[Federal Register Volume 83, Number 167 (Tuesday, August 28, 2018)]
[Notices]
[Pages 43934-43942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18572]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83904; File No. SR-NYSEArca-2017-139]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order 
Disapproving a Proposed Rule Change To List and Trade the Shares of the 
ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF

August 22, 2018.

I. Introduction

    On December 4, 2017, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade the shares 
(``Shares'') of the ProShares Bitcoin ETF and the ProShares Short 
Bitcoin ETF (each a ``Fund'' and, collectively, the ``Funds'') issued 
by the ProShares Trust II (``Trust'') under NYSE Arca Rule 8.200-E, 
Commentary .02. The proposed rule change was published for comment in 
the Federal Register on December 26, 2017.\3\ The comment period for 
the Notice of Proposed Rule Change closed on January 16, 2018.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82350 (Dec. 19, 
2017), 82 FR 61100 (Dec. 26, 2017) (``Notice'').
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    On January 30, 2018, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\5\ On March 23, 2018, the Commission 
instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 
\6\ to determine whether to approve or disapprove the proposed rule 
change.\7\ The comment period and rebuttal comment period for the Order 
Instituting Proceedings closed on April 19, 2018, and May 3, 2018, 
respectively. Finally, on June 15, 2018, the Commission extended the 
period for consideration of the proposed rule change to August 23, 
2018.\8\ As of

[[Page 43935]]

August 21, 2018, the Commission had received 13 comments on the 
proposed rule change.\9\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 82602 (Jan. 30, 
2018), 83 FR 4941 (Feb. 2, 2018).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 82939 (Mar. 23, 
2018), 83 FR 13537 (Mar. 29, 2018) (``Order Instituting 
Proceedings'').
    \8\ See Securities Exchange Act Release No. 83452 (June 15, 
2018), 83 FR 28894 (June 21, 2018).
    \9\ See Letters from Abe Kohen, AK Financial Engineering 
Consultants, LLC (Dec. 27, 2017) (``Kohen Letter''); Anita Desai 
(Apr. 6, 2018) (``Desai Letter''); Ed Kaleda (Apr. 6, 2018) 
(``Kaleda Letter''); Scott Moberg (Apr. 6, 2018) (``Moberg 
Letter''); Adam Malkin (Apr. 8, 2018) (``Malkin Letter''); Gisan 
Mohammed (Apr. 11, 2018) (``Mohammed Letter''); Shravan Kumar (Apr. 
11, 2018) (``Kumar Letter''); Louise Fitzgerald (Apr. 19, 2018) 
(``Fitzgerald Letter''); Joshua Rousseau (Apr. 30, 2018) (``Rousseau 
Letter''); Thomas W. Fink (May 3, 2018) (``Fink Letter''); Sharon 
Brown-Hruska, Managing Director, and Trevor Wagener, Consultant, 
NERA Economic Consulting (May 18, 2018) (``NERA Letter''); Sami 
Santos (Aug. 9, 2018) (``Santos Letter''); and Sam M. Ahn (Aug. 16, 
2018) (``Ahn Letter''). All comments on the proposed rule change are 
available on the Commission's website at: https://www.sec.gov/comments/sr-nysearca-2017-139/nysearca2017139.htm.
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    This order disapproves the proposed rule change. Although the 
Commission is disapproving this proposed rule change, the Commission 
emphasizes that its disapproval does not rest on an evaluation of 
whether bitcoin, or blockchain technology more generally, has utility 
or value as an innovation or an investment. Rather, the Commission is 
disapproving this proposed rule change because, as discussed below, the 
Exchange has not met its burden under the Exchange Act and the 
Commission's Rules of Practice to demonstrate that its proposal is 
consistent with the requirements of the Exchange Act Section 6(b)(5), 
in particular the requirement that a national securities exchange's 
rules be designed to prevent fraudulent and manipulative acts and 
practices.\10\ Among other things, the Exchange has offered no record 
evidence to demonstrate that bitcoin futures markets are ``markets of 
significant size.'' That failure is critical because, as explained 
below, the Exchange has failed to establish that other means to prevent 
fraudulent and manipulative acts and practices will be sufficient, and 
therefore surveillance-sharing with a regulated market of significant 
size related to bitcoin is necessary to satisfy the statutory 
requirement that the Exchange's rules be designed to prevent fraudulent 
and manipulative acts and practices.\11\
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    \10\ See 15 U.S.C. 78f(b)(5).
    \11\ See infra notes 29-31 and accompanying text.
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares under NYSE Arca 
Rule 8.200-E, Commentary .02, which governs the listing and trading of 
Trust Issued Receipts on the Exchange.\12\ Each Fund will be a series 
of the Trust, and the Trust and the Funds will be managed and 
controlled by ProShare Capital Management LLC (``Sponsor''). Brown 
Brothers Harriman & Co. will be the custodian and administrator for the 
Trust. SEI Investments Distribution Co. will serve as the distributor 
of the Shares (``Distributor''). The Trust will offer Shares of the 
Funds for sale through the Distributor in ``Creation Units.'' \13\
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    \12\ See NYSE Arca Rule 8.200-E, Commentary .02. NYSE Arca Rule 
8.200-E permits the listing and trading of ``Trust Issued 
Receipts,'' defined as a security (1) that is issued by a trust 
which holds specific securities deposited with the trust; (2) that, 
when aggregated in some specified minimum number, may be surrendered 
to the trust by the beneficial owner to receive the securities; and 
(3) that pay beneficial owners dividends and other distributions on 
the deposited securities, if any are declared and paid to the 
trustee by an issuer of the deposited securities. Commentary .02 
applies to Trust Issued Receipts that invest in any combination of 
investments, including cash; securities; options on securities and 
indices; futures contracts; options on futures contracts; forward 
contracts; equity caps, collars, and floors; and swap agreements.
    \13\ See Notice, supra note 3, 82 FR at 61101.
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    According to the Notice, the ProShares Bitcoin ETF's investment 
objective will be to seek results (before fees and expenses) that, both 
for a single day and over time, correspond to the performance of lead-
month bitcoin futures contracts \14\ listed and traded on either the 
Cboe Futures Exchange (``CFE'') or the Chicago Mercantile Exchange 
(``CME'') (``Benchmark Futures Contract''). This Fund generally intends 
to invest substantially all of its assets in the Benchmark Futures 
Contracts, but may invest in other U.S. exchange-listed bitcoin futures 
contracts, if available (together with Benchmark Futures Contracts, 
collectively, ``Bitcoin Futures Contracts'').\15\
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    \14\ According to the Exchange, lead-month futures contracts are 
the monthly contracts with the earliest expiration date. See Notice, 
supra note 3, 82 FR at 61101, n.6.
    \15\ See Notice, supra note 3, 82 FR at 61101.
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    According to the Notice, the ProShares Short Bitcoin ETF's 
investment objective will be to seek results, for a single day, that 
correspond (before fees and expenses) to the inverse of the daily 
performance of the Benchmark Futures Contract. This Fund generally 
intends to invest substantially all of its assets through short 
positions in Benchmark Futures Contracts, but may invest through short 
positions in Bitcoin Futures Contracts, if available.\16\
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    \16\ See id.
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    The Exchange represents that no more than 10% of the net assets of 
a Fund in the aggregate invested in Bitcoin Futures Contracts shall 
consist of Bitcoin Futures Contracts whose principal market is neither 
a member of the Intermarket Surveillance Group nor a market with which 
the Exchange does not have a comprehensive surveillance-sharing 
agreement.\17\ Further, according to the Notice, in the event that 
position, price, or accountability limits are reached with respect to 
Bitcoin Futures Contracts, each Fund may invest in listed options on 
Bitcoin Futures Contracts (should such listed options become available) 
and OTC swap agreements referencing Bitcoin Futures Contracts 
(collectively, ``Financial Instruments'').\18\ The Notice also states:
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    \17\ See id. at 61105.
    \18\ See id. at 61102.

    Bitcoin Futures Contracts are a new type of futures contract to 
be traded on the CFE and CME or other U.S. exchanges (if available). 
Unlike the established futures markets for traditional physical 
commodities, the market for Bitcoin Futures Contracts is in the 
development stage and has very limited trading and operational 
history. As such, the liquidity of the market for Bitcoin Futures 
Contracts will depend on, among other things, the supply and demand 
for Bitcoin Futures Contracts, the adoption of bitcoin and the 
commercial and speculative interest in the market for Bitcoin 
Futures Contracts and the potential ability to hedge against the 
price of bitcoin with exchange-traded Bitcoin Futures Contracts.\19\
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    \19\ Id. at 61103.

