Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 2 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 2, To List and Trade Shares of the iShares Commodity Multi-Strategy ETF Under NYSE Arca Rule 8.600-E, 11375-11379 [2019-05704]
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Federal Register / Vol. 84, No. 58 / Tuesday, March 26, 2019 / Notices
made the necessary showing to justify
granting a temporary exemption.
Accordingly,
It is hereby ordered, pursuant to
section 9(c) of the Act, that the
Applicants and any other Covered
Persons are granted a temporary
exemption from the provisions of
section 9(a), effective as of the date of
the Injunction, solely with respect to the
Injunction, subject to the
representations and conditions in the
application, until the Commission takes
final action on their application for a
permanent order.
By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–05686 Filed 3–25–19; 8:45 am]
BILLING CODE 8011–01–P
II. Summary of the Exchange’s
Description of the Proposal, as
Modified by Amendment No. 2 9
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85375; File No. SR–
NYSEArca–2018–98]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of
Amendment No. 2 and Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change, as Modified by
Amendment No. 2, To List and Trade
Shares of the iShares Commodity
Multi-Strategy ETF Under NYSE Arca
Rule 8.600–E
jbell on DSK30RV082PROD with NOTICES
March 20, 2019.
I. Introduction
On December 21, 2018, NYSE Arca,
Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) 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 Commodity
Multi-Strategy ETF (‘‘Fund’’) under
NYSE Arca Rule 8.600–E. On February
1, 2019, pursuant to Section 19(b)(1) of
the Act,3 the Commission noticed the
proposed rule change and, pursuant to
Section 19(b)(2) of the Act,4 designated
a longer period within which to approve
the proposed rule change, disapprove
the proposed rule change, or institute
proceedings to determine whether to
approve or disapprove the proposed
rule change.5 On March 6, 2019, the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(1).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 85033,
84 FR 2618 (February 7, 2019). The Commission
2 17
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Exchange filed Amendment No. 1 to the
proposed rule change, which replaced
and superseded the proposed rule
change as originally filed.6 On March
14, 2019, the Exchange filed
Amendment No. 2 to the proposed rule
change, which replaced and superseded
the proposed rule change, as modified
by Amendment No. 1.7 The Commission
has received no comment letters on the
proposal. The Commission is publishing
this notice and order to solicit
comments on the proposed rule change,
as modified by Amendment No. 2, from
interested persons and to institute
proceedings pursuant to Section
19(b)(2)(B) of the Act 8 to determine
whether to approve or disapprove the
proposed rule change, as modified by
Amendment No. 2.
The Exchange proposes to list and
trade Shares of the Fund under NYSE
Arca Rule 8.600–E, which governs the
listing and trading of Managed Fund
Shares on the Exchange. The Shares will
be offered by iShares U.S. ETF Trust
designated March 21, 2019, as the date by which
the Commission shall approve the proposed rule
change, disapprove the proposed rule change, or
institute proceedings to determine whether to
approve or disapprove the proposed rule change.
6 Amendment No. 1 is available at: https://
www.sec.gov/comments/sr-nysearca-2018-98/
srnysearca201898-5031693-183046.pdf.
7 In Amendment No. 2, the Exchange: (1)
Identified the Reference Benchmark (as defined
below); (2) clarified that the Fund is not obligated
to invest in any futures contracts included in, and
does not seek to replicate the performance of, the
Reference Benchmark; (3) modified the types of
derivative instruments and reference assets for such
derivative instruments that the Fund may invest in;
(4) clarified that commodity-linked notes are among
the Fixed Income Instruments (as defined below)
that the Fund may invest in; (5) specified that the
Fund may invest in ETNs and ETFs (each as
defined below); (6) added a representation that to
the extent the Trust (as defined below) effects the
redemption of Shares in cash, such transactions
will be effected in the same manner or in an
equitable manner for all Authorized Participants (as
defined below), subject to the best interests of the
Fund; (7) added a representation that the Fund’s
holdings in OTC Derivatives (as defined below) will
satisfy the criteria applicable to holdings in listed
derivatives in Commentary .01(d)(2) to NYSE Arca
Rule 8.600–E on an initial and continued listing
basis; (8) added a representation that the Adviser
(as defined below) and its affiliates actively monitor
counterparty credit risk exposure (including for
OTC derivatives) and evaluate counterparty credit
quality on a continuous basis; (8) stated that the
Reference Benchmark price is available via
Bloomberg and that the Reference Benchmark
methodology and constituent list is available via
ICE Data Services; and (9) made technical and
conforming changes. Amendment No. 2 is available
at: https://www.sec.gov/comments/sr-nysearca2018-98/srnysearca201898-5123714-183326.pdf.
8 15 U.S.C. 78s(b)(2)(B).
9 For a complete description of the Exchange’s
proposal, see Amendment No. 2, supra note 7.
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11375
(‘‘Trust’’), which is registered with the
Commission as an open-end
management investment company.10
The Fund is a series of the Trust.
BlackRock Fund Advisors (‘‘Adviser’’)
will be the investment adviser for the
Fund.11 BlackRock Investments, LLC
will be the distributor for the Fund’s
Shares. State Street Bank and Trust
Company will serve as the
administrator, custodian and transfer
agent for the Fund.
A. Fund Investments
According to the Exchange, the
investment objective of the Fund will be
to seek to provide exposure, on a total
return basis, to a group of commodities
with characteristics of carry,
momentum, and value. The Fund is
actively managed and seeks to achieve
its investment objective in part 12 by,
under normal market conditions,13
investing in listed and over-the-counter
(‘‘OTC’’) total return swaps referencing
the ICE BofAML Commodity MultiFactor Total Return Index (‘‘Reference
Benchmark’’).14 In connection with
10 According to the Exchange, on December 3,
2018, the Trust filed with the Commission its
registration statement on Form N–1A under the
Securities Act of 1933 and under the Investment
Company Act of 1940 (‘‘1940 Act’’) relating to the
Fund (File Nos. 333–179904 and 811–22649)
(‘‘Registration Statement’’). In addition, the
Exchange states that the Commission has issued an
order upon which the Trust may rely, granting
certain exemptive relief under the 1940 Act. See
Investment Company Act Release No. 29571
(January 24, 2011) (File No. 812–13601).
11 According to the Exchange, the Adviser is not
registered as a broker-dealer but is affiliated with
a broker-dealer, and has implemented and will
maintain a fire wall with respect to its broker-dealer
affiliate regarding access to information concerning
the composition and/or changes to the portfolio. In
the event (a) the Adviser becomes registered as a
broker-dealer or newly affiliated with a brokerdealer, 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
its broker-dealer affiliate 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 Exchange also
represents that the Adviser and its related
personnel are subject to the provisions of Rule
204A–1 under the Investment Advisers Act of 1940
relating to codes of ethics.
