`[Federal Register Volume 90, Number 3 (Monday, January 6, 2025)]
[Notices]
[Pages 704-710]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31771]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102065; File No. SR-ISE-2024-62]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Proposed Rule Change To Increase the Position and Exercise Limits 
for iShares Bitcoin Trust ETF

December 31, 2024.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 20, 2024, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by ISE. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Options 9, Sections 13 and 15 to 
propose an increase to the position and exercise limits for iShares 
Bitcoin Trust ETF (``IBIT'').
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/ise/rules, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Options 9, Section 13, Position 
Limits, and Options 9, Section 15, Exercise Limits, to increase the 
position and exercise limits for options on IBIT from 25,000 to 250,000 
contracts.
    IBIT is an Exchange-Traded Fund (``ETF'') that holds bitcoin and is 
listed on The Nasdaq Stock Market LLC.\3\ On September 20, 2024, ISE 
received approval to list options on IBIT.\4\ The position and exercise 
limits for IBIT options are 25,000 contracts as stated in Options 9, 
Sections 13 and 15, the lowest limit available in options.\5\
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    \3\ Nasdaq received approval to list and trade Bitcoin-Based 
Commodity-Based Trust Shares in IBIT pursuant to Rule 5711(d) of 
Nasdaq. See Securities Exchange Act Release No. 99306 (January 10, 
2024), 89 FR 3008 (January 17, 2024) (SR-NASDAQ-2023-016) (Order 
Granting Accelerated Approval of Proposed Rule Changes, as Modified 
by Amendments Thereto, To List and Trade Bitcoin-Based Commodity-
Based Trust Shares and Trust Units). IBIT started trading on January 
11, 2024.
    \4\ See Securities Exchange Act Release No. 101128 (September 
20, 2024), 89 FR 78942 (September 26, 2024) (SR-ISE-2024-03) (Notice 
of Filing of Amendment Nos. 4 and 5 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1, 
4, and 5, To Permit the Listing and Trading of Options on the 
iShares Bitcoin Trust) (``IBIT Approval Order''). ISE began trading 
IBIT options on November 19, 2024.
    \5\ Options on Fidelity Wise Origin Bitcoin Fund, ARK 21Shares 
Bitcoin ETF, Grayscale Bitcoin Trust (BTC), Grayscale Bitcoin Mini 
Trust BTC, and Bitwise Bitcoin ETF are also subject to a 25,000 
contract position and exercise limit.
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    Per the Commission ``rules regarding position and exercise limits 
are intended to prevent the establishment of options positions that can 
be used or might create incentives to manipulate or disrupt the 
underlying market so as to benefit the options positions.'' \6\ For 
this reason, the Commission requires that ``position and exercise 
limits must be sufficient to prevent investors from disrupting the 
market for the underlying security by acquiring and exercising a number 
of options contracts disproportionate to the deliverable supply and 
average trading volume of the underlying security.'' \7\ Based on its 
review of the data and analysis provided by the Exchange, the 
Commission concluded that the 25,000 contract position limit for non-
FLEX IBIT options satisfied these objectives.\8\
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    \6\ See supra note 4, IBIT Approval Order, 89 FR 78946.
    \7\ See id.
    \8\ See id.

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[[Page 705]]

    While the Exchange proposed an aggregated 25,000 contract position 
limit for IBIT options in its IBIT Approval Order, it nonetheless 
believed that evidence existed to support a much higher position limit. 
Specifically, the Commission has considered and reviewed the Exchange's 
analysis in its IBIT Approval Order that the exercisable risk 
associated with a position limit of 25,000 contracts represented only 
0.4% of the outstanding shares of IBIT.\9\ The Commission also has 
considered and reviewed the Exchange's statement its IBIT Approval 
Order that with a position limit of 25,000 contracts on the same side 
of the market and 611,040,00 shares of IBIT outstanding, 244 market 
participants would have to simultaneously exercise their positions to 
place IBIT under stress.\10\ Based on the Commission's review of this 
information and analysis, the Commission concluded that the proposed 
position and exercise limits of 25,000 contracts were designed to 
prevent investors from disrupting the market for the underlying 
security by acquiring and exercising a number of options contracts 
disproportionate to the deliverable supply and average trading volume 
of the underlying security, and to prevent the establishment of options 
positions that can be used or might create incentives to manipulate or 
disrupt the underlying market so as to benefit the options 
position.\11\
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    \9\ See id. Data represents figures from August 12, 2024.
    \10\ See id. Data represents figures from August 12, 2024.
    \11\ See id.
