Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of Amendment No. 4 and Order Approving on an Accelerated Basis a Proposed Rule Change, as Modified by Amendment No. 4 Thereto, To List and Trade Shares of the iShares Inflation Hedged Corporate Bond ETF Under Rule 14.11(i), Managed Fund Shares, 4707-4715 [2018-01951]
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Federal Register / Vol. 83, No. 22 / Thursday, February 1, 2018 / Notices
Commentary .01(b)(1), the Fund’s
portfolio will meet all other
requirements of NYSE Arca Rule 8.600–
E. The Commission notes that
Commentary .01(a)(1)(E) to NYSE Arca
Rule 8.600–E requires that, on both an
initial and continuing basis, the
component stocks of the equity portion
of a portfolio that are U.S. Component
Stocks (as described in NYSE Arca Rule
5.2–E(j)(3)) be listed on a national
securities exchange and be NMS Stocks
as defined in Rule 600 of Regulation
NMS under the Act.23 Commentary
.01(a)(2)(E) to NYSE Arca Rule 8.600–E
requires that, on both an initial and
continuing basis, the component stocks
of the equity portion of a portfolio that
are Non-U.S. Component Stocks (as
described in NYSE Arca Rule 5.2–
E(j)(3)) be listed and traded on an
exchange that has last-sale reporting. In
the proposal, the Exchange states that
the Fund may invest in non-exchangetraded securities of other registered
investment companies (i.e., mutual
funds) and OTC convertible and
nonconvertible preferred stocks, but
does not explain the application of
Commentary .01(a)(1)(E) or Commentary
.01(a)(2)(E) (or both) to these
investments, and why these investments
are consistent with the Act. The
Commission seeks commenters’ views
on these aspects of the proposal, and
whether the Exchange’s statements and
representations support a determination
that the listing and trading of the Shares
would be consistent with Section 6(b)(5)
of the Act.
sradovich on DSK3GMQ082PROD 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
proposed rule change, as modified by
Amendment No. 2, 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
23 Commentary
.01(a)(1)(F) to NYSE Arca Rule
8.600–E provides that American Depositary
Receipts (‘‘ADRs’’) in a portfolio may be exchangetraded or non-exchange-traded, but no more than
10% of the equity weight of a portfolio may consist
of non-exchange-traded ADRs.
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Rule 19b–4 under the Act,24 any request
for an opportunity to make an oral
presentation.25
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposed rule change, as modified by
Amendment No. 2, should be approved
or disapproved by February 22, 2018.
Any person who wishes to file a rebuttal
to any other person’s submission must
file that rebuttal by March 8, 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 rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2017–99 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
Number SR–NYSEArca–2017–99. 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
24 17
CFR 240.19b–4.
19(b)(2) of the Act, as amended by the
Securities Acts Amendments of 1975, Public Law
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 Acts Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
25 Section
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4707
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–NYSEArca–2017–99 and
should be submitted by February 22,
2018. Rebuttal comments should be
submitted by March 8, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018–01952 Filed 1–31–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82591; File No. SR–
BatsBZX–2017–54]
Self-Regulatory Organizations; Bats
BZX Exchange, Inc.; Notice of Filing of
Amendment No. 4 and Order
Approving on an Accelerated Basis a
Proposed Rule Change, as Modified by
Amendment No. 4 Thereto, To List and
Trade Shares of the iShares Inflation
Hedged Corporate Bond ETF Under
Rule 14.11(i), Managed Fund Shares
January 26, 2018.
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’’) 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 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
26 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(57).
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).
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rule change.5 On December 8, 2017, the
Exchange submitted Amendment No. 1
to the proposed rule change. On
December 15, 2017, the Exchange
withdrew Amendment No.1 and
submitted Amendment No. 2 to the
proposed rule change, which amended
and replaced in its entirety the proposed
rule change as originally filed. On
December 22, 2017, the Commission
instituted proceedings under Section
19(b)(2)(B) of the Act 6 to determine
whether to approve or disapprove the
proposed rule change.7 On January 9,
2018, the Exchange submitted
Amendment No. 3 to the proposed rule
change, which amended and replaced in
its entirety the proposed rule change, as
modified by Amendment No. 2. On
January, 11, 2018, the Exchange
submitted Amendment No. 4 to the
proposed rule change, which amended
and replaced in its entirety the proposed
rule change, as modified by Amendment
No. 3.8 The Commission has received no
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 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 82388,
82 FR 61596 (December 28, 2017).
8 In Amendment No. 4, the Exchange: (1)
Identified the adviser of the Fund and made certain
representations relating to the adviser and its
personnel; (2) clarified the investment strategy and
holdings of the Fund; (3) supplemented its
description of the Inflation Hedging Instruments (as
defined below) that the Fund may invest, including
by adding interest rate swaps that are either listed
and traded on a U.S. SEF registered with the CFTC
or are centrally cleared; (4) stated that the listed
interest rate swaps that the Fund may invest in will
not comply with the generic requirements for listed
derivatives set forth in Rule 14.11(i)(4)(C)(iv)(a) or
(b) (as further described below) and that the OTC
interest swaps that the Fund may invest in will not
comply with the generic requirements for OTC
derivatives set forth in Rule 14.11(i)(4)(C)(v) (as
further described below); (5) 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; (6) stated that
price information for cash equivalents will be
available from major market data vendors; (7) made
additional representations regarding the Fund and
information relating to the Shares, including that (a)
the Disclosed Portfolio will be available on the
issuer’s website free of charge; (b) the Fund’s
website will include a form of the prospectus for
the Fund and additional information related to net
asset value (‘‘NAV’’) and other applicable
quantitative information; (c) information regarding
market price and trading volume of the Shares will
be continuously available throughout the day on
brokers’ computer screens and other electronic
services and information regarding the previous
day’s closing price, and trading volume for the
Shares will be published daily in the financial
section of newspapers; (d) quotation and last sale
information for the Shares will be available through
the Consolidated Tape Association; (e) trading in
the Shares may be halted for market conditions or
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19:34 Jan 31, 2018
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comments on the proposed rule change.
The Commission is publishing this
notice to solicit comments on
Amendment No. 4 from interested
persons, and is approving the proposed
rule change, as modified by Amendment
No. 4, on an accelerated basis.
II. Description of the Proposed Rule
Change, as Modified by Amendment
No. 4
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
This Amendment No. 4 to SR–
BatsBZX–2017–54 amends and replaces
in its entirety Amendment No. 3 to SR–
BatsBZX–2017–54, which was
submitted on January 9, 2017, which
amended and replaced in its entirety
Amendment No. 2 to SR–BatsBZX–
2017–54, which was submitted on
December 15, 2017, which amended and
replaced in its entirety the proposal as
originally submitted on September 7,
2017. The Exchange submits this
Amendment No. 3 [sic] in order to
clarify certain points and add additional
details about the Fund.
The Exchange proposes to list and
trade the Shares under Rule 14.11(i),
which governs the listing and trading of
Managed Fund Shares on the
for reasons that, in the view of the Exchange, make
trading inadvisable; (f) the Exchange deems the
Shares to be equity securities, thus rendering
trading in the Shares subject to the Exchange’s
existing rules governing the trading of equity
securities; (g) the Exchange has appropriate rules to
facilitate trading in the Shares during all trading
sessions; and (h) prior to the commencement of
trading, the Exchange will inform its members in
an Information Circular of the special
characteristics and risks associated with trading the
Shares; (8) provided additional justification for why
the Fund’s proposed investments are consistent
with the Act; (9) 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 nonpublic information by its employees; and (10) made
other clarifications, corrections, and technical
changes. Amendment No. 4 is available at https://
www.sec.gov/comments/sr-batsbzx-2017-54/
batsbzx201754-2916905-161845.pdf.
PO 00000
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Exchange.9 The Fund will be an actively
managed exchange-traded fund that
seeks to mitigate the inflation risk of a
portfolio composed of U.S. dollardenominated investment-grade
corporate bonds either through holding
such bonds or through holding
exchange-traded funds (‘‘ETFs’’) that
hold such bonds, as further described
below. The Exchange submits this
proposal in order to allow the Fund to
hold Inflation Hedging Instruments, as
defined below, in a manner that may not
comply with Rule 14.11(i)(4)(C)(iv)(a),10
Rule 14.11(i)(4)(C)(iv)(b),11 and/or Rule
14.11(i)(4)(C)(v),12 as further described
9 The Commission originally approved BZX Rule
14.11(i) in Securities Exchange Act Release No.
65225 (August 30, 2011), 76 FR 55148 (September
6, 2011) (SR–BATS–2011–018) and subsequently
approved generic listing standards for Managed
Fund Shares under Rule 14.11(i) in Securities
Exchange Act Release No. 78396 (July 22, 2016), 81
FR 49698 (July 28, 2016) (SR–BATS–2015–100).
10 Rule 14.11(i)(4)(C)(iv)(a) provides that ‘‘there
shall be no limitation to the percentage of the
portfolio invested in such holdings; provided,
however, that in the aggregate, at least 90% of the
weight of such holdings invested in futures,
exchange-traded options, and listed swaps shall, on
both an initial and continuing basis, consist of
futures, options, and swaps for which the Exchange
may obtain information via the Intermarket
Surveillance Group (‘‘ISG’’) from other members or
affiliates of the ISG or for which the principal
market is a market with which the Exchange has a
comprehensive surveillance sharing agreement,
calculated using the aggregate gross notional value
of such holdings.’’ The Exchange is proposing that
the Fund be exempt from this requirement only as
it relates to the Fund’s holdings in certain credit
default swaps, interest rate swaps, and Inflation
Swaps, as further described below.
11 Rule 14.11(i)(4)(C)(iv)(b) provides that ‘‘the
aggregate gross notional value of listed derivatives
based on any five or fewer underlying reference
assets shall not exceed 65% of the weight of the
portfolio (including gross notional exposures), and
the aggregate gross notional value of listed
derivatives based on any single underlying
reference asset shall not exceed 30% of the weight
of the portfolio (including gross notional
exposures).’’ The Exchange is proposing that the
Fund be exempt only from the requirement of Rule
14.11(i)(4)(C)(iv)(b) that prevents the aggregate gross
notional value of listed derivatives based on any
single underlying reference asset from exceeding
30% of the weight of the portfolio (including gross
notional exposures). The Exchange is proposing
that the Fund be exempt from this requirement as
it relates to the Fund’s holdings in listed
derivatives, which include U.S. Treasury futures,
credit default swaps, and certain Inflation Swaps
and interest rate swaps, as further described below.
The Fund will meet the requirement that the
aggregate gross notional value of listed derivatives
based on any five or fewer underlying reference
assets shall not exceed 65% of the weight of the
portfolio (including gross notional exposures).
12 Rule 14.11(i)(4)(C)(v) provides that ‘‘the
portfolio may, on both an initial and continuing
basis, hold OTC derivatives, including forwards,
options, and swaps on commodities, currencies and
financial instruments (e.g., stocks, fixed income,
interest rates, and volatility) or a basket or index of
any of the foregoing, however the aggregate gross
notional value of OTC Derivatives shall not exceed
20% of the weight of the portfolio (including gross
notional exposures).’’ The Exchange is proposing
that the Fund be exempt from this requirement only
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Federal Register / Vol. 83, No. 22 / Thursday, February 1, 2018 / Notices
sradovich on DSK3GMQ082PROD with NOTICES
below. Otherwise, the Fund will comply
with all other listing requirements on an
initial and continued listing basis under
Rule 14.11(i).
