Overview

Under its regulations, SIX Swiss Exchange (SIX) permits the listing of derivatives (Derivatives) and exchange-traded products (ETPs) with crypto-assets as the underlying instrument.

Derivatives within the meaning of the SIX listing rules are listed financial instruments with standardized features that are characterized by their value being dependent on the relevant underlying instrument, including one or more crypto assets (Crypto-Linked Derivatives). ETPs are listed and non-interest-bearing debt instruments that track the performance of an underlying asset either on a delta-1 or leveraged basis. Whilst initially established for the trading of ETPs with commodities as underlying, since the first issuance of an ETP with a crypto asset as underlying (Crypto-Linked ETPs, and together with Crypto-Linked Derivatives, Crypto-Linked Products) on SIX in November 2018, the designated ETP-segment of SIX has become increasingly popular for the issuance of Crypto-Linked ETPs. As of the middle of 2023, 170 ETPs were listed on SIX, with the vast majority being Crypto-Linked ETPs.

ETPs and Derivatives qualify as structured products within the meaning of article 3(a)(4) of the Federal Act on Financial Services (FinSA). As structured products, ETPs and Derivatives are subject to the relevant provisions of FinSA, such as the applicable prospectus requirements for public offerings or an admission to a trading venue in Switzerland and the rules on the offering of structured products pursuant to article 70 FinSA. Additionally, Crypto-Linked Products must satisfy the applicable listing requirements of SIX in order to be eligible for listing.

On February 15, 2024, after a long period of discussions with market participants and the Swiss Financial Supervisory Authority FINMA (FINMA), SIX Exchange Regulation (SER) published the new Directive on Crypto-Assets as Underlying Instruments (DCA) and a revised version of the Additional Rules for the Listing of Exchange Traded Products (ARETP), the Additional Rules for the Listing of Derivatives (ARD) and the Directive on the Procedures for Exchange Traded Products (DPETP, collectively, the SIX Crypto Regulations), setting out revised listing requirements for Crypto-Linked Products listed on SIX. The revised SIX Crypto Regulations aim to expand the universe of crypto-assets that are eligible as underlyings of Crypto-Linked Products and to better protect investors in Crypto-Linked ETPs.

Expansion of Universe of Eligible Underlyings

The eligibility criteria for crypto-assets to qualify as a permitted underlying of a Crypto-Linked Product have been further specified in the new DCA, leading to more liberal rules for issuers of Crypto-Linked Products. Crypto-assets satisfying the following eligibility criteria, qualify as permitted underlyings:

• Eligible Crypto-Assets: From a functional perspective, payment tokens, utility tokens and asset tokens (to the extent they do not economically represent an equity interest; see below) qualify as eligible underlyings for Crypto-Linked Products. The ARETP and the ARD refer to FINMA’s «Guidelines for enquiries regarding the regulatory framework for initial coin offerings» dated February 16, 2018 (the ICO Guidelines), for the definition of the terms asset token and hybrid asset token. In contrast, asset tokens or hybrid asset tokens that from an economic perspective represent an equity security (article 12a(2) ARETP and article 17a(3) ARD), such as a share (Aktie) or a participation certificate (Partizipationsschein), do not qualify as eligible underlyings for Crypto-Linked Products.

In addition, from a technical perspective, the underlying crypto-asset must be a coin that runs on the Distributed Ledger Technology (DLT) (article 12a(2) ARETP and article 17a(2) ARD). This means that the relevant crypto-assets must be based on open-source software (such as Ethereum) that functions on the principles of blockchain technology. Thereunder, a consensus protocol must be applied and transactions must be verified by network participants. Finally, the procedure and the requirements for the issuance of additional units of the relevant crypto asset must be clearly defined (article 2(1) DCA). As a consequence, so-called privacy coins that allow for and facilitate private and anonymous blockchain transactions are not permitted underlyings for Crypto-Linked Products (article 12a(3) ARETP and article 17a(3) ARD).

• Liquidity, Market Capitalization and Trading History: The SIX overcame its focus on the top 15 ranking on CoinMarketCap/coins. Pursuant to article 2(2) DCA, at the time of applying for provisional admission to trading of the Crypto-Linked Products in question, the underlying crypto-asset must cumulatively:
  • have a market capitalization of USD 500 million;
  • demonstrate an average daily liquidity of at least USD 50 million over the past 30 calendar days prior to submission of the listing application; and
  • have a trading history of at least 180 calendar days.

In order to evidence that the requirements relating to liquidity, market capitalization and trading history are satisfied the information published on any of the following websites can be used: www.coinmarketcap.com; www.coingecko.com/en, or www.cryptocompare.com.

