SIX Swiss Exchange Updates Regulatory Framework for Crypto-Linked Products

Introduction

On February 15, 2024, the SIX Exchange Regulation (SER) published the revised regulatory framework for listing derivatives and exchange-traded products (ETPs) with crypto-assets as underlying instruments (crypto ETPs).1 The new rules, consisting of the Directive on Crypto-Assets as Underlying Instruments (DCA), the revised Additional Rules for the Listing of Exchange Traded Products (ARETP), and the amended Additional Rules for the Listing of Derivatives (ARD), have the purpose of expanding the universe of eligible crypto-assets and enhancing investor protection.

This commentary analyzes the key changes in the SIX rules, focusing on the expanded eligibility criteria for underlying crypto-assets, the new collateralization requirements for ETPs, and the additional disclosure obligations for issuers. I discuss the potential impact of these changes on the Swiss crypto-asset management industry and the implications for market participants.

Expanded eligibility criteria

One of the most significant changes introduced by the revised SIX regulations is expanding the universe of eligible crypto-assets that can serve as underlying instruments for derivatives and ETPs listed on the SIX Swiss Exchange. Under the previous rules, only the top 15 crypto-assets by market capitalization were eligible as underlying.2 The new rules adopt a more liberal approach, allowing a broader range of crypto-assets to qualify as underlying.

According to Article 2 DCA, a crypto-asset must meet the following criteria to be eligible as an underlying instrument:

1. Functional classification: The crypto-asset must be a payment, utility, or asset token that does not economically represent an equity interest.3

2. Technical classification: The crypto-asset must be a coin that runs on Distributed Ledger Technology (DLT).?

3. Market capitalization: The crypto-asset must have a market capitalization of at least USD 500 million at the time of the listing application.?

4. Liquidity: The crypto-asset must demonstrate an average daily liquidity of at least USD 50 million over the past 30 calendar days before submitting the listing application.?

5. Trading history: The crypto-asset must have a trading history of at least 180 calendar days.?

These expanded eligibility criteria are expected to increase the number of crypto-assets that can serve as underlying for derivatives and ETPs on the SIX Swiss Exchange. According to SIX, 52 crypto-assets currently listed on CoinMarketCap would satisfy the revised requirements, compared to only 15 before.?

Stricter collateralization requirements

Another significant change introduced by the revised SIX regulations is the collateralization requirements for crypto ETPs. Under Article 70(2) of the Swiss Federal Financial Services Act (FinSA), ETPs offered to retail investors in Switzerland must be collateralized if not guaranteed by a bank, securities firm, or insurance company licensed in Switzerland.?

The revised ARETP adds requirements for the collateralization of crypto ETPs. According to Article 14 ARETP, the custodian of the crypto-assets serving as collateral must be subject to prudential supervision.1? Eligible custodians include:

1. custodians within the meaning of Article 4(2) of the Federal Act on Intermediated Securities (FISA), such as fund managers, banks, securities firms, and DLT trading facilities,11

2. persons holding a FinTech license pursuant to Article 1b of the Swiss Federal Act on Banks and Savings Banks (FBA),12 and

3. foreign institutions that are subject to equivalent supervision.13

The issuer must include a declaration in the listing application confirming that the collateralization structure complies with Article 70(2)(b) of FinSA. The issuer must also confirm that the custodian holds the collateral on behalf of the issuer and is an eligible custodian within the meaning of Article 14(4) ARETP.1?

The purpose of these enhanced collateralization requirements is to strengthen investor protection by ensuring that a regulated institution is always involved in the issuance setup of crypto ETPs, either as an issuer, guarantor, or custodian.

Strengthened disclosure obligations

The revised SIX regulations also introduce additional disclosure obligations for issuers of crypto ETPs. Per Article 4 DCA, the prospectuses must include:

1. a reference to the suspension and termination rights introduced under the revised SIX regulations,1?

2. a description of the key differences and related risks between traditional fiat currencies and the relevant underlying crypto-assets, particularly regarding the lack of intrinsic value, trading on unregulated exchanges, low trading volume, and higher volatility,1? and

3. an outline of the specific risks inherent to crypto ETPs, such as fraud risks and risks arising from possible hacker attacks.1?

For ETPs without a fixed maturity, including perpetual or open-ended, Article 6a ARETP requires the inclusion of an individual right of return in favor of the holders, referred to as an investor put option, and a right of termination for the issuer, referred to as an issuer call option.1?

