Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 2 Thereto, To List and Trade Shares of the iShares Inflation Hedged Corporate Bond ETF, a Series of the iShares U.S. ETF Trust, Under Rule 14.11(i), Managed Fund Shares, 61596-61598 [2017-28076]
Download as PDF
61596
Federal Register / Vol. 82, No. 248 / Thursday, December 28, 2017 / Notices
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a
domestic shipping services contract to
the list of Negotiated Service
Agreements in the Mail Classification
Schedule’s Competitive Products List.
POSTAL SERVICE
Date of notice required under 39
U.S.C. 3642(d)(1): December 28, 2017.
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a
domestic shipping services contract to
the list of Negotiated Service
Agreements in the Mail Classification
Schedule’s Competitive Products List.
DATES: Date of notice required under 39
U.S.C. 3642(d)(1): December 28, 2017.
FOR FURTHER INFORMATION CONTACT:
Elizabeth A. Reed, 202–268–3179.
SUPPLEMENTARY INFORMATION: The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on December 21,
2017, it filed with the Postal Regulatory
Commission a USPS Request to Add
First-Class Package Service Contract 90
to Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2018–79, CP2018–121.
SUMMARY:
DATES:
FOR FURTHER INFORMATION CONTACT:
Elizabeth A. Reed, 202–268–3179.
The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on December 20,
2017, it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Contract 400 to
Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2018–75, CP2018–116.
SUPPLEMENTARY INFORMATION:
Elizabeth A. Reed,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2017–27982 Filed 12–27–17; 8:45 am]
BILLING CODE 7710–12–P
POSTAL SERVICE
ACTION:
SECURITIES AND EXCHANGE
COMMISSION
The Postal Service gives
notice of filing a request with the Postal
Regulatory Commission to add a
domestic shipping services contract to
the list of Negotiated Service
Agreements in the Mail Classification
Schedule’s Competitive Products List.
SUMMARY:
Date of notice required under 39
U.S.C. 3642(d)(1): December 28, 2017.
DATES:
FOR FURTHER INFORMATION CONTACT:
Elizabeth A. Reed, 202–268–3179.
The
United States Postal Service® hereby
gives notice that, pursuant to 39 U.S.C.
3642 and 3632(b)(3), on December 21,
2017, it filed with the Postal Regulatory
Commission a USPS Request to Add
Priority Mail Express, Priority Mail, &
First-Class Package Service Contract 31
to Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2018–76, CP2018–118.
SUPPLEMENTARY INFORMATION:
sradovich on DSK3GMQ082PROD with NOTICES
SUMMARY:
BILLING CODE 7710–12–P
Notice.
Elizabeth A. Reed,
Attorney, Corporate and Postal Business Law.
[FR Doc. 2017–27985 Filed 12–27–17; 8:45 am]
[Release No. 34–82388; File No. SR–
BatsBZX–2017–54]
Self-Regulatory Organizations; Bats
BZX Exchange, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change, as Modified by
Amendment No. 2 Thereto, To List and
Trade Shares of the iShares Inflation
Hedged Corporate Bond ETF, a Series
of the iShares U.S. ETF Trust, Under
Rule 14.11(i), Managed Fund Shares
December 22, 2017.
I. Introduction
On September 7, 2017, Bats BZX
Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’)
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
list and trade Shares (‘‘Shares’’) of the
iShares Inflation Hedged Corporate
Bond ETF (‘‘Fund’’) under Exchange
1 15
2 17
BILLING CODE 7710–12–P
18:14 Dec 27, 2017
ACTION:
[FR Doc. 2017–27987 Filed 12–27–17; 8:45 am]
Postal ServiceTM.
VerDate Sep<11>2014
Postal ServiceTM.
Notice.
AGENCY:
Elizabeth A. Reed,
Attorney, Corporate and Postal Business Law.
Product Change—Priority Mail
Express, Priority Mail, & First-Class
Package Service Negotiated Service
Agreement
AGENCY:
Product Change—First-Class Package
Service Negotiated Service Agreement
Jkt 244001
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00064
Fmt 4703
Sfmt 4703
Rule 14.11(i) (‘‘Managed Fund Shares’’).
