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[Federal Register Volume 89, Number 220 (Thursday, November 14, 2024)]
[Notices]
[Pages 90205-90208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26532]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101571; File No. SR-ISE-2024-35]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To List and Trade Options on the iShares Ethereum Trust

November 8, 2024.

I. Introduction

    On July 22, 2024, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or 
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to allow the listing and trading of options on iShares Ethereum 
Trust (``Trust'').\3\ The proposed rule change was published for 
comment in the Federal Register on August 12, 2024.\4\ The Commission 
has received no comments regarding the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission approved proposals by several exchanges to 
list and trade shares of trusts that hold Ether, including the 
Trust. See Securities Exchange Act Release No. 100224 (May 23, 
2024), 89 FR 46937 (May 30, 2024).
    \4\ See Securities Exchange Act Release No. 100661 (Aug. 6, 
2024), 89 FR 65690 (``Notice'').
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    On September 30, 2024, pursuant to Section 19(b)(2) of the Exchange 
Act,\5\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\6\ This order institutes proceedings under 
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change.
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    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 1001154 (Sept. 24, 
2024) 89 FR 79664 (designating November 10, 2024, as the date by 
which the Commission shall either approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change).
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    As described more fully in the Notice,\8\ the Exchange proposes to 
amend Options 4, Section 3(h)(iv), to add the Trust to the list of 
Exchange-Traded Fund Shares (``Exchange-Traded Funds Shares'' or 
``ETFs'') that are appropriate for options trading.\9\ The Exchange 
states that the investment objective of the Trust is to reflect 
generally the performance of the price of ether before payment of the 
Trust's expenses and liabilities. The Exchange states that shares of 
the Trust are intended to constitute a simple means of making an 
investment similar to an investment in ether through the public 
securities market rather than by acquiring, holding, and trading ether 
directly on a peer-to-peer or other basis or via a digital asset 
platform.\10\ The Exchange further states that shares of the Trust have 
been designed to remove the obstacles represented by the complexities 
and operational burdens involved in a direct investment in ether, while 
at the same time having an intrinsic value that reflects, at any given 
time, the investment exposure to the ether owned by the Trust at such 
time, less the Trust's expenses and liabilities.\11\ The Exchange 
states that although shares in the Trust are not the exact equivalent 
of a direct investment in ether, they provide investors with an 
alternative method of achieving investment exposure to ether through 
the public securities market, which may be more familiar to them.\12\ 
The Exchange states that offering options on the Trust will benefit 
investors by providing them with an additional, relatively lower cost 
investing tool to gain exposure to spot ether as well as a hedging 
vehicle to meet their investment needs in connection with ether 
products and positions.\13\ In addition, the Exchange states that, 
similar to other commodity ETFs in which options may be listed on ISE 
(e.g. SPDR[supreg] Gold Trust, the iShares COMEX Gold Trust, the 
iShares Silver Trust, or the ETFS Gold Trust), the proposed ETF is a 
trust that essentially offers the same objectives and benefits to 
investors.\14\
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    \8\ See supra note 4.
    \9\ See Notice, 89 FR at 65691. The Exchange states that the 
Trust is not an investment company registered under the Investment 
Company Act of 1940, as amended. See id.
    \10\ See id.
    \11\ See id.
    \12\ See id.
    \13\ See id.
    \14\ See id. at 65691-2 and ISE Options 4, Section 3(h)(iv).
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    The Exchange states that options on the Trust will trade in the 
same manner as options on other ETFs on the Exchange, and that Exchange 
rules that currently apply to the listing and trading of all options on 
ETFs on the Exchange, including, for example, rules that govern listing 
criteria, expirations, exercise prices, minimum increments, position 
and exercise limits, margin requirements, customer accounts and trading 
halt procedures, will apply to the listing and trading of options on 
the

[[Page 90206]]

