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On August 19, 2024, Cboe Exchange, Inc. (“Cboe” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act” or “Exchange Act”) and Rule 19b-4 thereunder, a proposed rule change to list and trade options on the Fidelity Wise Origin Bitcoin Fund, the ARK21Shares Bitcoin ETF, the Invesco Galaxy Bitcoin ETF, the Franklin Bitcoin ETF, the VanEck Bitcoin Trust, the WisdomTree Bitcoin Fund, the Grayscale Bitcoin Trust BTC, the Bitwise Bitcoin ETF, the iShares Bitcoin Trust ETF, and the Valkyrie Bitcoin Fund. The proposed rule change was published for comment in the Federal Register on September 4, 2024. On September 27, 2024, the Exchange filed Amendment No. 1 to the proposed rule change. On September 30, 2024, the Exchange withdrew Amendment No. 1 and filed Amendment No. 2 to the proposal, which supersedes and replaces the original proposal in its entirety. On October 10, 2024, the Exchange filed Amendment No. 3 to the proposal. The Commission received no comments regarding the proposal. The Commission is publishing this notice to solicit comments on Amendment Nos. 2 and 3 from interested persons, and is approving the proposed rule change, as modified by Amendment Nos. 2 and 3, on an accelerated basis.
On January 10, 2024, the Commission approved proposals by NYSE Arca, Inc., The Nasdaq Stock Market LLC, and Cboe BZX Exchange, Inc. to list and trade the shares of 11 bitcoin-based commodity-based trust shares and trust units, including the trusts underlying the proposed options. See Securities Exchange Act Release No. 99306 (Jan. 10, 2024), 89 FR 3008 (Jan. 17, 2024) (order approving File Nos. SR-NYSEARCA-2021-90; SR-NYSEARCA-2023-44; SR-NYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-CboeBZX-2023-038; SR-CboeBZX-2023-040; SR-CboeBZX-2023-042; SR-CboeBZX-2023-044; SR-CboeBZX-2023-072) (“Bitcoin ETP Order”).
See Securities Exchange Act Release No. 100861 (Aug. 28, 2024), 89 FR 71982.
Amendment No. 2 narrows the scope of the proposal to the Fidelity Wise Origin Bitcoin Fund and the ARK 21Shares Bitcoin ETF; proposes new position and exercise limits for options on the funds and provides justification and analysis for the proposed position and exercise limits; provides additional discussion of surveillance procedures that will apply to the proposed options; and eliminates references to the applicability of specified Interpretations and Policies in Exchange Rule 8.30.
Amendment No. 3 narrows the scope of the proposal by providing that options on the Fidelity Wise Origin Bitcoin Fund and the ARK 21Shares Bitcoin ETF will not be available for FLEX trading. FLEX Options are flexible exchange options. A FLEX Option on an equity security may be referred to as a “FLEX Equity Option,” and a FLEX Option on an index may be referred to as a “FLEX Index Option.” See Exchange Rule 1.1 The Exchange may authorize for trading a FLEX Option class on any equity security or index if it may authorize for trading a non-FLEX Option class on that equity security or index pursuant to Exchange Rules 4.3 and 4.10, respectively, even if the Exchange does not list that non-FLEX Option class for trading. See Exchange Rule 4.20. There are no position limits for FLEX Equity Options, other than as set forth in Exchange Rules 8.35(c)(1)(B) and (d). See Exchange Rule 8.35(c)(1)(A). Amendment Nos. 2 and 3 are available on the Exchange's website at https://www.cboe.com/us/options/regulation/rule_filings/ .
I. The Exchange's Description of the Proposed Rule Change, as Modified by Amendment Nos. 2 and 3
The Exchange filed with the Commission a proposal to list and trade options on the Fidelity Wise Origin Bitcoin Fund and the ARK 21Shares Bitcoin ETF. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange's website https://www.cboe.com/us/options/regulation/rule_filings/, at the Exchange's Office of the Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Rule 4.3 regarding the criteria for underlying securities. Specifically, the Exchange proposes to amend Rule 4.3, Interpretation and Policy .06(a)(4) to allow the Exchange to list and trade options on Units that represent interests in the Fidelity Wise Origin Bitcoin Fund (the “Fidelity Fund”) and the ARK 21Shares Bitcoin ETF (the “ARK 21 Fund” and, with the Fidelity Fund, the “Bitcoin Funds”) , designating them as “Units” deemed appropriate for options trading on the Exchange. Current Rule 4.3, Interpretation and Policy .06 provides that, subject to certain other criteria set forth in that Rule, securities deemed appropriate for options trading include Units that represent certain types of interests, including interests in certain specific trusts that hold financial instruments, money market instruments, or precious metals (which are deemed commodities).
