On 10 September 2018, the SIX Exchange Regulation Ltd. published its revised Circular No. 3 that includes rules on the eligibility of certain crypto assets (crypto currencies) as underlyings of derivatives listed at SIX.

By Benjamin Leisinger (Reference: CapLaw-2018-42)

On 10 September 2018, the SIX Exchange Regulation Ltd. (SER) published its revised Circular No. 3 that includes rules on the eligibility of certain crypto assets (crypto currencies) as underlyings of derivatives listed at the SIX Swiss Exchange (SIX). The SER defined certain criteria that such crypto assets have to meet as well as the process to be adhered to prior to the registering for provisional admission to trading of products with new crypto assets as underlyings.

According to that Circular No. 3 crypto currencies are permitted as underlying assets for derivatives, provided that the following criteria are met. Before each application for provisional admission of a product, the respective issuer must check whether the following criteria are still fulfilled.

• The permissible crypto asset underlyings are crypto currencies in the form of coins (tokens, i.e., shares in a project, which are frequently issued as part of an initial coin offering (ICO), are not permissible as underlying instruments). Further, such coins must be based on open source software that functions on the principles of blockchain technology. A consensus protocol must be used and transactions must be verified by the network participants using a clearly defined process. The issuance of further crypto currency agreements must be clearly regulated and must not systematically favor individuals.
• At the time of application for provisional admission to trading, the relevant crypto currency must be one of the 15 largest crypto currencies in terms of market capitalization in USD. The information provided on the website: https://coinmarketcap.com/coins/ serves as a reference for this purpose.
• In order for the respective crypto currency being eligible as an underlying, it has to be ensured that the prices for the crypto currency used are regularly quoted and are readily publicly accessible via the internet. In addition, it must be ensured that the crypto currency can be traded directly against a common fiat currency such as USD or EUR and that a price feed is available via a common information system such as SIX Financial Information, Bloomberg or Reuters.
• There must be at least one trading venue for the relevant crypto currency that meets the following criteria: (1) It offers trading against a common fiat currency; (2) it creates transparency through the publication of prices; (3) the trading venue provides an API interface; and (4) the website of the trading venue must at least be written in English.

If a specific crypto currency is used (or intended to be used as underlying) for the first time, the applicant must clearly show to SER how the aforementioned requirements are met. This explanation can be submitted by e-mail to listing@six-group.com before submitting the application for provisional admission.

In the event of a fork in a crypto currency used as the underlying during the term of a derivative traded on the SIX, the derivative that relates to the new crypto currency and is allocated to existing investors free of charge may also be admitted to trading. Another permissible way to settle such a fork is to add the new crypto currency as an extra underlying instrument of the existing product. This may be done if the new crypto currency meets all the above requirements but for the requirement of being one of the 15 largest crypto currencies.

The provisional admission of new derivatives to the new crypto currency is only possible when all requirements including the requirement to belong to the 15 largest crypto currencies are met.

Furthermore, in the case of crypto currencies, information on the following points must be provided in the listing prospectus:

• The most important differences and the resulting risks between conventional (fiat) currencies and the crypto currency must be explained. These are in particular non-existent intrinsic value, trading of the crypto currency on unregulated online exchanges, lower trading volume, and greater volatility.
• The specific risks in connection with products in crypto currencies, in particular fraud risks and risks arising from possible hacker attacks, must be explained.
• SIX Exchange Regulation reserves the right to require the inclusion of further information in the listing prospectus if the crypto currency or the product structure so require.

This amendment to the Circular No. 3 is very welcome and certainly brings clarity and a clear procedure to the new generation of products that give investors an indirect exposure to eligible crypto assets. The requirements should ensure that only established and non-problematic crypto currencies can be used and that the investors are transparently informed about the unusual (or rather new) risks involved with this asset class.

This – as well as SIX’s announcement to launch full end-to-end and fully integrated digital asset trading, settlement and custody service – shows that the SIX is ahead of the curve with respect to crypto assets and will continue to contribute to an attractive and modern Swiss financial center.

Benjamin Leisinger (benjamin.leisinger@homburger.ch)