange notes when the Commission approved this 
filing, the position limits in Rule 8.30 were the same as they are 
today. For reference, the current position and exercise limits for 
options on SPDR Gold Shares ETF (``GLD'') and options on iShares 
Silver Trust (``SLV'') are 250,000 contracts, or 10 times that 
proposed position and exercise limit for the Bitcoin Fund options.
    \55\ For example, suppose an option has a position limit of 
25,000 option contracts and there are a total of 10 investors 
trading that option. If all 10 investors max out their positions, 
that would result in 250,000 option contracts outstanding at that 
time. However, suppose 10 more investors decide to begin trading 
that option and also max out their positions. This would result in 
500,000 option contracts outstanding at that time. An increase in 
the number of investors could cause an increase in outstanding 
options even if position limits remain unchanged.
    \56\ See Securities Exchange Act Release No. 39489 (December 24, 
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
    \57\ See id.
---------------------------------------------------------------------------

    The Exchange notes that a Registration Statement on Form S-1 was 
filed with the Commission for each Bitcoin Fund, each of which 
described the supply of Bitcoin as being limited to 21,000,000 (of 
which approximately 90% had already been mined), and that the limit 
would be reached around the year 2140.\58\ Each Registration Statement 
permits an unlimited number of shares of the applicable Bitcoin ETF to 
be created. Further, the Commission approved proposed rule changes that 
permitted the listing and trading of shares of each Bitcoin Fund, which 
approval did not comment on the sufficient supply of Bitcoin or address 
whether there was a risk that permitting an unlimited number of shares 
for a Bitcoin Fund would impact the supply of Bitcoin.\59\ Therefore, 
the Exchange believes the Commission had ample time and opportunity to 
consider whether the supply of Bitcoin was sufficient to permit the 
creation of unlimited Bitcoin Fund shares, and does not believe 
considering this supply with respect to the establishment of position 
and exercise limits is appropriate given its lack of relevance to the 
purpose of position and exercise limits. However, given the significant 
size of the Bitcoin supply, the proposed positions limits are more than 
sufficient to protect investors and the market.
---------------------------------------------------------------------------

    \58\ See Pre-Effective Amendment No. 5 to Form S-1 Registration 
Statement No. 333-254652, Fidelity Fund, filed January 9, 2024, at 
53--54; and Amendment No. 8 to Form S-1 Registration Statement No. 
333-257474, ARK 21 Fund, filed January 9, 2024, at 15.
    \59\ See Bitcoin ETP Approval Order.
---------------------------------------------------------------------------

    Based on the above information demonstrating, among other things, 
that each Bitcoin Fund is characterized by a substantial number of 
outstanding shares that are actively traded and widely held, the 
Exchange believes the proposed position and exercise limits are 
extremely conservative compared to those of ETF options with similar 
market characteristics. The proposed position and exercise limits 
reasonably and appropriately balance the liquidity provisioning in the 
market against the prevention of manipulation. The Exchange believes 
these proposed limits are effectively designed to prevent an individual 
customer or entity from establishing options positions that could be 
used to manipulate the market of the underlying as well as the Bitcoin 
market.\60\
---------------------------------------------------------------------------

    \60\ See Securities Exchange Act Release No. 39489 (December 24, 
1997), 63 FR 276 (January 5, 1998) (SR-CBOE-1997-11).
---------------------------------------------------------------------------

    The Exchange represents that it has the necessary systems capacity 
to support the new Bitcoin Fund options. As discussed above, the 
Exchange believes that its existing surveillance and reporting 
safeguards are designed to deter and detect possible manipulative 
behavior which might arise from listing and trading Unit options, 
including Bitcoin Fund options.
    Finally, the Exchange believes the proposed change to amend the 
last sentence of Rule 8.30 by deleting the references to 
Interpretations and Policies .02 and .04 is consistent with the Act and 
will perfect the mechanism of a free and open market, by clarifying and 
making more accurate the Exchange's Rulebook.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intramarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act as the Bitcoin Funds will be 
equally available to all market participants who wish to trade such 
options and will trade generally in the same manner as other options. 
The Exchange Rules that currently apply to the listing and trading of 
all Unit options on the Exchange, including, for example, Rules that 
govern listing criteria, expirations, exercise prices, minimum 
increments, margin requirements, customer accounts, and trading halt 
procedures will apply to the listing and trading of Bitcoin Funds 
options on the Exchange in the same manner as they apply to other 
options on all other Units that are listed and traded on the Exchange. 
Also, and as stated above, the Exchange already lists options on other 
commodity-based Units.\61\ Further, the Bitcoin Funds would need to 
satisfy the maintenance listing standards set forth in the Exchange 
Rules in the same manner as any other Unit for the Exchange to continue 
listing options on them.
---------------------------------------------------------------------------

