Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 3, to List and Trade Shares of the COtwo Advisors Physical European Carbon Allowance Trust Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)

I. Introduction

On August 19, 2024, 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 (“Act” or “Exchange Act”) ^[1] and Rule 19b-4 thereunder,^[2] a proposed rule change to list and trade shares (“Shares”) of the COtwo Advisors Physical European Carbon Allowance Trust (“Trust”) under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares). The proposed rule change was published for comment in the Federal Register on September 5, 2024.^[3]

On October 16, 2024, pursuant to Section 19(b)(2) of the 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 disapprove the proposed rule change.^[5] On November 22, 2024, the Exchange filed Amendment No. 1 to the proposed rule change, and on December 3, 2024, the Commission issued notice of filing of Amendment No. 1 to the proposed rule change and instituted proceedings pursuant to Section 19(b)(2)(B) of the Act ^[6] to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1.^[7] On February 20, 2025, pursuant to Section 19(b)(2) of the Act,^[8] the Commission designated a longer period for Commission action on the proposed rule change.^[9] On March 13, 2025, the Exchange filed Amendment No. 2 to the proposed rule change, and on March 20, 2025, the Exchange withdrew Amendment No. 2. On March 20, 2025, the Exchange filed Amendment No. 3 to the proposed rule change, which amended and replaced the proposed rule change, as modified by Amendment No. 1, in its entirety, and on March 21, 2025, the Commission issued notice of filing of Amendment No. 3 to the proposed rule change.^[10] This order grants approval of the proposed rule change, as modified by Amendment No. 3.

II. Description of the Proposal, as Modified by Amendment No. 3

The Exchange proposes to list and trade Shares of the Trust ^[11] under NYSE Arca Rule 8.201-E, which governs the listing and trading of Commodity-Based Trust Shares.^[12] The sponsor of the Trust ( printed page 17857) is COtwo Advisors LLC, a Delaware limited liability company (“Sponsor”); State Street Bank and Trust Company serves as the Trust's administrator, transfer agent, and custodian of the Trust's cash, if any (“Cash Custodian”); ^[13] and Wilmington Trust serves as trustee of the Trust.

Operation of the Trust ^[14]

The investment objective of the Trust will be for the Shares to reflect the performance of the price of EU Carbon Emission Allowances for stationary installations (“EUAs”), less the Trust's expenses. The Trust intends to achieve its objective by investing all of its assets in EUAs on a non-discretionary basis ( i.e., without regard to whether the value of EUAs is rising or falling over any particular period), and the Trust's only ordinary recurring expense will be the Sponsor's annual fee.^[15] The Trust may purchase or sell EUAs in connection with the creation or redemption of Shares, and the Trust also may sell EUAs to pay the Sponsor's annual fee.^[16] The Exchange represents that the Trust will not hold any assets other than EUAs and cash, and will not invest in futures, options, options on futures, or swap contracts, and will not hold any EUA derivatives.^[17]

Description of European Union (“EU”) Emissions Trading Scheme

According to the Exchange, the European Union Emissions Trading System (“EU ETS”) is a “cap and trade” system that caps the total volume of greenhouse gas (“GHG”) emissions from installations and aircraft operators responsible for around 40% of EU GHG emissions.^[18] The EU ETS is administered by the EU Commission, which issues a predefined amount of EUAs through auctions or free allocation.^[19] An EUA represents the right to emit one metric ton of carbon dioxide equivalent into the atmosphere by operators of stationary installations (“Covered Entities”).^[20] By the end of April each year, all Covered Entities are required to surrender EUAs equal to the total volume of actual emissions from their installation for the last calendar year. EU ETS operators can buy or sell EUAs to achieve EU ETS compliance.^[21]

In 2012, EU ETS operations were centralized into a single EU registry operated by the EU Commission (“Union Registry”), which covers all countries participating in the EU ETS.^[22] According to the Exchange, the Union Registry is an online database that holds accounts for all entities covered by the EU ETS, as well as for participants (such as the Trust) not covered under the EU ETS.^[23] The Union Registry can be accessed online in a similar manner to online banking systems. An account must be opened in the Union Registry by a legal or natural person before being able to participate in the EU ETS and transact in EUAs.^[24] The European Union Transaction Log (“EUTL”) ^[25] checks, records, and authorizes all transactions that take place between accounts in the Union Registry to ensure that transfers are in accordance with the EU ETS rules.^[26] The Exchange represents that the Union Registry is at all times responsible for holding the EUAs, and all EUAs are held in the Union Registry, regardless of whether the EUAs are acquired through transactions on an exchange or in over-the-counter (“OTC”) transactions.^[27]