12 The Fund’s investment objective is also
achieved by investing in cash, cash equivalents,
Commodity Investments, Fixed Income Securities
and Short-Term Fixed Income Securities (each as
defined or described below).
13 The term ‘‘normal market conditions’’ is
defined in NYSE Arca Rule 8.600–E(c)(5).
14 Although the Fund may hold swaps on the
Reference Benchmark, or direct investments in, the
same futures contracts as those included in the
Reference Benchmark, the Fund is not obligated to
invest in any futures contracts included in, and
does not seek to replicate the performance of, the
Reference Benchmark.
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investments in swaps on the Reference
Benchmark, the Fund is expected to
establish new swaps contracts on an
ongoing basis and replace expiring
contracts.15 Swaps subsequently entered
into by the Fund may have terms that
differ from the swaps the Fund
previously held. The Fund expects
generally to pay a fixed payment rate
and certain swap related fees to the
swap counterparty and receive the total
return of the Reference Benchmark,
including in the event of negative
performance by the Reference
Benchmark, negative return (i.e., a
payment from the Fund to the swap
counterparty). In seeking total return,
the Fund additionally aims to generate
interest income and capital appreciation
through a cash management strategy
consisting primarily of cash, cash
equivalents,16 and fixed income
securities other than cash equivalents,
as described below.
The Fund intends to follow a
multifactor strategy reflected by the
Reference Benchmark, which Reference
Benchmark equally weights three subindices designed to provide exposure to
carry, momentum, and value factors.
The Fund will invest in financial
instruments described below that
provide exposure to commodities and
not in the physical commodities
themselves. The ‘‘carry’’ sub-index
emphasizes commodities and contract
months with the greatest degree of
backwardation or lowest degree of
contango.17 Second, the ‘‘momentum’’
sub-index underweights or overweights
commodities based on the strength of
performance patterns over multiple time
periods. Third, the ‘‘value’’ sub-index
measures value for each commodity by
the ratio of its 3-month average spot
price to its 5-year average. Sector
weights are held constant versus a broad
15 Swaps on the Reference Benchmark are
included in ‘‘Commodity Investments’’ as defined
below.
16 Cash equivalents are the short-term instruments
enumerated in Commentary .01(c) to NYSE Arca
Rule 8.600–E.
17 According to the Exchange, in order to
maintain exposure to a futures contract on a
particular commodity, an investor must sell the
position in the expiring contract and buy a new
position in a contract with a later delivery month,
which is referred to as ‘‘rolling.’’ If the price for the
new futures contract is less than the price of the
expiring contract, then the market for the
commodity is said to be in ‘‘backwardation.’’ In
these markets, roll returns are positive, which is
referred to as ‘‘positive carry.’’ The term ‘‘contango’’
is used to describe a market in which the price for
a new futures contract is more than the price of the
expiring contract. In these markets, roll returns are
negative, which is referred to as ‘‘negative carry.’’
The ‘‘carry’’ sub-index seeks to employ a positive
carry strategy that emphasizes commodities and
futures contract months with the greatest degree of
backwardation and lowest degree of contango,
resulting in net gains through positive roll returns.
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non-factor weighted commodity index,
but within each sector, weights of
individual commodities are tilted to
favor those with the lowest valuation
ratio. Within each sub-index, contract
months are selected to maximize
backwardation and minimize contango.
The Fund expects to obtain a
substantial amount of its exposure to the
carry, momentum, and value strategies
by entering into total return swaps that
pay the returns of the commodity
futures contracts referenced in the
Reference Benchmark. The Reference
Benchmark includes 20 futures
contracts on physical agricultural,
energy, livestock, precious metals, and
industrial metals listed on U.S.
regulated futures exchanges.
The Fund (through its Subsidiary (as
defined below)) may hold the following
listed derivative instruments: Futures,
options, and swaps on commodities
(which commodities are from the same
sectors as those included in the
Reference Benchmark); currencies; U.S.
and non-U.S. equity securities; fixed
income securities (as defined in
Commentary .01(b) to NYSE Arca Rule
8.600–E, but excluding Short-Term
Fixed Income Securities (as defined
below)); interest rates; and financial
rates; or a basket or index of any of the
foregoing (collectively, ‘‘Listed
Derivatives’’).18 Listed Derivatives will
comply with the criteria in Commentary
.01(d) of NYSE Arca Rule 8.600–E.
The Fund (through its Subsidiary (as
defined below)) may hold the following
OTC derivative instruments: Forwards,
options, and swaps on commodities
(which commodities are from the same
sectors as those included in the
Reference Benchmark); currencies; U.S.
and non-U.S. equity securities; fixed
income securities (as defined in
Commentary .01(b) to NYSE Arca Rule
8.600–E, but excluding Short-Term
Fixed Income Securities); interest rates;
and financial rates; or a basket or index
of any of the foregoing (collectively,
‘‘OTC Derivatives,’’ 19 and together with
Listed Derivatives, ‘‘Commodity
Investments’’).20
18 Examples of Listed Derivatives the Fund may
invest in include: Exchange traded futures contracts
similar to those found in the Reference Benchmark,
exchange traded futures contracts on the Reference
Benchmark, swaps on commodity futures contracts
similar to those found in the Reference Benchmark,
and futures and options that correlate to the
investment returns of commodities without
investing directly in physical commodities.
19 As discussed below under ‘‘Application of
Generic Listing Requirements,’’ the Fund’s and the
Subsidiary’s holdings in OTC Derivatives will not
comply with the criteria in Commentary .01(e) of
NYSE Arca Rule 8.600–E.
20 Examples of OTC Derivatives the Fund may
invest in include swaps on commodity futures
contracts similar to those found in the Reference
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Sfmt 4703
The Fund may hold cash, cash
equivalents, and fixed income securities
other than cash equivalents, as
described further below.
Specifically, the Fund may invest in
Short-Term Fixed Income Securities (as
defined below) other than cash
equivalents on an ongoing basis to
provide liquidity or for other reasons.21
Short-Term Fixed Income Securities
will have a maturity of no longer than
397 days and include only the
following: (i) Money market
instruments; (ii) obligations issued or
guaranteed by the U.S. government, its
agencies or instrumentalities (including
government-sponsored enterprises); (iii)
negotiable certificates of deposit,
bankers’ acceptances, fixed-time
deposits and other obligations of U.S.
and non-U.S. banks (including non-U.S.
branches) and similar institutions; (iv)
commercial paper; (v) non-convertible
corporate debt securities (e.g., bonds
and debentures); (vi) repurchase
agreements; (vii) short-term U.S. dollardenominated obligations of non-U.S.
banks (including U.S. branches) that, in
the opinion of the Adviser, are of
comparable quality to obligations of
U.S. banks that may be purchased by the
Fund; and (viii) sovereign obligations
(collectively, ‘‘Short-Term Fixed Income
Securities’’). Any of these securities may
be purchased on a current or forwardsettled basis.22
The Fund also may invest in fixed
income securities as defined in
Commentary .01(b) to NYSE Arca Rule
8.600–E,23 other than cash equivalents
and Short-Term Fixed Income
Securities, with remaining maturities
longer than 397 days (‘‘Fixed Income
Benchmark and options that correlate to the
investment returns of commodities without
investing directly in physical commodities.