The Shares will be offered by the
Trust, which was established as a
Delaware statutory trust on June 21,
2011. BlackRock Fund Advisors (the
‘‘Adviser’’) is the investment adviser to
the Fund. The Trust is registered with
the Commission as an open-end
investment company and has filed a
registration statement on behalf of the
Fund on Form N–1A (‘‘Registration
Statement’’) with the Commission.13
Rule 14.11(i)(7) provides that, if the
investment adviser to the investment
company issuing Managed Fund Shares
is affiliated with a broker-dealer, such
investment adviser shall erect and
maintain a ‘‘fire wall’’ between the
investment adviser and the brokerdealer with respect to access to
information concerning the composition
and/or changes to such investment
company portfolio.14 In addition, Rule
14.11(i)(7) further requires that
personnel who make decisions on the
investment company’s portfolio
composition must be subject to
procedures designed to prevent the use
as it relates to the Fund’s holdings in OTC
derivatives, which include total return swaps and
certain Inflation Swaps and interest rate swaps, as
further described below.
13 See Registration Statement on Form N–1A for
the Trust, dated April 6, 2017 (File Nos. 333–
179904 and 811–22649). The descriptions of the
Fund and the Shares contained herein are based, in
part, on information in the Registration Statement.
The Commission has issued an order granting
certain exemptive relief to the Company under the
Investment Company Act of 1940 (15 U.S.C. 80a–
1) (‘‘1940 Act’’) (the ‘‘Exemptive Order’’). See
Investment Company Act Release No. 29571
(January 24, 2011) (File No. 812–13601).
14 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (the ‘‘Advisers Act’’). As a
result, the Adviser and its related personnel are
subject to the provisions of Rule 204A–1 under the
Advisers Act relating to codes of ethics. This Rule
requires investment advisers to adopt a code of
ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with
other applicable securities laws. Accordingly,
procedures designed to prevent the communication
and misuse of non-public information by an
investment adviser must be consistent with Rule
204A–1 under the Advisers Act. In addition, Rule
206(4)–7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment
advice to clients unless such investment adviser has
(i) adopted and implemented written policies and
procedures reasonably designed to prevent
violation, by the investment adviser and its
supervised persons, of the Advisers Act and the
Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review
regarding the adequacy of the policies and
procedures established pursuant to subparagraph (i)
above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
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19:34 Jan 31, 2018
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and dissemination of material
nonpublic information regarding the
applicable investment company
portfolio. Rule 14.11(i)(7) is similar to
Rule 14.11(b)(5)(A)(i), however, Rule
14.11(i)(7) in connection with the
establishment of a ‘‘fire wall’’ between
the investment adviser and the brokerdealer reflects the applicable open-end
fund’s portfolio, not an underlying
benchmark index, as is the case with
index-based funds. The Adviser is not a
registered broker-dealer, but is affiliated
with multiple broker-dealers and has
implemented and will maintain ‘‘fire
walls’’ with respect to such brokerdealers regarding access to information
concerning the composition 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 and maintain a fire wall with
respect to its relevant personnel or such
broker-dealer affiliate, as applicable,
regarding access to information
concerning the composition 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.
The Fund intends to qualify each year
as a regulated investment company
under Subchapter M of the Internal
Revenue Code of 1986, as amended.
iShares Inflation Hedged Corporate
Bond ETF
According to the Registration
Statement, the Fund will be an actively
managed exchange-traded fund that will
seek to mitigate the inflation risk of a
portfolio with exposure to U.S. dollardenominated investment-grade
corporate bonds. The Fund seeks to
achieve its investment objective by
investing, under Normal Market
Conditions,15 at least 80% of its net
assets in the iShares iBoxx $ Investment
Grade Corporate Bond ETF (the
15 As defined in Rule 14.11(i)(3)(E), the term
‘‘Normal Market Conditions’’ includes, but is not
limited to, the absence of trading halts in the
applicable financial markets generally; operational
issues causing dissemination of inaccurate market
information or system failures; or force majeure
type events such as natural or man-made disaster,
act of God, armed conflict, act of terrorism, riot or
labor disruption, or any similar intervening
circumstance.
PO 00000
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Fmt 4703
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4709
‘‘Underlying Fund’’), U.S. dollardenominated investment-grade
corporate bonds, in one or more other
ETFs 16 that principally invest in U.S.
dollar-denominated investment-grade
corporate bonds, 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 through 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’’),17 which are managed on an
active basis. As an alternative, the Fund
may also attempt to mitigate the
inflation risk of the underlying
securities or the Underlying Fund
through investing in other products
designed to transfer inflation risk from
one party to another, including only the
following: Treasury Inflation-Protected
Securities (‘‘TIPS’’), total return
swaps,18 credit default swaps,19 interest
rate swaps,20 and U.S. Treasury
16 For purposes of this proposal, 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.
17 See supra notes 10, 11, and 12. All Inflation
Swaps held by the Fund will be listed and/or
centrally cleared in order to reduce counterparty
risk. All listed Inflation Swaps held by the Fund
will be traded on a U.S. Swap Execution Facility
registered with the Commodity Futures Trading
Commission.
18 See supra note 12. All total return swaps held
by the Fund will be traded OTC. 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. The total return swaps will generally
reference TIPS, the Consumer Price Index, or a
corporate bond index.
19 See supra notes 10 and 11. Credit default swaps
held by the Fund will be traded on a U.S. Swap
Execution Facility registered with the Commodity
Futures Trading Commission.
20 See supra note 10, 11, and 12. All interest rate
swaps held by the Fund will be listed and/or
centrally cleared in order to reduce counterparty
risk. All listed interest rate swaps held by the Fund
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sradovich on DSK3GMQ082PROD with NOTICES
futures 21 (collectively with Inflation
Swaps, ‘‘Inflation Hedging
Instruments’’). The Exchange is
proposing to allow the Fund to hold up
to 50% of the weight of its portfolio
(including gross notional exposure) in
Inflation Hedging Instruments,
collectively, in a manner that may not
comply with Rules
14.11(i)(4)(C)(iv)(a),22
14.11(i)(4)(C)(iv)(b),23 and/or
14.11(i)(4)(C)(v),24 as discussed above.
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).25
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
(i.e., 2Xs and 3Xs) of the Fund’s primary
broad-based securities benchmark index
(as defined in Form N–1A). The Fund
will only use those derivatives included
in the defined term Inflation Hedging
Instruments. The Fund’s use of
derivative instruments will be
collateralized. As noted above, 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.
The Exchange notes that the Fund
may also hold certain fixed income
securities and cash and cash equivalents
in compliance with Rules
14.11(i)(4)(C)(ii) and (iii) in order to
collateralize its derivatives positions.
will be traded on a U.S. Swap Execution Facility
registered with the Commodity Futures Trading
Commission
21 See supra note 11.
22 See supra note 10.
23 See supra note 11.
24 See supra note 12.
25 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, as permitted by applicable regulations, enter
into certain offsetting positions) to cover its
obligations under derivative instruments. These
procedures have been adopted consistent with
Section 18 of the 1940 Act and related Commission
guidance. See 15 U.S.C. 80a–18; Investment
Company Act Release No. 10666 (April 18, 1979),
44 FR 25128 (April 27, 1979); Dreyfus Strategic
Investing, Commission No-Action Letter (June 22,
1987); Merrill Lynch Asset Management, L.P.,
Commission No-Action Letter (July 2, 1996).
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The Exchange represents that, except
for the exceptions to BZX Rule
14.11(i)(4)(C) described above, the
Fund’s proposed investments will
satisfy, on an initial and continued
listing basis, all of the generic listing
standards under BZX Rule 14.11(i)(4)(C)
and all other applicable requirements
for Managed Fund Shares under Rule
14.11(i). The Trust is required to comply
with Rule 10A–3 under the Act for the
initial and continued listing of the
Shares of the Fund. In addition, the
Exchange represents that the Shares of
the Fund will comply with all other
requirements applicable to Managed
Fund Shares including, but not limited
to, requirements relating to the
dissemination of key information such
as the Disclosed Portfolio, Net Asset
Value, and the Intraday Indicative
Value, rules governing the trading of
equity securities, trading hours, trading
halts, surveillance, firewalls, and the
information circular, as set forth in
Exchange rules applicable to Managed
Fund Shares and the orders approving
such rules. At least 100,000 Shares will
be outstanding upon the
commencement of trading.
Moreover, all of the equity securities
and futures contracts held by the Fund
will trade on markets that are a member
of Intermarket Surveillance Group
(‘‘ISG’’) or affiliated with a member of
ISG or with which the Exchange has in
place a comprehensive surveillance
sharing agreement.26 Additionally, the
Exchange or FINRA, on behalf of the
Exchange, are able to access, as needed,
trade information for certain fixed
income instruments reported to FINRA’s
Trade Reporting and Compliance Engine
(‘‘TRACE’’). All statements and
representations made in this filing
regarding the description of the
portfolio or reference assets, limitations
on portfolio holdings or reference assets,
dissemination and availability of index,
reference asset, and intraday indicative
values, and the applicability of
Exchange rules specified in this filing
shall constitute continued listing
requirements for the Fund. The issuer
has represented to the Exchange that it
will advise the Exchange of any failure
by the Fund or the Shares to comply
with the continued listing requirements,
and, pursuant to its obligations under
Section 19(g)(1) of the Act, the Exchange
will surveil for compliance with the
continued listing requirements. If the
26 For a list of the current members and affiliate
members of ISG, see www.isgportal.com. The
Exchange notes that not all components of the
Disclosed Portfolio for the Fund may trade on
markets that are members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.
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Fund or the Shares are not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
Exchange Rule 14.12.
Availability of Information
As noted above, the Fund will comply
with the requirements for Managed
Fund Shares related to Disclosed
Portfolio, Net Asset Value, and the
Intraday Indicative Value. Additionally,
the intra-day, closing and settlement
prices of exchange-traded portfolio
assets, including ETFs and futures, will
be readily available from the securities
exchanges and futures exchanges
trading such securities and futures, as
the case may be, automated quotation
systems, published or other public
sources, or online information services
such as Bloomberg or Reuters. Intraday
price quotations on both listed and OTC
swaps, TIPS, and fixed income
instruments are available from major
broker-dealer firms and from thirdparties, which may provide prices free
with a time delay or in real-time for a
paid fee. Price information for cash
equivalents will be available from major
market data vendors. The Disclosed
Portfolio will be available on the
issuer’s website free of charge. The
Fund’s website includes a form of the
prospectus for the Fund and additional
information related to NAV and other
applicable quantitative information.
Information regarding market price and
trading volume of the Shares will be
continuously available throughout the
day on brokers’ computer screens and
other electronic services. Quotation and
last sale information on the Shares will
be available through the Consolidated
Tape Association. Information regarding
the previous day’s closing price and
trading volume for the Shares will be
published daily in the financial section
of newspapers. Trading in the Shares
may be halted for market conditions or
for reasons that, in the view of the
Exchange, make trading inadvisable.