The additional eligibility criteria remain substantially the same (but have been moved to article 2 DCA), meaning that it must be ensured (i) that the prices for the crypto asset are set regularly and are publicly available on the internet and (ii) the crypto-asset can be traded directly against an established fiat currency and that a price feed is available via a reputable information system, such as SIX Financial Information, Bloomberg or Reuters (article 2(3) DCA). Finally, the trading of the relevant crypto-asset must be possible on at least one trading venue satisfying certain minimum requirements (article 2(4) DCA).

The eligibility criteria for crypto-assets under the revised SIX Crypto Regulations will increase the number of crypto-assets qualifying as permitted underlyings and will, as a consequence, grant the issuers of Crypto-Linked Products more flexibility to include additional underlyings. Under the previous SIX regulations only the top 15 crypto-assets based on market capitalization on CoinMarketCap/coins qualified as eligible underlyings for Crypto-Linked Products. Under the revised SIX Crypto Regulations, more flexible and liberal criteria have been introduced. Based on information provided by SIX, 52 crypto-assets currently listed on www.coinmarketcap.com would satisfy the requirements relating to liquidity, market capitalization and trading history under the revised SIX Crypto Regulations, leading to a considerable expansion of the universe of permitted underlyings for Crypto-Linked Products.

Collateralization and Regulatory Status of the Custodian

Since ETPs qualify as structured products within the meaning of article 3(a)(4) FinSA, the requirement that a structured product offered to retail investors in Switzerland and issued by a special purpose vehicle must be collateralized, if not guaranteed by a bank licensed under the Federal Act on Banks and Savings Institutions (FBA), a securities firm licensed under the Financial Institutions Act (FinIA) or insurance company licensed under the Federal Insurance Supervisory Act (ISA), generally applies to ETPs (article 70(2) FinSA). Therefore, the collateral set-up of ETPs will generally have to satisfy the requirements stipulated under article 70 FinSA and article 96 of the Swiss Financial Services Ordinance.

Additionally, the collateral set-up must satisfy the requirements under the SIX Crypto Regulations. The collateralization requirements for Crypto-Linked ETPs remain substantially the same under the revised ARETP, whereas it has been clarified under article 14 ARETP that Crypto-Linked ETPs, in line with past market practice, can be collateralized by granting an enforceable security interest over the claim (Herausgabeanspruch) relating to the underlying crypto-assets against the relevant custodian of the collateral, to the extent that (i) the relevant crypto-assets are held readily available for the issuer and (ii) the assets can either be allocated individually to the issuer or are allocated to a partnership and it is clear which share of the collective assets the issuer is entitled to.

In order to strengthen the collateralization structure, the revised SIX Crypto Regulations require that the custodian of the crypto-assets serving as collateral is subject to prudential supervision. This requirement will ensure that there is always a regulated institution involved in the issuance set up of Crypto-Linked ETPs, either as issuer, guarantor or custodian.

Pursuant to the revised ARETP, the following institutions qualify as eligible custodians for crypto-assets serving as collateral for Crypto-Linked ETPs:

• custodians within the meaning of article 4(2) of the Federal Intermediated Securities Act (FISA), being in particular (i) banks within the meaning of the FBA, (ii) securities firms within the meaning of FinIA, (iii) fund management companies within the meaning of FinIA, and (iv) DLT trading facilities within the meaning of the Financial Market Infrastructure Act;
• persons pursuant to article 1b FBA (FinTech-license): and
• foreign institutions that are subject to equivalent supervision.

The revised ARETP provides that the Regulatory Board of SIX Exchange Regulation may demand that suitable documents are provided as evidence of the crypto asset custodian’s regulatory status.

Confirmation on Compliance with Article 70 FinSA

Since In connection with the collateralization set up an additional requirement has been introduced under article 15a ARETP as to compliance of the issuance and collateralization structure with article 70 FinSA. Thereunder, the issuer must include a declaration in the listing application in which the issuer affirms:

• that (i) it or the guarantor is a bank pursuant to the FBA, an insurance company pursuant to the ISA or a securities firm within the meaning of the FinIA or a foreign institution subject to equivalent supervision, or (ii) that the collateralization structure of the ETP complies with article 70(2)(b) FinSA; and
• if applicable, that the custodian holds the assets serving as collateral on behalf of the issuer and is an eligible custodian within the meaning of article 14(4) ARETP (see above); and;
• if applicable, that the custodian keeps the assets serving as collateral for the ETPs available at all times and that the assets can either be allocated individually to the issuer or are allocated to a partnership (Gemeinschaft) and it is clear which share of the collective assets the issuer is entitled to.

The revised SIX Crypto Regulations explicitly specify that it is the issuer’s responsibility to properly assess the collaterization and ensure it complies with the regulations of SIX Swiss Exchange.