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    IBIT currently qualifies for a 250,000 contract position limit 
pursuant to the criteria in Options 9, Section 13(g), which requires 
that, for the most recent six-month period, trading volume for the 
underlying security be at least 100,000,000 shares.\12\ As of November 
25, 2024, the market capitalization for IBIT was $46,783,480,800 \13\ 
with an average daily volume (``ADV''), for the preceding three months 
prior to November 25, 2024, of 39,421,877 shares. IBIT is well above 
the requisite minimum of 100,000,000 shares necessary to qualify for 
the 250,000 contract position limit. Also, as of November 25, 2024, 
there are 19,787,762 bitcoins in circulation.\14\ At a price of 
$94,830,\15\ that equates to a market capitalization of greater than 
$1.876 trillion US. If a position limit of 250,000 contracts were 
considered, the exercisable risk would represent 2.89% \16\ of the 
outstanding shares outstanding of IBIT. Given IBIT's liquidity, the 
current 25,000 position limit is extremely conservative.
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    \12\ Options 9, Section 13(g), Equity Option Position Limits, 
provides at subparagraph (i) that the position limit shall be 
250,000 contracts for options: (a) on an underlying stock or 
Exchange-Traded Fund Share which had trading volume of at least 
100,000,000 shares during the most recent six-month trading period; 
or (b) on an underlying stock or Exchange-Traded Fund Share which 
had trading volume of at least 75,000,000 shares during the most 
recent six-month trading period and has at least 300,000,000 shares 
currently outstanding.
    \13\ The market capitalization was determined by multiplying a 
settlement price of ($54.02) by the number of shares outstanding 
(866,040,000). This figure was acquired as of November 25, 2024. See 
https://www.ishares.com/us/products/333011/ishares-bitcoin-trust-etf.
    \14\ See https://www.coingecko.com/en/coins/bitcoin.
    \15\ This is the approximate price of bitcoin from 4:00pm ET on 
November 25, 2024.
    \16\ This percentage is arrived at with this equation: (250,000 
contract limit * 100 shares per option/866,040,000 shares 
outstanding).
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    Position limits, and exercise limits, are designed to limit the 
number of options contracts traded on the exchange in an underlying 
security that an investor, acting alone or in concert with others 
directly or indirectly, may control. These limits, which are described 
in ISE Options 9, Sections 13 and 15, are intended to address potential 
manipulative schemes and adverse market impacts surrounding the use of 
options, such as disrupting the market in the security underlying the 
options. Position and exercise limits must balance concerns regarding 
mitigating potential manipulation and the cost of inhibiting potential 
hedging activity that could be used for legitimate economic purposes. 
To achieve this balance, ISE proposes to increase IBIT's position and 
exercise limits from 25,000 to 250,000 contracts. ISE believes that 
250,000 contracts is the appropriate position and exercise limit based 
on its analysis described below.
    First, ISE considered IBIT's market capitalization and Average 
Daily Volume (``ADV''), and prospective position limit in relation to 
other securities. In measuring IBIT against other securities, ISE 
aggregated market capitalization and volume data for securities that 
have defined position limits utilizing data from The Options Clearing 
Corporations (``OCC'').\17\ This pool of data took into consideration 
3,897 options on single stock securities, excluding broad based 
ETFs.\18\ Next, the data was aggregated based on market capitalization 
and ADV and grouped by option symbol and position limit utilizing 
statistical thresholds for ADV, based on ninety days, and market 
capitalization that were one standard deviation above the mean for each 
position limit category (i.e., 25,000, 50,000 to 65,000, 75,000, 
100,000 to less than 250,000, and 250,000).\19\ This exercise was 
performed to demonstrate IBIT's position limit relative to other 
options symbols in terms of market capitalization and ADV. For 
reference, the market capitalization for IBIT was $46,783,480,800 \20\ 
with an ADV, for the preceding three months prior to November 25, 2024, 
of 39,421,877 shares.
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    \17\ The computations are based on OCC data from November 25, 
2024. Data displaying zero values in market capitalization or ADV 
were removed.
    \18\ IBIT has one asset and therefore is not comparable to a 
broad based ETF where there are typically multiple components.
    \19\ ISE Options 9, Section 13(d) sets out position limits for 
various contracts. For example, a 25,000 contract limit applies to 
those options having an underlying security that does not meet the 
requirements for a higher options contract limit. The Exchange notes 
that position limits may also be higher due to corporate actions in 
the underlying equities, such as a stock split. See https://www.theocc.com/market-data/market-data-reports/series-and-trading-data/position-limits. As a result, the Exchange's pool of data 
considered higher position limits than 250,000 contracts, where 
applicable.
