SEC keeps Nasdaq bitcoin options on hold after granting CME review

Quick Take

• CME Group is asking the SEC's commissioners to overturn a staff decision conditionally approving Nasdaq PHLX's proposal to list cash-settled bitcoin index options.
• CME is arguing that the contracts are commodity option swaps subject exclusively to the CFTC's oversight rather than the SEC's.
• The SEC granted CME's petition for review and kept the approval stayed, with written statements due Aug. 24.

Exchange operator CME Group is asking the Securities and Exchange Commission (SEC) to overturn a staff decision that conditionally approved Nasdaq PHLX's proposal for cash-settled bitcoin index options, arguing that the contracts should fall exclusively under the jurisdiction of the Commodity Futures Trading Commission (CFTC).

In a July 29 order, the SEC granted CME's petition for review and kept the approval stayed while the full Commission considers the challenge. Written statements supporting or opposing the approval are due Aug. 24. The order does not indicate whether the commissioners agree with CME's arguments.

Nasdaq first announced plans for bitcoin index options with CF Benchmarks in 2024. The proposed contracts differ from the options already trading on spot bitcoin ETFs, as the underlying instruments for those options are securities. Nasdaq's contracts would instead reference an index tracking bitcoin itself, creating the jurisdictional issue at the center of CME's challenge.

CME and Nasdaq did not immediately respond to a request for comment from The Block.

CME disputes jurisdiction

The SEC's Division of Trading and Markets approved Nasdaq's proposal through delegated authority on May 22; however, Nasdaq could not begin trading the options without first obtaining exemptions from the CFTC.

The CFTC exemptions Nasdaq needs would allow would allow Nasdaq PHLX (formerly the Philadelphia Stock Exchange) to offer the contracts under concurrent SEC and CFTC oversight and permit the Options Clearing Corporation to clear them without registering as a CFTC-regulated derivatives clearing organization.

However, CME argued in its petition that bitcoin is a non-security commodity and that options based directly on its value are commodity option swaps under the CFTC's exclusive jurisdiction. The exchange operator said the CFTC cannot use an exemption to give that jurisdiction to the SEC, nor can the SEC assume oversight of a product with no securities-related features.

CME also argued in its challenge that the Division of Trading and Markets exceeded its delegated authority by adopting a novel interpretation of Section 717 of the Dodd-Frank Act. It asked the full Commission to vacate the approval, warning that the decision could open the door for securities exchanges to list options or futures tied to other non-security commodities under SEC rules.

CME said in its petition that the SEC's approval of the options would let Nasdaq's product directly compete with CME's offerings and could impose new regulatory costs on CME's exchanges and clearing business.

Proposed options are tied directly to bitcoin

The proposed contracts, which would trade under the ticker QBTC, would track the CME CF Bitcoin Real Time Index divided by 100. The underlying index is calculated every 200 milliseconds using order-book data from qualifying bitcoin-dollar markets. The options would be European-style, meaning they could be exercised only at expiration, and would settle entirely in U.S. dollars rather than bitcoin.

The final settlement value would use the CME CF Bitcoin Reference Rate New York Variant, also divided by 100. That once-daily benchmark is based on bitcoin-dollar transactions during the one-hour window ending at 4 p.m. New York time.

Nasdaq has argued that the options would allow holders of spot bitcoin ETFs to hedge or modify their exposure on a national securities exchange and within the same margin regime as their ETF positions.