    The Exchange represents that trading in the Shares of each Fund 
will be subject to the existing trading surveillances administered by 
the Exchange, as well as cross-market surveillances administered by 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\20\ The Exchange asserts that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and federal 
securities laws applicable to trading on the Exchange.\21\
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    \20\ See id. at 61105.
    \21\ See id.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether the Exchange's proposal is 
consistent with Exchange Act Section 6(b)(5), which requires, in 
relevant part, that the rules of a national securities exchange be 
designed ``to prevent fraudulent and manipulative acts and practices'' 
and ``to protect investors and the public interest.'' \22\ Under the 
Commission's Rules of Practice, the ``burden to demonstrate that a 
proposed rule change is consistent with the Exchange Act and the rules 
and regulations issued thereunder . . . is on

[[Page 43936]]

the self-regulatory organization [`SRO'] that proposed the rule 
change.'' \23\
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    \22\ 15 U.S.C. 78f(b)(5).
    \23\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\24\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\25\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\26\
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    \24\ See id.
    \25\ See id.
    \26\ See Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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B. Preventing Fraudulent and Manipulative Practices

1. Applicable Legal Standard
    To approve the Exchange's proposal to list the Shares, the 
Commission must be able to find that the proposal is, consistent with 
Exchange Act Section 6(b)(5), ``designed to prevent fraudulent and 
manipulative acts and practices.'' \27\ As the Commission recently 
explained in an order disapproving a listing proposal for the 
Winklevoss Bitcoin Trust (``Winklevoss Order''), although surveillance-
sharing agreements are not the exclusive means by which an exchange-
traded product (``ETP'') listing exchange can meet its obligations 
under Exchange Act Section 6(b)(5), such agreements are a widely used 
means for exchanges that list ETPs to meet their obligations, and the 
Commission has historically recognized their importance.\28\
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    \27\ 15 U.S.C. 78f(b)(5).
    \28\ Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579, 37580 (Aug. 1, 2018) (SR-BatsBZX-2016-30).
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    The Commission has therefore determined that, if the listing 
exchange for an ETP fails to establish that other means to prevent 
fraudulent and manipulative acts and practices will be sufficient, the 
listing exchange must enter into a surveillance-sharing agreement with 
a regulated market of significant size because ``[s]uch agreements 
provide a necessary deterrent to manipulation because they facilitate 
the availability of information needed to fully investigate a 
manipulation if it were to occur.'' \29\ Accordingly, a surveillance-
sharing agreement with a regulated market of significant size is 
required to ensure that, in compliance with the Exchange Act, the 
proposal is ``designed to prevent fraudulent and manipulative acts and 
practices.'' \30\ In this context, the Commission has interpreted the 
terms ``significant market'' and ``market of significant size'' to 
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 successfully manipulate the 
ETP, so that a surveillance-sharing agreement would assist the ETP 
listing market in detecting and deterring misconduct, and (b) it is 
unlikely that trading in the ETP would be the predominant influence on 
prices in that market.\31\ Thus, a surveillance-sharing agreement must 
be entered into with a ``significant market'' to assist in detecting 
and deterring manipulation of the ETP, because someone attempting to 
manipulate the ETP is reasonably likely to also engage in trading 
activity on that ``significant market.''
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    \29\ Id. (citing Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998) 
63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)).
    \30\ 15 U.S.C. 78f(b)(5).
    \31\ See Winklevoss Order, supra note 28, 83 FR at 37594. This 
definition is illustrative and not exclusive. There could be other 
types of ``significant markets'' and ``markets of significant 
size,'' but this definition is an example that will provide guidance 
to market participants. See id.
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    Although the Winklevoss Order applied these standards to a 
commodity-trust ETP based on bitcoin, the Commission believes that 
these standards are also appropriate for an ETP based on bitcoin 
futures. When approving the first commodity-futures ETP, the Commission 
specifically noted that ``[i]nformation sharing agreements with primary 
markets trading index components underlying a derivative product are an 
important part of a self-regulatory organization's ability to monitor 
for trading abuses in derivative products.'' \32\ And the Commission's 
approval orders for commodity-futures ETPs consistently note the 
ability of an ETP listing exchange to share surveillance information 
either through surveillance-sharing agreements or through membership by 
the listing exchange and the relevant futures exchanges in the 
Intermarket Surveillance Group.\33\ While the

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Commission in those orders did not explicitly undertake an analysis of 
whether the related futures markets were of ``significant size,'' the 
exchanges proposing commodity-futures ETPs on a single reference asset 
or benchmark generally made representations regarding the trading 
volume of the underlying futures markets,\34\ and the Commission was in 
each of those cases dealing with a large futures market that had been 
trading for a number of years before an exchange proposed an ETP based 
on those futures.\35\ And where the Commission has considered a 
proposed ETP based on futures that had only recently begun trading,\36\ 
the Commission specifically addressed whether the futures on which the 
ETP was based--which were futures on an index of well-established 
commodity futures--were illiquid or susceptible to manipulation.\37\
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    \32\ Securities Exchange Act Release No. 53105 (Jan. 11, 2006), 
71 FR 3129, 3136 (Jan. 19, 2006) (SR-Amex-2005-059). Additionally, 
the Winklevoss Order discusses the broader history and importance of 
surveillance-sharing agreements relating to derivative securities 
products, quoting Commission statements dating from 1990 on. See 
Winklevoss Order, supra note 28, 83 FR at 37592-94.
    \33\ See, e.g., Securities Exchange Act Release No. 53105 (Jan. 
11, 2006), 71 FR 3129, 3136 (Jan. 19, 2006) (SR-Amex-2005-059) 
(approval order noted that Amex's ``Information Sharing Agreement 
with the NYMEX and the CBOT and [Amex's] Memorandum of Understanding 
with the LME, along with the Exchange's participation in the ISG, in 
which the CBOT participates . . . create the basis for the Amex to 
monitor for fraudulent and manipulative practices in the trading of 
the Shares''); Securities Exchange Act Release No. 53582 (Mar. 31, 
2006), 71 FR 17510, 17518 (Apr. 6, 2006) (SR-Amex-2005-127) 
(approval order noted that Amex's ``comprehensive surveillance 
sharing agreements with the NYMEX and ICE Futures . . . create the 
basis for the Amex to monitor for fraudulent and manipulative 
practices in the trading of the Units'' and that ``[s]hould the USOF 
invest in oil derivatives traded on markets such as the Singapore 
Oil Market, the Exchange represents that it will file a proposed 
rule change pursuant to Section 19(b) of the [Exchange] Act, seeking 
Commission approval of [Amex's] surveillance agreement with such 
market''); Securities Exchange Act Release No. 54013 (June 16, 
2006), 71 FR 36372, 36378-79 (June 26, 2006) (NYSE-2006-17) 
(approval order noted that NYSE's ``comprehensive surveillance 
sharing agreements with the NYMEX, the Kansas City Board of Trade, 
ICE Futures, and the LME . . . create the basis for the NYSE to 
monitor for fraudulent and manipulative trading practices'' and that 
``all of the other trading venues on which current Index components 
and CERFs are traded are members of the ISG''); Securities Exchange 
Act Release No. 54450 (Sept. 14, 2006), 71 FR 55230, 55236 (Sept. 
21, 2006) (SR-Amex-2006-44) (approval order noted that ``CME, where 
the futures contract for each of the current Index components is 
traded, is a member of the ISG'' and that in the event of new fund 
investments in ``foreign currency futures contracts traded on 
futures exchanges other than CME, [Amex] must have a CSSA with that 
futures exchange or the futures exchange must be an ISG member''); 
Securities Exchange Act Release No. 55029 (Dec. 29, 2006), 72 FR 
806, 809-10 (Jan. 8, 2007) (SR-Amex-2006-76) (approval order noted 
that Amex's ``Comprehensive Surveillance Sharing Agreement with the 
ICE Futures, LME, and NYMEX, . . . and membership in the Intermarket 
Surveillance Group (`ISG') creates the basis for the Amex to monitor 
fraudulent and manipulative practices in the trading of the 
Shares''); Securities Exchange Act Release No. 56880 (Dec. 3, 2007), 
72 FR 69259, 69261 (Dec. 7, 2007) (SR-Amex-2006-96) (approval order 
noted that Amex has ``information sharing agreements with the 
InterContinental Exchange, the Chicago Mercantile Exchange, and the 
New York Mercantile Exchange and may obtain market surveillance 
information from other exchanges, including the Chicago Board of 
Trade, London Metals Exchange, and the New York Board of Trade 
through the Intermarket Surveillance Group''); Securities Exchange 
Act Release No. 55632 (Apr. 13, 2007), 72 FR 19987, 19988 (Apr. 20, 
2007) (SR-Amex-2006-112) (approval order noted that Amex ``currently 
has in place an Information Sharing Agreement with the NYMEX and ICE 
Futures'' and that if ``USNG invests in Natural Gas Interests traded 
on other exchanges, the Amex represented that it will seek to enter 
into Information Sharing arrangements with those particular 
exchanges''); Securities Exchange Act Release No. 57456 (Mar. 7, 
2008), 73 FR 13599, 13601 (Mar. 13, 2008) (NYSEArca-2007-91) 
(approval order noted that NYSEArca ``can obtain