Trust.\15\ The Exchange states that these rules apply to options on the 
various commodities ETFs deemed appropriate for options trading on the 
Exchange pursuant to Options 4, Section 3(h)(iv).\16\ In addition, the 
Exchange states that its initial listing standards for ETFs on which 
options may be listed and traded on the Exchange will apply to the 
Trust.\17\ The Exchange states that the initial listing standard set 
forth in Options 4, Section 3(a) provides that an underlying security 
must meet the following criteria: (1) the security must be registered 
and be an ``NMS stock'' as defined in Rule 600 of Regulation NMS under 
the Exchange Act; and (2) the security must be characterized by a 
substantial number of outstanding shares that are widely held and 
actively traded.\18\ The Exchange further states that, pursuant to ISE 
Options 4, Section 3, ETFs on which options may be listed and traded 
must satisfy the listing standards set forth in Options 4, Section 
3(h).\19\
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    \15\ See Notice at 65692.
    \16\ See id.
    \17\ See id.
    \18\ See id.
    \19\ Specifically, the Trust must meet either: (1) the criteria 
and guidelines for underlying securities set forth in Options 4, 
Section 3(h), or (2) it must be available for creation or redemption 
each business day from or through the issuing trust, investment 
company, commodity pool or other entity in cash or in kind at a 
price related to net asset value, and the issuer is obligated to 
issue Exchange-Traded Fund Shares in a specified aggregate number 
even if some or all of the investment assets and/or cash required to 
be deposited have not been received by the issuer, subject to the 
condition that the person obligated to deposit the investment assets 
has undertaken to deliver them 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 of 
the Exchange-Traded Fund Shares, all as described in the Exchange-
Traded Fund Shares' prospectus, or the Exchange-Traded Fund Shares 
must be based on international or global indexes, or portfolios that 
include non-U.S. securities, and meet other criteria See id.
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    The Exchange states that options on the Trust will also be subject 
to the Exchange's continued listing standards for options on in Options 
4, Section 4(g).\20\ The Exchange states that options approved for 
trading pursuant to Options 4, Section 3(h) will not be deemed 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 such ETFs, if the ETFs are delisted from trading as provided 
Options 4, Section 4(b)(5), or the ETFs are halted or suspended from 
trading on their primary market.\21\ In addition, the Exchange states 
that it will consider the suspension of opening transactions in any 
series of options of the class covering ETFs in any of the following 
circumstances:
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    \20\ See Notice at 65692.
    \21\ See id.
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    (1) in the case of options covering Exchange-Traded Fund Shares 
approved pursuant to Options 4, Section 3(h)(A)(i), in accordance with 
the terms of subparagraphs (b)(1), (2), (3) and (4) of Options 4, 
Section 4;
    (2) in the case of options covering Fund Shares approved pursuant 
to Options 4, Section 3(h)(A)(ii), following the initial twelve-month 
period beginning upon the commencement of trading, there were fewer 
than 50 record and/or beneficial holders of such Exchange-Traded Fund 
Shares for 30 or more consecutive trading days;
    (3) the value of the index or portfolio of securities or non-U.S. 
currency, portfolio of commodities including commodity futures 
contracts, options on commodity futures contracts, swaps, forward 
contracts, options on physical commodities and/or Financial Instruments 
and Money Market Instruments on which the Exchange-Traded Fund Shares 
are based is no longer calculated or available; or
    (4) such other event occurs or condition exists that in the opinion 
of the Exchange makes further dealing in such options on the Exchange 
inadvisable.\22\
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    \22\ See id.
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    The Exchange states that options on the Trust will be physically 
settled contracts with American-style exercise.\23\ As described more 
fully in the Notice, the Exchange's rules governing the opening of 
options series and the strike prices for ETF options will apply to the 
proposed Trust options.\24\
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    \23\ See id.
    \24\ See id. at 65692-3.
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    The Exchange states that position and exercise limits for options 
on ETFs, including options on the Trust, will be determined pursuant to 
Options 9, Sections 13 and 15, respectively.\25\ Position and exercise 
limits for ETF options vary according to the number of outstanding 
shares and the trading volumes of the underlying ETF over the past six 
months, where the largest in capitalization and the most frequently 
traded ETFs have an option position and exercise limit of 250,000 
contracts (with adjustments for splits, re-capitalizations, etc.) on 
the same side of the market; and smaller capitalization ETFs have 
position and exercise limits of 200,000, 75,000, 50,000 or 25,000 
contracts (with adjustments for splits, re-capitalizations, etc.) on 
the same side of the market.\26\ The Exchange states that margin 
requirements in Options 6C, Section 3 will apply to the trading of the 
Trust options.\27\
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    \25\ See id. at 65693.
    \26\ See id.
    \27\ See id.
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    The Exchange represents that the same surveillance procedures 
applicable to other options on other ETFs currently listed and traded 
on the Exchange will apply to options on the Trust.\28\ In addition, 
the Exchange represents that it has the necessary systems capacity to 
support the new option series.\29\ The Exchange states that its 
existing surveillance and reporting safeguards are designed to deter 
and detect possible manipulative behavior which might potentially arise 
from listing and trading options on ETFs, including the proposed Trust 
options.\30\ The Exchange states that it would implement any new 
surveillance procedures it deemed necessary to effectively monitor the 
trading of options on the Trust. In addition, the Exchange states that 
it may obtain trading information via the Intermarket Surveillance 
Group (``ISG'') from other exchanges who are members or affiliates of 
the ISG.\31\
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    \28\ See id.
    \29\ See id.
    \30\ See id.
    \31\ See id.
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    The Exchange states that it has analyzed its capacity and 
represents that it believes that the Exchange and the Options Price 
Reporting Authority 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 the Trust up to the number 
of expirations currently permissible under the Exchange's rules.\32\ 
Because the proposal is limited to one class, the Exchange states that 
any additional traffic that may be generated from the introduction of 
the Trust options will be manageable.\33\
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    \32\ See id.
    \33\ See id.
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    The Exchange states that the proposal is consistent with Section 
6(b) of the Act, in general,\34\ and furthers the objectives of Section 
6(b)(5) of the Act,\35\ in particular.\36\ The Exchange states that the 
proposal 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 Trust will provide investors 
with a greater opportunity to realize the benefits of utilizing options 
on an ETF based on spot ether, including cost efficiencies

