Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To List and Trade Shares of Direxion Daily Crude Oil Bull 3x Shares and Direxion Daily Crude Oil Bear 3x Shares Under NYSE Arca Equities Rule 8.200, 22042-22044 [2017-09522]
Download as PDF
22042
Federal Register / Vol. 82, No. 90 / Thursday, May 11, 2017 / Notices
Nos. 2, 3, and 4, be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–09530 Filed 5–10–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80606; File No. SR–
NYSEArca-2017–05]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change To List and Trade Shares
of Direxion Daily Crude Oil Bull 3x
Shares and Direxion Daily Crude Oil
Bear 3x Shares Under NYSE Arca
Equities Rule 8.200
May 5, 2017.
I. Introduction
On January 23, 2017, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) 1 of the Securities
Exchange Act of 1934 (‘‘Act’’) 2 and Rule
19b–4 thereunder,3 a proposed rule
change to list and trade shares
(‘‘Shares’’) of Direxion Daily Crude Oil
Bull 3x Shares and Direxion Daily
Crude Oil Bear 3x Shares (each a
‘‘Fund,’’ and collectively the ‘‘Funds’’)
under NYSE Arca Equities Rule 8.200.
The proposed rule change was
published for comment in the Federal
Register on February 7, 2017.4 On
March 16, 2017, pursuant to Section
19(b)(2) of the Act,5 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.6 The Commission has
received no comments on the proposed
rule change. This order institutes
proceedings under Section 19(b)(2)(B) of
35 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
4 See Securities Exchange Act Release No. 79916
(February 1, 2017), 82 FR 9608 (‘‘Notice’’).
5 15 U.S.C. 78s(b)(2).
6 See Securities Exchange Act Release No. 80265
(March 22, 2017), 82 FR 14778. The Commission
designated May 8, 2017 as the date by which the
Commission shall either approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
1 15
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Jkt 241001
the Act 7 to determine whether to
approve or disapprove the proposed
rule change.
II. Exchange’s Description of the
Proposal
The Exchange proposes to list and
trade Shares of the Funds under NYSE
Arca Equities Rule 8.200, Commentary
.02, which governs the listing and
trading of Trust Issued Receipts.8 Each
Fund is a series of the Direxion Shares
ETF Trust II (‘‘Trust’’), a Delaware
statutory trust.9 The Trust and the
Funds are managed and controlled by
Direxion Asset Management, LLC
(‘‘Sponsor’’).10 Bank of New York
Mellon will be the custodian and
transfer agent for the Funds. U.S.
Bancorp Fund Services, LLC is the
administrator for the Funds. Foreside
Fund Services, LLC serves as the
distributor of the Shares.
The Exchange has made the following
representations and statements in
describing the Funds and their
investment strategies, including the
Funds’ portfolio holdings and
investment restrictions.11
A. Investment Objectives of the Funds
The investment objective of the
Direxion Daily Crude Oil Bull 3X Shares
is to seek, on a daily basis,12 investment
7 15
U.S.C. 78s(b)(2)(B).
.02 to NYSE Arca Equities Rule
8.200 applies to Trust Issued Receipts that invest
in ‘‘Financial Instruments.’’ The term ‘‘Financial
Instruments,’’ as defined in Commentary .02(b)(4) to
NYSE Arca Equities Rule 8.200, means any
combination of investments, including cash;
securities; options on securities and indices; futures
contracts; options on futures contracts; forward
contracts; equity caps, collars, and floors; and swap
agreements.
9 According to the Exchange, on December 14,
2016, the Trust filed with the Commission a
registration statement on Form S–1 under the
Securities Act of 1933, as amended, relating to the
Funds (File No. 333–215091) (‘‘Registration
Statement’’).
10 According to the Exchange, the Sponsor is
registered as a commodity pool operator with the
Commodity Futures Trading Commission and is a
member of the National Futures Association. See
Notice, supra note 4, 82 FR at 9608.