    \20\ The market capitalization was determined by multiplying a 
settlement price of ($54.02) by the number of shares outstanding 
(866,040,000). This figure was acquired as of November 25, 2024. See 
https://www.ishares.com/us/products/333011/ishares-bitcoin-trust-etf.

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                   Market cap  statistics                            25k               50k               75k           100k-<250k         250k-<500k           500k-1mm              >1mm
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# of observations...........................................               562               473               651               240                1934                  27                  10
average.....................................................     1,038,795,162     2,957,127,045     4,466,049,699     5,390,836,360      26,286,624,063      67,390,777,100     717,540,906,097
median......................................................       360,130,143       889,627,570     1,445,831,231     1,643,123,279       3,535,963,213      27,063,940,966      90,047,209,478
min.........................................................         2,204,436         4,211,156         3,830,532         5,090,230           1,616,094       2,762,394,749      11,786,645,969
max.........................................................    36,120,249,097    70,846,805,916   174,820,296,591   106,971,594,180   3,573,884,443,220     733,972,714,698   3,358,647,600,000
                                                             -----------------------------------------------------------------------------------------------------------------------------------
    IBIT % rank.............................................           100.00%            98.94%            98.77%            98.33%              88.57%              59.26%              20.00%
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[[Page 706]]


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                   90-Day ADV  statistics                            25k               50k               75k           100k-<250k         250k-<500k           500k-1mm              >1mm
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# of observations...........................................               562               473               651               240                1934                  27                  10
average.....................................................            76,586           213,419           425,542           623,888           3,510,784           5,930,607          44,610,385
median......................................................            67,231           206,402           409,177           625,882           1,620,931           4,724,248          18,017,607
min.........................................................             4,791            10,084            18,191           105,713              16,276           1,207,242           1,771,544
max.........................................................           244,499           564,451           989,341         1,339,553          88,351,060          22,397,311         271,230,790
                                                             -----------------------------------------------------------------------------------------------------------------------------------
    IBIT % rank.............................................           100.00%           100.00%           100.00%           100.00%              99.43%             100.00%              80.00%
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    Based on the above table, if IBIT were compared to the 1,934 stocks 
that have position limits of 250,000 contracts to less than 500,000 
contracts it would rank in the 88th percentile for market 
capitalization and the 99th percentile for ADV.
    The Exchange also analyzed the position limits for IBIT by 
regressing the market capitalization figures and 90-day ADV of all non-
ETF equities, against their respective position limit figures. From 
this regression, the Exchange was able to determine the implied 
coefficients to create a formulaic method for determining an 
appropriate position limit.\21\ In this case, the modeled position 
limit is 565,796 contracts.\22\ The results of the study are below.
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    \21\ The Exchange utilized Excel's Data Analysis Package to 
model the position limit.
    \22\ The Exchange utilized this formula to arrive at the number 
of contracts: ((46,783,380,800 mkt cap * 0.0000002630 market cap 
coefficient) + (39,421,877 ADV * 0.0140402219 ADV coefficient)).

                          Regression Statistics
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------------------------------------------------------------------------
Multiple R............................................       0.496800597
R Square..............................................       0.246810833
Adjusted R Square.....................................       0.246361643
Standard Error........................................       202227.4271
Observations..........................................              3905
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                                                      ANOVA
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                                                        df              SS              MS               F
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Regression......................................               2      5.2304E+13      2.6152E+13      639.482566
Residual........................................            3903      1.5962E+14      4.0896E+10  ..............
                                                 ---------------------------------------------------------------
    Total.......................................            3905      2.1192E+14  ..............  ..............
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                                                    Coefficients  Standard error          t Stat         P-value
----------------------------------------------------------------------------------------------------------------
Intercept.......................................               0            #N/A            #N/A            #N/A
Market Cap......................................    0.0000002630      3.3371E-08      7.88130564      4.1699E-15
90-day ADV......................................    0.0140402219      0.00055818      25.1533643      1.613E-129
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    Based on the aforementioned analysis, the Exchange believes that 
the proposed 250,000 contracts for position and exercise limits is 
appropriate.
    Second, ISE reviewed IBIT's data relative to the market 
capitalization of the entire bitcoin market in terms of exercise risk 
and availability of deliverables. As of November 25, 2024, there are 
19,787,762 bitcoins in circulation.\23\ At a price of $94,830,\24\ that 
equates to a market capitalization of greater than $1.876 trillion US. 
