LMX Labs, LLC d/b/a Coinbase Derivatives

May 23, 2023

VIA CFTC Electronic Portal

Mr. Christopher J. Kirkpatrick

Secretary of the Commission

Office of the Secretariat

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

Re: CFTC Regulation 40.2(a) Certification: Listing of Ether Futures Contract

Coinbase Derivatives Submission #2023-3E

Dear Mr. Kirkpatrick:

Pursuant to Commodity Futures Trading Commission (“CFTC” or “Commission”) Regulation

40.2(a), LMX Labs, LLC, d/b/a Coinbase Derivatives (the “Exchange” or “CDE”) hereby submits

for self-certification its initial listing of the Ether Futures contract to be offered for trading on the

Exchange on trade date June 5, 2023.

Contract Description

The Ether Futures contract (the “Contract”) will be a monthly cash-settled and margined contract

with the following specifications:

Product Ether Futures

Product Type USD-settled index future

Contract Size 10 Ether

Displayed Price Example $2,000.50

Contract Notional ~$20,000 contract notional (i.e. 10 x ~ estimated Ether price $2,000)

Contract will always represent 10 Ether, using an estimated Ether price of

$2,000 for illustrative purposes.

Contract Code ETI

Minimum Tick Size and Value Min tick size: $0.50 per ether

Min tick value: $5 per contract

Listed Contracts 4 nearest monthly contracts, and the next December contract. A second

December contract will be listed if one is already listed in the nearest 4 monthly
contracts.

Daily Settlement Daily Settlement: 3:00 pm CT

1. 1-min VWAP of futures contract rounded to the nearest tradable tick

2. 1-min TWAP of futures contract midpoint of the Bid/Ask rounded to the

nearest tradable tick

3. If a two-sided market is not available during the sixty (60) seconds prior to

3:00 PM CT, then the Settlement Price will be the Market Vector Coinbase

CETBR index value - (difference between previous day’s CETBR value and

previous day’s futures settlement)

Final Settlement Final settlement price of the expiring contract will be the value of the Market

Vector Coinbase Ethereum benchmark reference rate (CETBR) at 4:00 p.m.

London time, calculated and disseminated by Market Vector. Contracts will be

cleared by Nodal Clear

Daily Price Limits 30% Daily Price Limits based on previous day settlement

Price Fluctuation Limits 10% of Hourly Calculated Reference Price

Last Trading Day Trading terminates at 4:00 pm London time on the last Friday of the contract

month. If that day is not a business day in the U.S., trading terminates on the

preceding day that is a U.S. business day.

Position Limits 40,000 ETI aggregate

Large Trader Reporting

5 contracts

Trading Hours 5pm to 4pm CT Sun-Fri, with trading halt from 4pm to 5pm CT Mon-Thurs.

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Contents:

I. Ether Overview

I. Contract Description

II. Volatility

III. Analysis of Deliverable Supply

IV. Compliance with Core Principles

I. Ether Market Overview

The Ether token (ETH) is a digital asset that was launched by the Ethereum Network in 2014

through an Initial Coin Offering. Like other digital assets, Ethereum is created on an open

source network with no intermediaries. As of May 10, 2023 there were approximately 117.84

million ETH in circulation.

1 Unlike Bitcoin, ETH is designed to have an unlimited supply, though

there is an annual maximum limit of 18 million ETH allowed to be created every year. In that

respect, it mimics fiat currencies where a higher supply generally leads to lower value. This

benefits the smaller trader or those entering the market as it makes investing in ETH more

attainable for the individual trader

2

.

II. Contract Description

The Ether Futures contract is a cash-settled contract based on the MarketVector Coinbase

Ethereum Benchmark Rate Index (“Index”). This Index tracks the price of Ethereum as traded

on the Coinbase spot exchange. MarketVector is an Index Provider based in Frankfurt,

Germany and is regulated by the Federal Financial Supervisory Authority (“BaFin”).

Each contract represents 10 Ether. At the current price of approximately $1,800, the notional

value of each Coinbase Derivatives contract would be approximately $18,000. The Exchange

will initially offer the four nearest contract months and the next December contract for trading.

