Self-Regulatory Organizations; BATS Exchange, Inc.; Order Granting Approval of Proposed Rule Change to Amend BATS Rule 14.11, Entitled “Other Securities,” and To List and Trade Shares of Certain ProShares Products, 3489-3494 [2013-00796]
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Federal Register / Vol. 78, No. 11 / Wednesday, January 16, 2013 / Notices
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2012–133 and should be submitted on
or before February 6, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–00789 Filed 1–15–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68619; File No. SR–BATS–
2012–044]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Order Granting
Approval of Proposed Rule Change to
Amend BATS Rule 14.11, Entitled
‘‘Other Securities,’’ and To List and
Trade Shares of Certain ProShares
Products
January 10, 2013.
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I. Introduction
On November 5, 2012, BATS
Exchange, Inc. (‘‘Exchange’’ or ‘‘BATS’’)
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
amend BATS Rule 14.11, entitled
‘‘Other Securities,’’ and to list and trade
shares of certain ProShares products.
The proposed rule change was
published for comment in the Federal
Register on November 26, 2012.3 The
Commission received no comments on
the proposal. This order grants approval
of the proposed rule change.
II. Description of the Proposed Rule
Change
The Exchange proposes to amend its
rules to allow listing of certain
exchange-traded products based on
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 68257
(November 19, 2012), 77 FR 70500 (‘‘Notice’’).
1 15
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provisions substantially similar to those
on NYSE MKT LLC (formerly the
American Stock Exchange LLC or
‘‘AMEX’’) and NYSE Arca Equities, Inc.
(‘‘NYSE Arca’’). Specifically, the
Exchange proposes to modify BATS
Rule 14.11(f), which governs the listing
of Trust Issued Receipts (‘‘TIRs’’), to
adopt new criteria for listing TIRs that
invest in ‘‘Investment Shares’’ or
‘‘Financial Instruments,’’ as proposed to
be defined. The Exchange proposes to
add subparagraph (4) to Rule 14.11(f).
The proposed subparagraph (4) is based
on Commentary .07 of AMEX Rule 1202
and Commentary .02 of NYSE Arca Rule
8.200 and is intended to accommodate
future listing and trading of TIRs that
invest in Investment Shares or Financial
Instruments. Any new listing or trading
of an issue of such TIRs, however, will
be subject to the approval of a proposed
rule change by the Commission
pursuant to Section 19(b)(2) of the Act 4
and Rule 19b–4 thereunder.5 In
addition, the Exchange proposes to
amend Rule 14.11 to allow TIRs to trade
until the end of the Exchange’s after
market session, which ends at 5:00 p.m.
E.T.,. The Exchange also proposes to
make certain changes so that its rules
conform to the listing rules of other
exchanges and to make certain nonsubstantive changes and corrections to
existing rule text.
In addition to the above enumerated
proposed changes, the Exchange further
proposes to list and trade shares
(‘‘Shares’’) of the following pursuant to
proposed Rule 14.11(f): ProShares
Managed Futures Strategy; ProShares
Commodity Managed Futures Strategy;
and ProShares Financial Managed
Futures Strategy (each a ‘‘Fund,’’ and
together, ‘‘Funds’’).6 Each Fund is a
series of the ProShares Trust II
(‘‘Trust’’), a Delaware statutory trust.
ProShare Capital Management LLC
(‘‘Sponsor’’) is the Trust’s Sponsor, and
Wilmington Trust Company is the
Trust’s trustee. Brown Brothers
Harriman & Co. serves as the
administrator (‘‘Administrator’’),
custodian, and transfer agent of the
Funds. SEI Investments Distribution Co.
serves as distributor of the Shares.7
4 15
U.S.C. 78s(b)(2).
CFR 240.19b–4.
6 See the Trust’s Registration Statement on Form
S–1, dated November 29, 2011, as amended (File
No. 333–178212) (‘‘Registration Statement’’).
7 The Commission approved the listing and
trading of shares of the Funds on NYSE Arca. See
Securities Exchange Act Release No. 66334
(February 6, 2012), 77 FR 7219 (February 10, 2012)
(SR–NYSEArca–2011–94) (order approving NYSE
Arca listing and trading of the Shares of the Funds).
Although the Shares of the Funds were approved
for listing and trading on NYSE Arca, the Shares
have not commenced trading.
5 17
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Proposed Listing Rules
The Exchange proposes to adopt
definitions for the terms ‘‘Investment
Shares,’’ ‘‘futures contract,’’ ‘‘forward
contract,’’ and ‘‘Financial Instruments’’
for purposes of Rule 14.11(f)(4).8
The proposed listing requirements
include a designation requirement.
Specifically, the proposed rules provide
that the Exchange may list and trade
TIRs investing in Investment Shares or
Financial Instruments and that each
issue of a TIR based on a particular
Investment Share or Financial
Instrument shall be designated as a
separate series and identified by a
unique symbol.
When the Exchange is the primary
listing exchange for a trust that issues
TIRs that invest in Investment Shares or
Financial Instruments, the trust will be
subject to the initial and continued
listing criteria under proposed Rule
14.11(f)(4), as well as Rules 14.11(f)(1)
and (2), as proposed to be amended. In
particular, the proposed initial listing
criteria provide that the Exchange will
establish a minimum number of receipts
required to be outstanding at the time of
commencement of trading on the
Exchange. The proposed continued
listing criteria provide that the
Exchange may consider delisting or
removal from listing TIRs under any of
the following circumstances:
• If following the initial twelve
month period following the
commencement of trading of the
receipts, (1) the trust has more than 60
days remaining until termination and
there are fewer than 50 record and/or
beneficial holders of TIRs for 30 or more
consecutive trading days; (2) the trust
has fewer than 50,000 receipts issued
and outstanding; or (3) the market value
of all receipts issued and outstanding is
less than $1 million.
• If the level or value of an
underlying index or portfolio is no
longer calculated or available on at least
a 15-second delayed basis or the
Exchange stops providing a hyperlink
on its Web site to any such asset or
investment value.
• If the Intraday Indicative Value
(‘‘IIV’’) is no longer made available on
at least a 15-second delayed basis.
• If such other event shall occur or
condition exists which in the opinion of
the Exchange makes further dealings on
the Exchange inadvisable.
In addition, the Exchange will remove
TIRs from listing and trading upon
termination of a trust. A trust may
terminate in accordance with the
provisions of the trust prospectus,
8 See Notice, supra note 3, for more information
on the proposed defined terms.
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which may provide for termination if
the value of securities in the trust falls
below a specified amount. The
Exchange represents that it prohibits the
initial and/or continued listing of any
security that is not in compliance with
Rule 10A–3 under the Exchange Act.9
Further, the Exchange proposes to
require that the term of a trust shall be
as stated in the prospectus; however,
such entity may be terminated earlier
under such circumstances as may be
specified in the prospectus. The
Exchange also proposes to add the
defined term ‘‘Trustee’’ to Rule
14.11(f)(1), along with certain
requirements for the Trustee.10
The Exchange also proposes to add to
Rule 14.11 a new subparagraph
(f)(4)(C)(v), which states that voting
rights shall be as set forth in the
applicable trust prospectus.
In addition, the Exchange proposes a
new sub-paragraph (D), which sets forth
certain restrictions on Members acting
as registered Market Makers in TIRs that
invest in Investment Shares or Financial
Instruments to facilitate surveillance.
Rule 14.11(f)(4)(D)(i) will require that a
registered Market Maker in TIRs must
file with the Exchange, in a manner
prescribed by the Exchange, and keep
current, a list identifying all accounts
for trading the underlying physical asset
or commodity, related futures or options
on futures, or any other related
derivatives, which the registered Market
Maker may have or over which it may
exercise investment discretion. The rule
will also prohibit a registered Market
Maker in the TIRs from trading in the
underlying physical asset or
commodity, related futures or options
on futures, or any other related
derivatives, in an account in which the
registered Market Maker, directly or
indirectly, controls trading activities or
has a direct interest in the profits or
losses thereof, which has not been
reported to the Exchange as required by
the rule. Finally, Rule 14.11(f)(4)(D)(ii)
will require that Market Makers
handling shares of TIRs provide the
Exchange with such books, records, or
other information pertaining to
transactions in the same, as may be
requested by the Exchange.
The Exchange also proposes to adopt
Rule 14.11(f)(4)(E) related to limitation
of liability.11 The Exchange further
proposes to adopt Rule 14.11(f)(4)(F),
which would require the Exchange to
file separate proposals under Section
9 17
CFR 240.10A–3.
10 See Notice, supra note 3, for more information
on such requirements for the Trustee.
11 See Notice, supra note 3, for additional details
on the proposed provision related to limitation of
liability.
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19(b) of the Act before listing and
trading TIRs based on separate
Investment Shares or Financial
Instruments.