The Commission published notice of the
proposed rule change in the Federal
Register on September 27, 2017.3 On
November 7, 2017, pursuant to Section
19(b)(2) of the Exchange Act,4 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.5 On December 8,
2017, the Exchange submitted
Amendment No. 1 to the proposed rule
change, which replaced and superseded
the proposed rule change as originally
filed. On December 15, 2017, the
Exchange withdrew Amendment No.1
and submitted Amendment No. 2 to the
proposed rule change, which replaced
and superseded 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
3 See Securities Exchange Act Release No. 81671
(September 21, 2017), 82 FR 45103.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 82025,
82 FR 52763 (November 14, 2017). The Commission
designated December 26, 2017, as the date by which
it should approve or disapprove, or institute
proceedings to determine whether to disapprove,
the proposed rule change.
6 In Amendment No. 2, the Exchange: (1)
Identified the adviser of the Fund and made certain
representations relating to the adviser and its
personnel, including (a) that the adviser has
implemented ‘‘fire walls’’ with respect to its brokerdealer affiliates regarding access to information
concerning the composition of and/or changes to
the Fund’s portfolio; and (b) personnel who make
decisions regarding the Fund’s portfolio are subject
to procedures designed to prevent the use and
dissemination of material nonpublic information
regarding the Fund’s portfolio; (2) clarified the
investment strategy and holdings of the Fund,
including that (a) all listed Inflation Swaps (as
defined herein) held by the Fund will be traded on
a U.S. Swap Execution Facility (‘‘SEF’’) registered
with the Commodity Futures Trading Commission
(‘‘CFTC’’); and (b) that all total return swaps held
by the Fund will be traded over-the-counter
(‘‘OTC’’) and will generally reference Treasury
Inflation-Protected Securities, the Consumer Price
Index, or a corporate bond index; (3) represented
that the Fund’s investments in derivative
instruments will be made in accordance with the
Investment Company Act of 1940 (‘‘1940 Act’’) and
consistent with the Fund’s investment objective and
policies, and that the Fund would take certain
actions to mitigate and disclose leveraging risk; (4)
stated that price information for cash equivalents
will be available from major market data vendors;
(5) provided additional justification for why the
Fund’s proposed investments are consistent with
the Exchange Act; (6) made additional
representations regarding the ability of the
Exchange to surveil trading in the Shares and
certain of the underlying investments, including
that the Exchange has a policy prohibiting the
distribution of material non-public information by
its employees; and (7) made other clarifications,
corrections, and technical changes. Amendment No.
2 is available at https://www.sec.gov/comments/srbatsbzx-2017-54/batsbzx201754.htm.
7 15 U.S.C. 78s(b)(2)(B).
E:\FR\FM\28DEN1.SGM
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Federal Register / Vol. 82, No. 248 / Thursday, December 28, 2017 / Notices
approve or disapprove the proposed
rule change, as modified by Amendment
No. 2.
II. Exchange’s Description of the
Proposed Rule Change, as Modified by
Amendment No. 2 8
The Exchange proposes to list and
trade Shares of the Fund under Rule
14.11(i), which governs the listing and
trading of Managed Fund Shares on the
Exchange. The Shares will be offered by
the iShares U.S. ETF Trust (‘‘Trust’’),
which is registered with the
Commission as an open-end investment
company.9 BlackRock Fund Advisors
(‘‘Adviser’’) will be the investment
adviser to the Fund.10
According to the Exchange, the Fund
will be an actively managed exchangetraded fund that seeks to mitigate the
inflation risk of a portfolio with
exposure to U.S. dollar-denominated
investment-grade corporate bonds.
A. Fund Investments
sradovich on DSK3GMQ082PROD with NOTICES
Under Normal Market Conditions,11
the Fund seeks to achieve its investment
objective by investing at least 80% of its
net assets in the iShares iBoxx $
Investment Grade Corporate Bond ETF
(‘‘Underlying Fund’’), in U.S. dollardenominated investment-grade
corporate bonds, in one or more other
exchange-traded funds (‘‘ETFs’’) that
principally invest in U.S. dollardenominated investment-grade
8 For more information regarding the Fund and
the Shares, see Amendment No. 2, supra note 6.