Rule 1.1 defines a “Unit” (which may also be referred to as an ETF) as a share or other security traded on a national securities exchange and defined as an NMS stock as set forth in Rule 4.3.
See Securities Exchange Act Release No. 99306 (January 10, 2024), 89 FR 3008, 3009 (January 17, 2024) (SR-NYSEArca-2021-90; SR-NYSEArca-2023-44; SR-NYSEArca-2023-58; SR-NASDAQ-2023-016; SR-NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-CboeBZX-2023-038; SR-CboeBZX-2023-040; SR-CboeBZX-2023-042; SRCboeBZX-2023-044; and SR-CboeBZX-2023-072) (Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, to List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units) (“Bitcoin ETP Approval Order”).
See Rule 4.3, Interpretation and Policy .06(a), which permits options trading on Units that represent (1) interests in registered investment companies (or series thereof) organized as open-end management investment companies, unit investment trusts or similar entities that hold portfolios of securities and/or financial instruments including, but not limited to, stock index futures contracts, options on futures, options on securities and indexes, equity caps, collars and floors, swap agreements, forward contracts, repurchase agreements and reverse purchase agreements (the “Financial Instruments”), and money market instruments, including, but not limited to, U.S. government securities and repurchase agreements (the “Money Market Instruments”) comprising or otherwise based on or representing investments in indexes or portfolios of securities and/or Financial Instruments and Money Market Instruments (or that hold securities in one or more other registered investment companies that themselves hold such portfolios of securities and/or Financial Instruments and Money Market Instruments); (2) interests in a trust or similar entity that holds a specified non-U.S. currency deposited with the trust or similar entity when aggregated in some specified minimum number may be surrendered to the trust by the beneficial owner to receive the specified non-U.S. currency and pays the beneficial owner interest and other distributions on deposited non-U.S. currency, if any, declared and paid by the trust (“Currency Trust Shares”); (3) commodity pool interests principally engaged, directly or indirectly, in holding and/or managing portfolios or baskets of securities, commodity futures contracts, options on commodity futures contracts, swaps, forward contracts and/or options on physical commodities and/or non-U.S. currency (“Commodity Pool Units”); (4) interests in the SPDR Gold Trust, the iShares COMEX Gold Trust, the iShares Silver Trust, the Aberdeen Standard Physical Silver Trust, the Aberdeen Standard Physical Gold Trust, the Aberdeen Standard Physical Palladium Trust, the Aberdeen Standard Physical Platinum Trust, the Sprott Physical Gold Trust or the Goldman Sachs Physical Gold ETF; or (5) an interest in a registered investment company (“Investment Company”) organized as an open-end management investment company or similar entity, that invests in a portfolio of securities selected by the Investment Company's investment adviser consistent with the Investment Company's investment objectives and policies, which is issued in a specified aggregate minimum number in return for a deposit of a specified portfolio of securities and/or a cash amount with a value equal to the next determined net asset value (“NAV”), and when aggregated in the same specified minimum number, may be redeemed at a holder's request, which holder will be paid a specified portfolio of securities and/or cash with a value equal to the next determined NAV (“Managed Fund Share”).
The Bitcoin Funds are Bitcoin-backed commodity ETFs structured as trusts. Similar to any Unit currently deemed appropriate for options trading under Rule 4.3, Interpretation and Policy .06, the investment objective of each Bitcoin Fund is for its shares to reflect the performance of Bitcoin (less the expenses of the trust's operations), offering investors an opportunity to gain exposure to Bitcoin without the complexities of Bitcoin delivery. As is the case for Units currently deemed appropriate for options trading, a Bitcoin Fund's shares represent units of fractional undivided beneficial interest in the trust, the assets of which consist principally of Bitcoin and are designed to track Bitcoin or the performance of the price of Bitcoin and offer access to the Bitcoin market. The Bitcoin Funds provide investors with cost-efficient alternatives that allow a level of participation in the Bitcoin market through the securities market. The primary substantive difference between Bitcoin Funds and Units currently deemed appropriate for options trading are that Units may hold securities, certain financial instruments, and specified precious metals (which are deemed commodities), while Bitcoin Funds hold Bitcoin (which is also deemed a commodity).
The trust may include minimal cash.
The Exchange believes each Bitcoin Fund satisfies the Exchange's initial listing standards for Units on which the Exchange may list options. Specifically, each Bitcoin Fund satisfies the initial listing standards set forth in Rule 4.3, Interpretation and Policy .06(b), as is the case for other Units on which the Exchange lists options (including trusts that hold commodities). Rule 4.3, Interpretation and Policy .06 requires that Units must either (1) meet the criteria and standards set forth in Rule 4.3, Interpretation and Policy .01(a), or (2) be available for creation or redemption each business day from or through the issuer in cash or in kind at a price related to net asset value, and the issuer must be obligated to issue Units in a specified aggregate number even if some or all of the investment assets required to be deposited have not been received by the issuer, subject to the condition that the person obligated to deposit the investments has undertaken to deliver the investment assets as soon as possible and such undertaking is secured by the delivery and maintenance of collateral consisting of cash or cash equivalents satisfactory to the issuer, as provided in the respective prospectus. Each Bitcoin Fund satisfies Rule 4.3, Interpretation and Policy .06(b)(2), as each is subject to this creation and redemption process.
