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Federal Register / Vol. 86, No. 172 / Thursday, September 9, 2021 / Notices delayed or missing data from an exchange does not cause a calculation failure.
In accordance with the methodology, if for any constituent exchange the absolute percentage deviation of the volume-weighted median trade price in comparison with the median of the volume-weighted median trade prices of all constituent exchanges exceeds a given threshold currently set at 10%
and defined in the methodology, all relevant transactions of that constituent exchange are flagged as potentially erroneous and are disregarded in the calculation of CME CF BRR for that calculation day.57 Furthermore, for inclusion in the CME CF BRRs calculation, a constituent exchanges bitcoin U.S. Dollar spot trading volume must meet the minimum threshold currently, 3% relative contribution over two 2 consecutive quarters as detailed in the methodology.58 The criteria collectively cause the constituent exchanges to deliver transparent and consistent trade and order data to CF
Benchmarks via an API with sufficient reliability, detail and timeliness.59
Furthermore, the constituent exchanges maintain fair and transparent market conditions to impede illegal, unfair or manipulative trading practices, and comply with applicable law and regulations including, capital markets regulations, money transmission regulations, client money custody requirements, know-your-client KYC
requirements, and anti-moneylaundering AML regulations.60 The constituent exchanges are also required to cooperate with inquiries and investigations of the administrator CF
Benchmarks and execute a data sharing agreement with CME.61
Core Principles Certification of CME
BTC Futures Contracts The CME Bitcoin Futures comply with all Core Principles of the CEA. In adhering to the Core Principles 62
applicable to all Designated Contract Markets DCM, the CME certified that the CME Bitcoin Futures met specific Core Principles as they apply to futures contracts traded on a DCM. This compliance results in the Trusts core asset being a well-regulated instrument that is not readily susceptible to
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57 Id
at 11.
CME CF Cryptocurrency Pricing Products Constituent Exchange Criteria Version 5.0 May 20, 2020 at 4, available at https docscfbenchmarks.s3.amazonaws.com/CME+CF+
Constituent+Exchanges+Criteria.pdf.
59 Id.
60 Id.
61 Id.
62 17 CFR part 38.
58 See
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manipulation. The following Core Principles are of particular relevance to the analysis of this filing.
Contracts Not Readily Subject to Manipulation In certifying the CME BTC Futures Contracts to the CFTC, the CME was required to include an analysis describing the contract, a discussion of the market research it conducted and note that the contract was designed to meet the risk management needs of prospective users and promote price discovery of bitcoin. The CME
consulted with market users to obtain their views and opinions during the contracts design process to ensure that the contracts terms and conditions reflected the underlying cash market and would perform the intended risk management and/or price discovery functions.
Since the CME BTC Futures Contract is cash settled by reference to the CME
CF BRR, the CME CF BRRs methodology was provided to the CFTC
with supporting information showing how the CME CF BRR is reflective of the underlying cash market, is not readily subject to manipulation or distortion, and is based on a cash price series that is reliable, acceptable, publicly available and timely as defined in paragraphs c2 and c3 of Appendix C to part 38 of the CFTCs Regulations.63
Prevention of Market Disruption The Core Principles also required CME to certify that it has the ability to prevent manipulation, price distortion, and disruptions of the cash-settlement process through market surveillance, compliance, and enforcement practices and procedures. This would include the ability to conduct real-time trade monitoring and comprehensive and accurate trade reconstruction. Such trade monitoring also allows for the detection of developing market anomalies, such as abnormal price movements and unusual trading volumes, and position-limit violations.
CME rules grant exchanges broad powers to intervene to prevent or reduce market disruptions. Once a threatened or actual disruption is detected, the CME may take steps to prevent the disruption or reduce its severity. CMEs program includes automated trading alerts to detect market anomalies and position-limit violations as they develop and before market disruptions occur or become more serious. CFTC guidance also requires a DCM to have access to its traders position and transaction data in the underlying reference market. The 63 Id.

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at Appendix C paragraphs c2 and c3.

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CME has, through an information sharing agreement with CF Benchmarks, the ability to access information about trader positions and transactions in the underlying spot BTC markets that contribute to the CME CF BRR. The CME has also implemented a series of risk controls as outlined in the CFTC
Regulations Acceptable Practices.64
Position Limits The CFTCs Core Principles also call for the use of position limits or position accountability to reduce the threat of market manipulation or congestion. The CME has set a position limit of 2,000
contracts for the CME Bitcoin Futures.
As a result of this position limit, an attempt to manipulate the price of the CME Bitcoin Futures, and consequently the shares in the Trust, would yield little benefit due to the limited potential profit available from the trading of 2,000
contracts.
Ongoing Coordination With CFTC on CME Bitcoin Futures Since the launch of CME Bitcoin Futures, the CME has worked with the CFTC on a regular and frequent basis to assess the trading in the contract and ensure that the market is free from fraud and manipulation. CFTC staff, in the recent past, has actively engaged CME
in reviewing CMEs surveillance program for bitcoin products pursuant to part 38 Designated Contract Markets of the CFTCs regulations. This engagement has concerned CMEs analysis of the trading activities and strategies of bitcoin futures market participants of significant size and outreach to these market participants. It has also concerned CMEs ability to obtain transactional information from the constituent exchanges that contribute data to the bitcoin reference rate in addition to CMEs continued monitoring of the bitcoin reference rate as a price series, particularly during the indexs one-hour calculation window.
Creation and Redemption of Shares According to the Draft Registration Statement, the Trust will issue and 64 These risk controls include: 1 Dynamic circuit breakers, which monitor for significant price movements within a trading session by defining an upper and lower limit of how far bitcoin futures can move 10% in any one hour rolling window and, if triggered, matching is suspended for 2 minutes;
2 velocity logic, which is designed to detect market movement of a predefined number of ticks either up or down within a predefined time and, if triggered, matching is suspended for 10 seconds; 3
daily price limits, which is the maximum daily price range permitted for BTC futures +/ 30%
from prior day settlement; and 4 initial margin currently set at 35% of notional value for outright positions charged for all open positions based on expected volatility over a two-day close out period.

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