11 The Commission notes that additional
information regarding the Trust, the Funds, and the
Shares, including investment strategies, risks, net
asset value (‘‘NAV’’) calculation, creation and
redemption procedures, fees, availability of
information, trading rules and halts, surveillance,
information bulletins, distributions, and taxes,
among other information, is included in the Notice
and the Registration Statement, as applicable. See
Notice and Registration Statement, supra notes 4
and 9, respectively.
12 According to the Exchange, the Funds do not
seek to achieve their investment objectives over a
period greater than a single trading day. The
Exchange states that a single trading day is
measured from the time a Fund calculates its NAV
to the time of a Fund’s next NAV calculation. The
Exchange states that the return of a Fund for a
period longer than a single trading day is the result
8 Commentary
PO 00000
Frm 00071
Fmt 4703
Sfmt 4703
results that correspond (before fees and
expenses) to a multiple three times (3x)
of the daily performance of the
Bloomberg WTI Crude Oil SubindexSM
(a subindex of the Bloomberg
Commodity IndexSM) (‘‘Benchmark’’).13
The investment objective of the
Direxion Daily Crude Oil Bear 3X
Shares is to seek, on a daily basis,14
investment results that correspond
(before fees and expenses) to three times
(3x) the inverse of the performance of
the Benchmark. The Benchmark is
intended to reflect the performance of
crude oil as measured by the price of
West Texas Intermediate crude oil
futures contracts traded on the New
York Mercantile Exchange (which is
part of the Chicago Mercantile
Exchange), including the impact of
rolling,15 without regard to income
earned on cash positions. According to
the Exchange, the Funds will not be
directly linked to the ‘‘spot’’ price of
crude oil.16
B. Investments of the Funds
In seeking to achieve the Funds’
investment objectives, the Exchange
states that the Sponsor will utilize a
mathematical approach to determine the
type, quantity, and mix of investment
positions that the Sponsor believes, in
combination, should produce daily
returns consistent with the Funds’
respective objectives.17 The Sponsor
would rely on a pre-determined model
to generate orders that result in
repositioning the Funds’ investments in
accordance with their respective
investment objectives.
According to the Exchange, each
Fund will seek to achieve its investment
objectives by investing, under normal
market conditions,18 substantially all of
of its return for each day compounded over the
period and thus will usually differ from a Fund’s
multiple times the return of the Benchmark for the
same period. See Notice, supra note 4, 82 FR at
9609.
13 According to the Exchange, the Benchmark is
a ‘‘rolling index,’’ which means that the index does
not take physical possession of any commodities.
See id. at 9609 n.7.
14 See supra note 12.
15 The Exchange states that futures contracts held
by the Funds near expiration are generally closed
out and replaced by contracts with a later
expiration as required by the Benchmark. The
Exchange states that this process is referred to as
‘‘rolling,’’ and that the Funds do not intend to hold
futures contracts through expiration, but instead to
‘‘roll’’ their respective positions. See Notice, supra
note 4, 82 FR at 9609 n.8.
16 See id. at 9609.
17 See id.
18 The Exchange states that the term ‘‘normal
market conditions’’ includes, but is not limited to,
the absence of trading halts in the applicable
financial markets generally; operational issues (e.g.,
systems failure) causing dissemination of inaccurate
market information; or force majeure type events
E:\FR\FM\11MYN1.SGM
11MYN1
Federal Register / Vol. 82, No. 90 / Thursday, May 11, 2017 / Notices
asabaliauskas on DSK3SPTVN1PROD with NOTICES
its assets in oil futures contracts traded
in the U.S. and listed options on such
contracts (such futures contracts and
options are collectively referred to as
‘‘Futures Contracts’’). The Funds’
investments in Futures Contracts will be
used to produce economically
‘‘leveraged’’ or ‘‘inverse leveraged’’
investment results for the Funds.