9 The Trust is registered under the 1940 Act. The
Trust has filed a registration statement on behalf of
the Fund on Form N–1A with the Commission. See
Registration Statement on Form N–1A for the Trust,
dated April 6, 2017 (File Nos. 333–179904 and 811–
22649). In addition, the Exchange states that the
Commission has issued an order granting certain
exemptive relief to the Adviser under the 1940 Act.
See Investment Company Act Release No. 29571
(January 24, 2011) (File No. 812–13601).
10 The Adviser is not a registered broker-dealer,
but is affiliated with multiple broker-dealers and
has implemented ‘‘fire walls’’ with respect to such
broker-dealers regarding access to information
concerning the composition of and/or changes to
the Fund’s portfolio. In addition, Adviser personnel
who make decisions regarding the Fund’s portfolio
are subject to procedures designed to prevent the
use and dissemination of material nonpublic
information regarding the Fund’s portfolio. In the
event that (a) the Adviser becomes registered as a
broker-dealer or newly affiliated with another
broker-dealer, or (b) any new adviser or sub-adviser
is a registered broker-dealer or becomes affiliated
with a broker-dealer, it will implement a fire wall
with respect to its relevant personnel or such
broker-dealer affiliate, as applicable, regarding
access to information concerning the composition
of and/or changes to the portfolio, and will be
subject to procedures designed to prevent the use
and dissemination of material non-public
information regarding such portfolio.
11 The term ‘‘Normal Market Conditions’’ is
defined in Rule 14.11(i)(3)(E).
VerDate Sep<11>2014
18:14 Dec 27, 2017
Jkt 244001
corporate bonds,12 and in Inflation
Hedging Instruments (as defined below).
The Fund will gain exposure to U.S.
dollar-denominated investment-grade
corporate bonds primarily through
investing in the Underlying Fund. As an
alternative, the Fund may gain such
exposure by investing in U.S. dollardenominated investment-grade
corporate bonds or other ETFs that are
listed on a U.S. national securities
exchange that principally invest in U.S.
dollar-denominated investment-grade
corporate bonds.
The Fund will attempt to mitigate the
inflation risk of the Fund’s exposure to
U.S. dollar-denominated investmentgrade corporate bonds primarily through
the use of either OTC or listed inflation
swaps (i.e., contracts in which the Fund
will make fixed-rate payments based on
notional amount while receiving
floating-rate payments determined from
an inflation index) (‘‘Inflation
Swaps’’),13 which are managed on an
active basis. As an alternative, the Fund
may also attempt to mitigate inflation
risk through investing in other products
designed to transfer inflation risk from
one party to another, including, but not
limited to, Treasury Inflation-Protected
Securities (‘‘TIPS’’), total return
swaps,14 credit default swaps,15 and
U.S. Treasury futures (collectively with
Inflation Swaps, ‘‘Inflation Hedging
Instruments’’). The Fund may hold up
to 50% of the weight of its portfolio
(including gross notional exposure) in
Inflation Hedging Instruments.
The Fund may also hold certain fixed
income securities and cash and cash
equivalents in order to collateralize its
derivatives positions.
B. Investment Restrictions
The Exchange represents that the
Fund’s investments, including
12 The Exchange states that for the purposes of
this proposed rule change, the term ETF includes
Portfolio Depositary Receipts, Index Fund Shares,
and Managed Fund Shares as defined in Rule
14.11(b), (c), and (i), respectively, and their
equivalents on other national securities exchanges.
13 The Exchange states that all Inflation Swaps
held by the Fund will be listed and/or centrally
cleared in order to reduce counterparty risk. In
addition, all listed Inflation Swaps held by the
Fund will be traded on a U.S. SEF registered with
the CFTC.
14 All total return swaps held by the Fund will
traded OTC and will generally reference TIPS, the
Consumer Price Index, or a corporate bond index.