In addition to the new subparagraph
(f)(4) to Rule 14.11, the Exchange
proposes to make additional substantive
modifications to Rule 14.11(f) in order
to conform to AMEX and NYSE Arca
rules related to TIRs. First, the Exchange
proposes to delete current subparagraph
(f)(2)(B) of Rule 14.11, which sets forth
criteria that are not included in the
equivalent TIR rules of AMEX (AMEX
Rule 1202) and NYSE Arca (NYSE Arca
Rule 8.200). Subparagraph (f)(2)(B) of
Exchange Rule 14.11 governs the
eligibility of certain component
securities that have already been
included as component securities in the
applicable series of TIRs or have been
received as part of a merger,
consolidation, corporate combination,
or other event. Rather than apply
different criteria to such securities, the
Exchange proposes to apply the criteria
of Rule 14.11(f)(2)(G) (to be re-numbered
as (f)(3)) to all component securities of
a TIR listed on the Exchange. Since this
change will help to align the Exchange’s
rules applicable to TIRs with the rules
of AMEX and NYSE Arca, it should help
to alleviate confusion amongst issuers.
Second, in order to align the
Exchange’s rules with NYSE Arca Rule
8.200, the Exchange proposes to
eliminate the requirement of current
Rule 14.11(f)(2)(E)(iv) that the Exchange
receive prior notice and provide
approval before a change can be made
to the trustee of a listed TIR
Third, the Exchange proposes to
eliminate the requirement in Rule
14.11(f)(2)(F) that transactions in TIRs
may only be made in round lots of 100
receipts or round lot multiples. As with
the proposed changes above, this change
will align the Exchange’s rules with
AMEX Rule 1202 and NYSE Arca Rule
8.200, which do not limit transactions
in TIRs to round lots. Further, to the
extent a specific TIR should be limited
to trading in round lots, the Exchange
has general authority pursuant to
Exchange Rule 11.2 to limit transactions
accordingly.12
The Exchange also proposes certain
other technical changes, which can be
found in the Notice.13
12 As set forth in Exchange Rule 11.2, ‘‘[a]ll
securities designated for trading are eligible for oddlot, round-lot and mixed-lot executions, unless
otherwise indicated by the Exchange or limited
pursuant to [the Exchange’s] Rules.’’
13 See Notice, supra note 3, for additional details
on such technical changes.
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Trading Rules
The Exchange deems the TIRs to be
equity securities, thus rendering trading
in the securities subject to the
Exchange’s existing rules governing the
trading of equity securities. The TIRs
will trade on the Exchange from 8:00
a.m. to 5:00 p.m. E.T. (Pre-Opening
Session, Regular Trading Hours, and
After Hours Trading Session). The
Exchange represents that it has
appropriate rules to facilitate
transactions in the TIRs during all
trading sessions. The minimum price
increment for quoting and entry of
orders in equity securities traded on the
Exchange is $0.01, with the exception of
securities that are priced less than
$1.00, for which the minimum price
increment for order entry is $0.0001.14
Trading Halts
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in the TIRs. The
Exchange represents that it will halt
trading in the TIRs under the conditions
specified in BATS Rule 11.18. Trading
may be halted because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the TIRs inadvisable. These may
include: (1) The extent to which trading
is not occurring in the TIRs and/or the
underlying asset or assets; or (2)
whether other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present. If any of the IIV, the
level of the underlying index, or the
value of the underlying assets of the
TIRs is not disseminated as required,
the Exchange may halt trading during
the day in which such interruption to
the dissemination occurs. If an
interruption to the dissemination of the
IIV, the level of the underlying index, or
the value of the underlying assets of the
TIRs persists past the trading day in
which it occurred, the Exchange
represents that it will halt trading no
later than the beginning of the trading
day following the interruption. In
addition, if the Exchange becomes
aware that the Net Asset Value (‘‘NAV’’)
with respect to a series of the TIRs is not
disseminated to all market participants
at the same time, it represents that it
will halt trading in such series until
such time as the NAV is available to all
market participants.
Surveillance
The Exchange represents that its
surveillance procedures are adequate to
address any concerns about the trading
14 See
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of the TIRs on the Exchange. Trading of
the TIRs on the Exchange will be subject
to the Exchange’s surveillance
procedures for derivative products. The
Exchange may obtain information via
the Intermarket Surveillance Group
(‘‘ISG’’) from other exchanges who are
members or affiliates of the ISG or with
which the Exchange has entered into a
comprehensive surveillance sharing
agreement. The Exchange provides that
it prohibits the distribution of material,
non-public information by its
employees.
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Suitability
Currently, BATS Rule 3.7 governs
Recommendations to Customers, and
Chapter III generally governs Rules of
Fair Practice. Prior to the
commencement of trading of any TIRs,
the Exchange represents that it will
remind its Members of the suitability
requirements of BATS Rule 3.7 in an
Information Circular.
FINRA has implemented increased
sales practice and customer margin
requirements for FINRA members
applicable to inverse, leveraged, and
inverse leveraged securities and options
on such securities, as described in
FINRA Regulatory Notices 09–31 (June
2009), 09–53 (August 2009) and 09–65
(November 2009) (together, ‘‘FINRA
Regulatory Notices’’). The Exchange
provides that its Members that carry
customer accounts will be required to
follow the FINRA guidance set forth in
the FINRA Regulatory Notices. The
Information Circular will reference the
FINRA Regulatory Notices regarding
sales practice and customer margin
requirements for FINRA members
applicable to inverse, leveraged, and
inverse leveraged securities and options
on such securities.
The Exchange notes that, for inverse,
leveraged, and inverse leveraged
securities, the corresponding funds seek
leveraged, inverse, or leveraged inverse
returns on a daily basis, and do not seek
to achieve their stated investment
objective over a period of time greater
than one day because compounding
prevents the funds from perfectly
achieving such results. Accordingly,
results over periods of time greater than
one day typically will not be a leveraged
multiple (+200%), the inverse (¥100%)
or a leveraged inverse multiple
(¥200%) of the period return of the
applicable benchmark and may differ
significantly from these multiples. The
Exchange’s Information Circular, as well
as the applicable registration statement,
will provide information regarding the
suitability of an investment in such
securities.
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Description of the Shares and the Funds
The Funds will seek to provide
investment results (before fees and
expenses) that correspond to the
performance of the S&P Dynamic
Futures Index (‘‘DFI’’ or ‘‘Index’’) or to
a sub-index of the Index (‘‘Sub-Index’’).
The ProShares Managed Futures
Strategy will seek to provide investment
results (before fees and expenses) that
correspond to the performance of the
DFI. The ProShares Commodity
Managed Futures Strategy will seek to
provide investment results (before fees
and expenses) that correspond to the
performance of the S&P Dynamic
Commodities Futures Index (‘‘DCFI’’), a
Sub-Index of the DFI. The ProShares
Financial Managed Futures Strategy will
seek to provide investment results
(before fees and expenses) that
correspond to the performance of the
S&P Dynamic Financial Futures Index
(‘‘DFFI’’), another Sub-Index of the DFI.
As mentioned above, the Commission
has previously approved the listing and
trading of the Funds on NYSE Arca.15
Since approving the listing and trading
of the Funds on NYSE Arca, the
structure of the Index and its SubIndexes have not changed, and the
underlying components remain the
same. However, how the Index is
administered has changed in the
following manner:
• Rebalancing and positioning now
occur on a component by component
basis, rather than by sector.
• Energy components can now be
held in long or short positions, rather
than just long or flat (as further
described herein).16
• Components are set to their annual
weights on a monthly basis, as opposed
to the previous sector structure in which
the component weights floated
throughout the year within the sector
weights, which were reset monthly.
Other than the foregoing, no other
aspect of the Index or Sub-Indexes is
changing.
The Index and each Sub-Index were
developed by Standard & Poor’s and are
long/short rules-based investable
indexes designed to capture the
economic benefit derived from both
rising and declining trends in futures
prices.17 The Index is composed of
unleveraged positions in U.S. exchangetraded futures contracts on sixteen
different tangible commodities
15 See
supra note 7.
previously approved, all sectors other than
energy could go long and short.
17 Standard & Poor’s is not a broker-dealer, is not
affiliated with a broker-dealer, and has
implemented procedures designed to prevent the
use and dissemination of material, non-public
information regarding the Index and Sub-Indexes.
16 As
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3491
(‘‘Commodity Futures Contracts’’), as
well as U.S. exchange-traded futures
contracts on eight different financials,
such as major currencies and U.S.
Treasury securities (‘‘Financial Futures
Contracts’’ and together with the
Commodity Futures Contracts, ‘‘Index
Components’’).18 Commodity Futures
Contracts and Financial Futures
Contracts each comprise a Sub-Index of
the Index: the DCFI and the DFFI,
respectively (together, ‘‘Sub-Indexes’’).
Previously, the Index and the DCFI
were designed such that the energy
components would only be set long or
flat (i.e., zero weight), rather than long
or short. The rationale for this was the
heightened potential for significant
losses in the event of a supply
disruption of certain energy markets.
The Index and the DCFI have been
redesigned to allow energy components
to be set long or short. The primary
considerations in this determination
were:
• Potential losses are mitigated by the
limited weight attributable to any single
energy component.
• The magnitude of energy market
price movements during previous major
market supply disruptions (e.g., the Gulf
Wars) does not support restricting short
energy positions.