In the event position or accountability
limits are reached with respect to
Futures Contracts,19 each Fund may
obtain exposure to the Benchmark
through investment in swap
transactions and forward contracts
referencing the Benchmark or other
benchmarks the Sponsor believes
should be closely correlated to the
performance of each Fund’s benchmark,
such as the Energy Select Sector Index
or the S&P Oil & Gas Exploration &
Production Select Industry Index (such
swap transactions and forward contracts
are collectively referred to as ‘‘Financial
Instruments’’). To the extent that the
Trust invests in Financial Instruments,
it would first make use of exchangetraded Financial Instruments, if
available. If an investment in exchangetraded Financial Instruments is
unavailable, then the Trust would invest
in Financial Instruments that clear
through derivatives clearing
organizations that satisfy the Trust’s
criteria, if available. If an investment in
cleared Financial Instruments is
unavailable, then the Trust would invest
in other Financial Instruments,
including uncleared Financial
Instruments in the over-the-counter
(‘‘OTC’’) market. The Funds may also
invest in Financial Instruments 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 prevent or make it
impractical for a Fund to obtain the
appropriate amount of investment
exposure using Futures Contracts.
such as natural or manmade disaster, act of God,
armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance.
See id. at 9609 n.11.
19 According to the Exchange, U.S. futures
exchanges have established accountability levels
and position limits on the maximum net long or net
short Futures Contracts in commodity interests that
any person or group of persons under common
trading control (other than as a hedge, which an
investment by a Fund is not) may hold, own, or
control. These levels and position limits apply to
the Futures Contracts that each Fund would invest
in to meet its investment objective. According to the
Exchange, in addition to accountability levels and
position limits, U.S. futures exchanges also set daily
price fluctuation limits on Futures Contracts. The
daily price fluctuation limit establishes the
maximum amount that the price of a Futures
Contract may vary either up or down from the
previous day’s settlement price. See id. at 9609.
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16:52 May 10, 2017
Jkt 241001
The Funds will invest such that each
Fund’s exposure to the Benchmark will
consist substantially of Futures
Contracts. The Funds’ remaining net
assets may be invested in cash or cash
equivalents and/or U.S. Treasury
securities or other high credit quality,
short-term fixed-income or similar
securities (such as shares of money
market funds and collateralized
repurchase agreements) for direct
investment or as collateral for the
Funds’ investments.
The Funds do not intend to hold
Futures Contracts through expiration,
but instead to ‘‘roll’’ their respective
positions.20
The Exchange states that the Funds do
not expect to have leveraged exposure
greater than three times (3x) the Funds’
net assets. Thus, the maximum margin
held at a Future Commission Merchant
would not exceed three times the
margin requirement for either Fund.21
The Exchange represents that not
more than 10% of the net assets of a
Fund in the aggregate invested in
Futures Contracts shall consist of
Futures Contracts whose principal
market is not a member of the
Intermarket Surveillance Group or is a
market with which the Exchange does
not have in place a comprehensive
surveillance sharing agreement.
III. Proceedings To Determine Whether
To Approve or Disapprove SR–
NYSEArca–2017–05 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 22 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of such proceedings is
20 The Exchange states that when the market for
these contracts is such that the prices are higher in
the more distant delivery months than in the nearer
delivery months, the sale during the course of the
‘‘rolling process’’ of the more nearby contract would
take place at a price that is lower than the price of
the more distant contract. This pattern of higher
futures prices for longer expiration Futures
Contracts is referred to as ‘‘contango.’’
Alternatively, when the market for these contracts
is such that the prices are higher in the nearer
months than in the more distant months, the sale
during the course of the ‘‘rolling process’’ of the
more nearby contract would take place at a price
that is higher than the price of the more distant
contract. This pattern of higher futures prices for
shorter expiration futures contracts is referred to as
‘‘backwardation.’’ According to the Exchange, the
presence of contango in certain Futures Contracts
at the time of rolling could adversely affect a Fund
with long positions, and positively affect a Fund
with short positions. Similarly, the presence of
backwardation in certain futures contracts at the
time of rolling such contracts could adversely affect
a Fund with short positions and positively affect a
Fund with long positions. See id.
21 See id.
22 15 U.S.C. 78s(b)(2)(B).
PO 00000
Frm 00072
Fmt 4703
Sfmt 4703
22043
appropriate at this time in view of the
legal and policy issues raised by the
proposed rule change. Institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described
below, the Commission seeks and
encourages interested persons to
provide comments on the proposed rule
change.