The Exchange represents that the Fund will attempt
to limit counterparty risk in non-cleared swap
contracts by entering into such contracts only with
counterparties the Adviser believes are
creditworthy and by limiting the Fund’s exposure
to each counterparty. The Adviser will monitor the
creditworthiness of each counterparty and the
Fund’s exposure to each counterparty on an
ongoing basis.
15 Credit default swaps held by the Fund will be
traded on a U.S. SEF registered with the CFTC.
PO 00000
Frm 00065
Fmt 4703
Sfmt 4703
61597
derivatives, will be consistent with the
1940 Act and the Fund’s investment
objective and policies and will not be
used to enhance leverage (although
certain derivatives and other
investments may result in leverage).16
That is, while the Fund will be
permitted to borrow as permitted under
the 1940 Act, the Fund’s investments
will not be used to seek performance
that is the multiple or inverse multiple
(e.g., 2Xs or 3Xs) of the Fund’s primary
broad-based securities benchmark index
(as defined in Form N–1A).
The Fund will only use those
derivatives described above and
included in the defined term Inflation
Hedging Instruments. The Fund’s use of
derivative instruments will be
collateralized. The Fund will only use
derivative instruments in order to
attempt to mitigate the inflation risk of
the U.S. dollar-denominated
investment-grade corporate bonds
exposure.
C. Application of Generic Listing
Standards
The Exchange proposes to list and
trade the Shares under Rule 14.11(i),
which provides generic listing standards
for Managed Fund Shares. According to
the Exchange, certain of the Fund’s
investments may not comply with all of
the generic listing requirements of Rule
14.11(i). Specifically, the Fund will
meet all the requirements of Rule
14.11(i) on an initial and ongoing basis
except for those set forth in Rules
14.11(i)(4)(C)(iv)(a), 14.11(i)(4)(C)(iv)(b),
and 14.11(i)(4)(C)(v).
Rule 14.11(i)(4)(C)(iv)(a) requires that,
on both an initial and continuing basis,
in the aggregate, at least 90% of the
weight of the portfolio holdings
invested in futures, exchange-traded
options, and listed swaps (calculated
using the aggregate gross notional value
of such holdings) shall consist of
futures, options, and swaps for which
the Exchange may obtain information
via the Intermarket Surveillance Group
(‘‘ISG’’) from other members or affiliates
16 The Fund will include appropriate risk
disclosure in its offering documents, including
leveraging risk. Leveraging risk is the risk that
certain transactions of a fund, including a fund’s
use of derivatives, may give rise to leverage, causing
a fund to be more volatile than if it had not been
leveraged. The Fund’s investments in in derivative
instruments will be made in accordance with the
1940 Act and consistent with the Fund’s investment
objective and policies. To mitigate leveraging risk,
the Fund will segregate or earmark liquid assets
determined to be liquid by the Adviser in
accordance with procedures established by the
Trust’s Board and in accordance with the 1940 Act
or otherwise cover the transactions that give rise to
such risk. These procedures have been adopted
consistent with Section 18 of the 1940 Act and
related Commission guidance.
E:\FR\FM\28DEN1.SGM
28DEN1
61598
Federal Register / Vol. 82, No. 248 / Thursday, December 28, 2017 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
of the ISG or for which the principal
market is a market with which the
Exchange has a comprehensive
surveillance sharing agreement. The
Exchange states that the Fund’s
investments in certain listed credit
default swaps and listed Inflation Swaps
will not comply with this requirement.
Rule 14.11(i)(4)(C)(iv)(b) requires that
the aggregate gross notional value of
listed derivatives based on any single
underlying reference asset not exceed
30% of the weight of the portfolio
(including gross notional exposures).
The Exchange states that the Fund’s
investments in listed derivatives, which
include U.S. Treasury futures, credit
default swaps, and certain Inflation
Swaps, will not comply with this
requirement.17
Rule 14.11(i)(4)(C)(v) requires that, on
both an initial and continuing basis, the
aggregate gross notional value of OTC
derivatives shall not exceed 20% of the
weight of the portfolio (including gross
notional exposures). The Exchange
states that the Fund’s holdings in OTC
derivatives, which include total return
swaps and OTC Inflation Swaps, will
not comply with this requirement.