If a position limit of 250,000 contracts were considered, the 
exercisable risk would represent 2.89% \25\ of the outstanding shares 
outstanding of IBIT. Since IBIT has a creation and redemption process 
managed through the issuer, the position limit can be compared to the 
total market capitalization of the entire bitcoin market and in that 
case, the exercisable risk for options on IBIT would represent less 
than .072% of all bitcoin outstanding.\26\ Assuming a scenario where 
all options on IBIT shares were exercised given the proposed 250,000 
contract position limit (and exercise limit), this would have a 
virtually unnoticed impact on the entire bitcoin market. This analysis 
demonstrates that the proposed 250,000 per same side position and 
exercise limit is appropriate for options on IBIT given its liquidity.
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    \23\ See https://www.coingecko.com/en/coins/bitcoin.
    \24\ This is the approximate price of bitcoin from 4:00 pm ET on 
November 25, 2024.
    \25\ This percentage is arrived at with this equation: (250,000 
contract limit * 100 shares per option/866,040,000 shares 
outstanding).
    \26\ This number was arrived at with this calculation: ((250,000 
limit * 100 shares per option * $54.02 settle) / (19,787,762 BTC 
outstanding * $94,830 BTC price)).
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    Third, ISE reviewed the proposed position limit by comparing it to 
position limits for derivative products regulated by the Commodity 
Futures Trading Commission (``CFTC''). While the CFTC, through the 
relevant Designated Contract Markets, only regulates options positions 
based upon delta equivalents (creating a less stringent standard), ISE 
examined equivalent bitcoin futures position limits. In particular, ISE 
looked to the CME bitcoin futures contract \27\ that has a position 
limit of 8,000 futures.\28\ On October 22, 2024, CME bitcoin futures 
settled at $94,945.\29\ On October 22, 2024, IBIT settled at $54.02, 
which would equate to greater than 17,557,898 shares of IBIT if the CME 
notional position limit was utilized. Since substantial portions of any 
distributed options portfolio is likely to be out of the money on 
expiration, an options position limit equivalent to the CME position 
limit for bitcoin futures (considering that all options deltas are 
<=1.00) should be a bit higher than the CME implied 175,578 limit. Of 
note, unlike options contracts, CME position limits are calculated on a 
net futures-equivalent basis by contract and include contracts that 
aggregate into one or more base contracts according to an aggregation 
ratio(s).\30\ Therefore, if a

[[Page 707]]

portfolio includes positions in options on futures, CME would aggregate 
those positions into the underlying futures contracts in accordance 
with a table published by CME on a delta equivalent value for the 
relevant spot month, subsequent spot month, single month and all month 
position limits.\31\ If a position exceeds position limits because of 
an option assignment, CME permits market participants to liquidate the 
excess position within one business day without being considered in 
violation of its rules. Additionally, if at the close of trading, a 
position that includes options exceeds position limits for futures 
contracts, when evaluated using the delta factors as of that day's 
close of trading, but does not exceed the limits when evaluated using 
the previous day's delta factors, then the position shall not 
constitute a position limit violation. Based on the aforementioned 
analysis, the Exchange believes that the proposed 250,000 contracts for 
position and exercise limits is appropriate.
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    \27\ CME Bitcoin Futures are described in Chapter 350 of CME's 
Rulebook.
    \28\ See the Position Accountability and Reportable Level Table 
in the Interpretations & Special Notices Section of Chapter 5 of 
CME's Rulebook.
    \29\ 2,000 futures at a 5 bitcoin multiplier (per the contract 
specifications) equates to $949,450,000 (2000 contracts * 5 BTC per 
contract * $94,945 price of November BTC future) of notional value.
    \30\ See https://www.cmegroup.com/education/courses/market-regulation/position-limits/position-limits-aggregation-of-contracts-and-table.htm.
    \31\ Id.
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    Fourth, ISE analyzed a position and exercise limit of 250,000 for 
IBIT against other options on ETFs with an underling commodity, namely 
SPDR Gold Shares (``GLD''), iShares Silver Trust (``SLV''), and 
ProShares Bitcoin ETF (``BITO'').\32\ GLD has a float of 306.1 million 
shares \33\ and a position limit of 250,000 contract. SLV has a float 
of 520.7 million shares,\34\ and a position limit of 250,000 contracts. 