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market surveillance information, including customer identity 
information, with respect to transactions occurring on the NYM, the 
Kansas City Board of Trade, ICE, and the LME, pursuant to its 
comprehensive information sharing agreements with each of those 
exchanges'' and that ``[a]ll of the other trading venues on which 
current Index components are traded are members of the ISG''); 
Securities Exchange Act Release No. 57838 (May 20, 2008), 73 FR 
30649, 30652, (May 28, 2008) (SR-NYSEArca-2008-09) (approval order 
noted that NYSEArca ``may obtain information via the ISG from other 
exchanges who are members or affiliate members of the ISG,'' that 
NYSEArca ``has an information sharing agreement in place with ICE 
Futures,'' and that NYSEArca will file a proposed rule change ``if 
the Fund invests in EUAs . . . that constitute more than 10% of the 
weight of the Fund where the principal trading market for such 
component is not a member or affiliate member of the ISG or where 
the Exchange does not have a comprehensive surveillance sharing 
agreement with such market''); Securities Exchange Act Release No. 
63635 (Jan. 3, 2011), 76 FR 1489, 1491 (Jan. 10, 2011) (NYSEArca-
2010-103) (approval order noted that ``with respect to Fund 
components traded on exchanges, not more than 10% of the weight of 
such components in the aggregate will consist of components whose 
principal trading market is not a member of the Intermarket 
Surveillance Group or is a market with which [NYSEArca] does not 
have a comprehensive surveillance sharing agreement''); Securities 
Exchange Act Release No. 66553 (Mar. 9, 2012), 77 FR 15440, 15444 
(Mar. 15, 2012) (SR-NYSEArca-2012-04) (approval order noted that 
NYSEArca ``can obtain market surveillance information, including 
customer identity information, from ICE [Futures] and CME, which are 
members of the Intermarket Surveillance Group''); Securities 
Exchange Act Release No. 67223 (June 20, 2012), 77 FR 38117, 38124 
(June 26, 2012) (NYSEAmex-2012-24) (approval order noted that 
NYSEAmex ``can obtain market surveillance information, including 
customer identity information, with respect to transactions 
occurring on exchanges that are members of ISG, including CME, CBOT, 
COMEX, NYMEX . . . and ICE Futures US,'' that NYSEAmex ``currently 
has in place a comprehensive surveillance sharing agreement with 
each of CME, NYMEX, ICE Futures Europe, and KCBOT,'' and that 
``while the Fund may invest in futures contracts or options on 
futures contracts which trade on markets that are not members of ISG 
or with which [NYSEAmex] does not have in place a comprehensive 
surveillance sharing agreement, such instruments will never 
represent more than 10% of the Fund's holdings''); Securities 
Exchange Act Release No. 73561 (Nov. 7, 2014), 79 FR 68329, 68330 
(Nov. 14, 2014) (NYSEArca-2014-102) (approval order noted that 
``FINRA may obtain trading information regarding trading in the 
Shares and Coal Futures from such markets and other entities that 
are members of ISG or with which [NYSEArca] has in place a 
comprehensive surveillance sharing agreement'' and that ``CME is a 
member of the ISG''); Securities Exchange Act Release No. 82390 
(Dec. 22, 2017), 82 FR 61625, 61631, 61634 (Dec. 28, 2017) 
(NYSEArca-2017-107) (approval order noted that NYSEArca ``may obtain 
information regarding trading in the Shares and Freight Futures from 
markets and other entities that are members of ISG or with which 
[NYSEArca] has in place a CSSA'' and that ``not more than 10% of the 
net assets of the Fund in the aggregate invested in Freight Futures 
or options on Freight Futures shall consist of derivatives whose 
principal market is not a member of the ISG or is a market with 
which [NYSEArca] does not have a CSSA'').
    \34\ See, e.g., Securities Exchange Act Release No. 62213 (June 
3, 2010), 75 FR 32828 (June 9, 2010) (SR-NYSEArca-2010-22) (notice 
of proposed rule change included NYSE Arca's representations that: 
(i) Corn futures volume on Chicago Board of Trade (``CBOT'') for 
2008 and 2009 (through November 30, 2009) was 59,934,739 contracts 
and 47,754,866 contracts, respectively, and as of March 16, 2010, 
CBOT open interest for corn futures was 1,118,103 contracts, and 
open interest for near month futures was 447,554 contracts; (ii) the 
corn futures contract price was $18,337.50 ($3.6675 per bushel and 
5,000 bushels per contract), and the approximate value of all 
outstanding contracts was $20.5 billion; (iii) as of March 16, 2010, 
open interest in corn swaps cleared on CBOT was approximately 2,100 
contracts, with an approximate value of $38.5 million; and (iv) the 
position limits for all months is 22,000 corn contracts, and the 
total value of contracts if position limits were reached would be 
approximately $403.5 million (based on the $18,337.50 contract 
price), Securities Exchange Act Release No. 61954 (Apr. 21, 2010), 
75 FR 22663, 22664 n.10 (Apr. 29, 2010)); Securities Exchange Act 
Release No. 63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR-
NYSEArca-2010-101) (notice of proposed rule change included NYSE 
Arca's representations that: (i) As of June 14, 2010, there was VIX 
futures contracts open interest on CFE of 88,366 contracts, with a 
contract price of $25.55 and value of open interest of 
$2,257,751,300; (ii) total CFE trading volume in 2009 in VIX futures 
contracts was 1,143,612 contracts, with average daily volume of 
4,538 contracts; and (iii) total volume year-to-date (through May 
31, 2010) was 1,399,709 contracts, with average daily volume of 
13,458 contracts, Securities Exchange Act Release No. 63317 (Nov. 
16, 2010), 75 FR 71158, 71159 n.9 (Nov. 22, 2010)); Securities 
Exchange Act Release No. 63753 (Jan. 21, 2011), 76 FR 4963 (Jan. 27, 
2011) (SR-NYSEArca-2010-110) (notice of proposed rule change 
included NYSE Arca's representations that: (i) Natural gas futures 
volume on New York Mercantile Exchange (``NYMEX'') for 2009 and 2010 
(through October 29, 2010) was 47,864,639 contracts and 52,490,180 
contracts, respectively; (ii) as of October 29, 2010, NYMEX open 
interest for natural gas futures was 794,741 contracts, and open 
interest for near month futures was 47,313 contracts; (iii) the 
contract price was $40,380 ($4.038 per MMBtu and 10,000 MMBtu per 
contract), and the approximate value of all outstanding contracts 
was $32.1 billion; (iv) the position limits for all months is 12,000 
natural gas contracts and the total value of contracts if position 
limits were reached would be approximately $484.56 million (based on 
the $40,380 contract price); and (v) as of October 29, 2010, open 
interest in natural gas swaps cleared on NYMEX was approximately 
2,618,092 contracts, with an approximate value of $26.4 billion 
($4.038 per MMBtu and 2,500 MMBtu per contract), Securities Exchange 
Act Release No. 63493 (Dec. 9, 2010), 75 FR 78290, 78291 n.11 (Dec. 
15, 2010)); Securities Exchange Act Release No. 63869 (Feb. 8, 
2011), 76 FR 8799 (Feb. 15, 2011) (SR-NYSEArca-2010-119) (notice of 
proposed rule change included NYSE Arca's representations that: (i) 
WTI crude oil futures volume on NYMEX for 2009 and 2010 (through 
November 30, 2010) was 137,352,118 contracts and 156,155,620 
contracts, respectively; (ii) as of November 30, 2010, NYMEX open 
interest for WTI crude oil was 1,342,325 contracts, and open 
interest for near month futures was 323,184 contracts; (iii) the 
position limits for all months is 20,000 WTI crude oil contracts and 
the total value of contracts if position limits were reached would 
be approximately $1.68 billion (based on the $84.11 contract price); 