    \61\ See Rule 4.3, Interpretation and Policy .06(a)(4).
---------------------------------------------------------------------------

    The Exchange does not believe that the proposal to list and trade 
options on Bitcoin Funds will impose any burden on intermarket 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. To the extent that the advent of Bitcoin Fund 
options trading on the Exchange may make the Exchange a more attractive 
marketplace to market participants at other exchanges, such market 
participants are free to elect to become market participants on the 
Exchange. Additionally, other options exchanges are free to amend their 
listing rules, as applicable, to permit them to list and trade options 
on Bitcoin Funds.\62\ The Exchange notes that listing and trading 
Bitcoin Fund options on the Exchange will subject such options to 
transparent exchange-based rules as well as price discovery and 
liquidity, as opposed to alternatively trading such options in the OTC 
market.
---------------------------------------------------------------------------

    \62\ The Exchange notes the Commission recently approved a rule 
filing of another exchange to permit the listing and trading of 
options on the iShares Bitcoin Trust. See Securities Exchange Act 
Release No. 101128 (September 20, 2024), 89 FR 78942 (September 26, 
2024) (SR-ISE-2024-03).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change may relieve any 
burden on, or otherwise promote, competition, as it is designed to 
increase competition for order flow on the Exchange in a manner that is 
beneficial to investors by providing them with a lower-cost option to 
hedge their investment portfolios. The Exchange notes that it operates 
in a highly competitive market in which market participants can readily 
direct order flow to competing venues that offer similar products. 
Ultimately, the Exchange believes that offering Bitcoin Fund options 
for trading on the Exchange will promote competition by providing 
investors with an additional, relatively low-cost means to hedge their 
portfolios and meet their investment needs in connection with Bitcoin 
prices and Bitcoin-related products and positions on a listed options 
exchange.
    Finally, the Exchange does not believe the proposed change to amend 
the last sentence of Rule 8.30 by deleting the references to 
Interpretations and Policies .02 and .04 will impose any burden on 
intermarket competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. The change is clarifying in 
nature, as the Exchange believes all the Interpretations and Policies 
to Rule 8.30 are relevant for determining position limits pursuant to 
Rule 8.30, not just the two currently specified ones, and therefore, 
the proposed change makes the Exchange's Rulebook more accurate.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received written comments on the 
proposed rule change.

[[Page 84957]]

III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 2 and 3, is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange,\63\ and, in particular, 
the requirements of Section 6 of the Act.\64\ Specifically, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\65\ 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.
---------------------------------------------------------------------------

    \63\ 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).
    \64\ 15 U.S.C. 78f.
    \65\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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.'' \66\ As described above, the Exchange states that, 
as of August 7, 2024, the Fidelity Fund had 201,100,100 shares 
outstanding and that, as of June 27, 2024, the Fidelity Fund had 
279,656 beneficial holders.\67\ The Exchange states that, as of August 
7, 2024, the ARK 21 Fund had 45,495,000 shares outstanding and that, as 
of June 26, 2024, the ARK 21 Fund had 69,425 beneficial holders.\68\ In 
addition, the Exchange states that, as of August 7, 2024, the Fidelity 
Fund had six-month total trading volume of 1,112,861,581 shares and, 
for the period from July 9, 2024, through August 7, 2024, 30-day 
average daily volume of 6,014,335 shares and 30-day average notional 
daily volume of $250,354,755.\69\ The Exchange states that, as of 
August 7, 2024, the ARK 21 Fund had six-month total trading volume of 
297,360,739 shares and, for the period from July 9, 2024, through 
August 7, 2024, 30-day average daily volume of 1,893,335 shares and 30-
day average notional daily volume of $90,484,307.\70\ The Exchange 
further states that, as of August 7, 2024, the trading volume for both 
Bitcoin Funds was in the top 5% of all ETFs trading at that time.\71\ 
In addition, the Exchange states that, as of August 7, 2024, the 
Fidelity Fund had a market capitalization of $14,217,013,188 and the 
ARK 21 Fund had a market capitalization of $2,487,666,600.\72\
---------------------------------------------------------------------------