In order to achieve the investment
objective of the Funds, the Sponsor will
invest in: (i) Exchange-traded futures
contracts of the type comprising the
Index or Sub-Indexes, as applicable
(‘‘Futures Contracts’’); 19 and/or (ii)
under limited circumstances (as further
described herein), swap agreements
whose value is derived from the level of
the Index, a Sub-Index, one or more
Index Components, or, in the case of
currency-based Financial Futures
Contracts, the exchange rates underlying
such Financial Futures Contracts, or
invest in other futures contracts or
swaps if such instruments tend to
exhibit trading prices or returns that
correlate with the Index or Sub-Indexes
or any Index Component and will
further the investment objective of the
Fund. Each Fund may also invest in
cash or cash equivalents such as U.S.
Treasury securities or other high credit
quality short-term fixed-income or
similar securities (including shares of
money market funds, bank deposits,
18 The Index Components are traded on the
Chicago Mercantile Exchange, Inc. (‘‘CME’’),
COMEX (a division of CME), Chicago Board of
Trade (‘‘CBOT,’’ a division of CME), NYMEX (a
division of CME), and ICE Futures US (‘‘ICE’’)
(collectively, ‘‘Futures Exchanges’’).
19 Futures Contracts will be the same type of
contracts as the Index Components, but the
expiration dates of such Futures Contracts may
differ from the expiration dates of the Index
Components at any given point in time.
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bank money market accounts, certain
variable rate-demand notes, and
repurchase agreements collateralized by
government securities) for direct
investment or as collateral for the
Futures Contracts or swap agreements.
The Sponsor does not expect that the
Funds will invest directly in any
commodity or currency.
Each Fund will seek to achieve its
investment objective by investing, under
normal market circumstances,20 in
exchange-traded Futures Contracts. In
the event position accountability rules
or position limits with respect to a
Futures Contract are reached with
respect to a Fund, the Sponsor may, in
its commercially reasonable judgment,
cause such Fund to obtain exposure
through swaps whose value is derived
from the level of the Index, a Sub-Index,
one or more Index Components, or, in
the case of currency-based Financial
Futures Contracts, the exchange rates
underlying such Financial Futures
Contracts, or invest in other futures
contracts or swaps if such instruments
tend to exhibit trading prices or returns
that correlate with the Index, the SubIndexes, or any Index Component and
will further the investment objective of
the Funds.21 The Funds may also invest
in swaps if the market for a specific
Futures Contract experiences
emergencies (e.g., natural disaster,
terrorist attack, or an act of God) or
disruptions (e.g., a trading halt or a flash
crash) that would prevent the Funds
from obtaining the appropriate amount
of investment exposure to the affected
Futures Contracts or other futures
contracts directly.22
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The Index and the Sub-Indexes
The Index is composed of the Index
Components, representing unleveraged
long or short positions in U.S. exchangetraded futures contracts in the
commodity and financial markets.23
20 The term ‘‘under normal market
circumstances’’ includes, but is not limited to, the
absence of extreme volatility or trading halts in the
futures markets or the financial markets generally;
operational issues causing dissemination of
inaccurate market information; or force majeure
type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar
intervening circumstance.
21 To the extent practicable, the Funds will invest
in swaps cleared through the facilities of a
centralized clearing house.
22 The Sponsor will also attempt to mitigate the
Funds’ credit risk by transacting only with large,
well-capitalized institutions using measures
designed to determine the creditworthiness of a
counterparty. The Sponsor will take various steps
to limit counterparty credit risk, as described in the
Registration Statement.
23 As set forth in the Index weighting scheme
example below, the commodity portion of the Index
consists of multiple commodities (e.g., Energy,
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Index Components are chosen based on
fundamental characteristics and
liquidity. The Commodity Futures
Contracts comprise the DCFI as
described below, and the Financial
Futures Contracts comprise the DFFI, as
described below.
Weightings of the Commodity Futures
Contracts are based on generally known
world production levels, as adjusted to
limit the impact of the energy-related
Index Components. Weightings of the
Financial Futures Contracts are based
on, but not directly proportional to,
gross domestic product (‘‘GDP’’).24
The positions the Index (and
accordingly, each Sub-Index) takes in
the Index Components are not longonly, but are set by component long or
short, based on the relation of the
current price input of each Index
Component with a seven-month
weighted moving average of the price
inputs of the same Index Component.
Determining the Long/Short Positioning
of the Index Components
The rules for the Index and each SubIndex regarding long or short positions
are summarized as follows:
• Long positions are tracked when an
Index Component’s current one-month
price change is greater than or equal to
the exponential weighted average of the
past seven monthly price inputs.
• Short positions are tracked when an
Index Component’s current one-month
price change is less than the exponential
weighted average of the past seven
monthly price inputs.
Monthly long or short positions are
determined on the second to last DFI
business day of the month (defined as
the position determination date, or PDD)
when the monthly percentage change of
an Index Component’s price is
compared to past monthly price
changes, exponentially weighted to give
greatest weight to the most recent return
and least weight to the return seven
months prior.25 The weighted sum of
the percentage changes of all Index
Component prices equals the daily
movement of the Index.
Index Component Rebalancing
Index Component weights are fixed
each year and rebalanced back to their
Industrial Metals) and each commodity is assigned
a percentage weight. Similarly, the financial
markets portion of the Index consists of multiple
foreign currency and U.S. Treasury sectors (e.g.,
Australian dollar, U.S. Treasury Notes), each with
an assigned component weight.
24 For initial 2012 weighting schemes for the
Index and each Sub-Index and information about
the exchange and trading hours for each Futures
Contract, see Notice, supra note 3.
25 See Notice, supra note 3, for more information
about how an exponential average is created for
comparison purposes.
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annual base weight monthly. During
this monthly rebalancing, the Index will
also ‘‘roll’’ certain of its positions from
the current contract to a contract further
from settlement.26
Additional details regarding the Trust,
Funds, Shares, trading policies and
investment strategies of the Funds,
creations and redemption procedures,
fees, investment risks, Index and SubIndexes, NAV calculation, the
dissemination and availability of
information about the underlying assets,
trading halts, applicable trading rules,
surveillance, and the Information
Bulletin, among other things, can be
found in the Notice and/or the
Registration Statement, as applicable.27
III. Discussion and Commission’s
Findings
The Commission has carefully
reviewed the proposed rule change and
finds that it is consistent with the
requirements of Section 6 of the Act 28
and the rules and regulations
thereunder applicable to a national
securities exchange.29 In particular, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,30 which requires, among other
things, that the Exchange’s rules be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
Proposed Changes to Rule 14.11
The Commission finds the proposal to
align Rule 14.11 to the rules of AMEX
and NYSE Arca (including the related
non-substantive, conforming, and
26 The Index is composed of Index Components,
which are futures contracts. In order to maintain
consistent exposure to the Index Components, each
Index Component contract must be sold prior to its
expiration date and replaced by a contract maturing
at a specified date in the future. This process is
known as rolling. Index Component contracts are
rolled periodically. The rolls are implemented
pursuant to a roll schedule over a five-day period
from the first through the fifth Index business days
of the month. An Index business day is any day on
which the majority of the Index Components are
open for official trading and official settlement
prices are provided, excluding holidays and
weekends.
27 See Notice and Registration Statement, supra
notes 3 and 6, respectively.
28 15 U.S.C. 78f.
29 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
30 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 78, No. 11 / Wednesday, January 16, 2013 / Notices
technical changes) consistent with
Sections 6(b)(5) of the Act. As discussed
above, the proposed changes to Rule
14.11 and the proposed adoption of
Rule 14.11(f) would conform to similar
standards for the listing and trading of
TIRs on AMEX and NYSE Arca. The
Commission notes that the listing
requirements as proposed would be at
least as stringent as those of AMEX and
NYSE Arca. In addition, the proposed
rule change is based on representations
governing suitability, surveillance, the
issuance of Information Circulars, and
circumstances pursuant to which
trading should be halted, among more
general trading rules governing TIRs.
The Commission believes these aspects
of the proposal present no novel issues
or significant regulatory concerns. The
proposed rules should enhance
competition in the marketplace to the
benefit of investors.
mstockstill on DSK4VPTVN1PROD with
Listing and Trading of the Shares
The Commission finds that the aspect
of the proposal to list and trade the
Shares on the Exchange is also
consistent with Section 11A(a)(1)(C)(iii)
of the Act,31 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.
The Commission notes that the Funds
and the Shares must comply with the
requirements of proposed BATS Rule
14.11(f) to be listed and traded on the
Exchange. Quotation and last-sale
information for the Shares will be
available via the Consolidated Tape
Association (‘‘CTA’’) high-speed line.
The IIV, which reflects a current
estimated intraday value of Futures
Contracts and other applicable holdings,
cash, and receivables, less liabilities of
each Fund, will be widely disseminated
on a per Share basis by one or more
major market data vendors at least every
15 seconds during the Exchange’s
Regular Trading Hours.32 The IIV will
be updated during Regular Trading
Hours when applicable Futures
Exchanges are trading any Futures
Contracts held by the Funds. However,
the IIV that will be disseminated
between 11:50 a.m. E.T. and the end of
Regular Trading Hours will be impacted
by static values for certain Futures
31 15
U.S.C. 78k–1(a)(1)(C)(iii).
to the Exchange, several major
market data vendors display and/or make widely
available IIVs published via the CTA or other data
feeds.
32 According
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17:01 Jan 15, 2013
Jkt 229001
Contracts.33 For each Fund, the IIV will
be calculated throughout Regular
Trading Hours, using the prior day’s
closing NAV of such Fund as a base,
and updated throughout the trading day
as each Fund’s Futures Contracts, cash
equivalents, swap agreements, if
applicable, and other applicable
holdings change in value.