Pursuant to Section 19(b)(2)(B) of the
Act,23 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of the proposed rule
change’s consistency with Section
6(b)(5) of the Act, which requires,
among other things, that the rules of a
national securities exchange be
‘‘designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade,’’ and ‘‘to protect investors and the
public interest.’’ 24
Under the proposal, each Fund will
seek to achieve its investment objective
by investing in Financial Instruments,
which, according to the Exchange, could
include uncleared OTC swap
transactions and forward contracts.25
The Exchange states that each Fund’s
total portfolio composition will be
disclosed each business day that the
Exchange is open for trading on the
Funds’ Web site. The Web site
disclosure will include, with respect to
the Futures Contracts and Financial
Instruments, their name, percentage
weighting, and value. The Commission
seeks commenters’ views on the
sufficiency of the information that
would be provided with respect to each
Fund’s Financial Instruments, and
whether the information will allow
market participants to value these
interests intraday.
In addition, under the proposal, the
investment objective of the Direxion
Daily Crude Oil Bull 3X Shares is to
seek, on a daily basis, investment results
that correspond (before fees and
expenses) to a multiple three times (3x)
of the daily performance of the
Benchmark, and the investment
objective of the Direxion Daily Crude
Oil Bear 3X Shares is to seek, on a daily
basis, investment results that
correspond (before fees and expenses) to
three times (3x) the inverse of the
performance of the Benchmark. The
Exchange’s filing does not address
whether the value of the Benchmark
will be publicly disseminated, and, if
23 Id.
24 15
U.S.C. 78f(b)(5).
Notice, supra note 4, at 9609.
25 See
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11MYN1
22044
Federal Register / Vol. 82, No. 90 / Thursday, May 11, 2017 / Notices
so, by whom and how often. The
Commission seeks commenters’ views
on the sufficiency of the Exchange’s
discussion regarding dissemination of
the value of the Benchmark on which
the investment objectives of the Funds
are based.
Furthermore, in its filing the
Exchange fails to include a
representation that all statements and
representations in the proposal
regarding the applicability of Exchange
listing rules specified in the proposal
shall constitute continued listing
requirements for listing the Shares on
the Exchange.26 The Commission seeks
commenter’s views on whether the
Exchange’s statements in the filing
relating to the applicability of continued
listing requirements for listing and
trading of the Shares on the Exchange
are sufficient to support a determination
that the listing and trading of the Shares
would be consistent with Section 6(b)(5)
of the Act.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
IV. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal is consistent with Section
6(b)(5) or any other provision of the Act,
or the rules and regulations thereunder.
Although there do not appear to be any
issues relevant to approval or
disapproval that would be facilitated by
an oral presentation of views, data, and
arguments, the Commission will
consider, pursuant to Rule 19b-4, any
request for an opportunity to make an
oral presentation.27
26 The Commission notes that the Exchange has
made this representation in other proposed rule
changes to list and trade Trust Issued Receipts. See,
e.g., Amendment No. 1 to Securities Exchange Act
Release No. 79917 (February 1, 2017), 82 FR 9620
(February 7, 2017) (SR–NYSEArca-2017–07),
available at: https://www.sec.gov/comments/srnysearca-2017-07/nysearca201707-1630210137426.pdf; Amendment No. 2 to Securities
Exchange Act Release No. 79742 (January 5, 2017),
82 FR 3366 (January 11, 2017) (SR–NYSEArca–
2016–173), available at: https://www.sec.gov/
comments/sr-nysearca-2016-173/nysearca20161731678044-149322.pdf.
27 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Pub. L. 94–29
(June 4, 1975), grants the Commission flexibility to
determine what type of proceeding—either oral or
notice and opportunity for written comments—is
appropriate for consideration of a particular
proposal by a self-regulatory organization. See
Securities Act Amendments of 1975, Senate Comm.
on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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16:52 May 10, 2017
Jkt 241001
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by June 12, 2017. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by June 26, 2017. The
Commission asks that commenters
address the sufficiency of the
Exchange’s statements in support of the
proposal, which are set forth in the
Notice,28 in addition to any other
comments they may wish to submit
about the proposed rule change.