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. The Exchange has
appropriate rules to facilitate trading in
the shares during all trading sessions.
Information Circular
Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (1) The
procedures for purchases and
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redemptions of Shares in Creation Units
(and that Shares are not individually
redeemable); (2) BZX Rule 3.7, which
imposes suitability obligations on
Exchange members with respect to
recommending transactions in the
Shares to customers; (3) how
information regarding the Intraday
Indicative Value and the Disclosed
Portfolio is disseminated; (4) the risks
involved in trading the Shares during
the Pre-Opening 27 and After Hours
Trading Sessions 28 when an updated
Intraday Indicative Value and
Underlying Index value will not be
calculated or publicly disseminated; (5)
the requirement that members deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (6) trading information.
In addition, the Information Circular
will advise members, prior to the
commencement of trading, of the
prospectus delivery requirements
applicable to the Fund. Members
purchasing Shares from the Fund for
resale to investors will deliver a
prospectus to such investors. The
Information Circular will also discuss
any exemptive, no-action and
interpretive relief granted by the
Commission from any rules under the
Act.
In addition, the Information Circular
will reference that the Fund is subject
to various fees and expenses described
in the Registration Statement. The
Information Circular will also disclose
the trading hours of the Shares of the
Fund and the applicable NAV
calculation time for the Shares. The
Information Circular will disclose that
information about the Shares of the
Fund will be publicly available on the
Fund’s website.
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2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act 29 in general and Section
6(b)(5) of the Act 30 in particular in that
it is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
27 The Pre-Opening Session is from 8:00 a.m. to
9:30 a.m. Eastern Time.
28 The After Hours Trading Session is from 4:00
p.m. to 5:00 p.m. Eastern Time.
29 15 U.S.C. 78f.
30 15 U.S.C. 78f(b)(5).
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general, to protect investors and the
public interest.
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest in that the Shares will
meet each of the initial and continued
listing criteria in BZX Rule 14.11(i)
except that the Fund may not comply
with Rules 14.11(i)(4)(C)(iv)(a),31
14.11(i)(4)(C)(iv)(b),32 and/or
14.11(i)(4)(C)(v).33 The Exchange
believes that the liquidity in the
Treasury futures markets mitigates the
concerns that Rule 14.11(i)(4)(C)(iv)(b)
is intended to address and that such
liquidity would help prevent the Shares
from being susceptible to manipulation.
Further, the Exchange believes that for
listed swaps, including credit default
swaps, interest rate swaps, and Inflation
Swaps, the price transparency and
surveillance performed by the
applicable swap execution facility
would similarly act to mitigate the risk
of manipulation of the Shares. The
Exchange also believes that the size of
the inflation swaps market,34 which
would include all of the listed and OTC
swaps that the Fund intends to invest
in, also mitigates manipulation concerns
relating to both listed and OTC swaps
held by the Fund.35
As it relates to Rule 14.11(i)(4)(C)(v),
which provides that the notional value
of OTC Derivatives shall not exceed
20% of the weight of the portfolio
(including gross notional exposures), in
an effort to mitigate counterparty risk
and exposure to potentially illiquid and
manipulable derivatives contracts, the
Exchange notes that the Fund will
attempt to limit counterparty risk in
non-cleared OTC swap contracts,
31 See
supra note 10.
supra note 11.
33 See supra note 12.
34 For purposes of this discussion, the term
‘‘inflation swaps market’’ means any swap contract
that references either a measure of inflation, an
inflation index, or an instrument designed to
transfer inflation risk from one party to another.
35 According to publicly available numbers from
LCH. Clearnet Limited, which clears both listed and
OTC swaps, as of November 28, 2017 there was
approximately $2.3 billion in average daily volume
in inflation swaps, which would include the credit
default swaps, interest rate swaps, and Inflation
Swaps that the Fund intends to invest in, cleared
through their platform alone and over $241 billion
in notional interest outstanding in such inflation
swaps.
32 See
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4711
namely total return swaps, 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. OTC
Inflation Swaps and interest rate swaps
held by the Fund will be centrally
cleared. Further, the Exchange notes
that notional principal never changes
hands in such swaps transactions, and
it is a theoretical value used to base the
exchanged payments. A more accurate
representation of the swaps value in
order to monitor total counterparty risk
would be the mark-to market value of
the swap since inception, which the
Adviser generally expects to remain at
around 5% of the Fund’s net assets.36
As noted above, the inflation swap
market,37 which would include all of
the listed and OTC swaps that the Fund
intends to invest in, is large and liquid,
which the Exchange believes further
mitigates the concerns which Rule
14.11(i)(4)(C)(v) is intended to address.
As it relates to the requirement in
Rule 14.11(i)(4)(C)(iv)(a) that at least
90% of the weight of the listed
derivatives portion of the portfolio be in
listed derivatives for which the
Exchange may obtain information via
ISG or for which the principal market is
a market with which the Exchange has
a comprehensive surveillance sharing
agreement, the Exchange believes that
its surveillance procedures are adequate
to properly monitor the trading of the
Shares on the Exchange during all
trading sessions and to deter and detect
violations of Exchange rules and the
applicable federal securities laws.
Additionally, all of the instruments that
would not meet this requirement would
nevertheless have a primary market that
is a swap execution facility that is
registered with and under the regulatory
oversight of the CFTC.38
Trading of the Shares through the
Exchange will be subject to the
Exchange’s surveillance procedures for
derivative products, including Managed
Fund Shares. All of the futures
contracts, equity securities, and certain
of the listed Inflation Swaps, listed
credit default swaps, and listed interest
36 The Adviser plans to implement a hedging
strategy very similar to the strategy that it employs
with interest rate swaps for several other funds,
each of which have approximately 50% of the
weight of their notional exposure in interest rate
swaps while each maintains less than 10%
exposure as calculated using mark-to-market.
37 See note 35, supra.
38 The Exchange represents that not all CFTC
registered swap execution facilities are members or
affiliates of members of the ISG.
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rate swaps held by the Fund will trade
on markets that are a member of ISG or
affiliated with a member of ISG or with
which the Exchange has in place a
comprehensive surveillance sharing
agreement. The Exchange, FINRA, on
behalf of the Exchange, or both will
communicate regarding trading in the
Shares and the underlying futures
contracts, equity securities, and certain
of the listed Inflation Swaps, listed
credit default swaps, and listed interest
rate swaps held by the Fund with the
ISG, other markets or entities who are
members or affiliates of the ISG, or with
which the Exchange has entered into a
comprehensive surveillance sharing
agreement.39 The Exchange, FINRA, on
behalf of the Exchange, or both may
obtain information regarding trading in
the Shares and the underlying futures
contracts, equity securities, and certain
of the listed Inflation Swaps, listed
credit default swaps, and listed interest
rate swaps held by the Fund via the ISG
from other markets or entities who are
members or affiliates of the ISG or with
which the Exchange has entered into a
comprehensive surveillance sharing
agreement.40 Additionally, the
Exchange or FINRA, on behalf of the
Exchange, may access, as needed, trade
information for certain fixed income
instruments reported to FINRA’s Trade
Reporting and Compliance Engine
(‘‘TRACE’’). The Exchange has a policy
prohibiting the distribution of material
non-public information by its
employees.
The Exchange notes that the Fund
will meet and be subject to all other
requirements of the Generic Listing
Rules and other applicable continued
listing requirements for Managed Fund
Shares under Rule 14.11(i), including
those requirements regarding the
Disclosed Portfolio and the requirement
that the Disclosed Portfolio and the
NAV will be made available to all
market participants at the same time,41
Intraday Indicative Value,42 suspension
of trading or removal,43 trading halts,44
disclosure,45 and firewalls.46 Further, at
least 100,000 Shares will be outstanding
upon the commencement of trading.47
For the above reasons, the Exchange
believes that the proposed rule change
is consistent with the requirements of
Section 6(b)(5) of the Act.
sradovich on DSK3GMQ082PROD with NOTICES
39 See
note 26, supra.
note 26, supra.
41 See Rules 14.11(i)(4)(A)(ii) and
14.11(i)(4)(B)(ii).
42 See Rule 14.11(i)(4)(B)(i).
43 See Rule 14.11(i)(4)(B)(iii).
44 See Rule 14.11(i)(4)(B)(iv).
45 See Rule 14.11(i)(6).
46 See Rule 14.11(i)(7).
47 See Rule 14.11(i)(4)(A)(i).
40 See
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19:34 Jan 31, 2018
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change,
rather will facilitate the listing and
trading of an additional activelymanaged exchange-traded product that
will enhance competition among both
market participants and listing venues,
to the benefit of investors and the
marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 4, is
consistent with the Act and the rules
and regulations thereunder applicable to
a national securities exchange.48 In
particular, the Commission finds that
the proposed rule change, as modified
by Amendment No. 4, is consistent with
Section 6(b)(5) of the Act,49 which
requires, among other things, that the
Exchange’s rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
As noted above, the Fund may hold
up to 50% of the weight of its portfolio
(including gross notional exposure) in
Inflation Hedging Instruments,
including certain derivatives, in a
manner that may not comply with the
generic listing requirements in Rules
14.11(i)(4)(C)(iv)(a), 14.11(i)(4)(C)(iv)(b),
and 14.11(i)(4)(C)(v).50 The Exchange
48 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
49 15 U.S.C. 78f(b)(5).
50 The Exchange states that the Fund’s
investments 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 (or, as permitted by applicable
regulations, enter into certain offsetting positions)
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states that the Fund will only use those
derivatives included in the defined term
Inflation Hedging Instruments and that
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 to which the Fund will
have exposure. The Exchange states that
the Fund’s use of derivative instruments
will be collateralized. In addition, the
Exchange represents that the Shares of
the Fund will comply with all other
requirements applicable to Managed
Fund Shares including, but not limited
to, requirements relating to the
dissemination of key information such
as the Disclosed Portfolio (as defined in
BZX Rule 14.11(i)(3)(B)).51
The Exchange states that the Fund’s
investments in certain listed credit
default swaps, certain listed interest rate
swaps, and certain listed Inflation
Swaps will not meet the generic listing
requirement that at least 90% of the
weight of the listed derivatives holdings
in the portfolio be in listed derivatives
for which the Exchange may obtain
information via the ISG from other
members or affiliates of the ISG or for
which the principal market is a market
with which the Exchange has a
comprehensive surveillance sharing
agreement.52 The Exchange represents
that all of the listed credit default
swaps, listed interest rate swaps, and
listed Inflation Swaps that would not
meet this requirement would
nevertheless be listed on a U.S. SEF
and, therefore, have as a primary market
a SEF registered with, and under the
regulatory oversight of, the CFTC.53
to cover its obligations under derivative
instruments. According to the Exchange, these
procedures have been adopted consistent with
Section 18 of the 1940 Act and related Commission
guidance. In addition, the Fund will include
appropriate risk disclosure in its offering
documents, including leveraging risk. See supra
note 25.