and (iv) the contract price was $84,110 ($84.11 USD per barrel and 
1,000 barrels per contract), and the approximate value of all 
outstanding contracts was $112.9 billion, Securities Exchange Act 
Release No. 63625 (Dec. 30, 2010), 76 FR 807, 808 n.11 (Jan. 6, 
2011)); Securities Exchange Act Release No. 65134 (Aug. 15, 2011), 
76 FR 52034 (Aug. 19, 2011) (SR-NYSEArca-2011-23) (notice of 
proposed rule change included NYSE Arca's representations that: (i) 
As of January 31, 2011, there was VIX futures contracts open 
interest on CFE of 163,396 contracts with a value of open interest 
of $3,461,984,900; (ii) total CFE trading volume in 2010 in VIX 
futures contracts was 4,402,616 contracts, with average daily volume 
of 17,741 contracts; and (iii) total volume year-to-date (through 
January 31, 2011) was 779,493 contracts, with average daily volume 
of 38,975 contracts, Securities Exchange Act Release No. 64470 (May 
11, 2011), 76 FR 28493, 28494 n.12 (May 17, 2011)); Securities 
Exchange Act Release No. 65136 (Aug. 15, 2011), 76 FR 52037 (Aug. 
19, 2011) (SR-NYSEArca-2011-24) (notice of proposed rule change 
included NYSE Arca's representations that: (i) Natural gas futures 
volume on NYMEX for 2009 and 2010 (through December 31, 2010) was 
47,864,639 contracts and 64,350,673 contracts, respectively; (ii) as 
of December 31, 2010, NYMEX open interest for all natural gas 
futures was 772,104 contracts, and the approximate value of all 
outstanding contracts was $35,664,257,310 billion [sic]; (iii) open 
interest as of December 31, 2010 for the near month contract was 
166,757 contracts and the near month contract value was 
$7,345,645,850 ($4.405 per MMBtu and 10,000 MMBtu per contract); 
(iv) the position accountability limits for all months is 12,000 
natural gas contracts and the total value of contracts if position 
accountability limits were reached would be approximately 
$528,600,000 million (based on the $4.405 contract price); and (v) 
as of December 31, 2010, open interest in natural gas swaps cleared 
on NYMEX was approximately 1,493,013 contracts, with an approximate 
value of $16,463,384,003 ($4.411 per MMBtu and 2,500 MMBtu per 
contract), Securities Exchange Act Release No. 64464 (May 11, 2011), 
76 FR 28483, 28484 n.11 (May 17, 2011)); Securities Exchange Act 
Release No. 65344 (Sept. 15, 2011), 76 FR 58549 (Sept. 21, 2011) 
(SR-NYSEArca-2011-48) (notice of proposed rule change included NYSE 
Arca's representations that: (i) Wheat futures volume on CBOT for 
2010 and 2011 (through April 29, 2011) was 23,058,783 contracts and 
8,860,135 contracts, respectively; (ii) as of April 29, 2011, open 
interest for wheat futures was 456,851 contracts; (iii) the wheat 
contract price was $40,062.50 (801.25 cents per bushel and 5,000 
bushels per contract), and the approximate value of all outstanding 
contracts was $18.3 billion; (iv) the position limits for all months 
was 6,500 wheat contracts and the total value of contracts if 
position limits were reached would be approximately $260.4 million 
(based on the $40,062.50 contract price); (v) soybean futures volume 
on CBOT for 2010 and 2011 (through April 29, 2011) was 36,962,868 
contracts and 16,197,385 contracts, respectively; (vi) as of April 
29, 2011, open interest for soybean futures was 572,959 contracts; 
(vii) the soybean contract price was $69,700.00 (1394 cents per 
bushel and 5,000 bushels per contract), and the approximate value of 
all outstanding contracts was $39.9 billion; (viii) the position 
limits for all months is 6,500 soybean contracts and the total value 
of contracts if position limits were reached would be approximately 
$453 million (based on the $69,700.00 contract price); (ix) sugar 
futures volume on ICE Futures for 2010 and 2011 (through April 29, 
2011) was 27,848,391 contracts and 9,045,069 contracts, 
respectively; (x) as of April 29, 2011, open interest for sugar 
futures was 570,948 contracts; (xi) the sugar contract price was 
$24,920.00 (22.25 cents per pound and 112,000 pounds per contract), 
and the approximate value of all outstanding contracts was $14.2 
billion; and (xii) the position limits for all months is 15,000 
sugar contracts and the total value of contracts if position limits 
were reached would be approximately $373.8 million (based on the 
$24,920.00 contract price), Securities Exchange Act Release No. 
64967 (July 26, 2011), 76 FR 45885, 45886 n.10, 45888 n.20, 45890 
n.24 (Aug. 1, 2011)); Securities Exchange Act Release No. 66553 
(Mar. 9, 2012), 77 FR 15440 (Mar. 15, 2012) (SR-NYSEArca-2012-04) 
(notice of proposed rule change included NYSE Arca's representations 
that: (i) As of December 30, 2011, open interest in AUD/USD futures 
contracts traded on CME was $11.56 billion, and AUD/USD futures 
contracts had an average daily trading volume in 2011 of 123,006 
contracts; (ii) as of December 30, 2011, open interest in CAD/USD 
futures contracts traded on CME was $11.66 billion, and CAD/USD 
futures contracts had an average daily trading volume in 2011 of 
89,667 contracts; (iii) as of December 30, 2011, open interest in 
CHF/USD futures contracts traded on CME was $4.99 billion, and CHF/
USD futures contracts had an average daily trading volume in 2011 of 
40,955 contracts; (iv) futures contracts based on the U.S. Dollar 
Index (``USDX'') were listed on November 20, 1985, and options on 
the USDX futures contracts began trading on September 3, 1986; (v) 
as of December 30, 2011, open interest in USDX futures contracts 
traded on ICE Futures was $5.44 billion, and USDX futures contracts 
had an average daily trading volume in 2011 of 30,341 contracts; 
(vi) as of December 30, 2011, open interest in EUR/USD futures 
contracts traded on CME was $46.12 billion, and EUR/USD futures 
contracts had an average daily trading volume in 2011 of 336,947 
contracts; and (vii) as of December 30, 2011, open interest in JPY/
USD futures contracts traded on CME was $25.75 billion, and JPY/USD 
futures contracts had an average daily trading volume in 2011 of 
113,476 contracts, Securities Exchange Act Release No. 66180 (Jan. 
18, 2012), 77 FR 3532, 3534-35 (Jan. 24, 2012)); Securities Exchange 
Act Release No. 68165 (Nov. 6, 2012), 77 FR 67707 (Nov. 13, 2012) 
(SR-NYSEArca-2012-102) (notice of proposed rule change included NYSE 
Arca's representations that: (i) Gold and silver futures contracts 
traded on Commodity Exchange, Inc. (``COMEX'') are the global 
benchmark contracts and most liquid futures contracts in the world 
for each respective commodity; (ii) as of March 15, 2012, open 
interest in gold futures contracts and silver futures contracts 
traded on CME was $23.7 billion and $8.5 billion, respectively; 
(iii) gold futures contracts and silver futures contracts had an 
average daily trading volume in 2011 of 138,964 contracts and 63,913 
contracts, respectively; (iv) CME constitutes the largest regulated 
foreign exchange marketplace in the world, with over $100 billion in 
daily liquidity; (v) as of March 15, 2012, open interest in Euro 
futures contracts and Yen futures contracts traded on CME and, for 
Dollar futures contracts, on ICE Futures, were $42.7 billion, $20.8 
billion, and $4.8 billion, respectively; and (vi) Euro futures 
contracts, Yen futures contracts, and Dollar futures contracts had 
an average daily trading volume in 2011 of 325,103, 106,824, and 
27,258 contracts, respectively, Securities Exchange Act Release No. 
67882 (Sept. 18, 2012), 77 FR 58881, 58883 n.10, 58883 n.14 (Sept. 
24, 2012)); Securities Exchange Act Release No. 81686 (Sept. 22, 
2017), 82 FR 45643, 45646 (Sept. 29, 2017) (SR-NYSEArca-2017-05) 