Additional Prospectus Requirements

The revised SIX Crypto Regulations introduce a number of additional requirements that will ultimately, if not already implemented, have to be reflected in the relevant (base) prospectus of the issuers and terms and conditions of Crypto-Linked Products:

• Investor Put Option / Issuer Call Option: Pursuant article 6a ARETP, ETPs that do not provide for a fixed maturity (perpetual or open-ended products), must provide for an individual right of return in favor of the holders (Investor Put Option) and a right of termination for the issuer (Issuer Call Option). To the extent, the relevant (base) prospectus or terms and conditions, respectively, of an issuer does not already include such rights, the issuer will upon updating the (base) prospectus be required to add an Investor Put Option and an Issuer Call Option to the terms and conditions of the relevant ETPs. It is expected that an annual investor put right – analogous to articles 2 and 3 of the SIX Directive on Debt Securities with Specific Structures – is still sufficient.
• Suspension of Trading: Under article 5 DCA, SIX Swiss Exchange and/or the SER may temporarily suspend trading of Crypto-Linked Products at the request of the issuer or upon its own initiative if this is deemed necessary in exceptional circumstances, in particular in the event of suspected price manipulation, falsification of liquidity or criminal activity. Further, for Crypto-Linked ETPs, SER may pursuant to article 28 ARETP, additionally order a suspension in trading, if the ongoing listing requirements are no longer fulfilled, in particular, if the custodian loses its regulatory status required under article 14(4) ARETP. If trading has been suspended for a continuous period of three months, the relevant Crypto-Linked Derivatives and/or Crypto-Linked ETPs, as applicable, can be delisted by SER.

Pursuant to article 4 DCA, the relevant (base) prospectus of an issuer of Crypto-Linked Products must include an express reference to the suspension and termination rights introduced under the revised SIX Crypto Regulations.

• Risk Disclosure: Finally, pursuant to article 4 DCA, and in line with past practice of SER and the Swiss prospectus review bodies, the relevant (base) prospectus of an issuer of Crypto-Linked Products must outline (i) the key differences and pertaining risks between traditional fiat currencies and the relevant underlying crypto-assets, in particular relating to the lack of an intrinsic value, the trading on unregulated exchanges, low trading volume and higher volatility and (ii) the specific risks inherent to Crypto-Linked Products, in particular, the fraud risks and risks arising from possible hacker attacks.

Transitional Provisions / Grandfathering

The revised SIX Crypto Regulations will enter into force on April 1, 2024. Crypto-Linked Products issued prior to the entry into force will remain listed, with the following transitional provisions applying. Within six months of the entry into force:

• Issuers of Crypto-Linked Products must submit a revised prospectus to SER, satisfying the additional requirements set out under article 4 DCA (see above «Additional Prospectus Requirements») (article 8 DCA); and
• Issuers of Crypto-Linked ETPs must additionally submit a declaration in accordance with article 15a (see above «Confirmation of compliance with article 70 FinSA»), and if applicable satisfy the requirements applicable to the utilized custodian pursuant to article 14(4) and (6) ARETP.

If these requirements are not satisfied by October 1, 2024, the relevant Crypto-Linked Products will be delisted extraordinarily by SER.

Next Steps for Issuers

Due to the limited transitional period, it is advisable that issuers of Crypto-Linked Products swiftly assess which changes need to be made in relation to their (base) prospectuses and more generally their issuance and collateralization set-up in order to ensure full compliance by October 1, 2024. In particular:

• Issuers of Crypto-Linked Products should ensure that their (base) prospectuses include all required information stipulated under article 4 DCA (and for Crypto-Linked ETPs additionally article 6a ARETP). Whilst the relevant (base) prospectuses currently used by issuers of Crypto-Linked Products will typically already include a risk disclosure satisfying the requirements stipulated under the revised SIX Crypto Regulations, most issuers will need to include a reference to the newly introduced suspension rights of SER, and, if not already included an Investor Put Option under the terms and conditions. For issuers of Crypto-Linked Derivatives, ensuring compliance with article 4 DCA will satisfy the newly introduced requirements under the revised SIX Crypto Regulations.
• Issuers of Crypto-Linked ETPs will additionally be required to ensure that their collateralization set-up satisfies the new requirements set out under the ARETP, in particular the inclusion of an adequately prudentially regulated custodian. The introduction of the requirement to utilize a custodian licensed and prudentially supervised by FINMA, such as a bank, a FinTech-license holder, a securities firm or a foreign financial institution subject to equivalent supervision is likely the most profound change introduced under the revised SIX Crypto Regulations. Considering that the majority of the issuers of Crypto-Linked ETPs currently use custodians domiciled outside of Switzerland, it will have to be assessed on a case-by-case basis, whether these custodians are subject to an equivalent supervision outside of Switzerland. Ultimately, this question will be determined by SER. As a consequence, issuers utilizing foreign custodians should as a matter of urgency submit a relevant application to SER seeking confirmation on the eligibility of the utilized custodian under the ARETP. To the extent the relevant custodians are not subject to an equivalent supervision outside of Switzerland, issuers should seek to effect a transfer of their collateralization set-up to a custodian satisfying the requirements of the ARETP or engage, for example, a bank acting as guarantor.