21 As discussed under ‘‘Application of Generic
Listing Requirements’’ below, investments in ShortTerm Fixed Income Securities will not comply with
the requirements of Commentary .01(b)(1)–(4) to
NYSE Arca Rule 8.600–E.
22 To the extent that the Fund and the Subsidiary
invest in cash and Short-Term Fixed Income
Securities that are cash equivalents (i.e., that have
maturities of less than 3 months) as specified in
Commentary .01(c) to NYSE Arca Rule 8.600–E,
such investments will comply with Commentary
.01(c) and may be held without limitation. Nonconvertible corporate debt securities and sovereign
obligations are not included as cash equivalents in
Commentary .01(c).
23 Commentary .01(b) to NYSE Arca Rule 8.600–
E defines fixed income securities as debt securities
that are notes, bonds, debentures or evidence of
indebtedness that include, but are not limited to,
U.S. Department of Treasury securities (‘‘Treasury
Securities’’), government-sponsored entity
securities (‘‘GSEs’’), municipal securities, trust
preferred securities, supranational debt and debt of
a foreign country or a subdivision thereof,
investment grade and high yield corporate debt,
bank loans, mortgage and asset backed securities,
and commercial paper.
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Securities’’). Such Fixed Income
Securities will comply with
requirements of Commentary .01(b) to
NYSE Arca Rule 8.600–E.24
The Fund may also hold exchangetraded notes (‘‘ETNs’’) 25 and exchangetraded funds (‘‘ETFs’’).26
The Fund’s exposure to Commodity
Investments is obtained by investing
through a wholly-owned subsidiary
organized in the Cayman Islands
(‘‘Subsidiary’’).27 The Fund controls the
Subsidiary, and the Subsidiary is
advised by the Adviser and has the
same investment objective as the Fund.
In compliance with the requirements of
Sub-Chapter M of the Internal Revenue
Code of 1986, the Fund may invest up
to 25% of its total assets in the
Subsidiary. The Subsidiary is not an
investment company registered under
the 1940 Act and is a company
organized under the laws of the Cayman
Islands. The Trust’s Board of Trustees
(‘‘Board’’) has oversight responsibility
for the investment activities of the
Fund, including its investment in the
Subsidiary, and the Fund’s role as sole
shareholder of the Subsidiary.
The Fund’s Commodity Investments
held in the Subsidiary are intended to
provide the Fund with exposure to
broad commodities. The Subsidiary may
hold cash and cash equivalents.
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B. Investment Restrictions
The Fund and the Subsidiary will not
invest in securities or other financial
instruments that have not been
described in the proposed rule change.
The Fund’s investments, including
derivatives, will be consistent with the
Fund’s investment objective and will
not be used to enhance leverage
(although certain derivatives and other
investments may result in leverage).
That is, the Fund’s investments will not
be used to seek performance that is the
multiple or inverse multiple (e.g., 2X or
–3X) of the Fund’s Reference
Benchmark.
24 Among the Fixed Income Securities in which
the Fund may invest are commodity-linked notes.
25 ETNs are securities as described in NYSE Arca
Rule 5.2–E(j)(6) (Equity Index-Linked Securities,
Commodity-Linked Securities, Currency-Linked
Securities, Fixed Income Index-Linked Securities,
Futures-Linked Securities and Multifactor IndexLinked Securities).
26 For purposes of the filing, the term ‘‘ETFs’’
includes Investment Company Units (as described
in NYSE Arca Rule 5.2–E(j)(3)); Portfolio Depositary
Receipts (as described in NYSE Arca Rule 8.100–
E); and Managed Fund Shares (as described in
NYSE Arca Rule 8.600–E). All ETFs will be listed
and traded in the U.S. on a national securities
exchange. The Fund will not invest in inverse or
leveraged (e.g., 2X, –2X, 3X or –3X) ETFs.
27 The Exchange represents that all statements
related to the Fund’s investments and restrictions
are applicable to the Fund and Subsidiary
collectively.
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C. Use of Derivatives by the Fund
Investments in derivative instruments
will be made in accordance with the
Fund’s investment objective and
policies. To limit the potential risk
associated with such transactions, the
Fund will enter into offsetting
transactions or segregate or ‘‘earmark’’
assets determined to be liquid by the
Adviser in accordance with procedures
established by the Board. In addition,
the Fund has included appropriate risk
disclosure in its offering documents,
including leveraging risk. Leveraging
risk is the risk that certain transactions
of the Fund, including the Fund’s use of
derivatives, may give rise to leverage,
causing the Fund to be more volatile
than if it had not been leveraged.
The Adviser believes there will be
minimal, if any, impact to the arbitrage
mechanism as a result of the Fund’s use
of derivatives. The Adviser understands
that market makers and participants
should be able to value derivatives as
long as the positions are disclosed with
relevant information. The Adviser
believes that the price at which Shares
of the Fund trade will continue to be
disciplined by arbitrage opportunities
created by the ability to purchase or
redeem Shares of the Fund at their net
asset value (‘‘NAV’’), which should
ensure that Shares of the Fund will not
trade at a material discount or premium
in relation to their NAV.
The Adviser does not believe there
will be any significant impacts to the
settlement or operational aspects of the
Fund’s arbitrage mechanism due to the
use of derivatives.
D. Application of Generic Listing
Requirements
The Exchange represents that the
portfolio for the Fund will not meet all
of the ‘‘generic’’ listing requirements of
Commentary .01 to NYSE Arca Rule
8.600–E applicable to the listing of
Managed Fund Shares. The Exchange
represents that, other than Commentary
.01(b)(1)–(4) (with respect to Short-Term
Fixed Income Securities) and .01(e)
(with respect to OTC Derivatives) to
NYSE Arca Rule 8.600–E, as described
below, the Fund’s portfolio will meet all
other requirements of NYSE Arca Rule
8.600–E.