    \66\ See Exchange Rule 4.3(a)(2).
    \67\ See Amendment No. 2 at 8 and 12.
    \68\ See id.
    \69\ See Amendment No. 2 at 8.
    \70\ See id.
    \71\ See Amendment No. 2 at 9.
    \72\ See id. at 12.
---------------------------------------------------------------------------

    The Commission has reviewed the Exchange's analysis and publicly 
available data regarding the Bitcoin Funds. Based on this review of 
information provided by the Exchange and publicly available 
information--including information regarding the number of shares 
outstanding and the number of beneficial holders for each Bitcoin Fund, 
the ADV of each Bitcoin Fund, and the market capitalization of each 
Bitcoin Fund--the Commission concludes that it is reasonable for the 
Exchange to determine that the Bitcoin Funds satisfy the requirement of 
Exchange Rule 4.3(a)(2) that the security underlying a listed option be 
widely held and actively traded.

B. Position and Exercise Limits

    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.\73\ In addition, such limits serve to reduce the 
possibility of disruption in the options market itself, especially in 
illiquid classes.\74\ 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.\75\ 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.\76\ 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.\77\
---------------------------------------------------------------------------

    \73\ 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) (``Position Limit Order'').
    \74\ Id.
    \75\ Id.
    \76\ 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).
    \77\ See id.
---------------------------------------------------------------------------

    The Exchange proposes a position limit of 25,000 contracts on the 
same side of the market for options on each Bitcoin Fund and an 
equivalent exercise limit.\78\ In proposing these position and exercise 
limits, the Exchange considered, among other things, the approximate 
six-month ADV, outstanding shares, and market capitalization of each 
Bitcoin Fund.\79\ The Exchange states that the proposed position and 
exercise limits of 25,000 contracts are significantly lower than the 
position and exercise limits of options on other ETFs with a similar 
number of outstanding shares.\80\ In addition, the Exchange states that 
the number of shares represented by the proposed position and exercise 
limits were equal to approximately 1.2% of the outstanding shares of 
the Fidelity Fund and approximately 5.5% of the outstanding shares of 
the ARK 21 Fund.\81\ The Exchange further states that ``[t]he proposed 
position and exercise limits are the lowest position and exercise 
limits available for equity options in the industry, are extremely 
conservative, and are more than appropriate given each Bitcoin Fund's 
market capitalization, ADV, and high number of outstanding share.'' 
\82\
---------------------------------------------------------------------------

    \78\ See Amendment No. 2 and proposed Exchange Rules 8.30, 
Interpretation and Policy .10, and 8.42, Interpretation and Policy 
.02.
    \79\ See Amendment No. 2 at 13-14.
    \80\ The Exchange states that options on ETFs with outstanding 
shares similar to the Fidelity Fund had average position and 
exercise limits of 188,110 contracts, and that options on ETFs with 
outstanding shares similar to the ARK 21 Fund had average position 
and exercise limits of 108,696 contracts. See Amendment No. 2 at 13.
    \81\ See Amendment No. 2 at 14 (using outstanding shares as of 
August 7, 2024).
    \82\ Amendment No. 2 at 16.
---------------------------------------------------------------------------

    The Exchange also compared the size of the position and exercise 
limits to the market capitalization of the Bitcoin market, which, 
according to the Exchange, had a market capitalization of

[[Page 84958]]

$1.165 trillion as of August 27, 2024.\83\ The Exchange calculated that 
with a position limit of 25,000 contracts (2,500,000 shares of the 
underlying Fund), as of August 27, 2024, a market participant could 
hold a position in shares of the Fidelity Fund that represented 0.01% 
of the bitcoin market, and a position in ARK 21 Fund shares that 
represented 0.01% of the Bitcoin market, positions that the Exchange 
states ``would have no practical impact on the Bitcoin market.'' \84\
---------------------------------------------------------------------------

    \83\ See Amendment No. 2 at 23.
    \84\ Id.
---------------------------------------------------------------------------