Each Fund’s total portfolio
composition will be disclosed on such
Fund’s Web site or another relevant
Web site as determined by the Trust
and/or the Exchange. The Trust will
provide Web site disclosure of portfolio
holdings daily and will include, as
applicable, the names, notional value
(in U.S. dollars) and number of Futures
Contracts or units of swaps held by a
Fund, if any, cash equivalents, and the
amount of cash held in the portfolio of
each Fund. This public Web site
disclosure of the portfolio composition
of the Funds will occur at the same time
as the disclosure by the Sponsor of the
portfolio composition to authorized
participants, so that all market
participants are provided portfolio
composition information at the same
time.
The NAV for the Funds will be
calculated daily by the Administrator at
3:00 p.m. E.T. and will be disseminated
daily to market participants.
Additionally, the Exchange will make
available on its Web site daily trading
volume of the Shares. Daily trading
volume information will also be
available in the financial section of
newspapers, their related Web sites or
other financial Web sites, through
subscription services, which can be
accessed by authorized participants and
other investors, as well as through other
electronic services, including major
public Web sites.
The intraday, closing, and settlement
prices of the Futures Contracts are also
readily available, as applicable, from the
respective Futures Exchanges. The Web
site for the Funds will include a form of
the prospectus for the Funds, additional
data relating to NAV, and other
applicable quantitative information. The
daily closing Index level and the
percentage change in the daily closing
Index level for the Index and each SubIndex will be publicly available from
one or more major market data vendors.
Data regarding the Index and each SubIndex, updated every 15 seconds during
Regular Trading Hours, is also available
from Standard & Poor’s on a
subscription basis. Several independent
data vendors also package and
disseminate Index and Sub-Index data
in various value-added formats
(including vendors displaying both
Index constituents and Index levels and
vendors displaying Index levels only).
Data regarding the Index Components is
also available from the Web sites of the
Futures Exchanges. Data regarding the
commodities, currencies, and Treasury
securities underlying the Index
Components is publicly available from
various financial information service
providers.
The Commission believes that the
proposal to list and trade the Shares is
reasonably designed to promote fair
disclosure of information that may be
necessary to price the Shares
appropriately and to prevent trading
when a reasonable degree of
transparency cannot be assured. The
Commission notes that the Exchange
will obtain a representation (prior to
listing of Shares of each Fund) from the
Trust that the NAV per Share will be
calculated daily and made available to
all market participants at the same time.
In addition, if the Exchange becomes
aware that the NAV with respect to a
series of the TIRs is not disseminated to
all market participants at the same time,
it will halt trading in such series until
such time as the NAV is available to all
market participants.34 Trading in the
Shares will also be subject to BATS Rule
11.18, which sets forth circumstances
under which Shares of the Funds may
be halted.35 If any of the IIV, the level
of the underlying index, or the value of
the underlying assets of the TIRs is not
being disseminated as required, the
Exchange may halt trading during the
day in which such interruption to the
dissemination occurs. If an interruption
to the dissemination of the IIV, the
value of the underlying index, or the
value of the underlying assets of the
TIRs persists past the trading day in
which it occurred, the Exchange will
halt trading no later than the beginning
of the trading day following the
34 See
33 The
value of the IIV will be based on the
underlying Futures Contracts. Once a particular
Futures Contract settles, a static closing value for
that Futures Contract will be used to calculate the
IIV, which will continue to update based on any
other futures contracts that have not reached their
settlement time. The IIV should not be viewed as
an actual real-time update of the NAV because NAV
is calculated only once each trading day at 3:00
p.m. E.T. In addition, the IIV also should not be
viewed as a precise value of the Shares.
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
3493
Notice, supra note 3.
BATS Rule 11.18. The Exchange further
represents that trading may be halted because of
market conditions or for reasons that, in the view
of the Exchange, make trading in the Shares
inadvisable. These may include: (1) The extent to
which trading is not occurring in the futures
contracts and/or the financial instruments
comprising the Funds; or (2) whether other unusual
conditions or circumstances detrimental to the
maintenance of a fair and orderly market are
present.
35 See
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3494
Federal Register / Vol. 78, No. 11 / Wednesday, January 16, 2013 / Notices
mstockstill on DSK4VPTVN1PROD with
interruption.36 Further, the Commission
notes that the Exchange states that it
prohibits the distribution of material,
non-public information by its
employees.37 Finally, with respect to the
Index and Sub-Indexes, Standard &
Poor’s is not a broker-dealer, is not
affiliated with a broker-dealer, and has
implemented procedures designed to
prevent the use and dissemination of
material, non-public information
regarding the Index and Sub-Indexes.
The Exchange further represents that
the Shares are deemed to be equity
securities, thus rendering trading in the
Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. In support of this
proposal, the Exchange has made
representations, including:
(1) For initial and/or continued listing
of the Shares, the Funds must be in
compliance with Exchange Rule 14.11(f)
and Rule 10A–3 under the Act.38
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) The Exchange’s surveillance
procedures applicable to derivative
products, which include TIRs, are
adequate to properly monitor the
trading of the Shares on the Exchange
during all trading sessions and to deter
and detect violations of Exchange rules
and applicable federal securities laws.
The Exchange is able to obtain
information via the ISG from other
exchanges that are members of ISG or
with which the Exchange has in place
a comprehensive surveillance sharing
agreement.39 In addition, for
components traded on exchanges, not
more than 10% of the weight of a
Fund’s portfolio in the aggregate shall
consist of components whose principal
trading market is not a member of ISG
or is a market with which the Exchange
does not have a comprehensive
surveillance sharing agreement. All
Futures Contracts will be traded on a
trading market that is a member of ISG
or is a market with which the Exchange
has a comprehensive surveillance
sharing agreement.
(4) Prior to the commencement of
trading of the Shares, the Exchange will
inform its members in an Information
Circular of the special characteristics
and risks associated with trading the
Shares. Specifically, BATS Rule 3.7
provides that, in recommending
transactions in the Shares, a Member
36 See BATS Rule 14.11(f)(4)(C)(ii) (providing
additional considerations for the removal from
listing of TIRs on the Exchange).
37 See Notice, supra note 3.
38 See 17 CFR 240.10A–3.
39 See Notice, supra note 3.
VerDate Mar<15>2010
17:01 Jan 15, 2013
Jkt 229001
must have reasonable grounds for
believing that (a) the recommendation is
suitable for a customer given reasonable
inquiry concerning the customer’s
investment objectives, financial
situation, needs, and any other
information known by such Member,
and (b) the customer can evaluate the
special characteristics, and is able to
bear the financial risks, of an investment
in the securities. In connection with the
suitability obligation, the Circular will
also provide that Members must make
reasonable efforts to obtain the
following information: (a) The
customer’s other securities holdings; (b)
the customer’s financial situation and
needs; (c) the customer’s investment
objectives; and (d) such other
information used or considered to be
reasonable by such Member or
registered representative in making
recommendations to the customer.
(5) Each Fund will seek to achieve its
investment objective by investing, under
normal market circumstances, in
exchange-traded Futures Contracts. In
the event position accountability rules
or position limits with respect to a
Futures Contract are reached with
respect to a Fund, the Sponsor may, in
its commercially reasonable judgment,
cause such Fund to obtain exposure
through swaps whose value is derived
from the level of the Index, a Sub-Index,
one or more Index Components, or, in
the case of currency-based Financial
Futures Contracts, the exchange rates
underlying such Financial Futures
Contracts or invest in other futures
contracts or swaps if such instruments
tend to exhibit trading prices or returns
that correlate with the Index, the SubIndexes, or any Index Component and
will further the investment objective of
the Funds. The Funds may also invest
in swaps if the market for a specific
Futures Contract experiences
emergencies (e.g., natural disaster,
terrorist attack, or an act of God) or
disruptions (e.g., a trading halt or a flash
crash) that would prevent the Funds
from obtaining the appropriate amount
of investment exposure to the affected
Futures Contracts or other futures
contracts directly.
(6) To the extent practicable, the
Funds will invest in swaps cleared
through the facilities of a centralized
clearing house. In addition, the Sponsor
will also attempt to mitigate the Funds’
credit risk by transacting only with
large, well-capitalized institutions using
measures designed to determine the
creditworthiness of a counterparty. The
Sponsor will take various steps to limit
counterparty credit risk, as described in
the Registration Statement.
PO 00000
Frm 00105
Fmt 4703
Sfmt 4703
(7) The anticipated minimum number
of Shares for each Fund to be
outstanding at the start of trading will
be 100,000 Shares.
(8) The NAV per Share will be
calculated daily and made available to
all market participants at the same time.
This approval order is based on all of
the Exchange’s representations and
description of the Funds, including
those set forth above and in the
Notice.40
For the foregoing reasons, the
Commission finds that the proposed
rule change to amend Rule 14.11 and to
list and trade the Shares pursuant to
Rule 14.11, as proposed to be amended,
is consistent with Sections 6(b)(5) of the
Act 41 and the rules and regulations
thereunder applicable to a national
securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,42 that the
proposed rule change (SR–BATS–2012–
044) be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–00796 Filed 1–15–13; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #13439 and #13440]
Mississippi Disaster #MS–00063
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
This is a notice of an
Administrative declaration of a disaster
for the State of Mississippi dated 01/04/
2013.
