NYSE Arca Inc Request to the SEC for trading of Direxion Bitcoin Shares

SEC File No. SR-NYSEArca-2018-02

Next: Further SEC Review

October 4, 2018 ORDER > Division of Trading and Markets Disapproval Order of August 22, 2018, to Remain in Effect and Schedule for Filing Statements on Review – See SEC Release No. 34-84370 for File No. SR-NYSEArca-2018-02. [83 FR 51531] (1) The Commissioner set the time limit for comments to November 5, 2018, and (2) ORDERED that the order August 22, 2018, ORDER disapproving proposed rule change SR-CboeBZX-2018-001 would remain in effect pending review by the Commission.

August 23, 2018 – The Secretary of the Commission notified NYSE Arca, Inc., that, pursuant to Commission Rule of Practice 431 the Commission would review the action of the Division and thus the action was automatically stayed.

Direxion Bitcoin Disapproved

SEC Disapproves Trading of 5 Funds of Bitcoin Shares from the Direxion Shares ETF Trust

August 22, 2018 – SEC Disapproval Order – See SEC Release No. 34-83912 for File No. SR-NYSEArca-2018-02 by the SEC Division of Trading and Markets. [83 FR 43912]

After review of the NYSE proposed rule change, the SEC Disapproved the proposal, concluding as follows:

III.B – Preventing Fraudulent and Manipulative Practices – As stated in the Winklevoss Order, although surveillance-sharing agreements were not the exclusive means by which an exchange could meet its obligations under Exchange Act Section 6(b)(5), such agreements were widely used as a means for exchanges that list ETPs to meet their obligations in deterring manipulation.  Even though the Winklevoss Order was based on a commodity-trust ETP it was also appropriate for an ETP based on bitcoin futures. Thus, a surveillance-sharing agreement with a regulated market of significant size was required to prevent fraudulent and manipulative acts and practices. That the bitcoin markets of the CME and CBOE regulated by the CFTC were not of sufficient size.

In reaching its conclusion, the Commission stated it had to consider whether the potential benefits of the proposal met the applicable requirements of the Exchange Act. In accord with Section 19(b)(2) of the Exchange Act, the Commission had to disapprove a proposed rule change filed by a national securities exchange if it did not find that the proposed rule change was 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 investors and the markets, the proposed rule change would still fail to meet other requirements under the Exchange Act. Thus the Commission concluded that exchange had not met its burden of demonstrating an adequate basis on the record for the Commission to find that the proposal was consistent with Exchange Act Section 6(b)(5), and therefor disapproved the proposal.

Although the Commission disapproved this proposed rule change, the Commission emphasized that its disapproval did not evaluate whether bitcoin, or blockchain technology more generally, had utility or value as an innovation or an investment. Rather, the Commission disapproved the proposed rule change because the Exchange had not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal was consistent with the requirements, in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.

July 18, 2018 – The Commission extended the period for consideration of the proposed rule change to September 21, 2018, in that it had only received a few comments. [83 FR 35040]

April 23, 2018 – The Commission instituted proceedings under Section 19(b)(2)(B) of the Exchange Act to determine whether to approve or disapprove the proposed rule change. The comment period and rebuttal comment period for the Order Instituting Proceedings closed on May 18, 2018, and June 1, 2018, respectively. [83 FR 18603]

March 1, 2018 – Pursuant to Section 19(b)(2) of the Exchange Act, 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. [83 FR 9768]

January 18, 2018 – The proposed rule change was published for comment in the Federal Register on January 24, 2018, and the comment period closed on February 14, 2018. [SEC Release No. 34-82532][83 FR 3380].

January 4, 2018 – The NYSE Arca Inc., filed a proposed rule change with the Commission pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 USC 78s(b)(1)] and Rule 19b-4 [17 CFR 240.19b-4] thereunder, to list and trade shares of the following five exchange traded products :

• Direxion Daily Bitcoin Bear 1X Shares (“1X Bear Fund”),
• Direxion Daily Bitcoin 1.25X Bull Shares (“1.25X Bull Fund”),
• Direxion Daily Bitcoin 1.5X Bull Shares (“1.5X Bull Fund”),
• Direxion Daily Bitcoin 2X Bull Shares (“2X Bull Fund”), and
• Direxion Daily Bitcoin 2X Bear Shares (“2X Bear Fund”) (collectively, the “Funds”).

Each Fund was a series of the Direxion Shares ETF Trust II (the ‘‘Trust’’), a Delaware statutory trust.

According to the Registration Statement, the Funds would offer investors the opportunity to obtain daily short, leveraged long or leveraged short exposure to the lead month bitcoin futures contract traded on the Chicago Mercantile Exchange (‘‘CME’’) or on Cboe Global Markets, Inc. (‘‘CBOE’’) or on any other U.S. exchange that subsequently trades bitcoin futures contracts (the ‘‘Bitcoin Futures Contract’’), the target benchmark before fees and expenses.

See SEC Release No. 34-82532 or Federal Register 83 FR 3380 for the complete rule change proposal.

Commentary by Attorney Timothy F. Mills, Editor / Action Cyber Times™ © 2018 All Rights Reserved.

Action Cyber Times™ provides resources for cybersecurity, data privacy, compliance, breach reporting and risk management, intellectual property theft, and the utilization of emerging technologies such as artificial intelligence, machine learning, blockchain DLT, advances in cryptographic applications, and more.

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