(order approving the listing and trading of the Direxion Daily Crude 
Oil Bull 3x Shares and Direxion Daily Crude Oil Bear 3x Shares, 
citing to NYSE Arca's representations that: (i) The oil contract 
market was of significant size and liquidity, and had average daily 
volume of 650,000 contracts and daily open interest of 450,000 
contracts; (ii) the Sponsor is registered as a commodity pool 
operator with the CFTC and is a member of the National Futures 
Association, and (iii) the CFTC has regulatory jurisdiction over the 
trading of futures contracts traded on U.S. markets); Securities 
Exchange Act Release No. 82390 (Dec. 22, 2017), 82 FR 61625 (Dec. 
28, 2017) (SR-NYSEArca-2017-107) (notice of proposed rule change 
included NYSE Arca's representations that: (i) Freight futures 
liquidity has remained relatively constant, in lot terms, over the 
last five years with approximately 1.1 million lots trading 
annually; (ii) open interest currently stood at approximately 
290,000 lots across all asset classes representing an estimated 
value of more than $3 billion, and, of such open interest, Capesize 
contracts accounted for approximately 50%, Panamax for approximately 
40%, and Handymax for approximately 10%, Securities Exchange Act 
Release No. 81681 (Sept. 22, 2017), 82 FR 45342, 45345 (Sept. 28, 
2017)). See also Securities Exchange Act Release No. 53582 (Mar. 31, 
2006), 71 FR 17510 (Apr. 6, 2006) (SR-Amex-2005-127) (notice of 
proposed rule change included Amex's representations that: (i) WTI 
light, sweet crude oil contract, listed and traded at NYMEX, trades 
in units of 42,000 gallons (1,000 barrels), and annual daily 
contract volume on NYMEX from 2001 through October 2005 was 149,028, 
182,718, 181,748, 212,382 and 242,262, respectively; (ii) annual 
daily contract volume on ICE Futures for Brent crude contracts from 
2001 through October 2005 was 74,011, 86,499, 96,767, 102,361 and 
120,695 respectively; (iii) annual daily contract volume on NYMEX 
for heating oil futures from 2001 through October 2005 was 41,710, 
42,781, 46,327, 51,745 and 52,334, respectively; (iv) annual daily 
contract volume on NYMEX for natural gas contracts from 2001 through 
October 2005 was 47,457, 97,431, 76,148, 70,048 and 77,149, 
respectively; and (v) annual daily contract volume on NYMEX for 
gasoline contracts from 2001 through October 2005 was 38,033, 
43,919, 44,688, 51,315 and 53,577, respectively, Securities Exchange 
Act Release No. 53324 (Feb. 16, 2006), 71 FR 9614, 9618 (Feb. 24, 
2006)); Securities Exchange Act Release No. 55632 (Apr. 13, 2007), 
72 FR 19987 (Apr. 20, 2007) (SR-Amex-2006-112) (notice of proposed 
rule change included Amex's representations that annual daily 
contract volume on NYMEX for natural gas contracts from 2001 through 
October 2006 was 47,457, 97,431, 76,148, 70,048, 76,265, and 
102,097, respectively, Securities Exchange Act Release No. 55372 
(Feb. 28, 2007), 72 FR 10267, 10268 (Mar. 7, 2007)).
    \35\ For example, corn futures began trading in 1877, see 
https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETP based on corn futures was approved for 
listing and trading in 2010. See Securities Exchange Act Release No. 
62213 (June 3, 2010), 75 FR 32828 (June 9, 2010) (SR-NYSEArca-2010-
22). VIX futures began trading in 2004, see http://cfe.cboe.com/cfe-products/vx-cboe-volatility-index-vix-futures/contract-specifications, and the first ETPs based on VIX futures were 
approved for listing and trading in 2010. See Securities Exchange 
Act Release No. 63610 (Dec. 27, 2010), 76 FR 199 (Jan. 3, 2011) (SR-
NYSEArca-2010-10). Natural gas futures began trading in 1990, see 
https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETP based on natural gas was approved for 
listing and trading in 2007. See Securities Exchange Act Release No. 
55632 (Apr. 13, 2007), 72 FR 19987 (Apr. 20, 2007) (SR-Amex-2006-
112). Crude oil futures began trading in 1983, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and 
the first ETP based on crude oil futures was approved for listing 
and trading in 2006. See Securities Exchange Act Release No. 53582 
(Mar. 31, 2006), 71 FR 17510 (Apr. 6, 2006) (SR-Amex-2005-127). 
Wheat futures, sugar futures, and soybean futures began trading in 
1877, 1914, and 1936, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html and https://www.theice.com/publicdocs/ICE_Sugar_Brochure.pdf, and the first ETPs 
based on each of these commodity futures were approved for listing 
and trading in 2011. See Securities Exchange Act Release No. 65344 
(Sept. 15, 2011), 76 FR 58549 (Sept. 21, 2011) (SR-NYSEArca-2011-
48). U.S. Dollar Index futures began trading in 1985, https://www.theice.com/publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf, and 
the first ETPs based on U.S. Dollar Index futures was approved for 
listing and trading in 2007. See Securities Exchange Act Release No. 
55292 (Feb. 14, 2007), 72 FR 8406 (Feb. 26, 2007) (SR-Amex-2006-86). 
Australian Dollar futures and Euro futures began trading in 1987 and 
1999, respectively, and Canadian Dollar futures, Swiss Franc 
futures, and Yen futures began trading in 2002, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and 
the first ETPs based on each of these individual currency futures 
were approved for listing and trading in 2012. See Securities 
Exchange Act Release No. 66553 (Mar. 9, 2012), 77 FR 15440 (Mar. 15, 
2012) (SR-NYSEArca-2012-04). Silver futures and gold futures began 
trading in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and 
the first ETPs based on each of these commodity futures were 
approved for listing and trading in 2006. See Securities Exchange 
Act Release No. 55029 (Dec. 29, 2006), 72 FR 806 (Jan. 8, 2007) (SR-
Amex-2006-76). Freight futures have been cleared since 2005, and the 
first ETP based on freight futures was approved for listing and 
trading in 2017. See Securities Exchange Act Release No. 82390 (Dec. 
22, 2017), 82 FR 61625, 61626 n.6 (Dec. 28, 2017) (SR-NYSEArca-2017-
107) (noting that ``Freight Futures have been cleared since 2005'').
    \36\ The Exchange filed its proposal before bitcoin futures 
began trading on either CME or CFE.
    \37\ At issue were futures on an index comprising futures on 
crude oil, Brent crude oil, natural gas, heating oil, gasoline, gas 
oil, live cattle, wheat, aluminum, corn, copper, soybeans, lean 
hogs, gold, sugar, cotton, red wheat, coffee, standard lead, feeder 
cattle, zinc, primary nickel, cocoa, and silver. See Securities 
Exchange Act Release No. 53659 (Apr. 17, 2006), 71 FR 21074, 21080 
(Apr. 24, 2006) (SR-NYSE-2006-17) (notice of proposed rule change to 
list shares of iShares GSCI Commodity-Indexed Trust). The Commission 
concluded that requirements of Exchange Act Section 6(b)(5) had been 
met because concerns about manipulation would be addressed by the 
arbitrage relationship between the new index futures and the 
existing component futures, as well as the ETP listing exchange's 
comprehensive surveillance-sharing agreements not only with the 
market for the index futures, but also with the markets for the 
component futures. See Securities Exchange Act Release No. 54013 
(June 16, 2006), 71 FR 36372, 36379 (June 26, 2006) (SR-NYSE-2006-
17) (order approving listing of shares of iShares GSCI Commodity-
Indexed Trust). Additionally, the approval order for the ETP noted 
that, if the volume in any futures contract that was part of the 
reference index fell below a specified multiple of production of the 
underlying commodity, that contract's weight in the index would 
decrease. See id. at 36374.
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    Accordingly, the Commission examines below whether the