According to the Exchange, the
Fund’s investments in Short-Term Fixed
Income Securities will not comply with
the requirements set forth in
Commentary .01(b)(1)–(4) to NYSE Arca
Rule 8.600–E.28 The Exchange states
28 Commentary .01(b)(1)–(4) to NYSE Arca Rule
8.600–E requires that the components of the fixed
income portion of a portfolio meet the following
criteria initially and on a continuing basis: (1)
PO 00000
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11377
that while the requirements set forth in
Commentary .01(b)(1)–(4) include rules
intended to ensure that the fixed income
securities included in a fund’s portfolio
are sufficiently large and diverse, and
have sufficient publicly available
information regarding the issuances, the
Exchange believes that any concerns,
regarding non-compliance are mitigated
by the types of instruments that the
Fund would hold. The Exchange
represents that the Fund’s Short-Term
Fixed Income Securities primarily
would include those instruments that
are included in the definition of cash
and cash equivalents,29 but are not
considered cash and cash equivalents
because they have maturities of three
months or longer. The Exchange
believes, however, that, because all
Short-Term Fixed Income Securities,
including non-convertible corporate
debt securities and sovereign obligations
(which are not cash equivalents as
enumerated in Commentary .01(c) to
NYSE Arca Rule 8.600–E), are highly
liquid they are less susceptible than
other types of fixed income instruments
both to price manipulation and
volatility and that the holdings as
proposed are generally consistent with
the policy concerns which Commentary
.01(b)(1)–(4) is intended to address.
Because the Short-Term Fixed Income
Securities will consist of high-quality
fixed income securities described above,
the Exchange believes that the policy
concerns that Commentary .01(b)(1)–(4)
Components that in the aggregate account for at
least 75% of the fixed income weight of the
portfolio each shall have a minimum original
principal amount outstanding of $100 million or
more; (2) no component fixed-income security
(excluding Treasury Securities and GSE Securities)
shall represent more than 30% of the fixed income
weight of the portfolio, and the five most heavily
weighted component fixed income securities in the
portfolio (excluding Treasury Securities and GSE
Securities) shall not in the aggregate account for
more than 65% of the fixed income weight of the
portfolio; (3) an underlying portfolio (excluding
exempted securities) that includes fixed income
securities shall include a minimum of 13 nonaffiliated issuers, provided, however, that there
shall be no minimum number of non-affiliated
issuers required for fixed income securities if at
least 70% of the weight of the portfolio consists of
equity securities as described in Commentary .01(a);
and (4) component securities that in aggregate
account for at least 90% of the fixed income weight
of the portfolio must be either (a) from issuers that
are required to file reports pursuant to Sections 13
and 15(d) of the Securities Exchange Act of 1934;
(b) from issuers that have a worldwide market value
of its outstanding common equity held by nonaffiliates of $700 million or more; (c) from issuers
that have outstanding securities that are notes,
bonds debentures, or evidence of indebtedness
having a total remaining principal amount of at
least $1 billion; (d) exempted securities as defined
in Section 3(a)(12) of the Securities Exchange Act
of 1934; or (e) from issuers that are a government
of a foreign country or a political subdivision of a
foreign country.
29 See supra note 16.
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jbell on DSK30RV082PROD with NOTICES
is intended to address are otherwise
mitigated and that the Fund should be
permitted to hold these securities in a
manner that may not comply with
Commentary .01(b)(1)–(4).
The Exchange represents that the
Fund’s portfolio with respect to OTC
Derivatives will not comply with the
requirements set forth in Commentary
.01(e) to NYSE Arca Rule 8.600–E.30
Specifically, the Exchange states that up
to 60% of the Fund’s assets (calculated
as the aggregate gross notional value)
may be invested in OTC Derivatives.
The Exchange states that the Adviser
believes that it is important to provide
the Fund with additional flexibility to
manage risk associated with its
investments and, depending on market
conditions, it may be critical that the
Fund be able to utilize available OTC
Derivatives to efficiently gain exposure
to the multiple commodities that
underlie the Reference Benchmark, as
well as commodity futures contracts
similar to those found in the Reference
Benchmark. The Exchange states that
OTC Derivatives can be tailored to
provide specific exposure to the Fund’s
Reference Benchmark, as well as
commodity futures contracts similar to
those found in the Reference
Benchmark, allowing the Fund to more
efficiently meet its investment
objective.31 The Exchange further states
that if the Fund were to gain commodity
exposure exclusively through the use of
listed futures, the Fund’s holdings in
Listed Derivatives would be subject to
position limits and accountability levels
established by an exchange, and such
limitations would restrict the Fund’s
ability to gain efficient exposure to the
commodities in the Reference
Benchmark, or futures contracts similar
to those found in the Reference
Benchmark, thereby impeding the
Fund’s ability to satisfy its investment
objective.
The Exchange states that the Adviser
represents that the Fund’s holdings in
30 Commentary .01(e) to NYSE Arca Rule 8.600–
E provides that, on an initial and continuing basis,
no more than 20% of the assets in the portfolio may
be invested in OTC derivatives (calculated as the
aggregate gross notional value of the OTC
derivatives).
31 As an example, the Exchange states that the
Reference Benchmark is composed of 20 futures
contracts across 20 physical commodities, which
may not be sufficiently liquid and would not
provide the commodity exposure the Fund requires
to meet its investment objective if the Fund were
to invest in the futures directly. The Exchange
states that a total return swap can be structured to
provide exposure to the same futures contracts as
exist in the Reference Benchmark, as well as
commodity futures contracts similar to those found
in the Reference Benchmark, while providing
sufficient efficiency to allow the Fund to more
easily meet its investment objective.
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17:54 Mar 25, 2019
Jkt 247001
OTC Derivatives will satisfy the criteria
applicable to holdings in Listed
Derivatives in Commentary .01(d)(2) to
NYSE Arca Rule 8.600–E on an initial
and continued listing basis.32 Thus,
with respect to the Fund’s holdings in
OTC Derivatives, the aggregate gross
notional value of OTC Derivatives based
on any five or fewer underlying
reference assets will not exceed 65% of
the weight of the portfolio (including
gross notional exposures), and the
aggregate gross notional value of OTC
Derivatives based on any single
underlying reference asset will not
exceed 30% of the weight of the
portfolio (including gross notional
exposures). The Exchange also
represents that the Adviser and its
affiliates actively monitor counterparty
credit risk exposure (including for OTC
derivatives) and evaluate counterparty
credit quality on a continuous basis.
Finally, the Exchange states that the
Adviser represents that futures contracts
on all commodities in the Reference
Benchmark are traded on futures
exchanges that are members of the
Intermarket Surveillance Group.
III. Proceedings To Determine Whether
To Approve or Disapprove SR–
NYSEArca–2018–98, as Modified by
Amendment No. 2, and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 33 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of such proceedings is
appropriate at this time in view of the
legal and policy issues raised by the
proposed rule change. Institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described
below, the Commission seeks and
encourages interested persons to
provide comments on the proposed rule
change.