III. Proceedings To Determine Whether
To Approve or Disapprove SR–
BatsBZX–2017–54 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 18 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.
Pursuant to Section 19(b)(2)(B) of the
Act,19 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
17 Rule 14.11(i)(4)(C)(iv)(b) also requires that the
aggregate gross notional value of listed derivatives
based on any five or fewer underlying reference
assets not exceed 65% of the weight of the portfolio
(including gross notional exposures). The Exchange
states that the Fund will meet this requirement.
18 15 U.S.C. 78s(b)(2)(B).
19 Id.
VerDate Sep<11>2014
18:14 Dec 27, 2017
Jkt 244001
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.’’ 20
Under the proposal, the Fund may
hold up to 50% of the weight of its
portfolio (including gross notional
exposure) in Inflation Hedging
Instruments, which include, but are not
limited to, TIPS, listed and OTC
Inflation Swaps, OTC total return
swaps, listed credit default swaps, and
U.S. Treasury futures.21 The
Commission notes that the definition of
Inflation Hedging Instruments is not
exhaustive and may include certain
investments that are not enumerated in
the filing. The Commission seeks
commenters’ views on the sufficiency of
the information that is provided with
respect to Inflation Hedging
Instruments, which could comprise up
to 50% of the weight of the Fund’s
portfolio, to support a determination
that the listing and trading of the Shares
would be consistent with Section 6(b)(5)
of the Act.
IV. Procedure: Request for Written
Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended by Amendment No.
2, is consistent with Section 6(b)(5) of
the Act 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.22
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by January 18, 2018. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by February 1, 2018.
20 15
U.S.C. 78f(b)(5).
Amendment No. 2, supra note 6.
22 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).
21 See
PO 00000
Frm 00066
Fmt 4703
Sfmt 9990
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BatsBZX–2017–54 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–BatsBZX–2017–54. 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 website (https://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 website 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.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–BatsBZX–2017–54 and
should be submitted on or before
January 18, 2018. Rebuttal comments
should be submitted by February 1,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–28076 Filed 12–27–17; 8:45 am]
BILLING CODE 8011–01–P
23 17
E:\FR\FM\28DEN1.SGM
CFR 200.30–3(a)(57).
28DEN1
Agencies
[Federal Register Volume 82, Number 248 (Thursday, December 28, 2017)]
[Notices]
[Pages 61596-61598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-28076]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82388; File No. SR-BatsBZX-2017-54]
Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by Amendment No. 2 Thereto, To List
and Trade Shares of the iShares Inflation Hedged Corporate Bond ETF, a
Series of the iShares U.S. ETF Trust, Under Rule 14.11(i), Managed Fund
Shares
December 22, 2017.
I. Introduction
On September 7, 2017, Bats BZX Exchange, Inc. (``BZX'' or
``Exchange'') 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 list and trade Shares
(``Shares'') of the iShares Inflation Hedged Corporate Bond ETF
(``Fund'') under Exchange Rule 14.11(i) (``Managed Fund Shares''). The
Commission published notice of the proposed rule change in the Federal
Register on September 27, 2017.\3\ On November 7, 2017, pursuant to
Section 19(b)(2) of the Exchange Act,\4\ 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.\5\ On
December 8, 2017, the Exchange submitted Amendment No. 1 to the
proposed rule change, which replaced and superseded the proposed rule
change as originally filed. On December 15, 2017, the Exchange withdrew
Amendment No.1 and submitted Amendment No. 2 to the proposed rule
change, which replaced and superseded 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
[[Page 61597]]
approve or disapprove the proposed rule change, as modified by
Amendment No. 2.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 81671 (September 21,
2017), 82 FR 45103.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 82025, 82 FR 52763
(November 14, 2017). The Commission designated December 26, 2017, as
the date by which it should approve or disapprove, or institute
proceedings to determine whether to disapprove, the proposed rule
change.