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (http://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2017–05 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Numbers SR–NYSEArca–2017–05. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
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
28 See
PO 00000
supra note 4.
Frm 00073
Fmt 4703
Sfmt 4703
should refer to File Number SR–
NYSEArca–2017–05 and should be
submitted on or before June 12, 2017
Rebuttal comments should be submitted
by June 26, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–09522 Filed 5–10–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80610; File No. SR–MSRB–
2017–01]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Withdrawal of a
Proposed Rule Change To Add New
MSRB Rule G–49, on Transactions
Below the Minimum Denomination of
an Issue, to the Rules of the MSRB,
and To Rescind Paragraph (f), on
Minimum Denominations, From MSRB
Rule G–15
May 5, 2017.
On January 24, 2017, the Municipal
Securities Rulemaking Board (‘‘MSRB’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (the ‘‘Exchange
Act’’ or ‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
add new MSRB Rule G–49, on
transactions below the minimum
denomination of an issue, to the rules of
the MSRB, and, in MSRB Rule G–15, on
confirmation, clearance, settlement, and
other uniform practice requirements
with respect to transactions with
customers, to rescind paragraph (f), on
minimum denominations. The proposed
rule change was published for comment
in the Federal Register on February 9,
2017.3 The Commission received four
comment letters on the proposal.4 On
March 21, 2017, pursuant to Section
19(b)(2) of the Exchange Act,5 the MSRB
29 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 79978
(February 6, 2017), 82 FR 10123.
4 See letters from Leslie M. Norwood, Managing
Director and Associate General Counsel, Securities
Industry and Financial Markets Association, dated
March 2, 2017; Mike Nichols, Chief Executive
Officer, Bond Dealers of America, dated March 2,
2017; Paige W. Pierce, President and Chief
Executive Officer, RW Smith, dated March 3, 2017;
and James J. Angel, Associate Professor of Finance,
Georgetown University, McDonough School of
Business, dated March 7, 2017.
5 15 U.S.C. 78s(b)(2).
1 15
E:\FR\FM\11MYN1.SGM
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Agencies
[Federal Register Volume 82, Number 90 (Thursday, May 11, 2017)]
[Notices]
[Pages 22042-22044]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09522]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80606; File No. SR-NYSEArca-2017-05]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change To List and Trade Shares of Direxion Daily Crude Oil Bull
3x Shares and Direxion Daily Crude Oil Bear 3x Shares Under NYSE Arca
Equities Rule 8.200
May 5, 2017.
I. Introduction
On January 23, 2017, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ a
proposed rule change to list and trade shares (``Shares'') of Direxion
Daily Crude Oil Bull 3x Shares and Direxion Daily Crude Oil Bear 3x
Shares (each a ``Fund,'' and collectively the ``Funds'') under NYSE
Arca Equities Rule 8.200. The proposed rule change was published for
comment in the Federal Register on February 7, 2017.\4\ On March 16,
2017, pursuant to Section 19(b)(2) of the Act,\5\ the Commission
designated a longer period within which to approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to disapprove the proposed rule change.\6\ The
Commission has received no comments on the proposed rule change. This
order institutes proceedings under Section 19(b)(2)(B) of the Act \7\
to determine whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 79916 (February 1,
2017), 82 FR 9608 (``Notice'').
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 80265 (March 22,
2017), 82 FR 14778. The Commission designated May 8, 2017 as the
date by which the Commission shall either approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Exchange's Description of the Proposal
The Exchange proposes to list and trade Shares of the Funds under
NYSE Arca Equities Rule 8.200, Commentary .02, which governs the
listing and trading of Trust Issued Receipts.\8\ Each Fund is a series
of the Direxion Shares ETF Trust II (``Trust''), a Delaware statutory
trust.\9\ The Trust and the Funds are managed and controlled by
Direxion Asset Management, LLC (``Sponsor'').\10\ Bank of New York
Mellon will be the custodian and transfer agent for the Funds. U.S.