[[Page 43939]]

representations by the Exchange, and the comments received from the 
public, support a finding that the Exchange has entered into a 
surveillance-sharing agreement with a market of significant size 
relating to bitcoin, the asset underlying the proposed ETPs, or that 
alternative means of preventing fraud and manipulation would be 
sufficient to satisfy the requirement of Exchange Act Section 6(b)(5) 
that the proposed rule change be designed to prevent fraudulent and 
manipulative acts and practices.
2. Comments Received
    One commenter states that commencing an ETP without allowing the 
market to adjust to the cash-settled futures products would be akin to 
``putting the cart before the horse'' and seems to be an attempt to 
appease institutional investors.\38\
---------------------------------------------------------------------------

    \38\ See Desai Letter, supra note 9, at 1.
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    One commenter states that the market for bitcoin derivatives other 
than bitcoin exchange-traded futures appears to be developing and that 
financial institutions are reportedly moving toward launching bitcoin-
related trading desks and other operations. This commenter believes 
that the proposed offering of both long and short ETPs raises the 
possibility that market makers in bitcoin-related derivatives could 
make two-sided markets if interest in the long and short ETPs is 
similar in magnitude. The commenter further believes that interest 
outside of the bitcoin ETPs may be sufficient to motivate market makers 
to maintain bitcoin derivatives desks.\39\ In addition, the commenter 
suggests that questions about bitcoin derivatives markets can be 
addressed through market depth analyses, discussions with potential 
bitcoin derivatives liquidity providers, and analyses of order and 
trade data across CME and CFE to determine the plausibility of 
simultaneous liquidity collapses on both bitcoin future markets.\40\
---------------------------------------------------------------------------

    \39\ See NERA Letter, supra note 9, at 2.
    \40\ See id. at 2.
---------------------------------------------------------------------------

    Three commenters assert that there is manipulation in the bitcoin 
market.\41\ One commenter states that it is common knowledge that the 
bitcoin market is being manipulated and asserts that BitConnect, which 
was recently shut down and had promised risk-free annual returns of up 
to 120%, is an example of Ponzi and multi-level marketing schemes that 
are too common. This commenter argues that the Commission should not 
send the wrong signal to bitcoin manipulators--who, the commenter 
asserts, currently operate with impunity--by approving a bitcoin 
ETP.\42\ Another commenter believes that the volatility of bitcoin 
trading does not appear to be the result of natural trading and in the 
long run would prevent true price discovery.\43\
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    \41\ See Desai Letter, supra note 9, at 1; Fitzgerald Letter, 
supra note 9, at 1; Kumar Letter, supra note 9.
    \42\ See Kumar Letter, supra note 9.
    \43\ See Malkin Letter, supra note 9, at 1-2.
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    One commenter asserts that, in an unregulated market, a small 
minority can manipulate the price of bitcoin and other ``altcoins'' and 
that bitcoin and other cryptocurrencies are freely manipulated by 
players who hold a disproportionate amount of cryptocurrencies or 
access to fiat currencies. This commenter cites data showing that 4.11% 
of bitcoin addresses own 96.53% of all the bitcoin in circulation, that 
the top four addresses control 3.13% of all bitcoin currently in 
distribution (worth over $4 billion), and that 115 individuals control 
bitcoin worth over $24 billion.\44\ In contrast, another commenter 
states that, although a small number of wallets may own 90% of 
available bitcoin, exchanges own some of these wallets and may hold 
bitcoin on behalf of hundreds, thousands, or millions of people.\45\
---------------------------------------------------------------------------

    \44\ See Fitzgerald Letter, supra note 9, at 1-2.
    \45\ See Rousseau Letter, supra note 9.
---------------------------------------------------------------------------

    One commenter asserts that widespread pump-and-dump schemes 
organized through the messaging platform ``Telegram'' are evidence of 
manipulation.\46\ This commenter further cites an inquiry by then-New 
York Attorney General Eric Schneiderman into cryptocurrency exchanges 
and the use of trading ``bots'' on those exchanges to manipulate the 
market, and asserts that such activity can drive prices above fair 
market value by over 300%. The commenter notes the Kraken exchange's 
refusal to cooperate with this inquiry and believes that this refusal 
should pose serious questions for investors and the Commission about 
the Kraken exchange's operations, particularly after the Kraken 
exchange recently exited the Japanese market due to regulatory 
requirements.\47\
---------------------------------------------------------------------------

    \46\ See Fitzgerald Letter, supra note 9, at 2.
    \47\ See id. at 2.
---------------------------------------------------------------------------

    One commenter states that a commonly cited factor mitigating 
possible susceptibility to manipulation is the securities exchanges' 
own surveillance procedures, in addition to the futures exchanges' 
surveillance procedures and market surveillance and oversight by the 
Commodity Futures Trading Commission (``CFTC''). This commenter cites 
statements by the CFTC that it has the legal authority and means to 
police certain spot markets for fraud and manipulation through 
``heightened review'' collaboration with exchanges, that exchanges will 
provide the CFTC surveillance team with trade settlement data upon 
request, and that the exchanges will enter into information-sharing 
agreements with spot market platforms and monitor trading activity on 
the spot markets. The commenter also states that the Gemini exchange 
has announced that it would use Nasdaq's market surveillance system to 
monitor its marketplace.\48\
---------------------------------------------------------------------------

    \48\ See NERA Letter, supra note 9, at 4-5.
---------------------------------------------------------------------------

    This commenter further asserts that market surveillance is 
generally a prerequisite to identifying potential market manipulation 
and discourages market manipulation. The commenter believes that the 
emergence of institutionalized market surveillance on both futures and 
spot markets is a positive sign for the long-term future of bitcoin 
markets.\49\ The commenter suggests that the Commission, in 
coordination with the CFTC, self-regulatory organizations, bitcoin 
futures exchanges, and bitcoin spot market platforms, could gather 
market surveillance data to conduct an independent analysis of trade 
and settlement patterns and determine whether potentially manipulative 
trading practices occur on bitcoin spot and futures markets.\50\
---------------------------------------------------------------------------

    \49\ See id. at 5.
    \50\ See id.
---------------------------------------------------------------------------

3. Analysis
    Unlike previous proposals for bitcoin-based ETPs,\51\ the Exchange 
does not assert here that bitcoin prices or markets are inherently 
resistant to manipulation. A number of commenters, however, have noted 
the potential for manipulation in bitcoin markets.\52\ Instead, the 
Exchange asserts that its existing surveillance procedures (including 
its ability to review activity by its members) and its ability to share 
surveillance information with U.S. futures exchanges are sufficient to 
meet the requirements of Exchange Act

[[Page 43940]]

Section 6(b)(5).\53\ One commenter also asserts that the exchange's own 
surveillance procedures, along with market surveillance and oversight 
by the CFTC, can mitigate manipulation.\54\
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    \51\ See Winklevoss Order, supra note 28, 83 FR at 37582 (noting 
exchange argument that ``intrinsic properties of bitcoin and bitcoin 
markets make manipulation `difficult and prohibitively costly' ''); 
Order Disapproving Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to the Listing and Trading of Shares of the SolidX 
Bitcoin Trust, Securities Exchange Act Release No. 80319 (Mar. 28, 
2017), 82 FR 16247, 16251 (Apr. 3, 2017) (SR-NYSEArca-2016-101) 
(noting that study commissioned by trust sponsor argues that ``the 
underlying market for bitcoin is inherently resistant to 
manipulation'').
    \52\ See supra notes 41-47 and accompanying text.
    \53\ See Notice, supra note 3, 82 FR at 61105.
    \54\ See supra notes 48-49 and accompanying text. This commenter 
also suggests that the Commission--in coordination with the CFTC, 
SROs, futures markets, and bitcoin spot platforms--could gather 
market surveillance data to independently analyze whether 
manipulative practices occur on bitcoin spot and futures platforms. 
See supra note 50 and accompanying text. As noted above, however, it 
is the Exchange that bears the burden to demonstrate that its 
proposal is designed to ``prevent fraudulent and manipulative acts 
and practices.'' See supra notes 23-26 and accompanying text.
---------------------------------------------------------------------------

