FR 2025-06510

The document under review is a notice from the Securities and Exchange Commission concerning a proposed rule change by the Cboe BZX Exchange. This rule change seeks to amend existing regulations to permit the listing and trading of options on the Fidelity Ethereum Fund. This fund is a type of financial instrument known as an Ethereum-backed commodity ETF. In essence, it provides an opportunity for investors to gain exposure to Ethereum—a popular cryptocurrency—without dealing with the digital currency directly.

General Summary

The primary focus of this proposal is to enhance the investment opportunities available to the public by allowing investors to trade options on the Fidelity Ethereum Fund. The Exchange claims that this will provide a cost-efficient way for investors to incorporate Ethereum exposure into their portfolios. According to the proposal, the Exchange will adhere to existing rules and guidelines—including certain limits on the number of options contracts that can be held by a single entity—to ensure fair and orderly markets.

Key Issues and Concerns

1. Complex Language and Jargon: The document is heavily laden with technical terminologies and specific regulatory language. This makes it difficult for those without a background in finance or securities regulation to fully grasp the implications.

2. Impact on the Ethereum Market: While the proposal provides detailed arguments justifying the introduction of these options, there is a lack of clear information on how these changes will affect the Ethereum market directly.

3. Position and Exercise Limit Justification: The proposed limits for holding options contracts are extensively compared with other securities. While this is aimed at transparency, the depth of the explanation might overwhelm the average reader and could be simplified.

4. Surveillance and Regulation: There is a comprehensive detailing of the surveillance mechanisms in place. However, the extensive detail may obscure rather than illuminate the essential points about how these mechanisms will ensure fair trading.

5. Benefits to the Average Investor: Although the rule change aims to aid investors, the document does not clearly outline how it will benefit the everyday investor in simple, comprehensible terms.

Impact on the Public and Stakeholders

Broad Public Impact:

For the general public, especially those engaged or interested in cryptocurrency investments, the introduction of options on the Fidelity Ethereum Fund could offer a new avenue for investment. It is designed to make Ether-based fund shares accessible through traditional finance avenues, potentially making investments in cryptocurrencies less daunting and more regulated.

Specific Stakeholders:

• Investors: For individual and institutional investors, this development provides an opportunity to diversify investment portfolios. Options on the Fidelity Fund could serve as a hedging tool against the volatility of cryptocurrencies.

• Market Participants: The increase in market participants trading these options might lead to greater liquidity and more competitive pricing in the market. However, there are concerns about market dominance, which the document does not thoroughly address.

• Regulatory Bodies: While regulatory entities will need to ensure compliance and monitor market activity, the introduction of such options will offer a test case for the regulation of more complex cryptocurrency-based financial products.

Overall, the proposal by Cboe BZX Exchange can be seen as a step towards integrating traditional financial markets with cryptocurrency investments, aiming to democratize access while maintaining regulatory oversight. However, the dense and specialized language of the document might limit a broader understanding among the general public.

This Federal Register document discusses a rule change proposal by the Cboe BZX Exchange, specifically concerning the trading of options on the Fidelity Ethereum Fund. The proposal essentially focuses on allowing trading options related to securities backed by Ethereum. The document contains various financial references that highlight its implications both financially and regulatorily.

Financial Amounts and Allocations

The document references several financial metrics associated with Ethereum, which operates as the underlying asset of the Fidelity Fund. It states that as of December 23, 2024, the global supply of Ethereum was approximately 120,000,000 coins, leading to a price of $3,494.25 per coin, creating an overall market capitalization of about $419.31 billion. These figures support the economically substantial value of Ethereum, which underlies the Fidelity Fund.

The document further illustrates metrics regarding trading positions in Ethereum versus the Fidelity Fund. For example, there is a reference to the position limit imposed by the Chicago Mercantile Exchange (CME) on Ethereum futures contracts, capped at 8,000 futures, which translates into a notional value of $1,367,200,000.

Additionally, the Fidelity Fund's share valuation, mentioned at $34.37 per share, enables a comparable analysis with Ethereum. It is stated that 2,500,000 shares at that price would equate to a value of $85,925,000, representing about 0.02% of the size of the Ethereum market. This comparison underscores the potentially low market impact of options even when reaching higher trading limits.

Relation to Identified Issues

One critical issue highlighted in the document is the complexity and depth of financial justifications, particularly for the position and exercise limits of 25,000 contracts for options on the Fidelity Fund. While financially justified given Ethereum's expansive market value, the extensive comparison utilized may obscure the simple, impactful point that this is a conservative limit with minimal market disruption risk. The notional value calculations offer a deep insight into how trading options could scale and impact market behaviors but might also confuse those unfamiliar with securities trading.

Additionally, the document's focus on surveillance and regulatory mechanisms indirectly touches on financial aspects, ensuring market stability without referencing explicit monetary allocations for these measures. However, the exhaustive detail in surveillance discussions might detract from illustrating how financial protections are tangibly enacted.

The exchange's proposed rule change indicates a desire to offer investors a "lower-cost risk management tool" to align with broader investment needs concerning Ethereum. Yet, the potential financial benefit for the average investor—particularly one not engaged in large-scale trading—remains somewhat abstract and underexplored.

In summary, while the document provides a thorough financial analysis underpinning the rule change for the Fidelity Fund options, its technical detailing necessitates simplification to better convey to the general public just how these financial structures reflect broader economic or investor trends.