NYSE Arca, Inc., Exchange Proposal to the SEC for ProShares Bitcoin ETFs

 SEC File No. SR-NYSEArca-2017-139

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. 34-84369 (1) The Commissioner set the time limit for comments to November 5, 2018, and (2) ORDERED that the order August 22, 2018, ORDER disapproving the proposed rule change would remain in effect pending review by the Commission. [83 FR 51520 October 11, 2018]

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

SEC Disapproves 2 Bitcoin Funds from the ProShares ETP Trust

August 22, 2018 – SEC Disapproval Order – See SEC Release No. 34-83904, by the Division of Trading and Markets. [83 FR 43934, August 28, 2018]

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

Analysis – 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.

In conclusion, the Commission stated that pursuant to Section 19(b)(2) of the Exchange Act, the proposed rule change was not 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. Therefore, it ORDERED that the proposed rule change was disapproved.

June 15, 2018 – Time Extended – [SEC Release No. 34-83452][83 FR 28894, June 21, 2018] – Section 19(b)(2) of the Act provides that, after initiating disapproval proceedings, the Commission shall issue an order approving or disapproving the proposed rule change not later than 180 days after the date of publication of notice of filing of the proposed rule change. The Commission may extend the period for issuing an order approving or disapproving the proposed rule change, however, by not more than 60 days if the Commission determines that a longer period is appropriate and publishes the reasons for such determination.

The proposed rule change was published for notice and comment in the Federal Register on January 18, 2018. June 24, 2018, is 180 days from that date, and August 23, 2018, is 240 days from that date.
The Commission finds it appropriate to designate a longer period within which to issue an order approving or disapproving the proposed rule change so that it has sufficient time to consider this proposed rule change. Accordingly, the Commission designates August 23, 2018, as the date by which the Commission shall either approve or disapprove the proposed rule change.

January 30, 2018 – Time Extended – The Commission decided to extend the 45-day time period to March 26, 2018, to designate a longer period within which to take action on the proposed rule change so that it had sufficient time to consider the proposed rule change. [SEC Release No. 34-82602] [83 FR 4941, Feb. 2, 2018]

December 4, 2017  – NYSE Arca Inc Proposed Rule Change (SEC Release 34-82350, December 19, 2017)(82 FR 61100, Dec. 26, 2017) – The NYSE Arca, Inc. (“BZX”) exchange filed with the Commission a proposed rule change 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.

The Exchange filed a proposal to list and trade shares of:

• ProShares Bitcoin ETF (the “Long Fund”)
• ProShares Short Bitcoin ETF (the “Short Fund”)

(each a “Fund” and, collectively, the “Funds”), a series of the ProShares ETP Trust (the “Trust”), under Rule 14.11(f)(4) (“Trust Issued Receipts”). The shares of the Funds were referred to as the “Shares.”

The Long Fund sought as its investment objective that for a single day and over time, it would match the performance of lead month Benchmark Futures Contracts. By being long Bitcoin Futures Contracts, it should benefit from daily increases in the price of the Bitcoin Futures Contracts but would lose value when the price of the Bitcoin Futures Contracts declined.

The Short Fund seeks to provide investment results that, on a daily basis correspond to the inverse (-1x) of the daily performance of the Benchmark Futures Contracts for a single day. By being short Bitcoin Futures Contracts, the Short Fund will benefit from daily decreases in the price of the Bitcoin Futures Contracts and will lose value when the price of the Bitcoin Futures Contracts increase.

The proposal stated that each Fund would hold substantially all of its assets in Benchmark Futures Contracts, and cash and Cash Equivalents (used to collateralize the Benchmark Futures Contracts) in order to achieve the investment objective. The Funds may also invest in other U.S. exchange-listed bitcoin futures contracts, as available, in addition to the Benchmark Futures Contracts. In the event that position price, or accountability limits are reached with respect to Bitcoin Futures Contracts, each Fund may invest in U.S. listed swaps on bitcoin or the Benchmark Futures Contracts. In the event that position price or accountability limits are reached with respect to Listed Bitcoin Swaps, each Fund may invest in OTC swaps on bitcoin or the Benchmark Futures Contracts.

Time of Next Action by the Commission: Pursuant to Section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)), within 45 days of the date of publication of the notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: A. by order approve or disapprove the proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. All comments were to be submitted within 21 days from the date of publication in the Federal Register.

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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