Pursuant to Section 19(b)(2)(B) of the
Act,34 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of the proposed rule
change’s consistency with Section
6(b)(5) of the Act, which requires,
among other things, that the rules of a
national securities exchange be
‘‘designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade,’’ and ‘‘to protect investors and the
public interest.’’ 35
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
Rule 19b–4 under the Act,36 any request
for an opportunity to make an oral
presentation.37
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 April 16, 2019. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by April 30, 2019. The
Commission asks that commenters
address the sufficiency of the
Exchange’s statements in support of the
proposal, which are set forth in
Amendment No. 2,38 in addition to any
other comments they may wish to
submit about the proposed rule change.
In this regard, the Commission seeks
comment on the Exchange’s statements
that the Fund will not comply with the
requirement in Commentary .01(e) to
NYSE Arca Rule 8.600–E that
35 15
32 Commentary
.01(d)(2) to NYSE Arca Rule
8.600–E provides that, with respect to a fund’s
portfolio, 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).
33 15 U.S.C. 78s(b)(2)(B).
34 Id.
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
U.S.C. 78f(b)(5).
CFR 240.19b–4.
37 Section 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).
38 See supra note 7.
36 17
E:\FR\FM\26MRN1.SGM
26MRN1
Federal Register / Vol. 84, No. 58 / Tuesday, March 26, 2019 / Notices
investments in OTC Derivatives be
limited to 20% of the assets of the
Fund’s portfolio. Instead, the Fund’s
investments in OTC Derivatives would
be limited to 60% of the Fund’s assets.
Such OTC Derivatives may be forwards,
options, and swaps on commodities
(which commodities are from the same
sectors as those included in the
Reference Benchmark); currencies; U.S.
and non-U.S. equity securities; fixed
income securities (as defined in
Commentary .01(b) to NYSE Arca Rule
8.600–E, but excluding Short-Term
Fixed Income Securities); interest rates;
and financial rates; or a basket or index
of any of the foregoing. The Commission
specifically seeks comment on whether
the Fund’s proposed investments in
OTC Derivatives are consistent with the
requirement that the rules of a national
securities exchange be ‘‘designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade,’’ and ‘‘to
protect investors and the public
interest.’’ 39 Has the Exchange has
provided sufficient information relating
to OTC Derivatives, including the
underlying reference assets of such OTC
Derivatives, for the Commission to
determine that trading of the Fund’s
Shares would be consistent with the
Act?
Comments may be submitted by any
of the following methods:
jbell on DSK30RV082PROD with NOTICES
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–2018–98 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–2018–98. 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
39 15
U.S.C. 78f(b)(5).
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17:54 Mar 25, 2019
Jkt 247001
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2018–98 and
should be submitted by April 16, 2019.
Rebuttal comments should be
submittedby April 30, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–05704 Filed 3–25–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85373; File No. SR–
NASDAQ–2019–015]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Amend
Equity 7, Section 118(a)(3)
March 20, 2019
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 March 12,
2019, The Nasdaq Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III 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.
40 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.
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
11379
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Exchange’s transaction fees at Equity 7,
Section 118(a)(3) to adopt a $0.00005
per share executed credit provided to
members for displayed quotes/orders
(other than Supplemental Orders or
Designated Retail Orders) in securities
listed on exchanges other than Nasdaq
and NYSE (‘‘Tape B Securities’’) that
provide liquidity, as described further
below.
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
1. Purpose
The purpose of the proposed rule
change is to amend the Exchange’s
transaction fees at Equity 7, Section
118(a)(3) to adopt a $0.00005 per share
executed credit provided to members for
displayed quotes/orders (other than
Supplemental Orders or Designated
Retail Orders) in Tape B Securities that
provide liquidity. The proposed credit
would be provided to a member in
addition to any other credit it qualifies
for under Section 118(a)(3), including
the $0.0001 per share executed credit
for displayed quotes/orders in Tape B
securities provided in addition to other
credits under Section 118(a)(3).3 To
3 The Exchange provides the credit to members
with shares of liquidity provided in Tape B
securities during the month representing at least
0.10% of Consolidated Volume during the month
through one or more of its Nasdaq Market Center
MPIDs. Thus, a member that qualifies for the
proposed credit would also qualify for the existing
$0.0001 per share executed credit, resulting in a
combined credit of $0.00015 per share executed
E:\FR\FM\26MRN1.SGM
Continued
26MRN1
]]>Agencies
[Federal Register Volume 84, Number 58 (Tuesday, March 26, 2019)]
[Notices]
[Pages 11375-11379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05704]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85375; File No. SR-NYSEArca-2018-98]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 2 and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by
Amendment No. 2, To List and Trade Shares of the iShares Commodity
Multi-Strategy ETF Under NYSE Arca Rule 8.600-E
March 20, 2019.
I. Introduction
On December 21, 2018, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') 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 Commodity Multi-Strategy ETF (``Fund'') under NYSE Arca Rule
8.600-E. On February 1, 2019, pursuant to Section 19(b)(1) of the
Act,\3\ the Commission noticed the proposed rule change and, pursuant
to Section 19(b)(2) of the Act,\4\ designated a longer period within
which to approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to approve or
disapprove the proposed rule change.\5\ On March 6, 2019, the Exchange
filed Amendment No. 1 to the proposed rule change, which replaced and
superseded the proposed rule change as originally filed.\6\ On March
14, 2019, the Exchange filed Amendment No. 2 to the proposed rule
change, which replaced and superseded the proposed rule change, as
modified by Amendment No. 1.\7\ The Commission has received no comment
letters on the proposal. The Commission is publishing this notice and
order to solicit comments on the proposed rule change, as modified by
Amendment No. 2, from interested persons and to institute proceedings
pursuant to Section 19(b)(2)(B) of the Act \8\ to determine whether to
approve or disapprove the proposed rule change, as modified by
Amendment No. 2.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(1).
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 85033, 84 FR 2618
(February 7, 2019). The Commission designated March 21, 2019, as the
date by which the Commission shall approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to approve or disapprove the proposed rule change.
\6\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2018-98/srnysearca201898-5031693-183046.pdf.