Incident: Severe storms and
tornadoes.
Incident Period: 12/25/2012.
DATES: Effective Date: 01/04/2013.
Physical Loan Application Deadline
Date: 03/05/2013.
SUMMARY:
40 The Commission notes that it does not regulate
the market for futures in which the Fund plans to
take positions, which is the responsibility of the
Commodity Futures Trading Commission (‘‘CFTC’’).
The CFTC has the authority to set limits on the
positions that any person may take in futures. These
limits may be directly set by the CFTC or by the
markets on which the futures are traded. The
Commission has no role in establishing position
limits on futures even though such limits could
impact an exchange-traded product that is under
the jurisdiction of the Commission.
41 15 U.S.C. 78f(b)(5).
42 15 U.S.C. 78s(b)(2).
43 17 CFR 200.30–3(a)(12).
E:\FR\FM\16JAN1.SGM
16JAN1
]]>Agencies
[Federal Register Volume 78, Number 11 (Wednesday, January 16, 2013)]
[Notices]
[Pages 3489-3494]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00796]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68619; File No. SR-BATS-2012-044]
Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Granting Approval of Proposed Rule Change to Amend BATS Rule 14.11,
Entitled ``Other Securities,'' and To List and Trade Shares of Certain
ProShares Products
January 10, 2013.
I. Introduction
On November 5, 2012, BATS Exchange, Inc. (``Exchange'' or ``BATS'')
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 amend BATS Rule 14.11, entitled ``Other
Securities,'' and to list and trade shares of certain ProShares
products. The proposed rule change was published for comment in the
Federal Register on November 26, 2012.\3\ The Commission received no
comments on the proposal. This order grants approval of the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 68257 (November 19,
2012), 77 FR 70500 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange proposes to amend its rules to allow listing of
certain exchange-traded products based on provisions substantially
similar to those on NYSE MKT LLC (formerly the American Stock Exchange
LLC or ``AMEX'') and NYSE Arca Equities, Inc. (``NYSE Arca'').
Specifically, the Exchange proposes to modify BATS Rule 14.11(f), which
governs the listing of Trust Issued Receipts (``TIRs''), to adopt new
criteria for listing TIRs that invest in ``Investment Shares'' or
``Financial Instruments,'' as proposed to be defined. The Exchange
proposes to add subparagraph (4) to Rule 14.11(f). The proposed
subparagraph (4) is based on Commentary .07 of AMEX Rule 1202 and
Commentary .02 of NYSE Arca Rule 8.200 and is intended to accommodate
future listing and trading of TIRs that invest in Investment Shares or
Financial Instruments. Any new listing or trading of an issue of such
TIRs, however, will be subject to the approval of a proposed rule
change by the Commission pursuant to Section 19(b)(2) of the Act \4\
and Rule 19b-4 thereunder.\5\ In addition, the Exchange proposes to
amend Rule 14.11 to allow TIRs to trade until the end of the Exchange's
after market session, which ends at 5:00 p.m. E.T.,. The Exchange also
proposes to make certain changes so that its rules conform to the
listing rules of other exchanges and to make certain non-substantive
changes and corrections to existing rule text.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(2).
\5\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
In addition to the above enumerated proposed changes, the Exchange
further proposes to list and trade shares (``Shares'') of the following
pursuant to proposed Rule 14.11(f): ProShares Managed Futures Strategy;
ProShares Commodity Managed Futures Strategy; and ProShares Financial
Managed Futures Strategy (each a ``Fund,'' and together, ``Funds'').\6\
Each Fund is a series of the ProShares Trust II (``Trust''), a Delaware
statutory trust. ProShare Capital Management LLC (``Sponsor'') is the
Trust's Sponsor, and Wilmington Trust Company is the Trust's trustee.
Brown Brothers Harriman & Co. serves as the administrator
(``Administrator''), custodian, and transfer agent of the Funds. SEI
Investments Distribution Co. serves as distributor of the Shares.\7\
---------------------------------------------------------------------------
\6\ See the Trust's Registration Statement on Form S-1, dated
November 29, 2011, as amended (File No. 333-178212) (``Registration
Statement'').
\7\ The Commission approved the listing and trading of shares of
the Funds on NYSE Arca. See Securities Exchange Act Release No.
66334 (February 6, 2012), 77 FR 7219 (February 10, 2012) (SR-
NYSEArca-2011-94) (order approving NYSE Arca listing and trading of
the Shares of the Funds). Although the Shares of the Funds were
approved for listing and trading on NYSE Arca, the Shares have not
commenced trading.
---------------------------------------------------------------------------
Proposed Listing Rules
The Exchange proposes to adopt definitions for the terms
``Investment Shares,'' ``futures contract,'' ``forward contract,'' and
``Financial Instruments'' for purposes of Rule 14.11(f)(4).\8\
---------------------------------------------------------------------------
\8\ See Notice, supra note 3, for more information on the
proposed defined terms.
---------------------------------------------------------------------------
The proposed listing requirements include a designation
requirement. Specifically, the proposed rules provide that the Exchange
may list and trade TIRs investing in Investment Shares or Financial
Instruments and that each issue of a TIR based on a particular
Investment Share or Financial Instrument shall be designated as a
separate series and identified by a unique symbol.
When the Exchange is the primary listing exchange for a trust that
issues TIRs that invest in Investment Shares or Financial Instruments,
the trust will be subject to the initial and continued listing criteria
under proposed Rule 14.11(f)(4), as well as Rules 14.11(f)(1) and (2),
as proposed to be amended. In particular, the proposed initial listing
criteria provide that the Exchange will establish a minimum number of
receipts required to be outstanding at the time of commencement of
trading on the Exchange. The proposed continued listing criteria
provide that the Exchange may consider delisting or removal from
listing TIRs under any of the following circumstances:
If following the initial twelve month period following the
commencement of trading of the receipts, (1) the trust has more than 60
days remaining until termination and there are fewer than 50 record
and/or beneficial holders of TIRs for 30 or more consecutive trading
days; (2) the trust has fewer than 50,000 receipts issued and
outstanding; or (3) the market value of all receipts issued and
outstanding is less than $1 million.
If the level or value of an underlying index or portfolio
is no longer calculated or available on at least a 15-second delayed
basis or the Exchange stops providing a hyperlink on its Web site to
any such asset or investment value.
If the Intraday Indicative Value (``IIV'') is no longer
made available on at least a 15-second delayed basis.
If such other event shall occur or condition exists which
in the opinion of the Exchange makes further dealings on the Exchange
inadvisable.
In addition, the Exchange will remove TIRs from listing and trading
upon termination of a trust. A trust may terminate in accordance with
the provisions of the trust prospectus,
[[Page 3490]]
which may provide for termination if the value of securities in the
trust falls below a specified amount. The Exchange represents that it
prohibits the initial and/or continued listing of any security that is
not in compliance with Rule 10A-3 under the Exchange Act.\9\
---------------------------------------------------------------------------
\9\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
Further, the Exchange proposes to require that the term of a trust
shall be as stated in the prospectus; however, such entity may be
terminated earlier under such circumstances as may be specified in the
prospectus. The Exchange also proposes to add the defined term
``Trustee'' to Rule 14.11(f)(1), along with certain requirements for
the Trustee.\10\
---------------------------------------------------------------------------
\10\ See Notice, supra note 3, for more information on such
requirements for the Trustee.
---------------------------------------------------------------------------
The Exchange also proposes to add to Rule 14.11 a new subparagraph
(f)(4)(C)(v), which states that voting rights shall be as set forth in
the applicable trust prospectus.
In addition, the Exchange proposes a new sub-paragraph (D), which
sets forth certain restrictions on Members acting as registered Market
Makers in TIRs that invest in Investment Shares or Financial
Instruments to facilitate surveillance. Rule 14.11(f)(4)(D)(i) will
require that a registered Market Maker in TIRs must file with the
Exchange, in a manner prescribed by the Exchange, and keep current, a
list identifying all accounts for trading the underlying physical asset
or commodity, related futures or options on futures, or any other
related derivatives, which the registered Market Maker may have or over
which it may exercise investment discretion. The rule will also
prohibit a registered Market Maker in the TIRs from trading in the
underlying physical asset or commodity, related futures or options on
futures, or any other related derivatives, in an account in which the
registered Market Maker, directly or indirectly, controls trading
activities or has a direct interest in the profits or losses thereof,
which has not been reported to the Exchange as required by the rule.
Finally, Rule 14.11(f)(4)(D)(ii) will require that Market Makers
handling shares of TIRs provide the Exchange with such books, records,
or other information pertaining to transactions in the same, as may be
requested by the Exchange.
The Exchange also proposes to adopt Rule 14.11(f)(4)(E) related to
limitation of liability.\11\ The Exchange further proposes to adopt
Rule 14.11(f)(4)(F), which would require the Exchange to file separate
proposals under Section 19(b) of the Act before listing and trading
TIRs based on separate Investment Shares or Financial Instruments.
---------------------------------------------------------------------------
\11\ See Notice, supra note 3, for additional details on the
proposed provision related to limitation of liability.