    The Exchange states that the proposed position and exercise limits 
also are appropriate given position limits for Bitcoin futures.\85\ The 
Exchange states that the Chicago Mercantile Exchange (``CME'') 
establishes a position limit of 2,000 Bitcoin futures for the spot 
month and that, as of August 28, 2024, such a position would have had a 
notional value of $589,500,000.\86\ The Exchange states that, as of 
that date, 114,532 options on the Fidelity Fund, and 100,203 options on 
the ARK 21 Fund, would be the equivalent of the $589,500,000 CME 
bitcoin futures notional value.\87\ The Exchange states that the option 
contract equivalent numbers are significantly higher than the proposed 
position and exercise limit of 25,000 contracts.\88\
---------------------------------------------------------------------------

    \85\ See id.
    \86\ See id. at 23-24.
    \87\ See id. at 24.
    \88\ See id.
---------------------------------------------------------------------------

    In addition, the Exchange states that with a position limit of 
25,000 contracts, 80 market participants, each with a position of 
25,000 contracts, would have to exercise all of their Fidelity Fund 
options to place the Fidelity Fund shares under stress, and 18 market 
participants, each with a position of 25,000 contracts, would have 
exercise all of their ARK 21 Fund options to place the ARK 21 Fund 
shares under stress.\89\ Based on the information provided, 
demonstrating, among other things, that each Bitcoin Fund is 
characterized by a substantial number of outstanding shares that are 
actively traded and widely held, the Exchange believes the proposed 
position and exercise limits are extremely conservative compared to 
those of ETF options with similar market characteristics.\90\ The 
Exchange states that the proposed position and exercise limits 
reasonably and appropriately balance the liquidity provisioning in the 
market against the prevention of manipulation. The Exchange further 
states that the proposed limits are effectively designed to prevent an 
individual customer or entity from establishing options positions that 
could be used to manipulate the market of the underlying as well as the 
Bitcoin market.\91\
---------------------------------------------------------------------------

    \89\ The Exchange bases this calculation on the number of 
Fidelity Fund and ARK 21 Fund shares outstanding as of August 7, 
2024. See Amendment No. 2 at 26.
    \90\ See id. at 34.
    \91\ See id. at 29-30 (citing the Position Limit Order, supra 
note 70).
---------------------------------------------------------------------------

    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.\92\ 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.\93\ 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, as of August 
7, 2024, the proposed position and exercise limits of 25,000 contracts 
represented 1.2% of the outstanding shares of the Fidelity Fund and 
5.5% of the outstanding shares of the ARK 21 Fund.\94\ The Commission 
also has considered and reviewed the Exchange's statement that with a 
position limit of 25,000 contracts, 80 market participants, each with a 
same side position of 25,000 contracts, would have to exercise all of 
their Fidelity Fund options to place the Fidelity Fund shares under 
stress, and 18 market participants, each with a same side position of 
25,000 contracts, would have to exercise all of their ARK 21 Fund 
options to place the ARK 21 Fund shares under stress.\95\ 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 
securities 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.
---------------------------------------------------------------------------

    \92\ See supra note 73 and accompanying text.
    \93\ 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).
    \94\ See Amendment No. 2 at 14.
    \95\ The Exchange bases this calculation on the number of 
Fidelity Fund and ARK 21 Fund shares outstanding as of August 7, 
2024. See Amendment No. 2 at 25-26.
---------------------------------------------------------------------------

    The proposal excludes the Bitcoin Fund options from FLEX 
trading.\96\ Excluding Bitcoin Fund options from FLEX trading will 
allow the Commission to consider the listing of FLEX options on the 
Bitcoin Funds in the context of any separate proposal the Exchange 
files to list such options.
---------------------------------------------------------------------------

    \96\ The Exchange states that excluding Bitcoin Fund options 
from FLEX trading will allow the Exchange to continue to participate 
in ongoing discussions with the Commission regarding appropriate 
position limits for ETF options. See Amendment No. 3 at 4.
---------------------------------------------------------------------------

C. Surveillance

    As described more fully above, the Exchange states that it will 
apply its existing options surveillance program procedures to options 
on the Bitcoin Funds.\97\ The Exchange states that its market 
surveillance staff would have access to the surveillances conducted by 
Cboe BZX Exchange, Inc.\98\ with respect to the Bitcoin Funds and would 
review activity in the underlying Bitcoin Funds when conducting 
surveillances for market abuse or manipulation in the options on the 
Bitcoin Funds.\99\ 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.\100\ CME also is a 
member of ISG. In

[[Page 84959]]

approving the Bitcoin ETPs, the Commission concluded that:
---------------------------------------------------------------------------

    \97\ The surveillance program includes surveillance patterns for 
price and volume movements as well as patterns for potential 
manipulation (e.g., spoofing and marking the close). See Amendment 
No. 2 at 16.
    \98\ Cboe BZX Exchange, Inc. is an affiliated market of the 
Exchange. See Amendment No. 2 at 17, footnote 28.
    \99\ See Amendment No. 2 at 17.
    \100\ 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].\101\
---------------------------------------------------------------------------

    \101\ 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 
options on the Bitcoin Funds.