\7\ In Amendment No. 2, the Exchange: (1) Identified the
Reference Benchmark (as defined below); (2) clarified that the Fund
is not obligated to invest in any futures contracts included in, and
does not seek to replicate the performance of, the Reference
Benchmark; (3) modified the types of derivative instruments and
reference assets for such derivative instruments that the Fund may
invest in; (4) clarified that commodity-linked notes are among the
Fixed Income Instruments (as defined below) that the Fund may invest
in; (5) specified that the Fund may invest in ETNs and ETFs (each as
defined below); (6) added a representation that to the extent the
Trust (as defined below) effects the redemption of Shares in cash,
such transactions will be effected in the same manner or in an
equitable manner for all Authorized Participants (as defined below),
subject to the best interests of the Fund; (7) added a
representation that the Fund's holdings in OTC Derivatives (as
defined below) will satisfy the criteria applicable to holdings in
listed derivatives in Commentary .01(d)(2) to NYSE Arca Rule 8.600-E
on an initial and continued listing basis; (8) added a
representation that the Adviser (as defined below) and its
affiliates actively monitor counterparty credit risk exposure
(including for OTC derivatives) and evaluate counterparty credit
quality on a continuous basis; (8) stated that the Reference
Benchmark price is available via Bloomberg and that the Reference
Benchmark methodology and constituent list is available via ICE Data
Services; and (9) made technical and conforming changes. Amendment
No. 2 is available at: https://www.sec.gov/comments/sr-nysearca-2018-98/srnysearca201898-5123714-183326.pdf.
\8\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
II. Summary of the Exchange's Description of the Proposal, as Modified
by Amendment No. 2 \9\
---------------------------------------------------------------------------
\9\ For a complete description of the Exchange's proposal, see
Amendment No. 2, supra note 7.
---------------------------------------------------------------------------
The Exchange proposes to list and trade Shares of the Fund under
NYSE Arca Rule 8.600-E, which governs the listing and trading of
Managed Fund Shares on the Exchange. The Shares will be offered by
iShares U.S. ETF Trust (``Trust''), which is registered with the
Commission as an open-end management investment company.\10\ The Fund
is a series of the Trust.
---------------------------------------------------------------------------
\10\ According to the Exchange, on December 3, 2018, the Trust
filed with the Commission its registration statement on Form N-1A
under the Securities Act of 1933 and under the Investment Company
Act of 1940 (``1940 Act'') relating to the Fund (File Nos. 333-
179904 and 811-22649) (``Registration Statement''). In addition, the
Exchange states that the Commission has issued an order upon which
the Trust may rely, granting certain exemptive relief under the 1940
Act. See Investment Company Act Release No. 29571 (January 24, 2011)
(File No. 812-13601).
---------------------------------------------------------------------------
BlackRock Fund Advisors (``Adviser'') will be the investment
adviser for the Fund.\11\ BlackRock Investments, LLC will be the
distributor for the Fund's Shares. State Street Bank and Trust Company
will serve as the administrator, custodian and transfer agent for the
Fund.
---------------------------------------------------------------------------
\11\ According to the Exchange, the Adviser is not registered as
a broker-dealer but is affiliated with a broker-dealer, and has
implemented and will maintain a fire wall with respect to its
broker-dealer affiliate regarding access to information concerning
the composition and/or changes to the portfolio. In the event (a)
the Adviser becomes registered as a broker-dealer or newly
affiliated with a 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 its broker-dealer affiliate
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 Exchange also represents
that the Adviser and its related personnel are subject to the
provisions of Rule 204A-1 under the Investment Advisers Act of 1940
relating to codes of ethics.
---------------------------------------------------------------------------
A. Fund Investments
According to the Exchange, the investment objective of the Fund
will be to seek to provide exposure, on a total return basis, to a
group of commodities with characteristics of carry, momentum, and
value. The Fund is actively managed and seeks to achieve its investment
objective in part \12\ by, under normal market conditions,\13\
investing in listed and over-the-counter (``OTC'') total return swaps
referencing the ICE BofAML Commodity Multi-Factor Total Return Index
(``Reference Benchmark'').\14\ In connection with
[[Page 11376]]
investments in swaps on the Reference Benchmark, the Fund is expected
to establish new swaps contracts on an ongoing basis and replace
expiring contracts.\15\ Swaps subsequently entered into by the Fund may
have terms that differ from the swaps the Fund previously held. The
Fund expects generally to pay a fixed payment rate and certain swap
related fees to the swap counterparty and receive the total return of
the Reference Benchmark, including in the event of negative performance
by the Reference Benchmark, negative return (i.e., a payment from the
Fund to the swap counterparty). In seeking total return, the Fund
additionally aims to generate interest income and capital appreciation
through a cash management strategy consisting primarily of cash, cash
equivalents,\16\ and fixed income securities other than cash
equivalents, as described below.
---------------------------------------------------------------------------
\12\ The Fund's investment objective is also achieved by
investing in cash, cash equivalents, Commodity Investments, Fixed
Income Securities and Short-Term Fixed Income Securities (each as
defined or described below).
\13\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5).
\14\ Although the Fund may hold swaps on the Reference
Benchmark, or direct investments in, the same futures contracts as
those included in the Reference Benchmark, the Fund is not obligated
to invest in any futures contracts included in, and does not seek to
replicate the performance of, the Reference Benchmark.
\15\ Swaps on the Reference Benchmark are included in
``Commodity Investments'' as defined below.
\16\ Cash equivalents are the short-term instruments enumerated
in Commentary .01(c) to NYSE Arca Rule 8.600-E.
---------------------------------------------------------------------------
The Fund intends to follow a multifactor strategy reflected by the
Reference Benchmark, which Reference Benchmark equally weights three
sub-indices designed to provide exposure to carry, momentum, and value
factors. The Fund will invest in financial instruments described below
that provide exposure to commodities and not in the physical
commodities themselves. The ``carry'' sub-index emphasizes commodities
and contract months with the greatest degree of backwardation or lowest
degree of contango.\17\ Second, the ``momentum'' sub-index underweights
or overweights commodities based on the strength of performance
patterns over multiple time periods. Third, the ``value'' sub-index
measures value for each commodity by the ratio of its 3-month average
spot price to its 5-year average. Sector weights are held constant
versus a broad non-factor weighted commodity index, but within each
sector, weights of individual commodities are tilted to favor those
with the lowest valuation ratio. Within each sub-index, contract months
are selected to maximize backwardation and minimize contango.
---------------------------------------------------------------------------
\17\ According to the Exchange, in order to maintain exposure to
a futures contract on a particular commodity, an investor must sell
the position in the expiring contract and buy a new position in a
contract with a later delivery month, which is referred to as
``rolling.'' If the price for the new futures contract is less than
the price of the expiring contract, then the market for the
commodity is said to be in ``backwardation.'' In these markets, roll
returns are positive, which is referred to as ``positive carry.''
The term ``contango'' is used to describe a market in which the
price for a new futures contract is more than the price of the
expiring contract. In these markets, roll returns are negative,
which is referred to as ``negative carry.'' The ``carry'' sub-index
seeks to employ a positive carry strategy that emphasizes
commodities and futures contract months with the greatest degree of
backwardation and lowest degree of contango, resulting in net gains
through positive roll returns.