---------------------------------------------------------------------------
In addition to the new subparagraph (f)(4) to Rule 14.11, the
Exchange proposes to make additional substantive modifications to Rule
14.11(f) in order to conform to AMEX and NYSE Arca rules related to
TIRs. First, the Exchange proposes to delete current subparagraph
(f)(2)(B) of Rule 14.11, which sets forth criteria that are not
included in the equivalent TIR rules of AMEX (AMEX Rule 1202) and NYSE
Arca (NYSE Arca Rule 8.200). Subparagraph (f)(2)(B) of Exchange Rule
14.11 governs the eligibility of certain component securities that have
already been included as component securities in the applicable series
of TIRs or have been received as part of a merger, consolidation,
corporate combination, or other event. Rather than apply different
criteria to such securities, the Exchange proposes to apply the
criteria of Rule 14.11(f)(2)(G) (to be re-numbered as (f)(3)) to all
component securities of a TIR listed on the Exchange. Since this change
will help to align the Exchange's rules applicable to TIRs with the
rules of AMEX and NYSE Arca, it should help to alleviate confusion
amongst issuers.
Second, in order to align the Exchange's rules with NYSE Arca Rule
8.200, the Exchange proposes to eliminate the requirement of current
Rule 14.11(f)(2)(E)(iv) that the Exchange receive prior notice and
provide approval before a change can be made to the trustee of a listed
TIR
Third, the Exchange proposes to eliminate the requirement in Rule
14.11(f)(2)(F) that transactions in TIRs may only be made in round lots
of 100 receipts or round lot multiples. As with the proposed changes
above, this change will align the Exchange's rules with AMEX Rule 1202
and NYSE Arca Rule 8.200, which do not limit transactions in TIRs to
round lots. Further, to the extent a specific TIR should be limited to
trading in round lots, the Exchange has general authority pursuant to
Exchange Rule 11.2 to limit transactions accordingly.\12\
---------------------------------------------------------------------------
\12\ As set forth in Exchange Rule 11.2, ``[a]ll securities
designated for trading are eligible for odd-lot, round-lot and
mixed-lot executions, unless otherwise indicated by the Exchange or
limited pursuant to [the Exchange's] Rules.''
---------------------------------------------------------------------------
The Exchange also proposes certain other technical changes, which
can be found in the Notice.\13\
---------------------------------------------------------------------------
\13\ See Notice, supra note 3, for additional details on such
technical changes.
---------------------------------------------------------------------------
Trading Rules
The Exchange deems the TIRs to be equity securities, thus rendering
trading in the securities subject to the Exchange's existing rules
governing the trading of equity securities. The TIRs will trade on the
Exchange from 8:00 a.m. to 5:00 p.m. E.T. (Pre-Opening Session, Regular
Trading Hours, and After Hours Trading Session). The Exchange
represents that it has appropriate rules to facilitate transactions in
the TIRs during all trading sessions. The minimum price increment for
quoting and entry of orders in equity securities traded on the Exchange
is $0.01, with the exception of securities that are priced less than
$1.00, for which the minimum price increment for order entry is
$0.0001.\14\
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\14\ See Rule 11.11(a).
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Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the TIRs. The Exchange represents that it will halt trading
in the TIRs under the conditions specified in BATS Rule 11.18. Trading
may be halted because of market conditions or for reasons that, in the
view of the Exchange, make trading in the TIRs inadvisable. These may
include: (1) The extent to which trading is not occurring in the TIRs
and/or the underlying asset or assets; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present. If any of the IIV, the level of the
underlying index, or the value of the underlying assets of the TIRs is
not disseminated as required, the Exchange may halt trading during the
day in which such interruption to the dissemination occurs. If an
interruption to the dissemination of the IIV, the level of the
underlying index, or the value of the underlying assets of the TIRs
persists past the trading day in which it occurred, the Exchange
represents that it will halt trading no later than the beginning of the
trading day following the interruption. In addition, if the Exchange
becomes aware that the Net Asset Value (``NAV'') with respect to a
series of the TIRs is not disseminated to all market participants at
the same time, it represents that it will halt trading in such series
until such time as the NAV is available to all market participants.
Surveillance
The Exchange represents that its surveillance procedures are
adequate to address any concerns about the trading
[[Page 3491]]
of the TIRs on the Exchange. Trading of the TIRs on the Exchange will
be subject to the Exchange's surveillance procedures for derivative
products. The Exchange may obtain information via the Intermarket
Surveillance Group (``ISG'') from other exchanges who are members or
affiliates of the ISG or with which the Exchange has entered into a
comprehensive surveillance sharing agreement. The Exchange provides
that it prohibits the distribution of material, non-public information
by its employees.
Suitability
Currently, BATS Rule 3.7 governs Recommendations to Customers, and
Chapter III generally governs Rules of Fair Practice. Prior to the
commencement of trading of any TIRs, the Exchange represents that it
will remind its Members of the suitability requirements of BATS Rule
3.7 in an Information Circular.
FINRA has implemented increased sales practice and customer margin
requirements for FINRA members applicable to inverse, leveraged, and
inverse leveraged securities and options on such securities, as
described in FINRA Regulatory Notices 09-31 (June 2009), 09-53 (August
2009) and 09-65 (November 2009) (together, ``FINRA Regulatory
Notices''). The Exchange provides that its Members that carry customer
accounts will be required to follow the FINRA guidance set forth in the
FINRA Regulatory Notices. The Information Circular will reference the
FINRA Regulatory Notices regarding sales practice and customer margin
requirements for FINRA members applicable to inverse, leveraged, and
inverse leveraged securities and options on such securities.
The Exchange notes that, for inverse, leveraged, and inverse
leveraged securities, the corresponding funds seek leveraged, inverse,
or leveraged inverse returns on a daily basis, and do not seek to
achieve their stated investment objective over a period of time greater
than one day because compounding prevents the funds from perfectly
achieving such results. Accordingly, results over periods of time
greater than one day typically will not be a leveraged multiple
(+200%), the inverse (-100%) or a leveraged inverse multiple (-200%) of
the period return of the applicable benchmark and may differ
significantly from these multiples. The Exchange's Information
Circular, as well as the applicable registration statement, will
provide information regarding the suitability of an investment in such
securities.
Description of the Shares and the Funds
The Funds will seek to provide investment results (before fees and
expenses) that correspond to the performance of the S&P Dynamic Futures
Index (``DFI'' or ``Index'') or to a sub-index of the Index (``Sub-
Index''). The ProShares Managed Futures Strategy will seek to provide
investment results (before fees and expenses) that correspond to the
performance of the DFI. The ProShares Commodity Managed Futures
Strategy will seek to provide investment results (before fees and
expenses) that correspond to the performance of the S&P Dynamic
Commodities Futures Index (``DCFI''), a Sub-Index of the DFI. The
ProShares Financial Managed Futures Strategy will seek to provide
investment results (before fees and expenses) that correspond to the
performance of the S&P Dynamic Financial Futures Index (``DFFI''),
another Sub-Index of the DFI.
As mentioned above, the Commission has previously approved the
listing and trading of the Funds on NYSE Arca.\15\ Since approving the
listing and trading of the Funds on NYSE Arca, the structure of the
Index and its Sub-Indexes have not changed, and the underlying
components remain the same. However, how the Index is administered has
changed in the following manner:
---------------------------------------------------------------------------
\15\ See supra note 7.
---------------------------------------------------------------------------
Rebalancing and positioning now occur on a component by
component basis, rather than by sector.
Energy components can now be held in long or short
positions, rather than just long or flat (as further described
herein).\16\
---------------------------------------------------------------------------
\16\ As previously approved, all sectors other than energy could
go long and short.
---------------------------------------------------------------------------
Components are set to their annual weights on a monthly
basis, as opposed to the previous sector structure in which the
component weights floated throughout the year within the sector
weights, which were reset monthly.
Other than the foregoing, no other aspect of the Index or Sub-Indexes
is changing.
The Index and each Sub-Index were developed by Standard & Poor's
and are long/short rules-based investable indexes designed to capture
the economic benefit derived from both rising and declining trends in
futures prices.\17\ The Index is composed of unleveraged positions in
U.S. exchange-traded futures contracts on sixteen different tangible
commodities (``Commodity Futures Contracts''), as well as U.S.
exchange-traded futures contracts on eight different financials, such
as major currencies and U.S. Treasury securities (``Financial Futures
Contracts'' and together with the Commodity Futures Contracts, ``Index
Components'').\18\ Commodity Futures Contracts and Financial Futures
Contracts each comprise a Sub-Index of the Index: the DCFI and the
DFFI, respectively (together, ``Sub-Indexes'').
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\17\ Standard & Poor's is not a broker-dealer, is not affiliated
with a broker-dealer, and has implemented procedures designed to
prevent the use and dissemination of material, non-public
information regarding the Index and Sub-Indexes.
\18\ The Index Components are traded on the Chicago Mercantile
Exchange, Inc. (``CME''), COMEX (a division of CME), Chicago Board
of Trade (``CBOT,'' a division of CME), NYMEX (a division of CME),
and ICE Futures US (``ICE'') (collectively, ``Futures Exchanges'').