51 Rule 14.11(i)(4)(B)(ii) requires that the
Disclosed Portfolio will be disseminated at least
once daily and will be made available to all market
participants at the same time. Rule 14.11(i)(3)(B)
requires that the website for each series of Managed
Fund Shares disclose the following information
regarding the Disclosed Portfolio, to the extent
applicable: (i) Ticker symbol; (ii) CUSIP or other
identifier; (iii) description of the holding; (iv) the
identity of the security, commodity, index, or other
asset upon which a derivative is based; (v) the strike
price for any options; (vi) the quantity of each
security or other asset held as measured by (a) par
value, (b) notional value, (c) number of shares, (d)
number of contracts, and (e) number of units; (vii)
maturity date; (viii) coupon rate; (ix) effective date;
(x) market value; and (xi) percentage weighting of
the holding in the portfolio. The Exchange
represents that this website information will be
publicly available free of charge.
52 See Rule 14.11(i)(4)(C)(iv)(a).
53 The Exchange represents that not all CFTCregistered SEFs are members or affiliates of
members of the ISG.
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The Exchange states that the Fund’s
investments in listed derivatives,
including U.S. Treasury futures, listed
credit default swaps, listed Inflation
Swaps, and listed interest rate swaps,
will not meet the generic listing
requirement 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.54 The Exchange
states that it believes the liquidity in the
Treasury futures markets mitigates
manipulation concerns. In addition, as
discussed above, all listed credit default
swaps, listed interest rate swaps and
listed Inflation Swaps that the Fund will
invest in will be traded on U.S. SEFs
registered with the CFTC. The Exchange
states that the price transparency and
surveillance performed by the
applicable SEF on which the credit
default swaps, interest rate swaps, or
Inflation Swaps are listed would act to
mitigate the risk of manipulation of the
Shares. The Exchange also states that it
believes that the size of the inflation
swaps market,55 which would include
all of the listed swaps that the Fund
intends to invest in, mitigates
manipulation concerns relating to both
the listed and OTC swaps held by the
Fund.56
The Exchange states that the Fund’s
holdings in OTC derivatives, which
include OTC total return swaps, OTC
interest rate swaps, and OTC Inflation
Swaps, will exceed 20% of the weight
of the portfolio and, therefore, not meet
the generic listing requirements.57 The
Exchange states that the Fund will
attempt to limit counterparty risk in
non-cleared OTC total return swaps by
entering into such contracts only with
counterparties the Adviser believes are
creditworthy and by limiting the Fund’s
exposure to each counterparty, and that
the Adviser will monitor the
creditworthiness of each counterparty
and the Fund’s exposure to each
counterparty on an ongoing basis. In
addition, the Exchange represents that
all OTC Inflation Swaps and OTC
interest rate swaps held by the Fund
will be centrally cleared. The Exchange
also represents that the Adviser
generally expects the mark-to-market
Rule 14.11(i)(4)(C)(iv)(b).
supra note 34.
56 The Exchange states that, as of November 28,
2017, according to publicly available data from
LCH.Clearnet Limited, there was approximately
$2.3 billion in average daily volume in inflation
swaps (which would include the listed and OTC
credit default swaps, interest rate swaps, and
Inflation Swaps that the Fund intends to invest in)
cleared through LCH.Clearnet Limited and over
$241 billion in notional interest outstanding in such
inflation swaps. See supra note 35.
57 See Rule 14.11(i)(4)(C)(v).
value of the OTC swaps to remain at
around 5% of the Fund’s net assets.58
Finally, the Exchange states that the
inflation swap market,59 which would
include all of the listed and OTC swaps
that the Fund intends to invest in, is
large and liquid, which mitigates the
concerns the 20% limitation on OTC
derivatives is intended to address.60
The Commission also finds that the
proposal is consistent with Section
11A(a)(1)(C)(iii) of the Act,61 which sets
forth Congress’s finding that it is in the
public interest and appropriate for the
protection of investors and the
maintenance of fair and orderly markets
to assure the availability to brokers,
dealers, and investors of information
with respect to quotations for, and
transactions in, securities. Quotation
and last-sale information for the Shares
will be available via the Consolidated
Tape Association (‘‘CTA’’). Further, as
required by Rule 14.11(i)(4B)(i), the
Intraday Indicative Value will be widely
disseminated by one or more major
market data vendors at least every 15
seconds during the Exchange’s Regular
Trading Hours (as defined in Rule
1.5(w))). Information regarding market
price and trading volume of the Shares
will be continually available on a realtime basis throughout the day on
brokers’ computer screens and other
electronic services. Information
regarding the previous day’s closing
price and trading volume information
for the Shares will be published daily in
the financial section of newspapers. The
intra-day, closing and settlement prices
of exchange-traded portfolio assets,
including ETFs and futures, will be
readily available from the securities
exchanges and futures exchanges
trading such securities and futures, as
the case may be, automated quotation
systems, published or other public
sources, or online information services,
such as Bloomberg or Reuters. Intraday
price quotations on both listed and OTC
swaps, TIPS, and fixed income
instruments will be available from major
broker-dealer firms and from thirdparties, which may provide prices free
with a time delay or in real-time for a
paid fee. Price information for cash
equivalents will be available from major
market data vendors. In addition, the
54 See
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55 See
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58 The Exchange states that with respect to
valuing the OTC swaps in the portfolio, the notional
principal never changes hands, it is a theoretical
value used to base the exchanged payments on, and
a more accurate representation of the swaps value
in order to monitor total counterparty risk would
be the mark-to market value of the swap since
inception. See supra note 36 and accompanying
text.
59 See supra note 34.
60 See supra note 56.
61 15 U.S.C. 78k–1(a)(1)(C)(iii).
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4713
Fund’s website includes a form of the
prospectus for the Fund and additional
data relating to NAV and other
applicable quantitative information.
The Commission also believes that the
proposal is reasonably designed to
promote fair disclosure of information
that may be necessary to price the
Shares appropriately and to prevent
trading when a reasonable degree of
transparency cannot be assured. As
required by Rule 14.11(i)(4)(A)(ii), the
Exchange will obtain a representation
from the issuer of the Shares that the
NAV per Share will be calculated daily
and that the NAV and the Disclosed
Portfolio will be made available to all
market participants at the same time.
Further, trading in the Shares may be
halted because of market conditions or
for reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable.62 Trading in the Shares will
also be subject to Rule 14.11(i)(4)(B)(iv),
which sets forth circumstances under
which Shares of a Fund may be halted.
The Exchange states that it has a
policy prohibiting the distribution of
material, non-public information by its
employees. The Exchange states that the
Adviser is not a registered broker-dealer
but the Adviser is affiliated with
multiple broker-dealer and has
implemented and will maintain ‘‘fire
walls’’ with respect to such brokerdealers regarding access to information
concerning the composition of and/or
changes to the Fund’s portfolio. Further,
the Commission notes that the
Reporting Authority that provides the
Disclosed Portfolio must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material, non-public
information regarding the actual
components of the portfolio.63
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. In support of this
proposal, the Exchange represents that:
(1) Other than Rule
14.11(i)(4)(C)(iv)(a), Rule
14.11(i)(4)(C)(iv)(b), and Rule
14.11(i)(4)(C)(v), the Fund will comply
with all other requirements for Managed
Fund Shares under Rule 14.11(i).
(2) The Fund may to hold up to 50%
of the weight of its portfolio (including
gross notional exposure) in Inflation
Hedging Instruments, which includes
only the listed and OTC derivatives as
described above. The Fund will only
use derivative instruments to attempt to
mitigate the inflation risk of the
62 See
63 See
E:\FR\FM\01FEN1.SGM
Amendment No. 4, supra note 8.
Rule 14.11(i)(4)(B)(ii)(b).
01FEN1
sradovich on DSK3GMQ082PROD with NOTICES
4714
Federal Register / Vol. 83, No. 22 / Thursday, February 1, 2018 / Notices
portfolio’s exposure to U.S. dollardenominated investment-grade
corporate bonds.
(3) At least 100,000 Shares will be
outstanding upon the commencement of
trading.
(4) Trading of the Shares on the
Exchange will be subject to the
Exchange’s surveillance procedures for
derivative products, and these
procedures are adequate to properly
monitor the trading of the Shares on the
Exchange during all trading sessions
and to deter and detect violations of
Exchange rules and the applicable
federal securities laws.
(5) The Exchange, the Financial
Industry Regulatory Authority
(‘‘FINRA’’) on behalf of the Exchange, or
both, will communicate regarding
trading in the Shares and the underlying
futures contracts, equity securities, and
certain of the listed swaps held by the
Fund with the ISG, other markets or
entities who are members or affiliates of
the ISG, or with which the Exchange has
entered into a comprehensive
surveillance sharing agreement. In
addition, the Exchange, FINRA on
behalf of the Exchange, or both may
obtain information regarding trading in
the Shares and the underlying futures
contracts, equity securities, and certain
of the listed swaps held by the Fund via
the ISG from other markets or entities
who are members or affiliates of the ISG
or with which the Exchange has entered
into a comprehensive surveillance
sharing agreement. The Exchange or
FINRA, on behalf of the Exchange, may
access, as needed, trade information for
certain fixed income instruments
reported to FINRA’s Trade Reporting
and Compliance Engine.
(6) Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (a) The
procedures for purchases and
redemptions of Shares in creation units
(and that Shares are not individually
redeemable); (b) Rule 3.7, which
imposes suitability obligations on
Exchange members with respect to
recommending transactions in the
Shares to customers; (c) how
information regarding the Intraday
Indicative Value and Disclosed Portfolio
is disseminated; (d) the risks involved
in trading the Shares during the PreOpening and After Hours Trading
Sessions when an updated Intraday
Indicative Value will not be calculated
or publicly disseminated; (e) the
requirement that members deliver a
prospectus to investors purchasing
VerDate Sep<11>2014
19:34 Jan 31, 2018
Jkt 244001
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (f) trading information.
(7) All of the equity securities and
futures contracts, and certain of the
listed Inflation Swaps, listed credit
default swaps, and listed interest rate
swaps held by the Fund will trade on
markets that are a member of ISG or
affiliated with a member of ISG or with
which the Exchange has in place a
comprehensive surveillance sharing
agreement.
(8) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(9) For initial and continued listing of
the Shares, the Trust must be in
compliance with Rule 10A–3 under the
Act.64
The Exchange represents that all
statements and representations made in
the filing regarding (1) the description of
the portfolio or reference assets; (2)
limitations on portfolio holdings or
reference assets; (3) dissemination and
availability of index, reference asset,
and Intraday Indicative Values; and (4)
the applicability of Exchange rules
specified in the rule filing constitute
continued listing requirements for the
Fund. In addition, the issuer has
represented to the Exchange that it will
advise the Exchange of any failure by
the Fund or the Shares to comply with
the continued listing requirements and,
pursuant to its obligations under
Section 19(g)(1) of the Act, the Exchange
will surveil for compliance with the
continued listing requirements. If the
Fund or the Shares is not in compliance
with the applicable listing requirements,
the Exchange will commence delisting
procedures under Exchange Rule 14.12.
This approval order is based on all of
the Exchange’s statements and
representations, including those set
forth above and in Amendment No. 4.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 4, is consistent with Section 6(b)(5)
of the Act 65 and Section
11A(a)(1)(C)(iii) of the Act 66 and the
rules and regulations thereunder
applicable to a national securities
exchange.
Comments may be submitted by any of
the following methods:
IV. Solicitation of Comments on
Amendment No. 4 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views and
arguments concerning Amendment No.