Finally, BITO has 107.65 million shares outstanding \35\ and a position 
limit of 250,000 contracts. As previously noted, position and exercise 
limits are designed to limit the number of options contracts traded on 
the exchange in an underlying security that an investor, acting alone 
or in concert with others directly or indirectly, may control. A 
position limit exercise in GLD would represent 8.17% of the float of 
GLD; a position limit exercise in SLV would represent 4.8% of the float 
of SLV, and a position limit exercise of BITO would represent 23.22% of 
the float of BITO. In comparison, a 250,000 contract position limit in 
IBIT would represent 2.89% of the float of IBIT. Consequently, the 
250,000 proposed IBIT options position and exercise limit is more 
conservative than the standard applied to GLD, SLV and BITO, and 
appropriate. Additionally, the Exchange notes that the Cboe Bitcoin 
U.S. ETF Index Options (CBTX) and the Cboe Mini Bitcoin U.S. ETF Index 
Options (MBTX),\36\ which trade exclusively on Cboe, are comprised of 
multiple bitcoin ETFs of which IBIT is the highest weighted (at 20%) in 
the index composition.\37\ These indices currently trade pursuant to a 
24,000 contract position and exercise limit.\38\
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    \32\ GLD, SLV and BITO each hold one asset in trust similar to 
IBIT.
    \33\ See https://www.ssga.com/us/en/intermediary/etfs/spdr-gold-shares-gld.
    \34\ See https://www.ishares.com/us/products/239855/ishares-silver-trust-fund.
    \35\ See https://www.marketwatch.com/investing/fund/bito.
    \36\ MBTX is based on 1/10th the value of the Cboe Bitcoin U.S. 
ETF Index.
    \37\ See https://www.cboe.com/tradable_products/bitcoin-etf-index-options?utm_source=mcae&utm_medium=email&utm_campaign=bitcoin_eft_options_launch. Cboe's website provides a product comparison chart 
indicating that CBTX and MBTX are permitted to trade FLEX as 
compared to spot bitcoin ETF options. See https://cdn.cboe.com/resources/membership/Cboe_Bitcoin_US_ETF_Options_Comparative_Overview.pdf?_gl=1*1xmm04c*_up*MQ..*_ga*MTc0MjU1NzU1Ni4xNzM0NTU2NTky*_ga_5Q99WB9X71*MTczNDU1NjU5MC4xLjAuMTczNDU1NjU5MC4wLjAuMA.
    \38\ See Cboe Rule 8.32(a). The Exchange notes that given the 
multiplier and notional value of CBTX, the index has a position and 
exercise limit that equates to 1,000,000 contracts of in kind 
exposure to IBIT, which is more than 40 times greater than the 
exposure for options on IBIT at the current 25,000 contract position 
and exercise limit.
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    Fifth, ISE notes that IBIT is likely to trade in penny increments 
as of January 2, 2025, provided it is able to meet the applicable 
criteria.\39\ The Commission noted that evidence contained in both the 
Exchanges' Report and the Cornerstone analysis demonstrates that the 
Penny Pilot has benefitted investors and other market participants in 
the form of narrower spreads.\40\ The most actively traded options 
classes are included in the Penny Program based on certain objective 
criteria (trading volume thresholds and initial price tests). As noted 
in the Penny Approval Order, the Penny Program reflects a certain level 
of trading interest (either because the class is newly listed or a 
class that experience a significant growth in investor interest) to 
quote in finer trading increments, which in turn should benefit market 
participants by reducing the cost of trading such options.\41\ If IBIT 
options were to enter the Penny Program, it will be among a select 
group of products that have achieved a certain level of liquidity that 
have garnered it the ability to trade in finer increments. The Exchange 
believes that if IBIT options were to trade in penny increments, 
failing to increase position and exercise limits once it started 
trading in finer increments, may artificially inhibit liquidity and 
create price inefficiency.
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    \39\ The Exchange may add to the Penny Program a newly listed 
option class provided that (i) it is among the 300 most actively 
traded multiply listed option classes, as ranked by National Cleared 
Volume at OCC, in its first full calendar month of trading and (ii) 
the underlying security is priced below $200 or the underlying index 
is at an index level below $200. Any option class added under this 
provision will be added on the first trading day of the month after 
it qualifies and will remain in the Penny Program for one full 
calendar year, after which it will be subject to the Annual Review 
described in Supplementary Material .01(b) to Options 3, Section 3. 
The Exchange may add any option class to the Penny Program, provided 
that (i) it is among the 75 most actively traded multiply listed 
option classes, as ranked by National Cleared Volume at OCC, in the 
past six full calendar months of trading and (ii) the underlying 
security is priced below $200 or the underlying index is at an index 
level below $200. Any option class added under this provision will 
be added on the first trading day of the second full month after it 
qualifies and will remain in the Penny Program for the rest of the 
calendar year, after which it will be subject to the Annual Review 
as described in Supplementary Material .01(b) to Options 3, Section 
3. See Supplementary Material .01 to ISE Options 3, Section 3.
    \40\ See Securities Exchange Act Release No. 88532 (April 1, 
2020), 67 FR 19545, 19548 (April 7, 2020) (File No. 4-443) (Joint 
Industry Plan; Order Approving Amendment No. 5 to the Plan for the 
Purpose of Developing and Implementing Procedures Designed To 
Facilitate the Listing and Trading of Standardized Options To Adopt 
a Penny Interval Program) (``Penny Approval Order'').