Bancorp Fund Services, LLC is the administrator for the Funds. Foreside
Fund Services, LLC serves as the distributor of the Shares.
---------------------------------------------------------------------------
\8\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to
Trust Issued Receipts that invest in ``Financial Instruments.'' The
term ``Financial Instruments,'' as defined in Commentary .02(b)(4)
to NYSE Arca Equities Rule 8.200, means any combination of
investments, including cash; securities; options on securities and
indices; futures contracts; options on futures contracts; forward
contracts; equity caps, collars, and floors; and swap agreements.
\9\ According to the Exchange, on December 14, 2016, the Trust
filed with the Commission a registration statement on Form S-1 under
the Securities Act of 1933, as amended, relating to the Funds (File
No. 333-215091) (``Registration Statement'').
\10\ According to the Exchange, the Sponsor is registered as a
commodity pool operator with the Commodity Futures Trading
Commission and is a member of the National Futures Association. See
Notice, supra note 4, 82 FR at 9608.
---------------------------------------------------------------------------
The Exchange has made the following representations and statements
in describing the Funds and their investment strategies, including the
Funds' portfolio holdings and investment restrictions.\11\
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\11\ The Commission notes that additional information regarding
the Trust, the Funds, and the Shares, including investment
strategies, risks, net asset value (``NAV'') calculation, creation
and redemption procedures, fees, availability of information,
trading rules and halts, surveillance, information bulletins,
distributions, and taxes, among other information, is included in
the Notice and the Registration Statement, as applicable. See Notice
and Registration Statement, supra notes 4 and 9, respectively.
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A. Investment Objectives of the Funds
The investment objective of the Direxion Daily Crude Oil Bull 3X
Shares is to seek, on a daily basis,\12\ investment results that
correspond (before fees and expenses) to a multiple three times (3x) of
the daily performance of the Bloomberg WTI Crude Oil Subindex\SM\ (a
subindex of the Bloomberg Commodity Index\SM\) (``Benchmark'').\13\ The
investment objective of the Direxion Daily Crude Oil Bear 3X Shares is
to seek, on a daily basis,\14\ investment results that correspond
(before fees and expenses) to three times (3x) the inverse of the
performance of the Benchmark. The Benchmark is intended to reflect the
performance of crude oil as measured by the price of West Texas
Intermediate crude oil futures contracts traded on the New York
Mercantile Exchange (which is part of the Chicago Mercantile Exchange),
including the impact of rolling,\15\ without regard to income earned on
cash positions. According to the Exchange, the Funds will not be
directly linked to the ``spot'' price of crude oil.\16\
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\12\ According to the Exchange, the Funds do not seek to achieve
their investment objectives over a period greater than a single
trading day. The Exchange states that a single trading day is
measured from the time a Fund calculates its NAV to the time of a
Fund's next NAV calculation. The Exchange states that the return of
a Fund for a period longer than a single trading day is the result
of its return for each day compounded over the period and thus will
usually differ from a Fund's multiple times the return of the
Benchmark for the same period. See Notice, supra note 4, 82 FR at
9609.
\13\ According to the Exchange, the Benchmark is a ``rolling
index,'' which means that the index does not take physical
possession of any commodities. See id. at 9609 n.7.
\14\ See supra note 12.
\15\ The Exchange states that futures contracts held by the
Funds near expiration are generally closed out and replaced by
contracts with a later expiration as required by the Benchmark. The
Exchange states that this process is referred to as ``rolling,'' and
that the Funds do not intend to hold futures contracts through
expiration, but instead to ``roll'' their respective positions. See
Notice, supra note 4, 82 FR at 9609 n.8.
\16\ See id. at 9609.
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B. Investments of the Funds
In seeking to achieve the Funds' investment objectives, the
Exchange states that the Sponsor will utilize a mathematical approach
to determine the type, quantity, and mix of investment positions that
the Sponsor believes, in combination, should produce daily returns
consistent with the Funds' respective objectives.\17\ The Sponsor would
rely on a pre-determined model to generate orders that result in
repositioning the Funds' investments in accordance with their
respective investment objectives.