Description of EUA Trading Markets

According to the Exchange, there are currently two avenues for trading EUAs: a primary market and a secondary market. The primary market involves participation in a regularly scheduled auction.^[28] The secondary market involves transactions between buyers and sellers on regulated markets.^[29] The instruments offered for trading are the following: (1) instruments with a daily expiry, which consist of spot EUAs and the Daily EUA Future (as defined herein); (2) futures contracts with various maturities; and (3) options on futures contracts.^[30] Spot EUAs are traded exclusively on the European Energy Exchange AG (“EEX”),^[31] and futures contracts and options on futures contracts are traded on EEX, ICE Endex ( printed page 17858) Markets B.V. (“ICE Endex”),^[32] and Nasdaq Oslo.^[33]

According to the Exchange, the single day futures contract on EUAs (“Daily EUA Future”) is exclusively traded on the ICE Endex, which settles each day at the close of trading.^[34] The Daily EUA Future is a deliverable contract where each person with a position open at cessation of trading is obliged to make or take physical delivery of EUAs upon the expiration of the contract at the end of each trading day.^[35] Settlement of the Daily EUA Future does not occur through cash transactions.^[36] Each Daily EUA Future represents one lot of 1,000 EUAs, with each EUA providing an entitlement to emit one ton of carbon dioxide equivalent gas.^[37] The Exchange represents that the settlement and economic outcome for a spot purchase on the EEX and a same day futures purchase on the ICE Endex are identical.^[38] In addition, the Exchange states that EEX also offers other monthly EUA futures contracts with various expirations, and options on EUA futures contracts also trade on EEX and ICE Endex for many of the available EUA futures.^[39]

Surveillance

The Exchange states that it has entered into a comprehensive surveillance sharing agreement (“CSSA”) with ICE Endex. Pursuant to the CSSA, the Exchange will communicate as needed regarding trading in the Shares and EUA derivatives, including Daily EUA Futures, with ICE Endex, and the Exchange may obtain trading information regarding trading in the Shares and EUA derivatives, including Daily EUA Futures, from ICE Endex.^[40] In addition, the Exchange represents that EEX is a member of the Intermarket Surveillance Group (“ISG”).^[41] Pursuant to its membership in ISG, EEX is obligated, and has undertaken a commitment, to share information, including, without limitation, with respect to spot EUAs, with other ISG members, including the Exchange, on an as-needed basis when such surveillance-sharing information is used for regulatory purposes.^[42]

III. Discussion and Commission Findings

After careful review, the Commission finds that the proposed rule change, as modified by Amendment No. 3, is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.^[43] In particular, the Commission finds that the proposed rule change, as modified by Amendment No. 3, is consistent with Section 6(b)(5) of the Act,^[44] which requires, among other things, that the Exchange's rules be designed to prevent fraudulent and manipulative acts and practices and, in general, to protect investors and the public interest; and with Section 11A(a)(1)(C)(iii) of the Act,^[45] which sets forth Congress' finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities.

A. Exchange Act Section 6(b)(5)

The Commission has previously recognized that surveillance-sharing agreements assist in the detection and deterrence of fraudulent and manipulative activity.^[46] The Commission also has stated that it considers two markets that are members of the ISG to have a comprehensive surveillance-sharing agreement with one another, even if they do not have a separate bilateral surveillance-sharing agreement.^[47]