2 https://investerest.vontobel.com/en-se/articles/13356/ether-explained---chapter-6-ethereum-vs-bitcoin-part-1/

1 https://ycharts.com/indicators/ethereum_supply

3
Ethereum Price as of May 2, 2023

Source: https://coinmarketcap.com/currencies/ethereum/

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III. Volatility

In the past six months, the Ethereum Volatility Index has hovered around 2-4%, with the latest

30-day estimate at 2.22% as of May 10, 2023

3

. By way of comparison, the Crude Oil Volatility

Index on May 2, 2023 stood at approximately 34.00

4%, and the current CBOE Market Volatility

Index was approximately 16.94%5. Spikes of volatility as well as time periods or prolonged

volatility will be managed using risk controls to protect both market participants and the

Exchange. Such controls include daily price limits, price banding, exposure limits, kill switches,

and appropriate margin levels. All contracts are centrally cleared by Nodal clear, which has in

place its own risk limits, offering further protection to market participants.

IV. Analysis of Deliverable Supply

As stated above, the supply of ETH has no limit. As of May, 2023, the deliverable supply of ETH

stands at approximately 117.84 million, and will continue to increase by a maximum of 18 million

in each subsequent year

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. The Exchange proposes a position limit of 400,000 Ether, which

represents 0.34% of the current deliverable supply.

V. Compliance with Core Principles

The Exchange has reviewed the designated contract market (“DCM”) core principles (“Core

Principles”) set forth in the Commodity Exchange Act and has identified that the Contract may

most directly implicate the following Core Principles:

6 https://ycharts.com/indicators/ethereum_supply

5 https://www.marketwatch.com/investing/index/vix

4 https://www.cnbc.com/quotes/.OVX

3 https://www.buybitcoinworldwide.com/volatility-index/

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Core Principle 2 -- Compliance with Rules

Trading in the Contract is subject to the Exchange Rulebook (the “Rulebook”) including Chapter

5, which prohibits fraud, non-competitive trading, market manipulation and abusive and

disruptive trade practices. Additionally, as with all contracts traded on the Exchange, trading will

be subject to monitoring and surveillance by the Market Regulation Department, which has the

authority to investigate and enforce Exchange rules, as described in Chapter 7.

Core Principle 3 -- Contracts Not Readily Subject to Manipulation

The Contract is based on the MarketVector Coinbase Ethereum Benchmark Rate, which was

first published on May 16, 2022. MarketVector Index Solutions GmbH (“MVIS”) is governed by

the European Benchmark Regulation (the “EUBMR”) and supports the International

Organisation of Securities Commissions (“IOSCO”) “Principles for Financial Benchmarks” (the

“IOSCO Principles”). The Exchange has a data sharing agreement with the Coinbase spot

market as well as a licensing agreement for the use of MVIS for the Exchange Contract. MVIS

manages the governance and oversight of the Index, as described in Appendix A below. Given

this oversight, the Index is not readily subject to manipulation.

Core Principle 4 -- Prevention of Market Disruption

Chapter 5 of the Rulebook prohibits Participants from manipulating, distorting the price of, and

disrupting the settlement process of the Contract. As with all contracts traded on the Exchange,

trading in the Contract will be subject to monitoring and surveillance by the Market Regulation

Department. Further, trading in the Contract shall be subject to price limits consistent with the

U.S. equity market-wide circuit breakers. In addition, the Index Provider uses a methodology

which makes potential manipulation of the underlying spot market unlikely to have an effect on

the Index price.

Core Principle 5 -- Position Limits or Accountability

The Contract shall be subject to a position limit of no more than 400,000 Ether per month, with a

reportable level of 5 contracts.

Core Principle 7 -- Availability of General Information

The Exchange shall publish on its website and in its Rulebook the specifications, terms and

conditions of the Contract.

Core Principle 8 -- Daily Publication of Trading Information

The Exchange shall publish on its website on a daily basis the trading volumes, open interest,

and price information for the Contract.

Core Principle 9 -- Execution of Transactions

The Contract shall be listed for trading on the Exchange’s trading system, which provides for

efficient, competitive, and open execution of transactions.

Core Principle 10 -- Trade Information

All requisite trade information shall be included in the audit trail and is sufficient for the Market

Regulation Department to monitor for market abuse.

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Core Principle 11 -- Financial Integrity of Transactions

The Contract shall be cleared by Nodal Clear, LLC, a CFTC registered derivatives clearing

organization subject to the CFTC regulations related thereto.

Core Principle 12 -- Protection of Markets and Market Participants

Chapters 4 and 5 of the Rulebook require all market participants, including futures commission

merchants (“FCMs”) carrying customer accounts, to observe high standards of integrity, market

conduct, commercial honor, fair dealing, and just and equitable principles of trade and prohibits,

among other things, fraud, non-competitive trading, market manipulation, and abusive and

disruptive trade practices. As with all contracts traded on the Exchange, trading will be subject

to monitoring and surveillance by the Market Regulation Department.