---------------------------------------------------------------------------
The Fund expects to obtain a substantial amount of its exposure to
the carry, momentum, and value strategies by entering into total return
swaps that pay the returns of the commodity futures contracts
referenced in the Reference Benchmark. The Reference Benchmark includes
20 futures contracts on physical agricultural, energy, livestock,
precious metals, and industrial metals listed on U.S. regulated futures
exchanges.
The Fund (through its Subsidiary (as defined below)) may hold the
following listed derivative instruments: Futures, options, and swaps on
commodities (which commodities are from the same sectors as those
included in the Reference Benchmark); currencies; U.S. and non-U.S.
equity securities; fixed income securities (as defined in Commentary
.01(b) to NYSE Arca Rule 8.600-E, but excluding Short-Term Fixed Income
Securities (as defined below)); interest rates; and financial rates; or
a basket or index of any of the foregoing (collectively, ``Listed
Derivatives'').\18\ Listed Derivatives will comply with the criteria in
Commentary .01(d) of NYSE Arca Rule 8.600-E.
---------------------------------------------------------------------------
\18\ Examples of Listed Derivatives the Fund may invest in
include: Exchange traded futures contracts similar to those found in
the Reference Benchmark, exchange traded futures contracts on the
Reference Benchmark, swaps on commodity futures contracts similar to
those found in the Reference Benchmark, and futures and options that
correlate to the investment returns of commodities without investing
directly in physical commodities.
---------------------------------------------------------------------------
The Fund (through its Subsidiary (as defined below)) may hold the
following OTC derivative instruments: Forwards, options, and swaps on
commodities (which commodities are from the same sectors as those
included in the Reference Benchmark); currencies; U.S. and non-U.S.
equity securities; fixed income securities (as defined in Commentary
.01(b) to NYSE Arca Rule 8.600-E, but excluding Short-Term Fixed Income
Securities); interest rates; and financial rates; or a basket or index
of any of the foregoing (collectively, ``OTC Derivatives,'' \19\ and
together with Listed Derivatives, ``Commodity Investments'').\20\
---------------------------------------------------------------------------
\19\ As discussed below under ``Application of Generic Listing
Requirements,'' the Fund's and the Subsidiary's holdings in OTC
Derivatives will not comply with the criteria in Commentary .01(e)
of NYSE Arca Rule 8.600-E.
\20\ Examples of OTC Derivatives the Fund may invest in include
swaps on commodity futures contracts similar to those found in the
Reference Benchmark and options that correlate to the investment
returns of commodities without investing directly in physical
commodities.
---------------------------------------------------------------------------
The Fund may hold cash, cash equivalents, and fixed income
securities other than cash equivalents, as described further below.
Specifically, the Fund may invest in Short-Term Fixed Income
Securities (as defined below) other than cash equivalents on an ongoing
basis to provide liquidity or for other reasons.\21\ Short-Term Fixed
Income Securities will have a maturity of no longer than 397 days and
include only the following: (i) Money market instruments; (ii)
obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities (including government-sponsored enterprises);
(iii) negotiable certificates of deposit, bankers' acceptances, fixed-
time deposits and other obligations of U.S. and non-U.S. banks
(including non-U.S. branches) and similar institutions; (iv) commercial
paper; (v) non-convertible corporate debt securities (e.g., bonds and
debentures); (vi) repurchase agreements; (vii) short-term U.S. dollar-
denominated obligations of non-U.S. banks (including U.S. branches)
that, in the opinion of the Adviser, are of comparable quality to
obligations of U.S. banks that may be purchased by the Fund; and (viii)
sovereign obligations (collectively, ``Short-Term Fixed Income
Securities''). Any of these securities may be purchased on a current or
forward-settled basis.\22\
---------------------------------------------------------------------------
\21\ As discussed under ``Application of Generic Listing
Requirements'' below, investments in Short-Term Fixed Income
Securities will not comply with the requirements of Commentary
.01(b)(1)-(4) to NYSE Arca Rule 8.600-E.
\22\ To the extent that the Fund and the Subsidiary invest in
cash and Short-Term Fixed Income Securities that are cash
equivalents (i.e., that have maturities of less than 3 months) as
specified in Commentary .01(c) to NYSE Arca Rule 8.600-E, such
investments will comply with Commentary .01(c) and may be held
without limitation. Non-convertible corporate debt securities and
sovereign obligations are not included as cash equivalents in
Commentary .01(c).
---------------------------------------------------------------------------
The Fund also may invest in fixed income securities as defined in
Commentary .01(b) to NYSE Arca Rule 8.600-E,\23\ other than cash
equivalents and Short-Term Fixed Income Securities, with remaining
maturities longer than 397 days (``Fixed Income
[[Page 11377]]
Securities''). Such Fixed Income Securities will comply with
requirements of Commentary .01(b) to NYSE Arca Rule 8.600-E.\24\
---------------------------------------------------------------------------
\23\ Commentary .01(b) to NYSE Arca Rule 8.600-E defines fixed
income securities as debt securities that are notes, bonds,
debentures or evidence of indebtedness that include, but are not
limited to, U.S. Department of Treasury securities (``Treasury
Securities''), government-sponsored entity securities (``GSEs''),
municipal securities, trust preferred securities, supranational debt
and debt of a foreign country or a subdivision thereof, investment
grade and high yield corporate debt, bank loans, mortgage and asset
backed securities, and commercial paper.
\24\ Among the Fixed Income Securities in which the Fund may
invest are commodity-linked notes.
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The Fund may also hold exchange-traded notes (``ETNs'') \25\ and
exchange-traded funds (``ETFs'').\26\
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\25\ ETNs are securities as described in NYSE Arca Rule 5.2-
E(j)(6) (Equity Index-Linked Securities, Commodity-Linked
Securities, Currency-Linked Securities, Fixed Income Index-Linked
Securities, Futures-Linked Securities and Multifactor Index-Linked
Securities).
\26\ For purposes of the filing, the term ``ETFs'' includes
Investment Company Units (as described in NYSE Arca Rule 5.2-
E(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca
Rule 8.100-E); and Managed Fund Shares (as described in NYSE Arca
Rule 8.600-E). All ETFs will be listed and traded in the U.S. on a
national securities exchange. The Fund will not invest in inverse or
leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
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The Fund's exposure to Commodity Investments is obtained by
investing through a wholly-owned subsidiary organized in the Cayman
Islands (``Subsidiary'').\27\ The Fund controls the Subsidiary, and the
Subsidiary is advised by the Adviser and has the same investment
objective as the Fund. In compliance with the requirements of Sub-
Chapter M of the Internal Revenue Code of 1986, the Fund may invest up
to 25% of its total assets in the Subsidiary. The Subsidiary is not an
investment company registered under the 1940 Act and is a company
organized under the laws of the Cayman Islands. The Trust's Board of
Trustees (``Board'') has oversight responsibility for the investment
activities of the Fund, including its investment in the Subsidiary, and
the Fund's role as sole shareholder of the Subsidiary.