Rule 4.3, Interpretation and Policy .01 provides for guidelines to be by the Exchange when evaluating potential underlying securities for Exchange option transactions.
While not required by the Rules for purposes of options listings, the Exchange believes each Bitcoin Fund satisfies the criteria and guidelines set forth in Rule 4.3, Interpretation and Policy .01. Pursuant to Rule 4.3(a), a security (which includes a Unit) on which options may be listed and traded on the Exchange must be duly registered (with the Commission) and be an NMS stock (as defined in Rule 600 of Regulation NMS under the Securities Exchange Act of 1934, as amended (the “Act”)), and be characterized by a substantial number of outstanding shares that are widely held and actively traded. Each Bitcoin Fund is an NMS Stock as defined in Rule 600 of Regulation NMS under the Act. The Exchange believes each Bitcoin Fund is characterized by a substantial number of outstanding shares that are widely held and actively traded.
The criteria and guidelines for a security to be considered widely held and actively traded are set forth in Rule 4.3, Interpretation and Policy .01, subject to exceptions.
An “NMS stock” means any NMS security other than an option, and an “NMS security” means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan (or an effective national market system plan for reporting transaction in listed options). See17 CFR 242.600(b)(64) (definition of “NMS security”) and (65) (definition of “NMS stock”).
As of August 7, 2024, the Bitcoin Funds had the following number of shares outstanding:
| Bitcoin Fund | Shares outstanding |
|---|---|
| Fidelity Fund | 201,100,100 |
| ARK 21 Fund | 45,495,000 |
| Bitcoin Fund | Beneficial holders | Date |
|---|---|---|
| Fidelity Fund | 279,656 | 6/27/2024 |
| ARK 21 Fund | 69,425 | 6/26/2024 |
| Bitcoin Fund | 6-Month trading volume (shares) | 30-Day ADV (shares) | 30-Day ADV (notional $) |
|---|---|---|---|
| Fidelity Fund | 1,112,861,581 | 6,014,335 | 250,354,755 |
| ARK 21 Fund | 297,360,739 | 1,893,335 | 90,484,307 |
| Underlying Bitcoin Fund | Six-month ADV (shares) | Outstanding shares | Market capitalization ($) |
|---|---|---|---|
| Fidelity Fund | 8,902,893 | 201,100,100 | 14,217,013,188 |
| ARK 21 Fund | 2,378,886 | 45,495,000 | 2,487,666,600 |
| Underlying Bitcoin Fund | Average Limit of other ETF options (contracts) | Proposed limit (contracts) |
|---|---|---|
| Fidelity Fund | 188,110 | 25,000 |
| ARK 21 Fund | 108,696 | 25,000 |
| Underlying Bitcoin Fund | Proposed position/exercise limit (in equivalent shares) | Outstanding shares | Percentage of outstanding shares |
|---|---|---|---|
| Fidelity Fund | 2,500,000 | 201,100,100 | 1.2 |
| ARK 21 Fund | 2,500,000 | 45,495,000 | 5.5 |
| Position/exercise limit (in equivalent shares) | Minimum outstanding shares | Percentage of outstanding shares |
|---|---|---|
| 2,500,000 | 6,300,000 | 40.0 |
| 5,000,000 | 40,000,000 | 12.5 |
| 7,500,000 | 120,000,000 | 6.3 |
| 20,000,000 | 240,000,000 | 8.3 |
| 25,000,000 | 300,000,000 | 8.3 |
| Bitcoin Fund | August 27, 2024 share price ($) | Value of 2,500,000 shares of Bitcoin Fund ($) | Percentage of bitcoin market |
|---|---|---|---|
| Fidelity Fund | 54.33 | 135,825,000 | 0.01% |
| ARK 21 Fund | 62.08 | 155,200,000 | 0.01% |
| Bitcoin Fund | August 28, 2024 Share price ($) | Number of option contracts |
|---|---|---|
| Fidelity Fund | 51.47 | 114,532 |
| ARK 21 Fund | 58.83 | 100,203 |
| Bitcoin Fund | Shares outstanding | Number of market participants with 25,000 same side positions |
|---|---|---|
| Fidelity Fund | 201,100,100 | 80 |
| ARK 21 Fund | 45,495,000 | 18 |