Core Principle 13 -- Disciplinary Procedures

Rulebook Chapter 7 sets forth the rules and procedures for the investigation, enforcement, and

sanctioning of persons that violate the Exchange’s Rules.

Core Principle 14 - Dispute Resolution

Disputes related to the Contract are governed by Chapter 8 of the Exchange Rulebook, which

provides for arbitration procedures overseen by the National Futures Association.

Certification

The Exchange has spoken with FCMs and market participants who support the decision to

launch the Contract. The Exchange is not aware of any substantive opposing views to the

Contract. The Exchange certifies that the Contract and related rules certified herein comply with

the Commodity Exchange Act and the rules and regulations promulgated thereunder.

The Exchange certifies that this submission has been concurrently posted on the Exchange’s

website at: https://www.coinbase.com/derivatives.

If you have any questions or require any further information, please contact me at

jane.downey@coinbase.com.

Sincerely,

/s/

Jane Downey

Chief Regulatory Officer

Attachments:

Appendix A MarketVector Coinbase Ethereum Benchmark Rate Index Methodology

Appendix B Amendments to CDE Rulebook Chapter 11

Appendix C Position Limit, Position Accountability, and Reportable Level Table (CDE

Rulebook Chapter 5)

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APPENDIX A

Market Vector Coinbase Ethereum Benchmark Rate Contract Methodology

Description

The Market Vector Coinbase Ethereum Benchmark Rate contract (“Contract”, “CETBR”)

7

is

produced by Market Vector Indexes of Frankfurt, Germany, an affiliate of Van Eck Associates

Corporation (“MVI”). The Contract is calculated and disseminated in USD and tracks the price of

Ether as traded on the Coinbase spot exchange.

How the Constituent Exchanges are Chosen

The governance and organizational structure of MVI includes the Advisory Board, the

Independent Oversight Function, the Management Board of MVI and its employees and their

specific participants, roles and responsibilities.

Advisory Board

The MVI Advisory Board is governed by the Rules of Procedure for the Advisory Board. The

Advisory Board is responsible to supervise and advise the Managing Directors of MV. The

approval of the Advisory Board is required for certain important decisions.

Independent Oversight Function

MVI has implemented an Independent Oversight Function (“IOF”) that consists of employees of

the Legal and Compliance department of VanEck (Europe) GmbH. Some of the key task and

responsibilities of the IOF are:

● Periodic review of the Index Guide and Methodology;

● Review and approval of the procedures for index cessation;

● Oversee third parties involved in the provision of the indices, including calculation or

dissemination agents;

● Assess internal and external audits or reviews, and monitor the implementation of

identified remedial actions; and

● Monitor input data and contributors and MVI’s related actions in challenging or validating

contributions of input data.

Managing Directors

MVI has two Managing Directors (MD), the Operations and the Shared Services MD. The roles

and responsibilities of the two different MDs are documented and serve to ensure mitigation of

conflicts of interest and enhance governance standards. The Managing Directors are

responsible for the ongoing review and monitoring of compliance with MVI’s policies and

procedures by all involved parties and the notification of possible breaches or incidents to the

IOF.

7 https://www.mvis-indices.com/indices/digital-assets/mvis-cryptocompare-bitcoin-benchmark-rate

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The MVIS Ethereum Benchmark Rate Index is not Subject to Manipulation

The index is calculated as an average of 1-hour quantity weighted median prices, which are

calculated for 20 3-minute intervals. The Contract price is determined by using a median price,

which filters out any prices that might be considered outliers, either high or low.

Due to the sheer number of times the price is recalculated, and the use of median prices, any

attempt to manipulate the price of the index would be extremely difficult. In addition to the

calculation safeguards, MVI has procedures in place to prevent manipulation, MVI has a

number of policies and procedures in place to ensure a fair marketplace. MVI has instituted

measures to investigate and correct a potentially erroneous price due to bad data, late or

delayed transactions and non-reporting exchanges. Incorrect or missing data is corrected

immediately.

9
Disruptions with calculation agents are handled by Compliance and Senior Management at MVI.

MVI will communicate any error to all affected clients. In addition, if MVI identifies any conduct

that may involve manipulation of an index by calculation/dissemination agent, it will report this to

its regulator, BaFin.