[[Page 90207]]

and increased hedging strategies.\37\ The Exchange states that offering 
options on a competitively priced ETF based on spot ether will benefit 
investors by providing them with an additional, relatively lower cost 
risk management tool allowing them to manage, more easily, their 
positions, and associated risks, in their portfolios in connection with 
exposure to spot ether.\38\ The Exchange states that it currently lists 
options on other commodity ETFs structured as a trust, which 
essentially offer the same objectives and benefits to investors, and 
for which the Exchange has not identified any issues with the continued 
listing and trading of options on those ETFs.\39\ In addition, the 
Exchange states that the proposed options on the Trust will comply with 
current Exchange rules, as described above.\40\ The Exchange states 
that the Commission has previously approved the listing and trading of 
options on other commodity ETFs structured as a trust, such as the 
SPDR[supreg] Gold Trust, the iShares COMEX Gold Trust, the iShares 
Silver Trust, the ETFS Gold Trust, and the ETFS Silver Trust.\41\
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    \34\ 15 U.S.C. 78f(b).
    \35\ 15 U.S.C. 78f(b)(5).
    \36\ See Notice, 89 FR at 65693.
    \37\ See id.
    \38\ See id.
    \39\ See id.
    \40\ See id.
    \41\ See id. at 65694.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-ISE-
2024-35 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \42\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \42\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\43\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act,\44\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and protect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \43\ Id.
    \44\ 15 U.S.C. 78f(b)(5).
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    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder . . . is on the 
self-regulatory organization that proposed the rule change.'' \45\ The 
description of a proposed rule change, its purpose and operation, its 
effect, and a legal analysis of its consistency with applicable 
requirements must all be sufficiently detailed and specific to support 
an affirmative Commission finding,\46\ and any failure of a self-
regulatory organization to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Act and the 
applicable rules and regulations.\47\ The Commission is instituting 
proceedings to allow for additional consideration and comment on the 
issues raised herein, including as to whether the proposal is 
consistent with the Act. In particular, the Commission asks commenters 
to address whether the proposal includes sufficient data and analysis 
to support a conclusion that the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act.
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    \45\ 17 CFR 201.700(b)(3).
    \46\ See id.
    \47\ See id.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, and 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\48\
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    \48\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by December 5, 2024. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
December 19, 2024.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-ISE-2024-35 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-ISE-2024-35. 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

[[Page 90208]]

that you wish to make available publicly. We may redact in part or 
withhold entirely from publication submitted material that is obscene 
or subject to copyright protection. All submissions should refer to 
file number SR-ISE-2024-35 and should be submitted on or before 
December 5, 2024. Rebuttal comments should be submitted by December 19, 
2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\49\
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    \49\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26532 Filed 11-13-24; 8:45 am]
BILLING CODE 8011-01-P
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