4 to the proposed rule change.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 4
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 4, prior to
the 30th day after the date of
publication of notice of Amendment No.
4 in the Federal Register. Amendment
No. 4 supplements the proposal by,
among other things: (1) Providing
64 See
17 CFR 240.10A–3.
U.S.C. 78f(b)(5).
66 15 U.S.C. 78k–1(a)(1)(C)(iii).
65 15
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
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 No. 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 No.
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 such
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 No.
SR–BatsBZX–2017–54 and should be
submitted on or before February 22,
2018.
E:\FR\FM\01FEN1.SGM
01FEN1
Federal Register / Vol. 83, No. 22 / Thursday, February 1, 2018 / Notices
additional information regarding the
Fund’s holdings in Inflation Hedging
Instruments; (2) making additional
representations regarding the Fund and
Shares, including representations
relating to the Fund’s investments in
derivatives and the ability of the
Exchange to surveil trading in the
Shares and certain of the underlying
investments; and (3) providing
additional justification for why the
Fund’s proposed investments are
consistent with the Act. These changes
assist the Commission in evaluating the
Exchange’s proposal and in determining
that the listing and trading of the Shares
is consistent with the Act. Accordingly,
the Commission finds good cause,
pursuant to Section 19(b)(2) of the
Act,67 to approve the proposed rule
change, as modified by Amendment No.
4, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,68 that the
proposed rule change (SR–BatsBZX–
2017–54), as modified by Amendment
No. 4 thereto, be, and it hereby is,
approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.69
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018–01951 Filed 1–31–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Make a
Technical Adjustment to its Rules To
Allow Sub-Penny Quoting and Order
Entry in Managed Fund Shares Priced
Less Than $1.00
sradovich on DSK3GMQ082PROD with NOTICES
January 26, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
23, 2018, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
U.S.C. 78s(b)(2).
U.S.C. 78s(b)(2).
69 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Nasdaq Rule 5735 to make a technical
adjustment to its rules to allow subpenny quoting and order entry in
Managed Fund Shares. This filing is
substantively identical to the relevant
portion of a NYSE Arca, Inc. filing (SR–
NYSEArca–2010–36).3
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaq.cchwallstreet.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[Release No. 34–82589; File No. SR–
NASDAQ–2018–006]
67 15
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
1. Purpose
The Exchange proposes to make a
technical adjustment [sic] its rules to
allow sub-penny quoting of Managed
Fund Shares. Currently, Nasdaq Rule
5735 restricts the minimum price
variation for quoting and order entry to
$0.01. Consistent with Regulation NMS
Rule 612, the Exchange proposes to
remove this provision to allow such
securities to be quoted in a minimum
pricing increment of $0.0001 for
securities priced less than $1.00. The
Exchange notes that it has not had any
of the aforementioned securities quote
below a dollar nor does it anticipate
such an occurrence in the reasonably
foreseeable future. The Exchange simply
seeks to harmonize the minimum price
variation in the aforementioned product
with other equity securities traded on
the Exchange.4
Moreover, the Exchange notes that
this approach is substantially similar to
the approach taken by NYSE Arca in
2010 in eliminating NYSE Arca Equities
Rule 8.600 Commentary .03, which
restricted the minimum price variation
for quoting and order entry for Managed
Fund Shares to $0.01.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,5 in general, and furthers the
objectives of Section 6(b)(5) of the Act,6
in particular, because it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, to remove impediments to,
and perfect the mechanisms of, a free
and open market and a national market
system.
The Exchange believes that the
proposed amendment is consistent with
the goal of removing impediments to a
free and open market because the
changes proposed herein will
substantially harmonize Nasdaq’s subpenny quoting and order entry rules
with Rule 612 of Regulation NMS which
allows a minimum pricing increment of
$0.0001 for securities priced less than
$1.00.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act and the
proposed rule change may serve to
enhance competition and put the
exchange on an equal competitive
footing as it pertains to sub-penny
quoting and order entry for Managed
Fund Shares.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
68 15
VerDate Sep<11>2014
19:34 Jan 31, 2018
3 See Securities Exchange Act Release No. 62006
(April 29, 2010), 75 FR 25019 (May 6, 2010) (SR–
NYSEArca–2010–36).
Jkt 244001
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
4715
4 See
Nasdaq Rule 4613(a)(2)(I).
U.S.C. 78f(b).
6 15 U.S.C. 78f(b)(5).
5 15
E:\FR\FM\01FEN1.SGM
01FEN1
]]>Agencies
[Federal Register Volume 83, Number 22 (Thursday, February 1, 2018)]
[Notices]
[Pages 4707-4715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01951]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82591; File No. SR-BatsBZX-2017-54]
Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of
Filing of Amendment No. 4 and Order Approving on an Accelerated Basis a
Proposed Rule Change, as Modified by Amendment No. 4 Thereto, To List
and Trade Shares of the iShares Inflation Hedged Corporate Bond ETF
Under Rule 14.11(i), Managed Fund Shares
January 26, 2018.
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'') \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
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
[[Page 4708]]
rule change.\5\ On December 8, 2017, the Exchange submitted Amendment
No. 1 to the proposed rule change. On December 15, 2017, the Exchange
withdrew Amendment No.1 and submitted Amendment No. 2 to the proposed
rule change, which amended and replaced in its entirety the proposed
rule change as originally filed. On December 22, 2017, the Commission
instituted proceedings under Section 19(b)(2)(B) of the Act \6\ to
determine whether to approve or disapprove the proposed rule change.\7\
On January 9, 2018, the Exchange submitted Amendment No. 3 to the
proposed rule change, which amended and replaced in its entirety the
proposed rule change, as modified by Amendment No. 2. On January, 11,
2018, the Exchange submitted Amendment No. 4 to the proposed rule
change, which amended and replaced in its entirety the proposed rule
change, as modified by Amendment No. 3.\8\ The Commission has received
no comments on the proposed rule change. The Commission is publishing
this notice to solicit comments on Amendment No. 4 from interested
persons, and is approving the proposed rule change, as modified by
Amendment No. 4, on an accelerated basis.
---------------------------------------------------------------------------
\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\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 82388, 82 FR 61596
(December 28, 2017).
\8\ In Amendment No. 4, the Exchange: (1) Identified the adviser
of the Fund and made certain representations relating to the adviser
and its personnel; (2) clarified the investment strategy and
holdings of the Fund; (3) supplemented its description of the
Inflation Hedging Instruments (as defined below) that the Fund may
invest, including by adding interest rate swaps that are either
listed and traded on a U.S. SEF registered with the CFTC or are
centrally cleared; (4) stated that the listed interest rate swaps
that the Fund may invest in will not comply with the generic
requirements for listed derivatives set forth in Rule
14.11(i)(4)(C)(iv)(a) or (b) (as further described below) and that
the OTC interest swaps that the Fund may invest in will not comply
with the generic requirements for OTC derivatives set forth in Rule
14.11(i)(4)(C)(v) (as further described below); (5) 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; (6) stated that price information for cash
equivalents will be available from major market data vendors; (7)
made additional representations regarding the Fund and information
relating to the Shares, including that (a) the Disclosed Portfolio
will be available on the issuer's website free of charge; (b) the
Fund's website will include a form of the prospectus for the Fund
and additional information related to net asset value (``NAV'') and
other applicable quantitative information; (c) information regarding
market price and trading volume of the Shares will be continuously
available throughout the day on brokers' computer screens and other
electronic services and information regarding the previous day's
closing price, and trading volume for the Shares will be published
daily in the financial section of newspapers; (d) quotation and last
sale information for the Shares will be available through the
Consolidated Tape Association; (e) trading in the Shares may be
halted for market conditions or for reasons that, in the view of the
Exchange, make trading inadvisable; (f) the Exchange deems the
Shares to be equity securities, thus rendering trading in the Shares
subject to the Exchange's existing rules governing the trading of
equity securities; (g) the Exchange has appropriate rules to
facilitate trading in the Shares during all trading sessions; and
(h) prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special
characteristics and risks associated with trading the Shares; (8)
provided additional justification for why the Fund's proposed
investments are consistent with the Act; (9) 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 (10) made other clarifications, corrections, and technical
changes. Amendment No. 4 is available at https://www.sec.gov/comments/sr-batsbzx-2017-54/batsbzx201754-2916905-161845.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
No. 4
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
This Amendment No. 4 to SR-BatsBZX-2017-54 amends and replaces in
its entirety Amendment No. 3 to SR-BatsBZX-2017-54, which was submitted
on January 9, 2017, which amended and replaced in its entirety
Amendment No. 2 to SR-BatsBZX-2017-54, which was submitted on December
15, 2017, which amended and replaced in its entirety the proposal as
originally submitted on September 7, 2017. The Exchange submits this
Amendment No. 3 [sic] in order to clarify certain points and add
additional details about the Fund.
The Exchange proposes to list and trade the Shares under Rule
14.11(i), which governs the listing and trading of Managed Fund Shares
on the Exchange.\9\ The Fund will be an actively managed exchange-
traded fund that seeks to mitigate the inflation risk of a portfolio
composed of U.S. dollar-denominated investment-grade corporate bonds
either through holding such bonds or through holding exchange-traded
funds (``ETFs'') that hold such bonds, as further described below. The
Exchange submits this proposal in order to allow the Fund to hold
Inflation Hedging Instruments, as defined below, in a manner that may
not comply with Rule 14.11(i)(4)(C)(iv)(a),\10\ Rule
14.11(i)(4)(C)(iv)(b),\11\ and/or Rule 14.11(i)(4)(C)(v),\12\ as
further described
[[Page 4709]]
below. Otherwise, the Fund will comply with all other listing
requirements on an initial and continued listing basis under Rule
14.11(i).
---------------------------------------------------------------------------
\9\ The Commission originally approved BZX Rule 14.11(i) in
Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR
55148 (September 6, 2011) (SR-BATS-2011-018) and subsequently
approved generic listing standards for Managed Fund Shares under
Rule 14.11(i) in Securities Exchange Act Release No. 78396 (July 22,
2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100).
\10\ Rule 14.11(i)(4)(C)(iv)(a) provides that ``there shall be
no limitation to the percentage of the portfolio invested in such
holdings; provided, however, that in the aggregate, at least 90% of
the weight of such holdings invested in futures, exchange-traded
options, and listed swaps shall, on both an initial and continuing
basis, consist of futures, options, and swaps for which the Exchange
may obtain information via the Intermarket Surveillance Group
(``ISG'') from other members or affiliates of the ISG or for which
the principal market is a market with which the Exchange has a
comprehensive surveillance sharing agreement, calculated using the
aggregate gross notional value of such holdings.'' The Exchange is
proposing that the Fund be exempt from this requirement only as it
relates to the Fund's holdings in certain credit default swaps,
interest rate swaps, and Inflation Swaps, as further described
below.