    \41\ Id. at 19548.
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    The Exchange believes that IBIT options has demonstrated that it 
has more than sufficient liquidity to garner an increased position and 
exercise limit of 250,000 contracts. The Exchange believes that any 
concerns related to manipulation and protection of investors are 
mollified by the significant liquidity provision in IBIT. The Exchange 
states that, as a general principle, increases in active trading volume 
and deep liquidity of the underlying securities do not lead to 
manipulation and/or disruption.
    The Exchange believes that increasing the position (and exercise) 
limits for IBIT options would lead to a more liquid and competitive 
market environment for IBIT options, which will benefit customers that 
trade these options. Further, the reporting requirement for such 
options would remain unchanged. Thus, the Exchange will still require 
that each member organization that maintains positions in impacted 
options on the same side of the market, for its own account or for the 
account of a customer, report certain information to the Exchange. This 
information includes, but would not be limited to, the options' 
positions, whether such positions are hedged and, if so, a description 
of the hedge(s). Market-Makers would continue to be exempt from this 
reporting requirement, however, the Exchange may access Market-Maker 
position information.\42\

[[Page 708]]

Moreover, the Exchange's requirement that member organizations file 
reports with the Exchange for any customer who held aggregate large 
long or short positions on the same side of the market of 200 or more 
option contracts of any single class for the previous day will remain 
at this level and will continue to serve as an important part of the 
Exchange's surveillance efforts.\43\
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    \42\ The Options Clearing Corporation (``OCC'') through the 
Large option Position Reporting (``LOPR'') system acts as a 
centralized service provider for TPH compliance with position 
reporting requirements by collecting data from each TPH or TPH 
organization, consolidating the information, and ultimately 
providing detailed listings of each TPH's report to the Exchange, as 
well as Financial Industry Regulatory Authority, Inc. (``FINRA''), 
acting as its agent pursuant to a regulatory services agreement 
(``RSA'').
    \43\ See Options 9, Section 16.
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    The Exchange also has no reason to believe that the growth in 
trading volume in IBIT will not continue. Rather, the Exchange expects 
continued options volume growth in IBIT as opportunities for investors 
to participate in the options markets increase and evolve. The Exchange 
believes that the current position and exercise limits in IBIT options 
are restrictive and will hamper the listed options markets from being 
able to compete fairly and effectively with the over-the-counter 
(``OTC'') markets. OTC transactions occur through bilateral agreements, 
the terms of which are not publicly disclosed to the marketplace. As 
such, OTC transactions do not contribute to the price discovery process 
on a public exchange or other lit markets. The Exchange believes that 
without the proposed changes to position and exercise limits for IBIT, 
market participants will find the 25,000 contract position limit an 
impediment to their business and investment objectives as well as an 
impediment to efficient pricing. As such, market participants may find 
the less transparent OTC markets a more attractive alternative to 
achieve their investment and hedging objectives, leading to a retreat 
from the listed options markets, where trades are subject to reporting 
requirements and daily surveillance.
    The Exchange believes that the existing surveillance procedures and 
reporting requirements at the Exchange are capable of properly 
identifying disruptive and/or manipulative trading activity. The 
Exchange also represents that it has adequate surveillances in place to 
detect potential manipulation, as well as reviews in place to identify 
continued compliance with the Exchange's listing standards. These 
procedures monitor market activity via automated surveillance 
techniques to identify unusual activity in both options and the 
underlyings, as applicable. The Exchange also notes that large stock 
holdings must be disclosed to the Commission by way of Schedules 13D or 
13G,\44\ which are used to report ownership of stock which exceeds 5% 
of a company's total stock issue and may assist in providing 
information in monitoring for any potential manipulative schemes. 
Further, the Exchange believes that the current financial requirements 
imposed by the Exchange and by the Commission adequately address 
concerns regarding potentially large, unhedged positions in equity 
options. Current margin and risk-based haircut methodologies serve to 
limit the size of positions maintained by any one account by increasing 
the margin and/or capital that a member organization must maintain for 
a large position held by itself or by its customer.\45\ In addition, 
Rule 15c3-1 \46\ imposes a capital charge on member organizations to 
the extent of any margin deficiency resulting from the higher margin 
requirement.
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    \44\ 17 CFR 240.13d-1.
    \45\ See Options 9, Section 3 regarding margin requirements.
    \46\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\47\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\48\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Additionally, the Exchange 
believes the proposed rule change is consistent with the Section 
(6)(b)(5) \49\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \47\ 15 U.S.C. 78f(b).