---------------------------------------------------------------------------
Previously, the Index and the DCFI were designed such that the
energy components would only be set long or flat (i.e., zero weight),
rather than long or short. The rationale for this was the heightened
potential for significant losses in the event of a supply disruption of
certain energy markets. The Index and the DCFI have been redesigned to
allow energy components to be set long or short. The primary
considerations in this determination were:
Potential losses are mitigated by the limited weight
attributable to any single energy component.
The magnitude of energy market price movements during
previous major market supply disruptions (e.g., the Gulf Wars) does not
support restricting short energy positions.
In order to achieve the investment objective of the Funds, the
Sponsor will invest in: (i) Exchange-traded futures contracts of the
type comprising the Index or Sub-Indexes, as applicable (``Futures
Contracts''); \19\ and/or (ii) under limited circumstances (as further
described herein), swap agreements whose value is derived from the
level of the Index, a Sub-Index, one or more Index Components, or, in
the case of currency-based Financial Futures Contracts, the exchange
rates underlying such Financial Futures Contracts, or invest in other
futures contracts or swaps if such instruments tend to exhibit trading
prices or returns that correlate with the Index or Sub-Indexes or any
Index Component and will further the investment objective of the Fund.
Each Fund may also invest in cash or cash equivalents such as U.S.
Treasury securities or other high credit quality short-term fixed-
income or similar securities (including shares of money market funds,
bank deposits,
[[Page 3492]]
bank money market accounts, certain variable rate-demand notes, and
repurchase agreements collateralized by government securities) for
direct investment or as collateral for the Futures Contracts or swap
agreements. The Sponsor does not expect that the Funds will invest
directly in any commodity or currency.
---------------------------------------------------------------------------
\19\ Futures Contracts will be the same type of contracts as the
Index Components, but the expiration dates of such Futures Contracts
may differ from the expiration dates of the Index Components at any
given point in time.
---------------------------------------------------------------------------
Each Fund will seek to achieve its investment objective by
investing, under normal market circumstances,\20\ in exchange-traded
Futures Contracts. In the event position accountability rules or
position limits with respect to a Futures Contract are reached with
respect to a Fund, the Sponsor may, in its commercially reasonable
judgment, cause such Fund to obtain exposure through swaps whose value
is derived from the level of the Index, a Sub-Index, one or more Index
Components, or, in the case of currency-based Financial Futures
Contracts, the exchange rates underlying such Financial Futures
Contracts, or invest in other futures contracts or swaps if such
instruments tend to exhibit trading prices or returns that correlate
with the Index, the Sub-Indexes, or any Index Component and will
further the investment objective of the Funds.\21\ The Funds may also
invest in swaps if the market for a specific Futures Contract
experiences emergencies (e.g., natural disaster, terrorist attack, or
an act of God) or disruptions (e.g., a trading halt or a flash crash)
that would prevent the Funds from obtaining the appropriate amount of
investment exposure to the affected Futures Contracts or other futures
contracts directly.\22\
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\20\ The term ``under normal market circumstances'' includes,
but is not limited to, the absence of extreme volatility or trading
halts in the futures markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
\21\ To the extent practicable, the Funds will invest in swaps
cleared through the facilities of a centralized clearing house.
\22\ The Sponsor will also attempt to mitigate the Funds' credit
risk by transacting only with large, well-capitalized institutions
using measures designed to determine the creditworthiness of a
counterparty. The Sponsor will take various steps to limit
counterparty credit risk, as described in the Registration
Statement.
---------------------------------------------------------------------------
The Index and the Sub-Indexes
The Index is composed of the Index Components, representing
unleveraged long or short positions in U.S. exchange-traded futures
contracts in the commodity and financial markets.\23\ Index Components
are chosen based on fundamental characteristics and liquidity. The
Commodity Futures Contracts comprise the DCFI as described below, and
the Financial Futures Contracts comprise the DFFI, as described below.
---------------------------------------------------------------------------
\23\ As set forth in the Index weighting scheme example below,
the commodity portion of the Index consists of multiple commodities
(e.g., Energy, Industrial Metals) and each commodity is assigned a
percentage weight. Similarly, the financial markets portion of the
Index consists of multiple foreign currency and U.S. Treasury
sectors (e.g., Australian dollar, U.S. Treasury Notes), each with an
assigned component weight.
---------------------------------------------------------------------------
Weightings of the Commodity Futures Contracts are based on
generally known world production levels, as adjusted to limit the
impact of the energy-related Index Components. Weightings of the
Financial Futures Contracts are based on, but not directly proportional
to, gross domestic product (``GDP'').\24\
---------------------------------------------------------------------------
\24\ For initial 2012 weighting schemes for the Index and each
Sub-Index and information about the exchange and trading hours for
each Futures Contract, see Notice, supra note 3.
---------------------------------------------------------------------------
The positions the Index (and accordingly, each Sub-Index) takes in
the Index Components are not long-only, but are set by component long
or short, based on the relation of the current price input of each
Index Component with a seven-month weighted moving average of the price
inputs of the same Index Component.
Determining the Long/Short Positioning of the Index Components
The rules for the Index and each Sub-Index regarding long or short
positions are summarized as follows:
Long positions are tracked when an Index Component's
current one-month price change is greater than or equal to the
exponential weighted average of the past seven monthly price inputs.
Short positions are tracked when an Index Component's
current one-month price change is less than the exponential weighted
average of the past seven monthly price inputs.
Monthly long or short positions are determined on the second to
last DFI business day of the month (defined as the position
determination date, or PDD) when the monthly percentage change of an
Index Component's price is compared to past monthly price changes,
exponentially weighted to give greatest weight to the most recent
return and least weight to the return seven months prior.\25\ The
weighted sum of the percentage changes of all Index Component prices
equals the daily movement of the Index.
---------------------------------------------------------------------------
\25\ See Notice, supra note 3, for more information about how an
exponential average is created for comparison purposes.
---------------------------------------------------------------------------
Index Component Rebalancing
Index Component weights are fixed each year and rebalanced back to
their annual base weight monthly. During this monthly rebalancing, the
Index will also ``roll'' certain of its positions from the current
contract to a contract further from settlement.\26\
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\26\ The Index is composed of Index Components, which are
futures contracts. In order to maintain consistent exposure to the
Index Components, each Index Component contract must be sold prior
to its expiration date and replaced by a contract maturing at a
specified date in the future. This process is known as rolling.
Index Component contracts are rolled periodically. The rolls are
implemented pursuant to a roll schedule over a five-day period from
the first through the fifth Index business days of the month. An
Index business day is any day on which the majority of the Index
Components are open for official trading and official settlement
prices are provided, excluding holidays and weekends.
---------------------------------------------------------------------------
Additional details regarding the Trust, Funds, Shares, trading
policies and investment strategies of the Funds, creations and
redemption procedures, fees, investment risks, Index and Sub-Indexes,
NAV calculation, the dissemination and availability of information
about the underlying assets, trading halts, applicable trading rules,
surveillance, and the Information Bulletin, among other things, can be
found in the Notice and/or the Registration Statement, as
applicable.\27\
---------------------------------------------------------------------------
\27\ See Notice and Registration Statement, supra notes 3 and 6,
respectively.
---------------------------------------------------------------------------
III. Discussion and Commission's Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of Section 6 of the
Act \28\ and the rules and regulations thereunder applicable to a
national securities exchange.\29\ In particular, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\30\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78f.
\29\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Proposed Changes to Rule 14.11
The Commission finds the proposal to align Rule 14.11 to the rules
of AMEX and NYSE Arca (including the related non-substantive,
conforming, and
[[Page 3493]]
technical changes) consistent with Sections 6(b)(5) of the Act. As
discussed above, the proposed changes to Rule 14.11 and the proposed
adoption of Rule 14.11(f) would conform to similar standards for the
listing and trading of TIRs on AMEX and NYSE Arca. The Commission notes
that the listing requirements as proposed would be at least as
stringent as those of AMEX and NYSE Arca. In addition, the proposed
rule change is based on representations governing suitability,
surveillance, the issuance of Information Circulars, and circumstances
pursuant to which trading should be halted, among more general trading
rules governing TIRs. The Commission believes these aspects of the
proposal present no novel issues or significant regulatory concerns.
The proposed rules should enhance competition in the marketplace to the
benefit of investors.
Listing and Trading of the Shares
The Commission finds that the aspect of the proposal to list and
trade the Shares on the Exchange is also consistent with Section
11A(a)(1)(C)(iii) of the Act,\31\ 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.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------
The Commission notes that the Funds and the Shares must comply with
the requirements of proposed BATS Rule 14.11(f) to be listed and traded
on the Exchange. Quotation and last-sale information for the Shares
will be available via the Consolidated Tape Association (``CTA'') high-
speed line.
The IIV, which reflects a current estimated intraday value of
Futures Contracts and other applicable holdings, cash, and receivables,
less liabilities of each Fund, will be widely disseminated on a per
Share basis by one or more major market data vendors at least every 15
seconds during the Exchange's Regular Trading Hours.\32\ The IIV will
be updated during Regular Trading Hours when applicable Futures
Exchanges are trading any Futures Contracts held by the Funds. However,
the IIV that will be disseminated between 11:50 a.m. E.T. and the end
of Regular Trading Hours will be impacted by static values for certain
Futures Contracts.\33\ For each Fund, the IIV will be calculated
throughout Regular Trading Hours, using the prior day's closing NAV of
such Fund as a base, and updated throughout the trading day as each
Fund's Futures Contracts, cash equivalents, swap agreements, if
applicable, and other applicable holdings change in value.