Transitional provisions

The revised SIX regulations entered into force on April 1, 2024. Crypto ETPs issued before then will remain listed. By October 1, 2024, issuers must submit a revised prospectus to SER that satisfies the additional requirements in Article 4 DCA1?. Crypto issuers must submit a declaration per Article 15a ARETP and satisfy the custody requirements in Article 14(4) and (6) ARETP.2? Issuers who fail to comply with these requirements by October 1, 2024, will see their products delisted.21

The updated rules present an opportunity for ETP issuers

Expanding the universe of eligible crypto-assets for listed products on the SIX Swiss Exchange presents opportunities for ETP issuers to differentiate their offerings. With a broader range of underlying assets to work with, issuers can now create more sophisticated and diversified products that cater to investors’ needs.

One notable trend expected to gain traction after the revised SIX regulations is the shift from single-asset ETPs to thematic multi-asset products. Investors increasingly seek exposure to specific themes or sectors rather than individual assets.22 Thematic ETPs allow investors to gain diversified exposure to a particular trend or investment strategy.

The move towards thematic multi-asset ETPs is not unique to crypto, which has seen an increased institutional adoption.23 In traditional finance, thematic products have recently gained popularity as investors seek to capitalize on long-term structural trends.2? One in four new ETF launches in 2021 was thematic, up from 7% in 2015.2?

The expanded eligibility criteria for crypto ETPs provide a unique opportunity to create innovative thematic products that stand out in a market crowded with single-asset products. By combining multiple crypto-assets with a common theme or investment thesis, issuers can compete better.2?

Creating thematic multi-asset ETPs can help issuers mitigate some risks associated with single-asset products, such as liquidity and idiosyncratic risks. Multi-asset ETPs can provide investors with a smoother and more resilient investment experience.2?

The development of thematic multi-asset ETPs has its challenges. Issuers must carefully consider the eligibility criteria for underlying crypto-assets and the collateralization and disclosure requirements outlined in the revised SIX regulations. Creating thematic products requires a deep understanding of the crypto-asset market and indexing. Issuers that can successfully navigate between listing rules, operational requirements between market participants, and market trends will likely be well-positioned for success.

Conclusion

The revised SIX rules are pivotal for crypto asset management firms. The new rules allow for the development of more diverse and mature crypto-asset ETPs.

The stricter collateralization and disclosure requirements may be challenging for some, but the expanded eligibility criteria open new possibilities for agile issuers.

The success of ETP issuers will depend on their ability to navigate the regulatory landscape, identify emerging trends and themes, and create compelling products that meet investors’ needs. Those who can successfully adapt to the new regime and capitalize on the opportunities are likely to play a leading role in shaping the future of the crypto ETP market.

Footnotes

[1] SER, Crypto-assets as underlying instruments for derivatives and ETPs: amendment of existing regulations and adoption of new regulations, Regulatory Board Communiqué №3/2024, February 15, 2024; SER, Additional Rules for the Listing of Derivatives, April 27, 2022; SER, Additional Rules for the Listing of Exchange Traded Products, Jan 16, 2024.

[2] ARETP, Article 12a(1).

[3] DCA, Article 2(1).

[4] ARETP, Article 12a(2); ARD, Article 17a(2).

[5] DCA, Article 2(2)(a).

[6] DCA, Article 2(2)(b).

[7] DCA, Article 2(2)(c).

[8] SIX Swiss Exchange, Press Release, “SIX expands the universe of eligible crypto-assets for listed products,” February 15, 2024.

[9] FinSA, Article 70(2).

[10] ARETP, Article 14(4).

[11] ARETP, Article 14(4)(a); FISA, Article 4(2).

[12] ARETP, Article 14(4)(b); FBA, Article 1b.

[13] ARETP, Article 14(4)(c).

[14] ARETP, Article 15a.

[15] DCA, Article 4(1).

[16] DCA, Article 4(2)(a).

[17] DCA, Article 4(2)(b).

[18] ARETP, Article 6a.

[19] DCA, Article 8(1).

[20] ARETP, Article 28(1).

[21] DCA, Article 8(2); ARETP, Article 28(2).

[22] Vincent Bérubé, Sacha Ghai, and Jonathan Tétrault, “From indexes to insights: The rise of thematic investing,” McKinsey on Investing, Number 1, 2014.

[23] Fidelity, “Institutional Investor Digital Assets Study: Key Findings” Fidelity Digital Assets Research, October 2022; PwC, ETFs 2028: Shaping the Future, 2024.

[24] Vincent Bérube et al., 2014.

[25] Thomas Paratore, Thematic ETFs: The future is trending now, Trackinsight, 2021.

[26] Kamil Kaczmarski, Sean Farrar, Philipp Zelter, Mara van der Zee, The renaissance of ETFs, Exchange-traded funds are surging and fueling market opportunities, Oliver Wyman research and analysis, 2023.

[27] Daniel Prince, A masterclass in diversification, iShares by Blackrock Market Insights, 2023.

Disclaimer: This commentary does not constitute legal or investment advice. Prospective investors should consult with qualified professionals to fully understand the complex nature of crypto-linked derivatives and ETPs.