\6\ In Amendment No. 2, the Exchange: (1) Identified the adviser
of the Fund and made certain representations relating to the adviser
and its personnel, including (a) that the adviser has implemented
``fire walls'' with respect to its broker-dealer affiliates
regarding access to information concerning the composition of and/or
changes to the Fund's portfolio; and (b) personnel who make
decisions regarding the Fund's portfolio are subject to procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the Fund's portfolio; (2) clarified the
investment strategy and holdings of the Fund, including that (a) all
listed Inflation Swaps (as defined herein) held by the Fund will be
traded on a U.S. Swap Execution Facility (``SEF'') registered with
the Commodity Futures Trading Commission (``CFTC''); and (b) that
all total return swaps held by the Fund will be traded over-the-
counter (``OTC'') and will generally reference Treasury Inflation-
Protected Securities, the Consumer Price Index, or a corporate bond
index; (3) represented that the Fund's investments in derivative
instruments will be made in accordance with the Investment Company
Act of 1940 (``1940 Act'') and consistent with the Fund's investment
objective and policies, and that the Fund would take certain actions
to mitigate and disclose leveraging risk; (4) stated that price
information for cash equivalents will be available from major market
data vendors; (5) provided additional justification for why the
Fund's proposed investments are consistent with the Exchange Act;
(6) made additional representations regarding the ability of the
Exchange to surveil trading in the Shares and certain of the
underlying investments, including that the Exchange has a policy
prohibiting the distribution of material non-public information by
its employees; and (7) made other clarifications, corrections, and
technical changes. Amendment No. 2 is available at https://www.sec.gov/comments/sr-batsbzx-2017-54/batsbzx201754.htm.
\7\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposed Rule Change, as Modified by
Amendment No. 2 \8\
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\8\ For more information regarding the Fund and the Shares, see
Amendment No. 2, supra note 6.
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The Exchange proposes to list and trade Shares of the Fund under
Rule 14.11(i), which governs the listing and trading of Managed Fund
Shares on the Exchange. The Shares will be offered by the iShares U.S.
ETF Trust (``Trust''), which is registered with the Commission as an
open-end investment company.\9\ BlackRock Fund Advisors (``Adviser'')
will be the investment adviser to the Fund.\10\
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\9\ The Trust is registered under the 1940 Act. The Trust has
filed a registration statement on behalf of the Fund on Form N-1A
with the Commission. See Registration Statement on Form N-1A for the
Trust, dated April 6, 2017 (File Nos. 333-179904 and 811-22649). In
addition, the Exchange states that the Commission has issued an
order granting certain exemptive relief to the Adviser under the
1940 Act. See Investment Company Act Release No. 29571 (January 24,
2011) (File No. 812-13601).
\10\ The Adviser is not a registered broker-dealer, but is
affiliated with multiple broker-dealers and has implemented ``fire
walls'' with respect to such broker-dealers regarding access to
information concerning the composition of and/or changes to the
Fund's portfolio. In addition, Adviser personnel who make decisions
regarding the Fund's portfolio are subject to procedures designed to
prevent the use and dissemination of material nonpublic information
regarding the Fund's portfolio. In the event that (a) the Adviser
becomes registered as a broker-dealer or newly affiliated with
another broker-dealer, or (b) any new adviser or sub-adviser is a
registered broker-dealer or becomes affiliated with a broker-dealer,
it will implement a fire wall with respect to its relevant personnel
or such broker-dealer affiliate, as applicable, regarding access to
information concerning the composition of and/or changes to the
portfolio, and will be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding
such portfolio.
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According to the Exchange, the Fund will be an actively managed
exchange-traded fund that seeks to mitigate the inflation risk of a
portfolio with exposure to U.S. dollar-denominated investment-grade
corporate bonds.