\11\ Rule 14.11(i)(4)(C)(iv)(b) provides that ``the aggregate
gross notional value of listed derivatives based on any five or
fewer underlying reference assets shall not exceed 65% of the weight
of the portfolio (including gross notional exposures), and the
aggregate gross notional value of listed derivatives based on any
single underlying reference asset shall not exceed 30% of the weight
of the portfolio (including gross notional exposures).'' The
Exchange is proposing that the Fund be exempt only from the
requirement of Rule 14.11(i)(4)(C)(iv)(b) that prevents the
aggregate gross notional value of listed derivatives based on any
single underlying reference asset from exceeding 30% of the weight
of the portfolio (including gross notional exposures). The Exchange
is proposing that the Fund be exempt from this requirement as it
relates to the Fund's holdings in listed derivatives, which include
U.S. Treasury futures, credit default swaps, and certain Inflation
Swaps and interest rate swaps, as further described below. The Fund
will meet the requirement that the aggregate gross notional value of
listed derivatives based on any five or fewer underlying reference
assets shall not exceed 65% of the weight of the portfolio
(including gross notional exposures).
\12\ Rule 14.11(i)(4)(C)(v) provides that ``the portfolio may,
on both an initial and continuing basis, hold OTC derivatives,
including forwards, options, and swaps on commodities, currencies
and financial instruments (e.g., stocks, fixed income, interest
rates, and volatility) or a basket or index of any of the foregoing,
however the aggregate gross notional value of OTC Derivatives shall
not exceed 20% of the weight of the portfolio (including gross
notional exposures).'' The Exchange is proposing that the Fund be
exempt from this requirement only as it relates to the Fund's
holdings in OTC derivatives, which include total return swaps and
certain Inflation Swaps and interest rate swaps, as further
described below.
---------------------------------------------------------------------------
The Shares will be offered by the Trust, which was established as a
Delaware statutory trust on June 21, 2011. BlackRock Fund Advisors (the
``Adviser'') is the investment adviser to the Fund. The Trust is
registered with the Commission as an open-end investment company and
has filed a registration statement on behalf of the Fund on Form N-1A
(``Registration Statement'') with the Commission.\13\
---------------------------------------------------------------------------
\13\ See Registration Statement on Form N-1A for the Trust,
dated April 6, 2017 (File Nos. 333-179904 and 811-22649). The
descriptions of the Fund and the Shares contained herein are based,
in part, on information in the Registration Statement. The
Commission has issued an order granting certain exemptive relief to
the Company under the Investment Company Act of 1940 (15 U.S.C. 80a-
1) (``1940 Act'') (the ``Exemptive Order''). See Investment Company
Act Release No. 29571 (January 24, 2011) (File No. 812-13601).
---------------------------------------------------------------------------
Rule 14.11(i)(7) provides that, if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a
broker-dealer, such investment adviser shall erect and maintain a
``fire wall'' between the investment adviser and the broker-dealer with
respect to access to information concerning the composition and/or
changes to such investment company portfolio.\14\ In addition, Rule
14.11(i)(7) further requires that personnel who make decisions on the
investment company's portfolio composition must be subject to
procedures designed to prevent the use and dissemination of material
nonpublic information regarding the applicable investment company
portfolio. Rule 14.11(i)(7) is similar to Rule 14.11(b)(5)(A)(i),
however, Rule 14.11(i)(7) in connection with the establishment of a
``fire wall'' between the investment adviser and the broker-dealer
reflects the applicable open-end fund's portfolio, not an underlying
benchmark index, as is the case with index-based funds. The Adviser is
not a registered broker-dealer, but is affiliated with multiple broker-
dealers and has implemented and will maintain ``fire walls'' with
respect to such broker-dealers regarding access to information
concerning the composition 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 and maintain a fire
wall with respect to its relevant personnel or such broker-dealer
affiliate, as applicable, regarding access to information concerning
the composition 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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\14\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
iShares Inflation Hedged Corporate Bond ETF
According to the Registration Statement, the Fund will be an
actively managed exchange-traded fund that will seek to mitigate the
inflation risk of a portfolio with exposure to U.S. dollar-denominated
investment-grade corporate bonds. The Fund seeks to achieve its
investment objective by investing, under Normal Market Conditions,\15\
at least 80% of its net assets in the iShares iBoxx $ Investment Grade
Corporate Bond ETF (the ``Underlying Fund''), U.S. dollar-denominated
investment-grade corporate bonds, in one or more other ETFs \16\ that
principally invest in U.S. dollar-denominated investment-grade
corporate bonds, 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. dollar-denominated investment-grade corporate bonds
or through 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''),\17\
which are managed on an active basis. As an alternative, the Fund may
also attempt to mitigate the inflation risk of the underlying
securities or the Underlying Fund through investing in other products
designed to transfer inflation risk from one party to another,
including only the following: Treasury Inflation-Protected Securities
(``TIPS''), total return swaps,\18\ credit default swaps,\19\ interest
rate swaps,\20\ and U.S. Treasury
[[Page 4710]]
futures \21\ (collectively with Inflation Swaps, ``Inflation Hedging
Instruments''). The Exchange is proposing to allow the Fund to hold up
to 50% of the weight of its portfolio (including gross notional
exposure) in Inflation Hedging Instruments, collectively, in a manner
that may not comply with Rules 14.11(i)(4)(C)(iv)(a),\22\
14.11(i)(4)(C)(iv)(b),\23\ and/or 14.11(i)(4)(C)(v),\24\ as discussed
above.
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\15\ As defined in Rule 14.11(i)(3)(E), the term ``Normal Market
Conditions'' includes, but is not limited to, the absence of trading
halts in the applicable financial markets generally; operational
issues causing dissemination of inaccurate market information or
system failures; or force majeure type events such as natural or
man-made disaster, act of God, armed conflict, act of terrorism,
riot or labor disruption, or any similar intervening circumstance.
\16\ For purposes of this proposal, 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.
\17\ See supra notes 10, 11, and 12. All Inflation Swaps held by
the Fund will be listed and/or centrally cleared in order to reduce
counterparty risk. All listed Inflation Swaps held by the Fund will
be traded on a U.S. Swap Execution Facility registered with the
Commodity Futures Trading Commission.
\18\ See supra note 12. All total return swaps held by the Fund
will be traded OTC. 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. The total return
swaps will generally reference TIPS, the Consumer Price Index, or a
corporate bond index.
\19\ See supra notes 10 and 11. Credit default swaps held by the
Fund will be traded on a U.S. Swap Execution Facility registered
with the Commodity Futures Trading Commission.
\20\ See supra note 10, 11, and 12. All interest rate swaps held
by the Fund will be listed and/or centrally cleared in order to
reduce counterparty risk. All listed interest rate swaps held by the
Fund will be traded on a U.S. Swap Execution Facility registered
with the Commodity Futures Trading Commission
\21\ See supra note 11.
\22\ See supra note 10.
\23\ See supra note 11.
\24\ See supra note 12.
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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).\25\ 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 (i.e., 2Xs and 3Xs) of the Fund's primary broad-
based securities benchmark index (as defined in Form N-1A). The Fund
will only use those derivatives included in the defined term Inflation
Hedging Instruments. The Fund's use of derivative instruments will be
collateralized. As noted above, 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.
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\25\ 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, as permitted by applicable
regulations, enter into certain offsetting positions) to cover its
obligations under derivative instruments. These procedures have been
adopted consistent with Section 18 of the 1940 Act and related
Commission guidance. See 15 U.S.C. 80a-18; Investment Company Act
Release No. 10666 (April 18, 1979), 44 FR 25128 (April 27, 1979);
Dreyfus Strategic Investing, Commission No-Action Letter (June 22,
1987); Merrill Lynch Asset Management, L.P., Commission No-Action
Letter (July 2, 1996).
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The Exchange notes that the Fund may also hold certain fixed income
securities and cash and cash equivalents in compliance with Rules
14.11(i)(4)(C)(ii) and (iii) in order to collateralize its derivatives
positions.
The Exchange represents that, except for the exceptions to BZX Rule
14.11(i)(4)(C) described above, the Fund's proposed investments will
satisfy, on an initial and continued listing basis, all of the generic
listing standards under BZX Rule 14.11(i)(4)(C) and all other
applicable requirements for Managed Fund Shares under Rule 14.11(i).
The Trust is required to comply with Rule 10A-3 under the Act for the
initial and continued listing of the Shares of the Fund. In addition,
the Exchange represents that the Shares of the Fund will comply with
all other requirements applicable to Managed Fund Shares including, but
not limited to, requirements relating to the dissemination of key
information such as the Disclosed Portfolio, Net Asset Value, and the
Intraday Indicative Value, rules governing the trading of equity
securities, trading hours, trading halts, surveillance, firewalls, and
the information circular, as set forth in Exchange rules applicable to
Managed Fund Shares and the orders approving such rules. At least
100,000 Shares will be outstanding upon the commencement of trading.
Moreover, all of the equity securities and futures contracts held
by the Fund will trade on markets that are a member of Intermarket
Surveillance Group (``ISG'') or affiliated with a member of ISG or with
which the Exchange has in place a comprehensive surveillance sharing
agreement.\26\ Additionally, the Exchange or FINRA, on behalf of the
Exchange, are able to access, as needed, trade information for certain
fixed income instruments reported to FINRA's Trade Reporting and
Compliance Engine (``TRACE''). All statements and representations made
in this filing regarding the description of the portfolio or reference
assets, limitations on portfolio holdings or reference assets,
dissemination and availability of index, reference asset, and intraday
indicative values, and the applicability of Exchange rules specified in
this filing shall constitute continued listing requirements for the
Fund. The issuer has represented to the Exchange that it will advise
the Exchange of any failure by the Fund or the Shares to comply with
the continued listing requirements, and, pursuant to its obligations
under Section 19(g)(1) of the Act, the Exchange will surveil for
compliance with the continued listing requirements. If the Fund or the
Shares are not in compliance with the applicable listing requirements,
the Exchange will commence delisting procedures under Exchange Rule
14.12.
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\26\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com. The Exchange notes that not all
components of the Disclosed Portfolio for the Fund may trade on
markets that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------
Availability of Information
As noted above, the Fund will comply with the requirements for
Managed Fund Shares related to Disclosed Portfolio, Net Asset Value,
and the Intraday Indicative Value. Additionally, the intra-day, closing
and settlement prices of exchange-traded portfolio assets, including
ETFs and futures, will be readily available from the securities
exchanges and futures exchanges trading such securities and futures, as
the case may be, automated quotation systems, published or other public
sources, or online information services such as Bloomberg or Reuters.
Intraday price quotations on both listed and OTC swaps, TIPS, and fixed
income instruments are available from major broker-dealer firms and
from third-parties, which may provide prices free with a time delay or
in real-time for a paid fee. Price information for cash equivalents
will be available from major market data vendors. The Disclosed
Portfolio will be available on the issuer's website free of charge. The
Fund's website includes a form of the prospectus for the Fund and
additional information related to NAV and other applicable quantitative
information. Information regarding market price and trading volume of
the Shares will be continuously available throughout the day on
brokers' computer screens and other electronic services. Quotation and
last sale information on the Shares will be available through the
Consolidated Tape Association. Information regarding the previous day's
closing price and trading volume for the Shares will be published daily
in the financial section of newspapers. Trading in the Shares may be
halted for market conditions or for reasons that, in the view of the
Exchange, make trading inadvisable. The Exchange deems the Shares to be
equity securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
The Exchange has appropriate rules to facilitate trading in the shares
during all trading sessions.
