Quiero saber acerca de...

jbell on DSKJLSW7X2PROD with NOTICES

Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices Trust Shares,71 to be listed on U.S.
national securities exchanges. In order for any proposed rule change from an exchange to be approved, the Commission must determine that, among other things, the proposal is consistent with the requirements of Section 6b5 of the Act, specifically including: i The requirement that a national securities exchanges rules are designed to prevent fraudulent and manipulative acts and practices; 72 and ii the requirement that an exchange proposal be designed, in general, to protect investors and the public interest.
The Exchange believes that the proposal is, in particular, designed to protect investors and the public interest.
With the growth of OTC Bitcoin Funds over the past year, so too has grown the potential risk to U.S. investors.
Significant and prolonged premiums and discounts, significant premium/
discount volatility, high fees, insufficient disclosures, and technical hurdles are putting U.S. investor money at risk on a daily basis that could potentially be eliminated through access to a bitcoin ETP. As such, the Exchange believes that this proposal acts to limit the risk to U.S. investors that are increasingly seeking exposure to bitcoin through the elimination of significant and prolonged premiums and discounts, significant premium/discount volatility, the reduction of management fees through meaningful competition, the avoidance of risks associated with investing in operating companies that are imperfect proxies for bitcoin exposure, and protection from risk associated with custodying spot bitcoin by providing direct, 1-for-1 exposure to bitcoin in a regulated, transparent, exchange-traded vehicle designed to reduce the likelihood of significant and prolonged premiums and discounts with its open-ended nature as well as the ability of market participants i.e., market makers and authorized participants to create and redeem on a daily basis.
The Exchange also believes that this proposal is consistent with the requirements of Section 6b5 of the Act and that it has sufficiently demonstrated that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by quantifiable investor protection issues that would be resolved by approving this proposal.
Specifically, the Exchange believes that 71 Commodity-Based Trust Shares, as described in Exchange Rule 14.11e4, are a type of Trust Issued Receipt.
72 See note 54.

VerDate Sep<11>2014

19:29 Aug 05, 2021

Jkt 253001

the significant increase in trading volume in Bitcoin Futures, the growth of liquidity at the inside in the spot market for bitcoin, and certain features of the Shares and the Index mitigate potential manipulation concerns to the point that the investor protection issues that have arisen from the rapid growth of over-the-counter bitcoin funds since the Commission last reviewed an exchange proposal to list and trade a bitcoin ETP, including premium/
discount volatility and management fees, should be the central consideration as the Commission determines whether to approve this proposal.
i Designed To Prevent Fraudulent and Manipulative Acts and Practices In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 73 with a regulated market of significant size. Both the Exchange and CME are members of ISG.74 The only remaining issue to be addressed is whether the Bitcoin Futures market constitutes a market of significant size, which the Exchange believes that it does. The terms significant market and market of significant size include a market or group of markets as to which: a There is a reasonable likelihood that a person attempting to manipulate the ETP
would also have to trade on that market to manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct; and b it is unlikely that trading in the ETP would 73 As previously articulated by the Commission, The standard requires such surveillance-sharing agreements since they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur. The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance-sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity;
that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party. The Commission has historically held that joint membership in ISG
constitutes such a surveillance sharing agreement.
See Wilshire Phoenix Disapproval.
74 For a list of the current members and affiliate members of ISG, see www.isgportal.com.

PO 00000

Frm 00143

Fmt 4703

Sfmt 4703

43301

be the predominant influence on prices in that market.75
The Commission has also recognized that the regulated market of significant size standard is not the only means for satisfying Section 6b5 of the act, specifically providing that a listing exchange could demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement.76
a Manipulation of the ETP
The significant growth in Bitcoin Futures across each of trading volumes, open interest, large open interest holders, and total market participants since the Wilshire Phoenix Disapproval was issued are reflective of that markets growing influence on the spot price, which according to the academic research cited above, was already leading the spot price in 2018 and 2019.
Where Bitcoin Futures lead the price in the spot market such that a potential manipulator of the bitcoin spot market beyond just the constituents of the Index would have to participate in the Bitcoin Futures market, it follows that a potential manipulator of the Shares would similarly have to transact in the Bitcoin Futures market because the Index is based on spot prices. Further, the Trust only allows for in-kind creation and redemption, which, as further described below, reduces the potential for manipulation of the Shares through manipulation of the Index or any of its individual constituents, again emphasizing that a potential manipulator of the Shares would have to manipulate the entirety of the bitcoin spot market, which is led by the Bitcoin Futures market. As such, the Exchange believes that part a of the significant market test outlined above is satisfied and that common membership in ISG
between the Exchange and CME would assist the listing exchange in detecting and deterring misconduct in the Shares.
b Predominant Influence on Prices in Spot and Bitcoin Futures The Exchange also believes that trading in the Shares would not be the predominant force on prices in the Bitcoin Futures market or spot market 75 See
Wilshire Phoenix Disapproval.
Winklevoss Order at 37580. The Commission has also specifically noted that it is not applying a cannot be manipulated standard;
instead, the Commission is examining whether the proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its contentions and to establish that the requirements of the Exchange Act have been met.
Id. at 37582.
76 See
E:FRFM06AUN1.SGM

06AUN1