A. Fund Investments
Under Normal Market Conditions,\11\ the Fund seeks to achieve its
investment objective by investing at least 80% of its net assets in the
iShares iBoxx $ Investment Grade Corporate Bond ETF (``Underlying
Fund''), in U.S. dollar-denominated investment-grade corporate bonds,
in one or more other exchange-traded funds (``ETFs'') that principally
invest in U.S. dollar-denominated investment-grade corporate bonds,\12\
and in Inflation Hedging Instruments (as defined below).
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\11\ The term ``Normal Market Conditions'' is defined in Rule
14.11(i)(3)(E).
\12\ The Exchange states that for the purposes of this proposed
rule change, the term ETF includes Portfolio Depositary Receipts,
Index Fund Shares, and Managed Fund Shares as defined in Rule
14.11(b), (c), and (i), respectively, and their equivalents on other
national securities exchanges.
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The Fund will gain exposure to U.S. dollar-denominated investment-
grade corporate bonds primarily through investing in the Underlying
Fund. As an alternative, the Fund may gain such exposure by investing
in U.S. dollar-denominated investment-grade corporate bonds or other
ETFs that are listed on a U.S. national securities exchange that
principally invest in U.S. dollar-denominated investment-grade
corporate bonds.
The Fund will attempt to mitigate the inflation risk of the Fund's
exposure to U.S. dollar-denominated investment-grade corporate bonds
primarily through the use of either OTC or listed inflation swaps
(i.e., contracts in which the Fund will make fixed-rate payments based
on notional amount while receiving floating-rate payments determined
from an inflation index) (``Inflation Swaps''),\13\ which are managed
on an active basis. As an alternative, the Fund may also attempt to
mitigate inflation risk through investing in other products designed to
transfer inflation risk from one party to another, including, but not
limited to, Treasury Inflation-Protected Securities (``TIPS''), total
return swaps,\14\ credit default swaps,\15\ and U.S. Treasury futures
(collectively with Inflation Swaps, ``Inflation Hedging Instruments'').
The Fund may hold up to 50% of the weight of its portfolio (including
gross notional exposure) in Inflation Hedging Instruments.
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\13\ The Exchange states that all Inflation Swaps held by the
Fund will be listed and/or centrally cleared in order to reduce
counterparty risk. In addition, all listed Inflation Swaps held by
the Fund will be traded on a U.S. SEF registered with the CFTC.
\14\ All total return swaps held by the Fund will traded OTC and
will generally reference TIPS, the Consumer Price Index, or a
corporate bond index. The Exchange represents that the Fund will
attempt to limit counterparty risk in non-cleared swap contracts by
entering into such contracts only with counterparties the Adviser
believes are creditworthy and by limiting the Fund's exposure to
each counterparty. The Adviser will monitor the creditworthiness of
each counterparty and the Fund's exposure to each counterparty on an
ongoing basis.
\15\ Credit default swaps held by the Fund will be traded on a
U.S. SEF registered with the CFTC.
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The Fund may also hold certain fixed income securities and cash and
cash equivalents in order to collateralize its derivatives positions.
B. Investment Restrictions
The Exchange represents that the Fund's investments, including
derivatives, will be consistent with the 1940 Act and the Fund's
investment objective and policies and will not be used to enhance
leverage (although certain derivatives and other investments may result
in leverage).\16\ That is, while the Fund will be permitted to borrow
as permitted under the 1940 Act, the Fund's investments will not be
used to seek performance that is the multiple or inverse multiple
(e.g., 2Xs or 3Xs) of the Fund's primary broad-based securities
benchmark index (as defined in Form N-1A).
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\16\ The Fund will include appropriate risk disclosure in its
offering documents, including leveraging risk. Leveraging risk is
the risk that certain transactions of a fund, including a fund's use
of derivatives, may give rise to leverage, causing a fund to be more
volatile than if it had not been leveraged. The Fund's investments
in in derivative instruments will be made in accordance with the
1940 Act and consistent with the Fund's investment objective and
policies. To mitigate leveraging risk, the Fund will segregate or
earmark liquid assets determined to be liquid by the Adviser in
accordance with procedures established by the Trust's Board and in
accordance with the 1940 Act or otherwise cover the transactions
that give rise to such risk. These procedures have been adopted
consistent with Section 18 of the 1940 Act and related Commission
guidance.