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (1) The procedures for purchases
and
[[Page 4711]]
redemptions of Shares in Creation Units (and that Shares are not
individually redeemable); (2) BZX Rule 3.7, which imposes suitability
obligations on Exchange members with respect to recommending
transactions in the Shares to customers; (3) how information regarding
the Intraday Indicative Value and the Disclosed Portfolio is
disseminated; (4) the risks involved in trading the Shares during the
Pre-Opening \27\ and After Hours Trading Sessions \28\ when an updated
Intraday Indicative Value and Underlying Index value will not be
calculated or publicly disseminated; (5) the requirement that members
deliver a prospectus to investors purchasing newly issued Shares prior
to or concurrently with the confirmation of a transaction; and (6)
trading information.
---------------------------------------------------------------------------
\27\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m.
Eastern Time.
\28\ The After Hours Trading Session is from 4:00 p.m. to 5:00
p.m. Eastern Time.
---------------------------------------------------------------------------
In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Fund. Members purchasing Shares from the Fund for
resale to investors will deliver a prospectus to such investors. The
Information Circular will also discuss any exemptive, no-action and
interpretive relief granted by the Commission from any rules under the
Act.
In addition, the Information Circular will reference that the Fund
is subject to various fees and expenses described in the Registration
Statement. The Information Circular will also disclose the trading
hours of the Shares of the Fund and the applicable NAV calculation time
for the Shares. The Information Circular will disclose that information
about the Shares of the Fund will be publicly available on the Fund's
website.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \29\ in general and Section 6(b)(5) of the Act \30\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78f.
\30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest in that the Shares will meet
each of the initial and continued listing criteria in BZX Rule 14.11(i)
except that the Fund may not comply with Rules
14.11(i)(4)(C)(iv)(a),\31\ 14.11(i)(4)(C)(iv)(b),\32\ and/or
14.11(i)(4)(C)(v).\33\ The Exchange believes that the liquidity in the
Treasury futures markets mitigates the concerns that Rule
14.11(i)(4)(C)(iv)(b) is intended to address and that such liquidity
would help prevent the Shares from being susceptible to manipulation.
Further, the Exchange believes that for listed swaps, including credit
default swaps, interest rate swaps, and Inflation Swaps, the price
transparency and surveillance performed by the applicable swap
execution facility would similarly act to mitigate the risk of
manipulation of the Shares. The Exchange also believes that the size of
the inflation swaps market,\34\ which would include all of the listed
and OTC swaps that the Fund intends to invest in, also mitigates
manipulation concerns relating to both listed and OTC swaps held by the
Fund.\35\
---------------------------------------------------------------------------
\31\ See supra note 10.
\32\ See supra note 11.
\33\ See supra note 12.
\34\ For purposes of this discussion, the term ``inflation swaps
market'' means any swap contract that references either a measure of
inflation, an inflation index, or an instrument designed to transfer
inflation risk from one party to another.
\35\ According to publicly available numbers from LCH. Clearnet
Limited, which clears both listed and OTC swaps, as of November 28,
2017 there was approximately $2.3 billion in average daily volume in
inflation swaps, which would include the credit default swaps,
interest rate swaps, and Inflation Swaps that the Fund intends to
invest in, cleared through their platform alone and over $241
billion in notional interest outstanding in such inflation swaps.
---------------------------------------------------------------------------
As it relates to Rule 14.11(i)(4)(C)(v), which provides that the
notional value of OTC Derivatives shall not exceed 20% of the weight of
the portfolio (including gross notional exposures), in an effort to
mitigate counterparty risk and exposure to potentially illiquid and
manipulable derivatives contracts, the Exchange notes that the Fund
will attempt to limit counterparty risk in non-cleared OTC swap
contracts, namely total return swaps, 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. OTC Inflation Swaps
and interest rate swaps held by the Fund will be centrally cleared.
Further, the Exchange notes that notional principal never changes hands
in such swaps transactions, and it is a theoretical value used to base
the exchanged payments. A more accurate representation of the swaps
value in order to monitor total counterparty risk would be the mark-to
market value of the swap since inception, which the Adviser generally
expects to remain at around 5% of the Fund's net assets.\36\ As noted
above, the inflation swap market,\37\ which would include all of the
listed and OTC swaps that the Fund intends to invest in, is large and
liquid, which the Exchange believes further mitigates the concerns
which Rule 14.11(i)(4)(C)(v) is intended to address.
---------------------------------------------------------------------------
\36\ The Adviser plans to implement a hedging strategy very
similar to the strategy that it employs with interest rate swaps for
several other funds, each of which have approximately 50% of the
weight of their notional exposure in interest rate swaps while each
maintains less than 10% exposure as calculated using mark-to-market.
\37\ See note 35, supra.
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As it relates to the requirement in Rule 14.11(i)(4)(C)(iv)(a) that
at least 90% of the weight of the listed derivatives portion of the
portfolio be in listed derivatives for which the Exchange may obtain
information via ISG or for which the principal market is a market with
which the Exchange has a comprehensive surveillance sharing agreement,
the Exchange believes that its surveillance procedures are adequate to
properly monitor the trading of the Shares on the Exchange during all
trading sessions and to deter and detect violations of Exchange rules
and the applicable federal securities laws. Additionally, all of the
instruments that would not meet this requirement would nevertheless
have a primary market that is a swap execution facility that is
registered with and under the regulatory oversight of the CFTC.\38\
---------------------------------------------------------------------------
\38\ The Exchange represents that not all CFTC registered swap
execution facilities are members or affiliates of members of the
ISG.
---------------------------------------------------------------------------
Trading of the Shares through the Exchange will be subject to the
Exchange's surveillance procedures for derivative products, including
Managed Fund Shares. All of the futures contracts, equity securities,
and certain of the listed Inflation Swaps, listed credit default swaps,
and listed interest
[[Page 4712]]
rate swaps held by the Fund will trade on markets that are a member of
ISG or affiliated with a member of ISG or with which the Exchange has
in place a comprehensive surveillance sharing agreement. The Exchange,
FINRA, on behalf of the Exchange, or both will communicate regarding
trading in the Shares and the underlying futures contracts, equity
securities, and certain of the listed Inflation Swaps, listed credit
default swaps, and listed interest rate swaps held by the Fund with the
ISG, other markets or entities who are members or affiliates of the
ISG, or with which the Exchange has entered into a comprehensive
surveillance sharing agreement.\39\ The Exchange, FINRA, on behalf of
the Exchange, or both may obtain information regarding trading in the
Shares and the underlying futures contracts, equity securities, and
certain of the listed Inflation Swaps, listed credit default swaps, and
listed interest rate swaps held by the Fund via the ISG from other
markets or entities who are members or affiliates of the ISG or with
which the Exchange has entered into a comprehensive surveillance
sharing agreement.\40\ Additionally, the Exchange or FINRA, on behalf
of the Exchange, may access, as needed, trade information for certain
fixed income instruments reported to FINRA's Trade Reporting and
Compliance Engine (``TRACE''). The Exchange has a policy prohibiting
the distribution of material non-public information by its employees.
---------------------------------------------------------------------------
\39\ See note 26, supra.
\40\ See note 26, supra.
---------------------------------------------------------------------------
The Exchange notes that the Fund will meet and be subject to all
other requirements of the Generic Listing Rules and other applicable
continued listing requirements for Managed Fund Shares under Rule
14.11(i), including those requirements regarding the Disclosed
Portfolio and the requirement that the Disclosed Portfolio and the NAV
will be made available to all market participants at the same time,\41\
Intraday Indicative Value,\42\ suspension of trading or removal,\43\
trading halts,\44\ disclosure,\45\ and firewalls.\46\ Further, at least
100,000 Shares will be outstanding upon the commencement of
trading.\47\
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\41\ See Rules 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
\42\ See Rule 14.11(i)(4)(B)(i).
\43\ See Rule 14.11(i)(4)(B)(iii).
\44\ See Rule 14.11(i)(4)(B)(iv).
\45\ See Rule 14.11(i)(6).
\46\ See Rule 14.11(i)(7).
\47\ See Rule 14.11(i)(4)(A)(i).
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For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change, rather will facilitate the listing and trading of
an additional actively-managed exchange-traded product that will
enhance competition among both market participants and listing venues,
to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 4, is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\48\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 4, is consistent
with Section 6(b)(5) of the Act,\49\ which requires, among other
things, that the Exchange's rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.
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\48\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\49\ 15 U.S.C. 78f(b)(5).
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As noted above, the Fund may hold up to 50% of the weight of its
portfolio (including gross notional exposure) in Inflation Hedging
Instruments, including certain derivatives, in a manner that may not
comply with the generic listing requirements in Rules
14.11(i)(4)(C)(iv)(a), 14.11(i)(4)(C)(iv)(b), and
14.11(i)(4)(C)(v).\50\ The Exchange states that the Fund will only use
those derivatives included in the defined term Inflation Hedging
Instruments and that 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 to which the Fund will
have exposure. The Exchange states that the Fund's use of derivative
instruments will be collateralized. In addition, the Exchange
represents that the Shares of the Fund will comply with all other
requirements applicable to Managed Fund Shares including, but not
limited to, requirements relating to the dissemination of key
information such as the Disclosed Portfolio (as defined in BZX Rule
14.11(i)(3)(B)).\51\
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\50\ The Exchange states that the Fund's investments 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 (or, as permitted by applicable regulations, enter into
certain offsetting positions) to cover its obligations under
derivative instruments. According to the Exchange, these procedures
have been adopted consistent with Section 18 of the 1940 Act and
related Commission guidance. In addition, the Fund will include
appropriate risk disclosure in its offering documents, including
leveraging risk. See supra note 25.
\51\ Rule 14.11(i)(4)(B)(ii) requires that the Disclosed
Portfolio will be disseminated at least once daily and will be made
available to all market participants at the same time. Rule
14.11(i)(3)(B) requires that the website for each series of Managed
Fund Shares disclose the following information regarding the
Disclosed Portfolio, to the extent applicable: (i) Ticker symbol;
(ii) CUSIP or other identifier; (iii) description of the holding;
(iv) the identity of the security, commodity, index, or other asset
upon which a derivative is based; (v) the strike price for any
options; (vi) the quantity of each security or other asset held as
measured by (a) par value, (b) notional value, (c) number of shares,
(d) number of contracts, and (e) number of units; (vii) maturity
date; (viii) coupon rate; (ix) effective date; (x) market value; and
(xi) percentage weighting of the holding in the portfolio. The
Exchange represents that this website information will be publicly
available free of charge.
---------------------------------------------------------------------------
The Exchange states that the Fund's investments in certain listed
credit default swaps, certain listed interest rate swaps, and certain
listed Inflation Swaps will not meet the generic listing requirement
that at least 90% of the weight of the listed derivatives holdings in
the portfolio be in listed derivatives for which the Exchange may
obtain information via the ISG from other members or affiliates of the
ISG or for which the principal market is a market with which the
Exchange has a comprehensive surveillance sharing agreement.\52\ The
Exchange represents that all of the listed credit default swaps, listed
interest rate swaps, and listed Inflation Swaps that would not meet
this requirement would nevertheless be listed on a U.S. SEF and,
therefore, have as a primary market a SEF registered with, and under
the regulatory oversight of, the CFTC.\53\
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\52\ See Rule 14.11(i)(4)(C)(iv)(a).