    \48\ 15 U.S.C. 78f(b)(5).
    \49\ 15 U.S.C. 78(f)(b)(5).
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    The Exchange believes increasing the position (and exercise limits) 
for IBIT options from 25,000 to 250,000 contracts will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, protect investors and the 
public interest, because it will provide market participants with the 
ability to more effectively execute their trading and hedging 
activities. Also, increasing the position (and exercise) limits for 
IBIT options may allow Market-Makers to maintain their liquidity in 
these options in amounts commensurate with the continued high consumer 
demand in IBIT options market. The proposed higher position and 
exercise limit may also encourage other liquidity providers to continue 
to trade on the Exchange rather than shift their volume to OTC markets, 
which will enhance the process of price discovery conducted on the 
Exchange through increased order flow. The Exchange notes that a higher 
position and exercise limit would further allow institutional investors 
to utilize IBIT options for prudent risk management purposes.
    In addition, the Exchange believes that the current liquidity in 
shares of and options on IBIT will mitigate concerns regarding 
potential manipulation of IBIT and/or disruption of IBIT upon 
increasing the position limit. ISE's proposed position and exercise 
limit of 250,000 contracts on IBIT options is appropriate given the 
market capitalization and ADV of IBIT and designed to prevent 
fraudulent and manipulative acts and practices. If IBIT were compared 
to the 1,934 stocks that have position limits of 250,000 contracts to 
less than 500,000 contracts it would rank in the 88th percentile for 
market capitalization and the 99th percentile for ADV.
    Additionally, the regression model performed by ISE demonstrates 
that the proposed position limit is half of the modeled limit given the 
liquidity of IBIT. Comparing IBIT's data relative to the market 
capitalization of the entire bitcoin market in terms of exercise risk 
and availability of deliverables, the Exchange was able to conclude 
that if a position limit of 250,000 contracts were considered, the 
exercisable risk would represent 2.89% \50\ of the shares outstanding 
of IBIT. Since IBIT has a creation and redemption process managed 
through the issuer (whereby Bitcoin is used to create IBIT shares), the 
position limit can be compared to the total market capitalization of 
the entire bitcoin market and in that case, the exercisable risk for 
options on IBIT would represent less than .072% of all bitcoin 
outstanding.\51\ Comparing the proposed position limit to position 
limits for equivalent bitcoin futures position limits, the analysis 
demonstrated that the proposed 250,000

[[Page 709]]

contracts for position and exercise limits is appropriate.
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    \50\ This percentage is arrived at with this equation: (250,000 
contract limit * 100 shares per option/866,040,000 shares 
outstanding).
    \51\ This number was arrived at with this calculation: ((250,000 
limit * 100 shares per option * $54.02 settle) / (19,787,762 BTC 
outstanding * $94,830 BTC price)).
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    Comparing a position limit of 250,000 for IBIT against other 
options on ETFs with an underling commodity, namely GLD, SLV and BITO, 
a position limit exercise in GLD represents 8.17% of the float of GLD, 
a position limit exercise in SLV represents 4.8% of the float of SLV, 
and a position limit exercise of BITO represents 23.22% of the float of 
BITO. In comparison, a 250,000 contract position limit in IBIT would 
represent 2.89% of the float of IBIT. Consequently, the 250,000 
proposed IBIT options position limit is more conservative than the 
standard applied to GLD, SLV and BITO, and appropriate. Also, the 
Exchange notes that Cboe's proprietary CBTX and MBTX indices weight 
IBIT the highest (at 20%) in its index composition among the other ETFs 
that comprise the index.\52\ The Exchange notes that today, these 
indexes have a position of 24,000 contracts which is much higher than 
the current position limits for IBIT options when considering the 
notional value of the indices.\53\ These indexes are already trading 
with position and exercise limits that are higher than the lowest 
position limit for an industry index option.\54\
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    \52\ See https://www.cboe.com/tradable_products/bitcoin-etf-index-options?utm_source=mcae&utm_medium=email&utm_campaign=bitcoin_eft_options_launch.
    \53\ See Cboe Rule 8.32(a). The Exchange notes that given the 
multiplier and notional value of CBTX, the index has a position and 
exercise limit that equates to 1,000,000 contracts of in kind 
exposure to IBIT, which is more than 40 times greater than the 
exposure for options on IBIT at the current 25,000 contract position 
and exercise limit.