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\17\ See id.
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According to the Exchange, each Fund will seek to achieve its
investment objectives by investing, under normal market conditions,\18\
substantially all of
[[Page 22043]]
its assets in oil futures contracts traded in the U.S. and listed
options on such contracts (such futures contracts and options are
collectively referred to as ``Futures Contracts''). The Funds'
investments in Futures Contracts will be used to produce economically
``leveraged'' or ``inverse leveraged'' investment results for the
Funds.
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\18\ The Exchange states that the term ``normal market
conditions'' includes, but is not limited to, the absence of trading
halts in the applicable financial markets generally; operational
issues (e.g., systems failure) causing dissemination of inaccurate
market information; or force majeure type events such as natural or
manmade disaster, act of God, armed conflict, act of terrorism, riot
or labor disruption or any similar intervening circumstance. See id.
at 9609 n.11.
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In the event position or accountability limits are reached with
respect to Futures Contracts,\19\ each Fund may obtain exposure to the
Benchmark through investment in swap transactions and forward contracts
referencing the Benchmark or other benchmarks the Sponsor believes
should be closely correlated to the performance of each Fund's
benchmark, such as the Energy Select Sector Index or the S&P Oil & Gas
Exploration & Production Select Industry Index (such swap transactions
and forward contracts are collectively referred to as ``Financial
Instruments''). To the extent that the Trust invests in Financial
Instruments, it would first make use of exchange-traded Financial
Instruments, if available. If an investment in exchange-traded
Financial Instruments is unavailable, then the Trust would invest in
Financial Instruments that clear through derivatives clearing
organizations that satisfy the Trust's criteria, if available. If an
investment in cleared Financial Instruments is unavailable, then the
Trust would invest in other Financial Instruments, including uncleared
Financial Instruments in the over-the-counter (``OTC'') market. The
Funds may also invest in Financial Instruments 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 prevent or make it impractical for
a Fund to obtain the appropriate amount of investment exposure using
Futures Contracts.
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\19\ According to the Exchange, U.S. futures exchanges have
established accountability levels and position limits on the maximum
net long or net short Futures Contracts in commodity interests that
any person or group of persons under common trading control (other
than as a hedge, which an investment by a Fund is not) may hold,
own, or control. These levels and position limits apply to the
Futures Contracts that each Fund would invest in to meet its
investment objective. According to the Exchange, in addition to
accountability levels and position limits, U.S. futures exchanges
also set daily price fluctuation limits on Futures Contracts. The
daily price fluctuation limit establishes the maximum amount that
the price of a Futures Contract may vary either up or down from the
previous day's settlement price. See id. at 9609.
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The Funds will invest such that each Fund's exposure to the
Benchmark will consist substantially of Futures Contracts. The Funds'
remaining net assets may be invested in cash or cash equivalents and/or
U.S. Treasury securities or other high credit quality, short-term
fixed-income or similar securities (such as shares of money market
funds and collateralized repurchase agreements) for direct investment
or as collateral for the Funds' investments.
The Funds do not intend to hold Futures Contracts through
expiration, but instead to ``roll'' their respective positions.\20\
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\20\ The Exchange states that when the market for these
contracts is such that the prices are higher in the more distant
delivery months than in the nearer delivery months, the sale during
the course of the ``rolling process'' of the more nearby contract
would take place at a price that is lower than the price of the more
distant contract. This pattern of higher futures prices for longer
expiration Futures Contracts is referred to as ``contango.''
Alternatively, when the market for these contracts is such that the
prices are higher in the nearer months than in the more distant
months, the sale during the course of the ``rolling process'' of the
more nearby contract would take place at a price that is higher than
the price of the more distant contract. This pattern of higher
futures prices for shorter expiration futures contracts is referred
to as ``backwardation.'' According to the Exchange, the presence of
contango in certain Futures Contracts at the time of rolling could
adversely affect a Fund with long positions, and positively affect a
Fund with short positions. Similarly, the presence of backwardation
in certain futures contracts at the time of rolling such contracts
could adversely affect a Fund with short positions and positively
affect a Fund with long positions. See id.