    While the Exchange would, pursuant to its listing rules, be able to 
obtain certain information regarding trading in the Shares and in the 
underlying bitcoin or any bitcoin derivative through registered market 
makers,\55\ this trade information would be limited to the activities 
of market participants who trade on the Exchange. Furthermore, neither 
the Exchange's ability to surveil trading in the Shares nor its ability 
to share surveillance information with other securities exchanges 
trading the Shares would give the Exchange insight into the activity 
and identity of market participants who trade in bitcoin futures 
contracts or other bitcoin derivatives or who trade in the underlying 
bitcoin spot markets, where a substantial majority of trading, the 
Commission concluded in the Winklevoss Order, ``occurs on unregulated 
venues overseas that are relatively new and that, generally, appear to 
trade only digital assets.'' \56\ Thus, consistent with its 
determination in the Winklevoss Order,\57\ and with the Commission's 
previous orders approving commodity-futures ETPs,\58\ the Commission 
believes that the Exchange must demonstrate that it has in place a 
surveillance-sharing agreement with a regulated market of significant 
size related to bitcoin, because ``[s]uch agreements provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a manipulation 
if it were to occur.'' \59\
---------------------------------------------------------------------------

    \55\ See Notice, supra note 3, at 82 FR 61105 (``The Exchange is 
also able to obtain information regarding trading in the Shares, the 
commodity underlying futures or options on futures through ETP 
[Exchange Trading Permit] Holders, in connection with such ETP 
Holders' proprietary or customer trades which they effect through 
ETP Holders on any relevant market.'').
    \56\ Winklevoss Order, supra note 28, 83 FR at 37580.
    \57\ See id. at 37591 (finding that ``traditional means'' of 
surveillance were not sufficient in the absence of a surveillance-
sharing agreement with a regulated market of significant size 
related to the underlying asset).
    \58\ See supra note 33 and accompanying text (noting previous 
commodity-futures ETPs where surveillance sharing in place between 
ETP listing exchange and underlying futures exchanges).
    \59\ Winklevoss Order, supra note 28, 83 FR at 37580 (quoting 
Amendment to Rule Filing Requirements for Self-Regulatory 
Organizations Regarding New Derivative Securities Products, 
Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 
70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)).
---------------------------------------------------------------------------

    The Exchange represents that it is able to share surveillance 
information with CME and CFE, which are bitcoin futures markets 
regulated by the CFTC, through membership in the Intermarket 
Surveillance Group.\60\ Nonetheless, the Commission must disapprove the 
proposal, because there is no evidence in the record demonstrating that 
CME's and CFE's bitcoin futures markets are markets of significant 
size.
---------------------------------------------------------------------------

    \60\ See https://www.isgportal.org/isgPortal/public/members.htm 
(listing the current members and affiliate members of the 
Intermarket Surveillance Group).
---------------------------------------------------------------------------

    The Order Instituting Proceedings sought comment on whether the CME 
and CFE bitcoin futures markets are markets of significant size,\61\ 
but the Exchange has not responded to any of the questions in the Order 
Instituting Proceedings, and the only analysis of the underlying 
futures markets the Exchange has provided in its proposed rule change 
are the generic statements that the market for bitcoin futures 
contracts ``has very limited trading and operational history'' and that 
the liquidity of these markets will depend on supply and demand, the 
adoption of bitcoin, and interest in the market for these futures.\62\ 
Thus, there is no basis in the record on which the Commission can 
conclude that the bitcoin futures markets are markets of significant 
size. Publicly available data show that the median daily notional 
trading volume, from inception through August 10, 2018, has been 14,185 
bitcoins on CME and 5,184 bitcoins on CFE, and that the median daily 
notional value of open interest on CME and CFE during the same period 
has been 10,145 bitcoins and 5,601 bitcoins, respectively.\63\ But 
while these futures contract figures are readily available, meaningful 
analysis of the size of the CME or CFE markets relative to the 
underlying bitcoin spot market is challenging, because reliable data 
about the spot market, including its overall size, are unavailable.\64\
---------------------------------------------------------------------------

    \61\ See Order Instituting Proceedings, supra note 7, 83 FR at 
13539.
    \62\ Notice, supra note 3, 82 FR at 61103; see also supra note 
19 and accompanying text.
    \63\ These volume figures were calculated by Commission staff 
using data published by CME and CFE on their websites.
    \64\ See Winklevoss Order, supra note 28, 83 FR at 37601.
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    The Commission also notes that in recent testimony CFTC Chairman 
Giancarlo characterized the volume of the bitcoin futures markets as 
``quite small.'' \65\ Additionally, the President and COO of CFE, 
recently acknowledged in a letter to the Commission staff that ``the 
current bitcoin futures trading volumes on Cboe Futures Exchange and 
CME may not currently be sufficient to support ETPs seeking 100% long 
or short exposure to bitcoin.'' \66\ These statements reinforce the 
Commission's conclusion that there is insufficient evidence to 
determine that the CME and CFE bitcoin futures markets are markets of 
significant size.
---------------------------------------------------------------------------

    \65\ CFTC Chairman Giancarlo testified: ``It is important to put 
the new Bitcoin futures market in perspective. It is quite small 
with open interest at the CME of 6,695 bitcoin and at Cboe Futures 
Exchange (Cboe) of 5,569 bitcoin (as of Feb. 2, 2018). At a price of 
approximately $7,700 per Bitcoin, this represents a notional amount 
of about $94 million. In comparison, the notional amount of the open 
interest in CME's WTI crude oil futures was more than one thousand 
times greater, about $170 billion (2,600,000 contracts) as of Feb[.] 
2, 2018 and the notional amount represented by the open interest of 
Comex gold futures was about $74 billion (549,000 contracts).'' See 
Written Testimony of J. Christopher Giancarlo, Chairman, Commodity 
Futures Trading Commission, Before the Senate Banking Committee at 
text accompanying nn. 14-15 (Feb. 6, 2018). See also Winklevoss 
Order, supra note 28, 83 FR at 37601 (citing Giancarlo testimony).
    \66\ Letter from Chris Concannon, President and COO, Cboe Global 
Markets, to Dalia Blass, Director, Division of Investment 
Management, Commission, at 5 (Mar. 23, 2018), available at https://www.sec.gov/divisions/investment/cboe-global-markets-innovation-cryptocurrency.pdf.
---------------------------------------------------------------------------

    Furthermore, while the Exchange represents that no more than 10% of 
the net assets of a Fund in the aggregate invested in bitcoin futures 
contracts will be invested in contracts whose principal market is 
neither a member of the Intermarket Surveillance Group nor a market 
with whom the Exchange has a comprehensive surveillance-sharing 
agreement,\67\ this does not function as a meaningful limitation where, 
as here, there is no minimum amount of a Fund that must be invested in 
such contracts. According to the Notice, in the event position, price, 
or accountability limits are reached with respect to bitcoin futures 
contracts, each Fund may invest in listed options on bitcoin futures 
contracts (should such listed options become available) and OTC swap 
agreements referencing bitcoin futures contracts.\68\ The Notice does 
not establish any limit on the Funds' holdings of these other bitcoin-
related derivatives; it provides no analysis of the size and liquidity 
of markets for those derivatives; and it does not discuss whether the 
Exchange has the ability to share surveillance information

[[Page 43941]]

with the markets for these derivatives. Thus, as to what might be a 
substantial proportion of the Funds' portfolios, the Commission is 
unable to conclude that surveillance-sharing will be available, that 
the related markets are regulated, or that the related markets are of 
significant size.
---------------------------------------------------------------------------

    \67\ See supra note 17 and accompanying text.
    \68\ See Notice, supra note 3, 83 FR at 61102; see also supra 
note 18 and accompanying text.
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    While one commenter suggests that the market for bitcoin 
derivatives other than exchange-traded futures appears to be 
developing--and that the offering of long and short bitcoin ETPs 
``raises the possibility that market makers in Bitcoin derivatives 
could make two-sided markets if interest in both the long and short 
ETFs is similar in magnitude'' \69\--these speculative statements do 
not provide a basis for the Commission to conclude that the non-
exchange-traded bitcoin derivatives market is now, or may eventually 
be, of significant size.
---------------------------------------------------------------------------

    \69\ See supra notes 39-40 and accompanying text.
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    The Commission therefore concludes that Exchange has not 
demonstrated that it has entered into a surveillance-sharing agreement 
with a regulated market of significant size related to bitcoin, or 
that, given the current absence of such an agreement, the exchange's 
own surveillance procedures described above would, by themselves, be 
sufficient to satisfy the requirement of Exchange Act Section 6(b)(5) 
that an exchange's rules be designed to prevent fraudulent and 
manipulative acts and practices.\70\ While CME and CFE are regulated 
markets for bitcoin derivatives, there is no basis in the record for 
the Commission to conclude that these markets are of significant size. 
Additionally, because bitcoin futures have been trading on CME and CFE 
only since December 2017, the Commission has no basis on which to 
predict how these markets may grow or develop over time, or whether or 
when they may reach significant size.
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    \70\ See 15 U.S.C. 78f(b)(5).
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    Although the Exchange has not demonstrated that a regulated bitcoin 
futures market of significant size currently exists, the Commission is 
not suggesting that the development of such a market would 
automatically require approval of a proposed rule change seeking to 
list and trade shares of an ETP holding bitcoins as an asset. The 
Commission would need to analyze the facts and circumstances of any 
particular proposal and examine whether any unique features of a 
bitcoin futures market would warrant further analysis before approval.