How Settlement is Calculated

During the 1-hour settlement window, MVI breaks the hour into 20 3-minute intervals. In each of

these intervals, MVI aggregates all trades and volume from the Coinbase spot exchange and

calculates a volume weighted median price for the interval. The settlement is based on a simple

average of the 20 volume weighted median prices calculated.

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APPENDIX B

Additions underscored; deletion are struckthrough

CHAPTER 11: CONTRACTS

* * * * *

RULE 1109. Ether Futures

(a) Scope. Rule 1109 is limited in application to the trading of the Ethereum futures (“ETI

Contract”). In addition to Rule 1109, the ETI Contract is subject to all Rules of the

Exchange as applicable. Unless otherwise stated, all times referred to herein are

Central Time Zone.

(b) Trading Schedule. The ETI Contract shall be offered for monthly trading in the front four

months and the following December contract month during such hours as the Exchange

shall determine from time-to-time.

(c) Trading Unit. The trading unit is equal to 10 Ether.

(d) Price Increments. The minimum price increment shall be 0.5 index points ($5 per

Contract).

(e) Position Limits, Position Accountability, and Reportable Levels. Pursuant to Rules 530

to 533 and subject to the requirements and exceptions therein, the ETI Contract is

subject to the following:

(1) Position Limit. 40,000 ETI aggregate

(2) Reportable Level. 5 ETI Contracts

(f) Price Fluctuation Limits. Trading in the ETI Contract shall be subject to the following

price fluctuation limits of

(1) 10% of the Hourly Calculated Reference Price at the top of each hour.

(2) Reference Price is calculated by using the settlement calculation from the last 60

seconds of each hour. A 10% up and down Price Limit will be applied to the

Reference Price.

(3) The market will enter a Halt state for 2 minutes if a Price Limit is reached. Orders

can be submitted, canceled and amended during this state but no matching will

occur.

(4) The new Reference Price will be the last Price Limit reached.

(5) If Price Limits are hit on the Lead Month Contract, all related instruments will be

Halted.

(6) If Price Limits are hit on non-Lead Month Contracts, only the specific instrument

which reached the Price Limit will be Halted.

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(g) Daily Price Limits. Trading in the ETI Contract shall be subject to the following Daily

Price Limits of

(1) 30% Daily Price Limits will be applied from the previous day’s settlement price

and applied to the next trading session.

(2) If Daily Price Limits are reached the market will remain open but will not trade

beyond the Daily Price Limit.

(h) Trading terminates at 4:00 pm London time on the last Friday of the contract month. If

that day is not a U.S. business day, trading terminates on the preceding day that is a

U.S. business day.

(i) Settlement. The ETI Contract is cash settled

(1) Daily Settlement Price at 3:00 PM CT shall be determined as follows:

(i) 1-min VWAP of futures contract rounded to the nearest tradable tick

(ii) 1-min TWAP of futures contract midpoint of the Bid/Ask rounded to the

nearest tradable tick

(iii) If a two-sided market is not available during the sixty (60) seconds prior

to 3:00 PM CT, then the Settlement Price will be Market Vector CBBR

index value - (difference between previous day’s CBBR index value and

previous day’s futures settlement)

(2) Final Settlement Price shall be the value of the underlying index at 4 p.m.

London Time on the day of expiration, calculated and disseminated by MVIS as

the Index Provider and calculation agent.

(3) Final Settlement. Clearing Firms holding open positions in an expiring ETI

Contract at the termination of trading shall make or receive payment in

accordance with the rules of the Clearing House.

(j) Disclaimer.

The MarketVector Index Solutions Coinbase Ethereum Benchmark rate is a trademark of

MarketVector Index Solutions and its affiliates (collectively “MVIS”). MVIS or MVIS’s

licensors own all proprietary rights in the Indices. MVIS is NOT affiliated with LMX Labs,

and neither approves, endorses, reviews or recommends the Ether Futures. MVIS does

not guarantee the timeliness, accurateness or completeness of any data or information

relating to the Coinbase Ethereum Benchmark Rate Index, and neither shall be liable in

any way to LMX Labs, investors in the Ether (ETI) futures or other third parties in respect

of the use or accuracy of the Coinbase Ethereum Benchmark Rate Index or any data

included therein.

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APPENDIX C

Additions underscored; deletion are struckthrough

CHAPTER 5: TRADING PRACTICES AND BUSINESS CONDUCT

* * * * *

RULE 533. Position Limit, Position Accountability, Reportable Level, and Volume

Threshold Level Table

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