D. Retail Customers

    Existing rules governing broker-dealer conduct when dealing with 
retail customers will apply to the proposed Bitcoin Fund 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.'' \102\ 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.\103\ 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.'' \104\
---------------------------------------------------------------------------

    \102\ See Exchange Rule 9.1(b).
    \103\ See id.
    \104\ See FINRA Rule 2360(b)(19).
---------------------------------------------------------------------------

E. Additional Change

    The Exchange proposes to amend Exchange Rule 8.30 to delete 
references to Interpretation and Policies .02 and .04. The Exchange 
states that the proposed change is designed to clarify the rule by 
indicating that all of the Interpretations and Policies to Exchange 
Rule 8.30 are relevant for determining position limits pursuant to 
Exchange Rule 8.30, not just the two currently specified provisions. 
The Commission agrees that this change will help to clarify and ensure 
the accuracy of Exchange Rule 8.30 by indicating that all of the 
Interpretations and Policies to Exchange Rule 8.30, not only 
Interpretation and Policies .02 and .04, apply when determining 
position limits.

IV. Solicitation of Comments on Amendment Nos. 2 and 3 to the Proposed 
Rule Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment Nos. 2 and 3 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#9defe8f1f8b0fef2f0f0f8f3e9eeddeef8feb3faf2eb"><span class="__cf_email__" data-cfemail="6a181f060f47090507070f041e192a190f09440d051c">[email protected]</span></a>. Please include 
file number SR-CBOE-2024-035 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-CBOE-2024-035. 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-CBOE-2024-035 and should be 
submitted on or before November 14, 2024.

V. Accelerated Approval of Amendment Nos. 2 and 3

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act, for approving Amendment Nos. 2 and 3 prior to the 30th day 
after the date of publication of notice of Amendment Nos. 2 and 3 in 
the Federal Register. Amendment No. 2 narrows the scope of the proposal 
to the Fidelity Fund and the ARK 21 Fund; proposes new position and 
exercise limits for options on the Bitcoin Funds and provides 
justification and analysis for the proposed position and exercise 
limits; provides additional discussion of surveillance procedures that 
will apply to the proposed options; and eliminates references to the 
applicability of specified Interpretations and Policies in Exchange 
Rule 8.30. As described above, in Amendment No. 2 the Exchange 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 1.2% of the outstanding shares of the Fidelity 
Fund and 5.5% of the outstanding shares of the ARK 21 Fund.\105\ The 
Commission concludes that the proposed position and exercise limits are 
designed to minimize the potential for manipulations or disruptions of 
the underlying market.\106\ Amendment No. 2 also describes in greater 
detail the surveillance procedures that will apply to the proposed 
Bitcoin Fund 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. The proposed change to Exchange Rule 8.30 
to delete references to specified Interpretations and Policies, and to 
indicate that all of the Interpretations and Policies in

[[Page 84960]]

Exchange Rule 8.30 apply when determining position limits, is designed 
to clarify and make the Exchange's rule more accurate. Amendment No. 3 
revises the proposal to exclude Bitcoin Fund options from FLEX trading. 
Excluding Bitcoin Fund options from FLEX trading will allow the 
Commission to consider the listing of FLEX options on the Bitcoin Funds 
in the context of any separate proposal the Exchange files to list such 
options. Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\107\ to approve the proposed rule change, 
as modified by Amendment Nos. 2 and 3, on an accelerated basis.
---------------------------------------------------------------------------

    \105\ See Amendment No. 2.
    \106\ 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.
    \107\ 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. 2 and 3, is 
consistent with the requirements of the 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.\108\
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\109\ that the proposed rule change (SR-CBOE-2024-035), as modified 
by Amendment Nos. 2 and 3, is approved.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\110\
---------------------------------------------------------------------------

    \110\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-24641 Filed 10-23-24; 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>