---------------------------------------------------------------------------
\32\ According to the Exchange, several major market data
vendors display and/or make widely available IIVs published via the
CTA or other data feeds.
\33\ The value of the IIV will be based on the underlying
Futures Contracts. Once a particular Futures Contract settles, a
static closing value for that Futures Contract will be used to
calculate the IIV, which will continue to update based on any other
futures contracts that have not reached their settlement time. The
IIV should not be viewed as an actual real-time update of the NAV
because NAV is calculated only once each trading day at 3:00 p.m.
E.T. In addition, the IIV also should not be viewed as a precise
value of the Shares.
---------------------------------------------------------------------------
Each Fund's total portfolio composition will be disclosed on such
Fund's Web site or another relevant Web site as determined by the Trust
and/or the Exchange. The Trust will provide Web site disclosure of
portfolio holdings daily and will include, as applicable, the names,
notional value (in U.S. dollars) and number of Futures Contracts or
units of swaps held by a Fund, if any, cash equivalents, and the amount
of cash held in the portfolio of each Fund. This public Web site
disclosure of the portfolio composition of the Funds will occur at the
same time as the disclosure by the Sponsor of the portfolio composition
to authorized participants, so that all market participants are
provided portfolio composition information at the same time.
The NAV for the Funds will be calculated daily by the Administrator
at 3:00 p.m. E.T. and will be disseminated daily to market
participants. Additionally, the Exchange will make available on its Web
site daily trading volume of the Shares. Daily trading volume
information will also be available in the financial section of
newspapers, their related Web sites or other financial Web sites,
through subscription services, which can be accessed by authorized
participants and other investors, as well as through other electronic
services, including major public Web sites.
The intraday, closing, and settlement prices of the Futures
Contracts are also readily available, as applicable, from the
respective Futures Exchanges. The Web site for the Funds will include a
form of the prospectus for the Funds, additional data relating to NAV,
and other applicable quantitative information. The daily closing Index
level and the percentage change in the daily closing Index level for
the Index and each Sub-Index will be publicly available from one or
more major market data vendors. Data regarding the Index and each Sub-
Index, updated every 15 seconds during Regular Trading Hours, is also
available from Standard & Poor's on a subscription basis. Several
independent data vendors also package and disseminate Index and Sub-
Index data in various value-added formats (including vendors displaying
both Index constituents and Index levels and vendors displaying Index
levels only). Data regarding the Index Components is also available
from the Web sites of the Futures Exchanges. Data regarding the
commodities, currencies, and Treasury securities underlying the Index
Components is publicly available from various financial information
service providers.
The Commission believes that the proposal to list and trade the
Shares is reasonably designed to promote fair disclosure of information
that may be necessary to price the Shares appropriately and to prevent
trading when a reasonable degree of transparency cannot be assured. The
Commission notes that the Exchange will obtain a representation (prior
to listing of Shares of each Fund) from the Trust that the NAV per
Share will be calculated daily and made available to all market
participants at the same time. In addition, if the Exchange becomes
aware that the NAV with respect to a series of the TIRs is not
disseminated to all market participants at the same time, it will halt
trading in such series until such time as the NAV is available to all
market participants.\34\ Trading in the Shares will also be subject to
BATS Rule 11.18, which sets forth circumstances under which Shares of
the Funds may be halted.\35\ If any of the IIV, the level of the
underlying index, or the value of the underlying assets of the TIRs is
not being disseminated as required, the Exchange may halt trading
during the day in which such interruption to the dissemination occurs.
If an interruption to the dissemination of the IIV, the value of the
underlying index, or the value of the underlying assets of the TIRs
persists past the trading day in which it occurred, the Exchange will
halt trading no later than the beginning of the trading day following
the
[[Page 3494]]
interruption.\36\ Further, the Commission notes that the Exchange
states that it prohibits the distribution of material, non-public
information by its employees.\37\ Finally, with respect to the Index
and Sub-Indexes, Standard & Poor's is not a broker-dealer, is not
affiliated with a broker-dealer, and has implemented procedures
designed to prevent the use and dissemination of material, non-public
information regarding the Index and Sub-Indexes.
---------------------------------------------------------------------------
\34\ See Notice, supra note 3.
\35\ See BATS Rule 11.18. The Exchange further represents that
trading may be halted because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable. These may include: (1) The extent to which trading is
not occurring in the futures contracts and/or the financial
instruments comprising the Funds; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present.
\36\ See BATS Rule 14.11(f)(4)(C)(ii) (providing additional
considerations for the removal from listing of TIRs on the
Exchange).
\37\ See Notice, supra note 3.
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The Exchange further represents that the Shares are deemed to be
equity securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including:
(1) For initial and/or continued listing of the Shares, the Funds
must be in compliance with Exchange Rule 14.11(f) and Rule 10A-3 under
the Act.\38\
---------------------------------------------------------------------------
\38\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange's surveillance procedures applicable to derivative
products, which include TIRs, are adequate to properly monitor the
trading of the Shares on the Exchange during all trading sessions and
to deter and detect violations of Exchange rules and applicable federal
securities laws. The Exchange is able to obtain information via the ISG
from other exchanges that are members of ISG or with which the Exchange
has in place a comprehensive surveillance sharing agreement.\39\ In
addition, for components traded on exchanges, not more than 10% of the
weight of a Fund's portfolio in the aggregate shall consist of
components whose principal trading market is not a member of ISG or is
a market with which the Exchange does not have a comprehensive
surveillance sharing agreement. All Futures Contracts will be traded on
a trading market that is a member of ISG or is a market with which the
Exchange has a comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------
\39\ See Notice, supra note 3.
---------------------------------------------------------------------------
(4) Prior to the commencement of trading of the Shares, the
Exchange will inform its members in an Information Circular of the
special characteristics and risks associated with trading the Shares.
Specifically, BATS Rule 3.7 provides that, in recommending transactions
in the Shares, a Member must have reasonable grounds for believing that
(a) the recommendation is suitable for a customer given reasonable
inquiry concerning the customer's investment objectives, financial
situation, needs, and any other information known by such Member, and
(b) the customer can evaluate the special characteristics, and is able
to bear the financial risks, of an investment in the securities. In
connection with the suitability obligation, the Circular will also
provide that Members must make reasonable efforts to obtain the
following information: (a) The customer's other securities holdings;
(b) the customer's financial situation and needs; (c) the customer's
investment objectives; and (d) such other information used or
considered to be reasonable by such Member or registered representative
in making recommendations to the customer.
(5) Each Fund will seek to achieve its investment objective by
investing, under normal market circumstances, in exchange-traded
Futures Contracts. In the event position accountability rules or
position limits with respect to a Futures Contract are reached with
respect to a Fund, the Sponsor may, in its commercially reasonable
judgment, cause such Fund to obtain exposure through swaps whose value
is derived from the level of the Index, a Sub-Index, one or more Index
Components, or, in the case of currency-based Financial Futures
Contracts, the exchange rates underlying such Financial Futures
Contracts or invest in other futures contracts or swaps if such
instruments tend to exhibit trading prices or returns that correlate
with the Index, the Sub-Indexes, or any Index Component and will
further the investment objective of the Funds. The Funds may also
invest in swaps if the market for a specific Futures Contract
experiences emergencies (e.g., natural disaster, terrorist attack, or
an act of God) or disruptions (e.g., a trading halt or a flash crash)
that would prevent the Funds from obtaining the appropriate amount of
investment exposure to the affected Futures Contracts or other futures
contracts directly.
(6) To the extent practicable, the Funds will invest in swaps
cleared through the facilities of a centralized clearing house. In
addition, the Sponsor will also attempt to mitigate the Funds' credit
risk by transacting only with large, well-capitalized institutions
using measures designed to determine the creditworthiness of a
counterparty. The Sponsor will take various steps to limit counterparty
credit risk, as described in the Registration Statement.
(7) The anticipated minimum number of Shares for each Fund to be
outstanding at the start of trading will be 100,000 Shares.
(8) The NAV per Share will be calculated daily and made available
to all market participants at the same time.
This approval order is based on all of the Exchange's representations
and description of the Funds, including those set forth above and in
the Notice.\40\
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\40\ The Commission notes that it does not regulate the market
for futures in which the Fund plans to take positions, which is the
responsibility of the Commodity Futures Trading Commission
(``CFTC''). The CFTC has the authority to set limits on the
positions that any person may take in futures. These limits may be
directly set by the CFTC or by the markets on which the futures are
traded. The Commission has no role in establishing position limits
on futures even though such limits could impact an exchange-traded
product that is under the jurisdiction of the Commission.
For the foregoing reasons, the Commission finds that the proposed
rule change to amend Rule 14.11 and to list and trade the Shares
pursuant to Rule 14.11, as proposed to be amended, is consistent with
Sections 6(b)(5) of the Act \41\ and the rules and regulations
thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\42\ that the proposed rule change (SR-BATS-2012-044) be, and it
hereby is, approved.
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\42\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
---------------------------------------------------------------------------
\43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00796 Filed 1-15-13; 8:45 am]
BILLING CODE 8011-01-P