As stated in Amendment No. 3, the Trust will seek to achieve its objective by holding only spot EUAs and possibly cash and will not hold any EUA derivatives. According to the Exchange, spot EUAs are traded exclusively on EEX, which is a member of ISG and is registered with the CFTC as an ( printed page 17859) authorized Foreign Board of Trade.^[48] In addition, although the Trust will not hold any EUA derivatives, the Exchange states that Daily EUA Futures market is “the functional equivalent of a `spot' market for EUAs” as the “settlement, functionality and economic outcome for a spot purchase on the EEX and a Daily EUA future purchase . . . are identical.” ^[49] ICE Endex offers trading in EUA derivatives, including Daily EUA Futures traded exclusively on ICE Endex, other EUA futures, and options on futures.^[50] The Exchange states that it has entered into CSSA with ICE Endex, which is registered with the CFTC as an authorized Foreign Board of Trade, and that, pursuant to the CSSA, the Exchange will communicate as needed regarding trading in the Shares and EUA derivatives, including Daily EUA Futures, with ICE Endex, and the Exchange may obtain trading information regarding trading in the Shares and EUA derivatives, including Daily EUA Futures, from ICE Endex.

Based on the record before it, the Commission is able to conclude that the Exchange's surveillance sharing agreement by virtue of EEX's ISG membership, with respect to the spot EUAs proposed to be held by the Trust, and the Exchange's CSSA with ICE Endex, with respect to EUA derivatives, including Daily EUA Futures, can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices with respect to the spot EUAs proposed to be held by the Trust. These agreements, whether through ISG membership or CSSAs, should help to ensure the availability of information necessary to detect and deter potential manipulations and other trading abuses, thereby making the Shares of the Trust less readily susceptible to manipulation. The Commission therefore finds that the proposed rule change, as modified by Amendment No. 3, is consistent with Section 6(b)(5) of the Act,^[51] which requires, among other things, that the Exchange's rules be designed to prevent fraudulent and manipulative acts and practices and, in general, to protect investors and the public interest.

B. Exchange Act Section 11A(a)(1)(C)(iii)

The proposed rule change, as modified by Amendment No. 3, sets forth aspects of the Trust, including the availability of EUA pricing and market information, transparency of Trust holdings, and types of surveillance procedures, that are consistent with other exchange-traded products that the Commission has approved.^[52] This includes commitments regarding: the availability via the Consolidated Tape Association of quotation and last-sale information for the Shares; the availability on the Trust's website of certain information related to the Trust and the Shares, including NAV; the dissemination of the IFV by one or more major market data vendors, updated every 15 seconds throughout the Exchange's regular trading hours; the Exchange's surveillance procedures and ability to obtain information regarding trading in the Shares of the Trust and trading in the spot EUAs traded on EEX and other EUA derivatives traded on both EEX and ICE Endex; the conditions under which the Exchange would implement trading halts and suspensions; and the requirements of registered market makers in the Shares of the Trust. In addition, the Exchange represents that it deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange's rules governing the trading of equity securities.^[53] Further, the applicable listing rule of the Exchange requires that all statements and representations made in its filing regarding, among others, the description of the portfolio or reference assets, limitations on such portfolio holdings or reference assets, and the applicability of the Exchange's listing rules specified in the filing, will constitute continued listing requirements.^[54] Moreover, the proposed rule change states that the Trust has represented to the Exchange that it will advise the Exchange of any failure by the Trust to comply with the applicable continued listing requirements; pursuant to obligations under Section 19(g)(1) of the Exchange Act, the Exchange will monitor for compliance with the continued listing requirements; and if the Exchange becomes aware that the Trust is not in compliance with the applicable listing requirements, that Exchange will commence delisting procedures.^[55]

The Commission therefore finds that the proposed rule change, as modified by Amendment No. 3, is reasonably designed to promote fair disclosure of information that may be necessary to price the Shares appropriately, to prevent trading when a reasonable degree of transparency cannot be assured, to safeguard material non-public information relating to the Trust's holdings, and to ensure fair and orderly markets for the Shares of the Trust.

IV. Conclusion

This approval order is based on all of the Exchange's representations and descriptions in the proposed rule change, as modified by Amendment No. 3, which the Commission has carefully evaluated as discussed above. For the foregoing reasons, the Commission finds that the proposed rule change, as modified by Amendment No. 3, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, Section 6(b)(5) and Section 11A(a)(1)(C)(iii) of the Act.^[56]

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[57] that the proposed rule change (SR-NYSEARCA-2024-70), as modified by Amendment No. 3, be, and it hereby is, approved.

April 23, 2025.