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 Bitcoin Futures Contract

Coinbase Derivatives Submission #2023-2E

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 Bitcoin Futures contract to be offered for trading on the

Exchange on trade date June 5, 2023.

Contract Description

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

contract with the following specifications:

Product Bitcoin Futures

Product Type USD-settled index future

Contract Size 1 Bitcoin

Displayed Price Example $30,005

Contract Notional ~$30,000 contract notional (i.e. 1 x estimated BTC price of $30,000)

Contract will always represent 1 Bitcoin, using an estimated Bitcoin price of

$30,000 for illustrative purposes.

Contract Code BTI

Minimum Tick Size and Value Min tick size: $5 per bitcoin

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

CBBR index value - (difference between previous day’s CBBR 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 Bitcoin benchmark reference rate (CBBR) 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 20,000 BTI 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. Bitcoin Market Overview

II. Contract Description

III. Volatility

IV. Analysis of Deliverable Supply

V. Compliance with Core Principles

I. Bitcoin Market Overview

Bitcoin was created in 2008 by the pseudonymous individual(s) operating under the name of

Satoshi Nakamoto. The technology behind the cryptocurrency was detailed in a white paper,

which described an open ledger called the blockchain that occupies a network accessible to all.

Bitcoin was launched in 2009 implementing this technology and is used as a mode of financial

exchange wherein one can process financial transactions without the intervention of a central

bank. Bitcoin has since become the most widely traded cryptocurrency in the markets.

Bitcoin is created by miners who perform complex mathematical calculations to create a new

block in the chain. The Bitcoin blockchain has a limit of 21 million Bitcoin that can be mined. As

of March 2023, 19 million Bitcoin have already been mined. When Bitcoin was first created,

each block represented 50 Bitcoin. As more blocks in the chain are created, the number of

Bitcoin per block is reduced. Currently, each block mined represents 6.25 Bitcoin. This number

is expected to reduce further with the ultimate expectation that the 21 million limit will be

reached around sometime in 2140

1

.

II. Contract Description

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

Bitcoin Benchmark Rate Index (“Index”). This Index tracks the price of Bitcoin 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 1 Bitcoin. At the current price of approximately $30,000, the notional

value of each Coinbase Derivatives contract would be approximately $30,000. The Exchange

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

1 https://www.coindesk.com/learn/what-happens-when-all-bitcoin-are-mined/

3
Bitcoin Price as of May 2, 2023

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

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III. Volatility

In the past six months, the Bitcoin Volatility Index has hovered around 2-3%, with the latest

30-day estimate at 1.85% as of May 2, 2023

2

. By way of comparison, the Crude Oil Volatility

Index on May 2, 2023 stood at approximately 35.94

3%, and the current CBOE Market Volatility

Index was approximately 16.57%4.

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

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

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

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IV. Analysis of Deliverable Supply

As stated above, Bitcoin was created with a limited supply of 21 million Bitcoin, with 19 million

currently mined. The current number of Bitcoin mined would not equal the number in circulation,

as there are Bitcoins that are permanently unavailable, or “burned” due to lost wallet keys and

other factors. It is estimated that up to 20% of Bitcoin are burned. Therefore, the deliverable

supply of Bitcoin would be closer to 15 million Bitcoin. Given that each Coinbase Derivatives

Bitcoin cash-settled contract represents 1 Bitcoin, a single contract is <0.01% of the deliverable

supply. A common practice is to set the position limit so that a market participant holds no more

than 25% of the deliverable supply of a commodity. Given that 25% of the deliverable supply of

Bitcoin is 4.725 million Bitcoin, a position limit of 20,000 Bitcoin would be reasonable. This

position limit is also consistent with Bitcoin products listed by other exchanges.

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:

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 Bitcoin 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.

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Core Principle 5 -- Position Limits or Accountability

The Contract shall be subject to a position limit of no more than 20,000 Bitcoin 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.

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.

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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 Bitcoin 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 Bitcoin Benchmark Rate Index Methodology

Description

The Market Vector Coinbase Bitcoin Benchmark Rate Index (“Index”)

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is produced by MV Index

Systems of Frankfurt, Germany, an affiliate of Van Eck Associates Corporation (“MVIS”). The

Index is calculated and disseminated in USD and tracks the price of Bitcoin Traded at Coinbase.

The Market Vector Coinbase Bitcoin Benchmark Rate uses the largest, most liquid Bitcoin

exchange in the United States. Coinbase is the dominant cryptocurrency spot market in the

United States, with nearly 70% of all Bitcoin trading in the U.S. traded on the exchange. To

illustrate the Coinbase market share over competing cryptocurrency markets, the price of Bitcoin

across the top five cryptocurrency markets as represented by the CF indexes contract used by

the CME, varies, on average by $4.4 on a daily settlement basis in 2023, or the equivalent of

approximately 1bp or 0.01% of the notional value of the underlying asset.

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Advisory Board

The MVIS 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 MVIS. The

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

Independent Oversight Function

MVIS 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 MVIS’ related actions in challenging or

validating contributions of input data.

Managing Directors

MVIS has two Managing Directors (“MD”), the Operations and the Shared Services MDs. 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 MDs are responsible

for the ongoing review and monitoring of compliance with MVIS’ policies and procedures by all

involved parties and the notification of possible breaches or incidents to the IOF.

6 Based on settlement data from Jan 1, 2023 through April 23, 2023.

5 https://marketvector.com/indices/digital-assets/marketvector-coinbase-bitcoin-benchmark-rate

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Market Vector Coinbase Bitcoin Benchmark Rate Index is not Subject to Manipulation

The Index is calculated daily between 00:00 and 24:00 London time, and the index values are

disseminated to data vendors every 15 seconds. The index is disseminated in USD and the

closing value is calculated at 16:00:00 London time with a fixed 16:00:00 London time exchange

rate.

Due to the sheer number of times the price is recalculated, and the size of Coinbase’s market,

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

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

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

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

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

immediately.

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

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

conduct that may involve manipulation of an index by calculation/dissemination agent, it will

report this to its regulator, BaFin.

The Exchange has in place an agreement with Coinbase to share information and trade data

occurring on Coinbase in connection with regulatory inquiries. This agreement gives Coinbase

Derivatives the opportunity to investigate activity in the spot market which may have an impact

on the listed futures contract.

How Settlement is Calculated

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

of these intervals, MVIS aggregates all trades and volume from the constituent 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 1108. Bitcoin Futures

(a) Scope. Rule 1108 is limited in application to the trading of the Bitcoin futures (“BTI

Contract”). In addition to Rule 1108, the BTI 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 BTI Contract shall be offered for monthly trading in the front four

months and 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 1 Bitcoin.

(d) Price Increments. The minimum price increment shall be 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 BTI Contract is

subject to the following:

(1) Position Limit. 20,000 BTI aggregate.

(2) Reportable Level. 5 BTI Contracts

(f) Price Fluctuation Limits. Trading in the BTI 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 BTI 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 BTI 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 BTI

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 Bitcoin 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 Bitcoin Futures. MVIS does

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

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

way to LMX Labs, investors in the Bitcoin (BTI) futures or other third parties in respect of

the use or accuracy of the Coinbase Bitcoin 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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