    \54\ 18,000 contracts is the lowest position limit for industry 
index options if the Exchange determines, at the time of a review 
conducted pursuant to subparagraph (2) of this paragraph (a), that 
any single underlying stock accounted, on average, for thirty 
percent (30%) or more of the index value during the thirty (30) -day 
period immediately preceding the review. See ISE Options 4A, Section 
7. Further, Cboe Rule 8.32(a)(3) permits a limit of 31,500 contracts 
if the Exchange determines that the conditions specified in Rule 
8.32(a)(1) and (2), which would require the establishment of a lower 
limit, have not occurred.
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    ISE notes that IBIT is likely to trade in penny increments in 
January 2025, provided it is able to meet the applicable criteria.\55\ 
The Commission noted that evidence contained in both the Exchanges' 
Report and the Cornerstone analysis demonstrates that the Penny Pilot 
has benefitted investors and other market participants in the form of 
narrower spreads.\56\ The most actively traded options classes are 
included in the Penny Program based on certain objective criteria 
(trading volume thresholds and initial price tests). As noted in the 
Penny Approval Order, the Penny Program reflects a certain level of 
trading interest (either because the class is newly listed or a class 
that experience a significant growth in investor interest) to quote in 
finer trading increments, which in turn should benefit market 
participants by reducing the cost of trading such options.\57\ If IBIT 
options were to enter the Penny Program, it will be among a select 
group of products that have achieved a certain level of liquidity that 
have garnered it the ability to trade in finer increments. The Exchange 
believes that if IBIT options were to trade in penny increments, 
failing to increase position and exercise limits once it started 
trading in finer increments, may artificially inhibit liquidity and 
create price inefficiency.
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    \55\ The Exchange may add to the Penny Program a newly listed 
option class provided that (i) it is among the 300 most actively 
traded multiply listed option classes, as ranked by National Cleared 
Volume at OCC, in its first full calendar month of trading and (ii) 
the underlying security is priced below $200 or the underlying index 
is at an index level below $200. Any option class added under this 
provision will be added on the first trading day of the month after 
it qualifies and will remain in the Penny Program for one full 
calendar year, after which it will be subject to the Annual Review 
described in Supplementary Material .01(b) to Options 3, Section 3. 
The Exchange may add any option class to the Penny Program, provided 
that (i) it is among the 75 most actively traded multiply listed 
option classes, as ranked by National Cleared Volume at OCC, in the 
past six full calendar months of trading and (ii) the underlying 
security is priced below $200 or the underlying index is at an index 
level below $200. Any option class added under this provision will 
be added on the first trading day of the second full month after it 
qualifies and will remain in the Penny Program for the rest of the 
calendar year, after which it will be subject to the Annual Review 
as described in Supplementary Material .01(b) to Options 3, Section 
3. See Supplementary Material .01 to ISE Options 3, Section 3.
    \56\ See Securities Exchange Act Release No. 88532 (April 1, 
2020), 85 FR 19545, 19548 (April 7, 2020) (File No. 4-443) (Joint 
Industry Plan; Order Approving Amendment No. 5 to the Plan for the 
Purpose of Developing and Implementing Procedures Designed To 
Facilitate the Listing and Trading of Standardized Options To Adopt 
a Penny Interval Program) (``Penny Approval Order'').
    \57\ Id. at 19548.
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    Finally, as discussed above, the Exchange's surveillance and 
reporting safeguards continue to be designed to deter and detect 
possible manipulative behavior that might arise from increasing or 
eliminating position and exercise limits in certain classes. The 
Exchange believes that the current financial requirements imposed by 
the Exchange and by the Commission adequately address concerns 
regarding potentially large, unhedged positions in the options on the 
underlying securities, further promoting just and equitable principles 
of trading, the maintenance of a fair and orderly market, and the 
protection of investors.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.
    The Exchange's proposal does not burden intra-market competition 
because all Members would be permitted to trade IBIT options pursuant 
to the proposed position and exercise limit of 250,000 contracts. The 
Exchange believes that the proposed rule change will also provide 
additional opportunities for market participants to continue to 
efficiently achieve their investment and trading objectives for equity 
options on the Exchange.
    The Exchange does not believe that the proposed rule change will 
impose any burden on inter-market competition as the proposal is not 
competitive in nature. The Exchange expects that all option exchanges 
will adopt substantively similar proposals for adopting the additional 
position limit tiers, such that the Exchange's proposal would benefit 
competition. For these reasons, the Exchange does not believe that the 
proposed rule change will impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act.

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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 710]]

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-ISE-2024-62 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-ISE-2024-62. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-ISE-2024-62 and should be 
submitted on or before January 27, 2025.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\58\
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    \58\ 17 CFR 200.30-3(a)(12).
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Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024-31771 Filed 1-3-25; 8:45 am]
BILLING CODE 8011-01-P`