C. Protecting Investors and the Public Interest

1. Comments Received
    One commenter states that approval of a bitcoin ETP on a U.S.-
regulated exchange would protect small traders and increase exposure to 
a new asset class in a safe manner.\71\ Another commenter states that 
if the Commission rejects bitcoin ETPs, it will push investors to 
unregulated and possibly unsafe environments.\72\
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    \71\ See Mohammed Letter, supra note 9.
    \72\ See Fink Letter, supra note 9.
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    One commenter believes that, while the Commission should deny the 
proposed ETPs, it should regulate this environment to stop individual 
consumers from coming to financial harm.\73\
---------------------------------------------------------------------------

    \73\ See Fitzgerald Letter, supra note 9, at 2.
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    One commenter suggests that the Commission could address some of 
its concerns about the proposed ETPs by working with self-regulatory 
organizations, and in particular FINRA, to create bitcoin and 
cryptocurrency-related asset suitability requirements. In addition, 
this commenter suggests that targeted disclosure requirements could 
make investors aware of volatility, discourage retail investors from 
investing more than a small portion of their portfolio in 
cryptocurrency-related assets, and present historical scenarios to 
retail investors to demonstrate how an instrument such as a particular 
bitcoin ETP would have performed over time. This commenter believes 
that suitability requirements are less prescriptive than an effective 
ban on a class of product and that they could balance the Commission's 
interest in protecting retail investors against its interest in 
allowing cryptocurrency-related asset markets to continue to develop in 
regulated markets where the Commission can observe their performance 
closely.\74\
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    \74\ See NERA Letter, supra note 9, at 5-6.
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    Several commenters assert that the Commission should deny the 
proposed ETPs to help protect the public from exposure to financial 
risk from an unregulated market.\75\ One commenter asserts that, while 
the risk posed by the cash-settled futures products is mostly 
contained, a bitcoin ETP would expose the public to significant 
financial risk due to a highly volatile, unregulated, and manipulated 
market in bitcoin as well as cryptocurrencies in general.\76\ Several 
commenters further believe that before the Commission approves a 
bitcoin ETP, there should be a proper legal and regulatory framework 
put in place by a suitable governmental body to prevent manipulation 
and protect the public.\77\ Another commenter refers to the proposed 
ETPs as a ``house of cards'' and expresses concern that the Funds' 
attempt to replicate the bitcoin futures markets, which are related to 
underlying cryptocurrencies that trade on unregulated exchanges, will 
lead to losses for retail investors, and that the inclusion of an 
inverse Fund will add to the risk.\78\
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    \75\ See Desai Letter, supra note 9, at 1; Kohen Letter, supra 
note 9; Kumar Letter, supra note 9; Malkin Letter, supra note 9, at 
2.
    \76\ See Desai Letter, supra note 9, at 1.
    \77\ See Desai Letter, supra note 9, at 1, 2; Kumar Letter, 
supra note 9; Malkin Letter, supra note 9, at 2.
    \78\ See Kohen Letter, supra note 9.
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2. Analysis
    The Exchange asserts that approval of the proposal would enhance 
competition among market participants, to the benefit of investors,\79\ 
and two commenters assert that approval would protect investors by 
permitting them to seek exposure to bitcoin through a safer, regulated 
market.\80\ Other commenters suggest that the Commission should either 
seek to regulate the underlying bitcoin markets,\81\ or should seek to 
protect investors through disclosure requirements or suitability 
standards, rather than disapproving a bitcoin-ETP proposal.\82\ Several 
other commenters, however, assert that approval of a bitcoin-based ETP 
would expose investors to risks from unregulated bitcoin markets.\83\
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    \79\ See Notice, supra note 3, 82 FR at 61106.
    \80\ See supra notes 71-72 and accompanying text.
    \81\ See supra note 73 and accompanying text.
    \82\ See supra note 74 and accompanying text.
    \83\ See supra notes 75-78 and accompanying text.
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    The Commission acknowledges that, compared to trading in 
unregulated bitcoin spot markets, trading a bitcoin-based ETP on a 
national securities exchange may provide some additional protection to 
investors, but the Commission must consider this potential benefit in 
the broader context of whether the proposal meets each of the 
applicable requirements of the Exchange Act. Pursuant to Section 
19(b)(2) of the Exchange Act, the Commission must disapprove a proposed 
rule change filed by a national securities exchange if it does not find 
that the proposed rule change is consistent with the applicable 
requirements of the Exchange Act--including the requirement under 
Section 6(b)(5) that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices.
    Thus, even if a proposed rule change would provide certain benefits 
to

[[Page 43942]]

investors and the markets, the proposed rule change may still fail to 
meet other requirements under the Exchange Act. For the reasons 
discussed above, the Exchange has not met its burden of demonstrating 
an adequate basis in the record for the Commission to find that the 
proposal is consistent with Exchange Act Section 6(b)(5), and, 
accordingly, the Commission must disapprove the proposal.y

D. Other Comments

    Comment letters also addressed the intrinsic value of bitcoin; \84\ 
the desire of investors to gain access to bitcoin through an ETP; \85\ 
investor understanding about bitcoin; \86\ the volatility of bitcoin 
prices,\87\ the regulation of bitcoin spot markets,\88\ the operation 
and valuation of the proposed ETPs,\89\ the potential impact of 
Commission approval of the proposed ETP on the price of bitcoin,\90\ 
and the legitimacy that Commission approval of the proposed ETP might 
confer upon bitcoin as a digital asset.\91\ Ultimately, however, 
additional discussion of these tangential topics is unnecessary, as 
they do not bear on the basis for the Commission's decision to 
disapprove the proposal.
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    \84\ See Ahn Letter, supra note 9.
    \85\ See Fink Letter, supra note 9; Kaleda Letter, supra note 9; 
Moberg Letter, supra note 9; Rousseau Letter, supra note 9; Santos 
Letter, supra note 9.
    \86\ See Desai Letter, supra note 9, at 1; Kumar Letter, supra 
note 9.
    \87\ See Desai Letter, supra note 9, at 1; Malkin Letter, supra 
note 9, at 1.
    \88\ See Desai Letter, supra note 9, at 1; Fitzgerald Letter, 
supra note 9, at 1; Kumar Letter, supra note 9; Malkin Letter, supra 
note 9, at 1; Mohammed Letter, supra note 9.
    \89\ See Desai Letter, supra note 9, at 1; Malkin Letter, supra 
note 9, at 1; Kumar Letter, supra note 9; NERA Letter, supra note 9, 
at 1-2, 3, 5.
    \90\ See Santos Letter, supra note 9.
    \91\ See Desai Letter, supra note 9, at 1, 2; Kumar Letter, 
supra note 9; Santos Letter, supra note 9.
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E. Basis for Disapproval

    The record before the Commission does not provide a basis for the 
Commission to conclude that the Exchange has met its burden under the 
Exchange Act and the Commission's Rules of Practice to demonstrate that 
its proposed rule change is consistent with Exchange Act Section 
6(b)(5).\92\
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    \92\ In disapproving the proposed rule change, the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
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IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange, and in particular, with Section 6(b)(5) of the 
Exchange Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-NYSEArca-2017-139 is 
disapproved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\93\
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    \93\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18572 Filed 8-27-18; 8:45 am]
 BILLING CODE 8011-01-P