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The Exchange states that the Funds do not expect to have leveraged
exposure greater than three times (3x) the Funds' net assets. Thus, the
maximum margin held at a Future Commission Merchant would not exceed
three times the margin requirement for either Fund.\21\
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\21\ See id.
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The Exchange represents that not more than 10% of the net assets of
a Fund in the aggregate invested in Futures Contracts shall consist of
Futures Contracts whose principal market is not a member of the
Intermarket Surveillance Group or is a market with which the Exchange
does not have in place a comprehensive surveillance sharing agreement.
III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2017-05 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \22\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
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\22\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\23\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' \24\
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\23\ Id.
\24\ 15 U.S.C. 78f(b)(5).
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Under the proposal, each Fund will seek to achieve its investment
objective by investing in Financial Instruments, which, according to
the Exchange, could include uncleared OTC swap transactions and forward
contracts.\25\ The Exchange states that each Fund's total portfolio
composition will be disclosed each business day that the Exchange is
open for trading on the Funds' Web site. The Web site disclosure will
include, with respect to the Futures Contracts and Financial
Instruments, their name, percentage weighting, and value. The
Commission seeks commenters' views on the sufficiency of the
information that would be provided with respect to each Fund's
Financial Instruments, and whether the information will allow market
participants to value these interests intraday.
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\25\ See Notice, supra note 4, at 9609.
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In addition, under the proposal, the investment objective of the
Direxion Daily Crude Oil Bull 3X Shares is to seek, on a daily basis,
investment results that correspond (before fees and expenses) to a
multiple three times (3x) of the daily performance of the Benchmark,
and the investment objective of the Direxion Daily Crude Oil Bear 3X
Shares is to seek, on a daily basis, investment results that correspond
(before fees and expenses) to three times (3x) the inverse of the
performance of the Benchmark. The Exchange's filing does not address
whether the value of the Benchmark will be publicly disseminated, and,
if
[[Page 22044]]
so, by whom and how often. The Commission seeks commenters' views on
the sufficiency of the Exchange's discussion regarding dissemination of
the value of the Benchmark on which the investment objectives of the
Funds are based.
Furthermore, in its filing the Exchange fails to include a
representation that all statements and representations in the proposal
regarding the applicability of Exchange listing rules specified in the
proposal shall constitute continued listing requirements for listing
the Shares on the Exchange.\26\ The Commission seeks commenter's views
on whether the Exchange's statements in the filing relating to the
applicability of continued listing requirements for listing and trading
of the Shares on the Exchange are sufficient to support a determination
that the listing and trading of the Shares would be consistent with
Section 6(b)(5) of the Act.
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\26\ The Commission notes that the Exchange has made this
representation in other proposed rule changes to list and trade
Trust Issued Receipts. See, e.g., Amendment No. 1 to Securities
Exchange Act Release No. 79917 (February 1, 2017), 82 FR 9620
(February 7, 2017) (SR-NYSEArca-2017-07), available at: https://www.sec.gov/comments/sr-nysearca-2017-07/nysearca201707-1630210-137426.pdf; Amendment No. 2 to Securities Exchange Act Release No.
79742 (January 5, 2017), 82 FR 3366 (January 11, 2017) (SR-NYSEArca-
2016-173), available at: https://www.sec.gov/comments/sr-nysearca-2016-173/nysearca2016173-1678044-149322.pdf.
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\27\
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\27\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by June 12, 2017. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 26,
2017. The Commission asks that commenters address the sufficiency of
the Exchange's statements in support of the proposal, which are set
forth in the Notice,\28\ in addition to any other comments they may
wish to submit about the proposed rule change.
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\28\ See supra note 4.
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Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2017-05 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Numbers SR-NYSEArca-2017-05. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
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-NYSEArca-2017-05 and should
be submitted on or before June 12, 2017 Rebuttal comments should be
submitted by June 26, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09522 Filed 5-10-17; 8:45 am]
BILLING CODE 8011-01-P