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The Fund will only use those derivatives described above and
included in the defined term Inflation Hedging Instruments. The Fund's
use of derivative instruments will be collateralized. The Fund will
only use derivative instruments in order to attempt to mitigate the
inflation risk of the U.S. dollar-denominated investment-grade
corporate bonds exposure.
C. Application of Generic Listing Standards
The Exchange proposes to list and trade the Shares under Rule
14.11(i), which provides generic listing standards for Managed Fund
Shares. According to the Exchange, certain of the Fund's investments
may not comply with all of the generic listing requirements of Rule
14.11(i). Specifically, the Fund will meet all the requirements of Rule
14.11(i) on an initial and ongoing basis except for those set forth in
Rules 14.11(i)(4)(C)(iv)(a), 14.11(i)(4)(C)(iv)(b), and
14.11(i)(4)(C)(v).
Rule 14.11(i)(4)(C)(iv)(a) requires that, on both an initial and
continuing basis, in the aggregate, at least 90% of the weight of the
portfolio holdings invested in futures, exchange-traded options, and
listed swaps (calculated using the aggregate gross notional value of
such holdings) shall consist of futures, options, and swaps for which
the Exchange may obtain information via the Intermarket Surveillance
Group (``ISG'') from other members or affiliates
[[Page 61598]]
of the ISG or for which the principal market is a market with which the
Exchange has a comprehensive surveillance sharing agreement. The
Exchange states that the Fund's investments in certain listed credit
default swaps and listed Inflation Swaps will not comply with this
requirement.
Rule 14.11(i)(4)(C)(iv)(b) requires that the aggregate gross
notional value of listed derivatives based on any single underlying
reference asset not exceed 30% of the weight of the portfolio
(including gross notional exposures). The Exchange states that the
Fund's investments in listed derivatives, which include U.S. Treasury
futures, credit default swaps, and certain Inflation Swaps, will not
comply with this requirement.\17\
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\17\ Rule 14.11(i)(4)(C)(iv)(b) also requires that the aggregate
gross notional value of listed derivatives based on any five or
fewer underlying reference assets not exceed 65% of the weight of
the portfolio (including gross notional exposures). The Exchange
states that the Fund will meet this requirement.
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Rule 14.11(i)(4)(C)(v) requires that, on both an initial and
continuing basis, the aggregate gross notional value of OTC derivatives
shall not exceed 20% of the weight of the portfolio (including gross
notional exposures). The Exchange states that the Fund's holdings in
OTC derivatives, which include total return swaps and OTC Inflation
Swaps, will not comply with this requirement.
III. Proceedings To Determine Whether To Approve or Disapprove SR-
BatsBZX-2017-54 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \18\ 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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\18\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\19\ 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.'' \20\
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\19\ Id.
\20\ 15 U.S.C. 78f(b)(5).
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Under the proposal, the Fund may hold up to 50% of the weight of
its portfolio (including gross notional exposure) in Inflation Hedging
Instruments, which include, but are not limited to, TIPS, listed and
OTC Inflation Swaps, OTC total return swaps, listed credit default
swaps, and U.S. Treasury futures.\21\ The Commission notes that the
definition of Inflation Hedging Instruments is not exhaustive and may
include certain investments that are not enumerated in the filing. The
Commission seeks commenters' views on the sufficiency of the
information that is provided with respect to Inflation Hedging
Instruments, which could comprise up to 50% of the weight of the Fund's
portfolio, 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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\21\ See Amendment No. 2, supra note 6.
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IV. Procedure: Request for Written Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended by Amendment No. 2, is consistent with Section
6(b)(5) of the Act 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.\22\
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\22\ 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 January 18, 2018. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
February 1, 2018.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BatsBZX-2017-54 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-BatsBZX-2017-54. 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 website (https://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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BatsBZX-2017-54 and should be submitted
on or before January 18, 2018. Rebuttal comments should be submitted by
February 1, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-28076 Filed 12-27-17; 8:45 am]
BILLING CODE 8011-01-P