\53\ The Exchange represents that not all CFTC-registered SEFs
are members or affiliates of members of the ISG.
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[[Page 4713]]
The Exchange states that the Fund's investments in listed
derivatives, including U.S. Treasury futures, listed credit default
swaps, listed Inflation Swaps, and listed interest rate swaps, will not
meet the generic listing requirement 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.\54\ The Exchange
states that it believes the liquidity in the Treasury futures markets
mitigates manipulation concerns. In addition, as discussed above, all
listed credit default swaps, listed interest rate swaps and listed
Inflation Swaps that the Fund will invest in will be traded on U.S.
SEFs registered with the CFTC. The Exchange states that the price
transparency and surveillance performed by the applicable SEF on which
the credit default swaps, interest rate swaps, or Inflation Swaps are
listed would act to mitigate the risk of manipulation of the Shares.
The Exchange also states that it believes that the size of the
inflation swaps market,\55\ which would include all of the listed swaps
that the Fund intends to invest in, mitigates manipulation concerns
relating to both the listed and OTC swaps held by the Fund.\56\
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\54\ See Rule 14.11(i)(4)(C)(iv)(b).
\55\ See supra note 34.
\56\ The Exchange states that, as of November 28, 2017,
according to publicly available data from LCH.Clearnet Limited,
there was approximately $2.3 billion in average daily volume in
inflation swaps (which would include the listed and OTC credit
default swaps, interest rate swaps, and Inflation Swaps that the
Fund intends to invest in) cleared through LCH.Clearnet Limited and
over $241 billion in notional interest outstanding in such inflation
swaps. See supra note 35.
---------------------------------------------------------------------------
The Exchange states that the Fund's holdings in OTC derivatives,
which include OTC total return swaps, OTC interest rate swaps, and OTC
Inflation Swaps, will exceed 20% of the weight of the portfolio and,
therefore, not meet the generic listing requirements.\57\ The Exchange
states that the Fund will attempt to limit counterparty risk in non-
cleared OTC total return swaps by entering into such contracts only
with counterparties the Adviser believes are creditworthy and by
limiting the Fund's exposure to each counterparty, and that the Adviser
will monitor the creditworthiness of each counterparty and the Fund's
exposure to each counterparty on an ongoing basis. In addition, the
Exchange represents that all OTC Inflation Swaps and OTC interest rate
swaps held by the Fund will be centrally cleared. The Exchange also
represents that the Adviser generally expects the mark-to-market value
of the OTC swaps to remain at around 5% of the Fund's net assets.\58\
Finally, the Exchange states that the inflation swap market,\59\ which
would include all of the listed and OTC swaps that the Fund intends to
invest in, is large and liquid, which mitigates the concerns the 20%
limitation on OTC derivatives is intended to address.\60\
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\57\ See Rule 14.11(i)(4)(C)(v).
\58\ The Exchange states that with respect to valuing the OTC
swaps in the portfolio, the notional principal never changes hands,
it is a theoretical value used to base the exchanged payments on,
and a more accurate representation of the swaps value in order to
monitor total counterparty risk would be the mark-to market value of
the swap since inception. See supra note 36 and accompanying text.
\59\ See supra note 34.
\60\ See supra note 56.
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The Commission also finds that the proposal is consistent with
Section 11A(a)(1)(C)(iii) of the Act,\61\ which sets forth Congress's
finding that it is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly markets
to assure the availability to brokers, dealers, and investors of
information with respect to quotations for, and transactions in,
securities. Quotation and last-sale information for the Shares will be
available via the Consolidated Tape Association (``CTA''). Further, as
required by Rule 14.11(i)(4B)(i), the Intraday Indicative Value will be
widely disseminated by one or more major market data vendors at least
every 15 seconds during the Exchange's Regular Trading Hours (as
defined in Rule 1.5(w))). Information regarding market price and
trading volume of the Shares will be continually available on a real-
time basis throughout the day on brokers' computer screens and other
electronic services. Information regarding the previous day's closing
price and trading volume information for the Shares will be published
daily in the financial section of newspapers. The intra-day, closing
and settlement prices of exchange-traded portfolio assets, including
ETFs and futures, will be readily available from the securities
exchanges and futures exchanges trading such securities and futures, as
the case may be, automated quotation systems, published or other public
sources, or online information services, such as Bloomberg or Reuters.
Intraday price quotations on both listed and OTC swaps, TIPS, and fixed
income instruments will be available from major broker-dealer firms and
from third-parties, which may provide prices free with a time delay or
in real-time for a paid fee. Price information for cash equivalents
will be available from major market data vendors. In addition, the
Fund's website includes a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative
information.
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\61\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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The Commission also believes that the proposal is reasonably
designed to promote fair disclosure of information that may be
necessary to price the Shares appropriately and to prevent trading when
a reasonable degree of transparency cannot be assured. As required by
Rule 14.11(i)(4)(A)(ii), the Exchange will obtain a representation from
the issuer of the Shares that the NAV per Share will be calculated
daily and that the NAV and the Disclosed Portfolio will be made
available to all market participants at the same time. Further, trading
in the Shares may be halted because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable.\62\ Trading in the Shares will also be subject to Rule
14.11(i)(4)(B)(iv), which sets forth circumstances under which Shares
of a Fund may be halted.
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\62\ See Amendment No. 4, supra note 8.
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The Exchange states that it has a policy prohibiting the
distribution of material, non-public information by its employees. The
Exchange states that the Adviser is not a registered broker-dealer but
the Adviser is affiliated with multiple broker-dealer and has
implemented and will maintain ``fire walls'' with respect to such
broker-dealers regarding access to information concerning the
composition of and/or changes to the Fund's portfolio. Further, the
Commission notes that the Reporting Authority that provides the
Disclosed Portfolio must implement and maintain, or be subject to,
procedures designed to prevent the use and dissemination of material,
non-public information regarding the actual components of the
portfolio.\63\
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\63\ See Rule 14.11(i)(4)(B)(ii)(b).
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The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. In support of this
proposal, the Exchange represents that:
(1) Other than Rule 14.11(i)(4)(C)(iv)(a), Rule
14.11(i)(4)(C)(iv)(b), and Rule 14.11(i)(4)(C)(v), the Fund will comply
with all other requirements for Managed Fund Shares under Rule
14.11(i).
(2) The Fund may to hold up to 50% of the weight of its portfolio
(including gross notional exposure) in Inflation Hedging Instruments,
which includes only the listed and OTC derivatives as described above.
The Fund will only use derivative instruments to attempt to mitigate
the inflation risk of the
[[Page 4714]]
portfolio's exposure to U.S. dollar-denominated investment-grade
corporate bonds.
(3) At least 100,000 Shares will be outstanding upon the
commencement of trading.
(4) Trading of the Shares on the Exchange will be subject to the
Exchange's surveillance procedures for derivative products, and these
procedures are adequate to properly monitor the trading of the Shares
on the Exchange during all trading sessions and to deter and detect
violations of Exchange rules and the applicable federal securities
laws.
(5) The Exchange, the Financial Industry Regulatory Authority
(``FINRA'') on behalf of the Exchange, or both, will communicate
regarding trading in the Shares and the underlying futures contracts,
equity securities, and certain of the listed swaps held by the Fund
with the ISG, other markets or entities who are members or affiliates
of the ISG, or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. In addition, the Exchange, FINRA on
behalf of the Exchange, or both may obtain information regarding
trading in the Shares and the underlying futures contracts, equity
securities, and certain of the listed swaps held by the Fund via the
ISG from other markets or entities who are members or affiliates of the
ISG or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. The Exchange or FINRA, on behalf of the
Exchange, may access, as needed, trade information for certain fixed
income instruments reported to FINRA's Trade Reporting and Compliance
Engine.
(6) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Circular will discuss the following: (a) The procedures for
purchases and redemptions of Shares in creation units (and that Shares
are not individually redeemable); (b) Rule 3.7, which imposes
suitability obligations on Exchange members with respect to
recommending transactions in the Shares to customers; (c) how
information regarding the Intraday Indicative Value and Disclosed
Portfolio is disseminated; (d) the risks involved in trading the Shares
during the Pre-Opening and After Hours Trading Sessions when an updated
Intraday Indicative Value will not be calculated or publicly
disseminated; (e) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (f) trading information.
(7) All of the equity securities and futures contracts, and certain
of the listed Inflation Swaps, listed credit default swaps, and listed
interest rate swaps held by the Fund will trade on markets that are a
member of ISG or affiliated with a member of ISG or with which the
Exchange has in place a comprehensive surveillance sharing agreement.
(8) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(9) For initial and continued listing of the Shares, the Trust must
be in compliance with Rule 10A-3 under the Act.\64\
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\64\ See 17 CFR 240.10A-3.
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The Exchange represents that all statements and representations
made in the filing regarding (1) the description of the portfolio or
reference assets; (2) limitations on portfolio holdings or reference
assets; (3) dissemination and availability of index, reference asset,
and Intraday Indicative Values; and (4) the applicability of Exchange
rules specified in the rule filing constitute continued listing
requirements for the Fund. In addition, the issuer has represented to
the Exchange that it will advise the Exchange of any failure by the
Fund or the Shares to comply with the continued listing requirements
and, pursuant to its obligations under Section 19(g)(1) of the Act, the
Exchange will surveil for compliance with the continued listing
requirements. If the Fund or the Shares is not in compliance with the
applicable listing requirements, the Exchange will commence delisting
procedures under Exchange Rule 14.12.
This approval order is based on all of the Exchange's statements
and representations, including those set forth above and in Amendment
No. 4.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 4, is consistent with Section
6(b)(5) of the Act \65\ and Section 11A(a)(1)(C)(iii) of the Act \66\
and the rules and regulations thereunder applicable to a national
securities exchange.
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\65\ 15 U.S.C. 78f(b)(5).
\66\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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IV. Solicitation of Comments on Amendment No. 4 to the Proposed Rule
Change
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 4 to the proposed rule change.
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 No. 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 No. 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 such 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 No. SR-BatsBZX-2017-54 and should be submitted on
or before February 22, 2018.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 4
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 4, prior to the 30th day after the
date of publication of notice of Amendment No. 4 in the Federal
Register. Amendment No. 4 supplements the proposal by, among other
things: (1) Providing
[[Page 4715]]
additional information regarding the Fund's holdings in Inflation
Hedging Instruments; (2) making additional representations regarding
the Fund and Shares, including representations relating to the Fund's
investments in derivatives and the ability of the Exchange to surveil
trading in the Shares and certain of the underlying investments; and
(3) providing additional justification for why the Fund's proposed
investments are consistent with the Act. These changes assist the
Commission in evaluating the Exchange's proposal and in determining
that the listing and trading of the Shares is consistent with the Act.
Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\67\ to approve the proposed rule change, as
modified by Amendment No. 4, on an accelerated basis.
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\67\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\68\ that the proposed rule change (SR-BatsBZX-2017-54), as
modified by Amendment No. 4 thereto, be, and it hereby is, approved on
an accelerated basis.
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\68\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\69\
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\69\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-01951 Filed 1-31-18; 8:45 am]
BILLING CODE 8011-01-P