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\27\ The Exchange represents that all statements related to the
Fund's investments and restrictions are applicable to the Fund and
Subsidiary collectively.
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The Fund's Commodity Investments held in the Subsidiary are
intended to provide the Fund with exposure to broad commodities. The
Subsidiary may hold cash and cash equivalents.
B. Investment Restrictions
The Fund and the Subsidiary will not invest in securities or other
financial instruments that have not been described in the proposed rule
change. The Fund's investments, including derivatives, will be
consistent with the Fund's investment objective and will not be used to
enhance leverage (although certain derivatives and other investments
may result in leverage). That is, the Fund's investments will not be
used to seek performance that is the multiple or inverse multiple
(e.g., 2X or -3X) of the Fund's Reference Benchmark.
C. Use of Derivatives by the Fund
Investments in derivative instruments will be made in accordance
with the Fund's investment objective and policies. To limit the
potential risk associated with such transactions, the Fund will enter
into offsetting transactions or segregate or ``earmark'' assets
determined to be liquid by the Adviser in accordance with procedures
established by the Board. In addition, the Fund has included
appropriate risk disclosure in its offering documents, including
leveraging risk. Leveraging risk is the risk that certain transactions
of the Fund, including the Fund's use of derivatives, may give rise to
leverage, causing the Fund to be more volatile than if it had not been
leveraged.
The Adviser believes there will be minimal, if any, impact to the
arbitrage mechanism as a result of the Fund's use of derivatives. The
Adviser understands that market makers and participants should be able
to value derivatives as long as the positions are disclosed with
relevant information. The Adviser believes that the price at which
Shares of the Fund trade will continue to be disciplined by arbitrage
opportunities created by the ability to purchase or redeem Shares of
the Fund at their net asset value (``NAV''), which should ensure that
Shares of the Fund will not trade at a material discount or premium in
relation to their NAV.
The Adviser does not believe there will be any significant impacts
to the settlement or operational aspects of the Fund's arbitrage
mechanism due to the use of derivatives.
D. Application of Generic Listing Requirements
The Exchange represents that the portfolio for the Fund will not
meet all of the ``generic'' listing requirements of Commentary .01 to
NYSE Arca Rule 8.600-E applicable to the listing of Managed Fund
Shares. The Exchange represents that, other than Commentary .01(b)(1)-
(4) (with respect to Short-Term Fixed Income Securities) and .01(e)
(with respect to OTC Derivatives) to NYSE Arca Rule 8.600-E, as
described below, the Fund's portfolio will meet all other requirements
of NYSE Arca Rule 8.600-E.
According to the Exchange, the Fund's investments in Short-Term
Fixed Income Securities will not comply with the requirements set forth
in Commentary .01(b)(1)-(4) to NYSE Arca Rule 8.600-E.\28\ The Exchange
states that while the requirements set forth in Commentary .01(b)(1)-
(4) include rules intended to ensure that the fixed income securities
included in a fund's portfolio are sufficiently large and diverse, and
have sufficient publicly available information regarding the issuances,
the Exchange believes that any concerns, regarding non-compliance are
mitigated by the types of instruments that the Fund would hold. The
Exchange represents that the Fund's Short-Term Fixed Income Securities
primarily would include those instruments that are included in the
definition of cash and cash equivalents,\29\ but are not considered
cash and cash equivalents because they have maturities of three months
or longer. The Exchange believes, however, that, because all Short-Term
Fixed Income Securities, including non-convertible corporate debt
securities and sovereign obligations (which are not cash equivalents as
enumerated in Commentary .01(c) to NYSE Arca Rule 8.600-E), are highly
liquid they are less susceptible than other types of fixed income
instruments both to price manipulation and volatility and that the
holdings as proposed are generally consistent with the policy concerns
which Commentary .01(b)(1)-(4) is intended to address. Because the
Short-Term Fixed Income Securities will consist of high-quality fixed
income securities described above, the Exchange believes that the
policy concerns that Commentary .01(b)(1)-(4)
[[Page 11378]]
is intended to address are otherwise mitigated and that the Fund should
be permitted to hold these securities in a manner that may not comply
with Commentary .01(b)(1)-(4).
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\28\ Commentary .01(b)(1)-(4) to NYSE Arca Rule 8.600-E requires
that the components of the fixed income portion of a portfolio meet
the following criteria initially and on a continuing basis: (1)
Components that in the aggregate account for at least 75% of the
fixed income weight of the portfolio each shall have a minimum
original principal amount outstanding of $100 million or more; (2)
no component fixed-income security (excluding Treasury Securities
and GSE Securities) shall represent more than 30% of the fixed
income weight of the portfolio, and the five most heavily weighted
component fixed income securities in the portfolio (excluding
Treasury Securities and GSE Securities) shall not in the aggregate
account for more than 65% of the fixed income weight of the
portfolio; (3) an underlying portfolio (excluding exempted
securities) that includes fixed income securities shall include a
minimum of 13 non-affiliated issuers, provided, however, that there
shall be no minimum number of non-affiliated issuers required for
fixed income securities if at least 70% of the weight of the
portfolio consists of equity securities as described in Commentary
.01(a); and (4) component securities that in aggregate account for
at least 90% of the fixed income weight of the portfolio must be
either (a) from issuers that are required to file reports pursuant
to Sections 13 and 15(d) of the Securities Exchange Act of 1934; (b)
from issuers that have a worldwide market value of its outstanding
common equity held by non-affiliates of $700 million or more; (c)
from issuers that have outstanding securities that are notes, bonds
debentures, or evidence of indebtedness having a total remaining
principal amount of at least $1 billion; (d) exempted securities as
defined in Section 3(a)(12) of the Securities Exchange Act of 1934;
or (e) from issuers that are a government of a foreign country or a
political subdivision of a foreign country.
\29\ See supra note 16.
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The Exchange represents that the Fund's portfolio with respect to
OTC Derivatives will not comply with the requirements set forth in
Commentary .01(e) to NYSE Arca Rule 8.600-E.\30\ Specifically, the
Exchange states that up to 60% of the Fund's assets (calculated as the
aggregate gross notional value) may be invested in OTC Derivatives. The
Exchange states that the Adviser believes that it is important to
provide the Fund with additional flexibility to manage risk associated
with its investments and, depending on market conditions, it may be
critical that the Fund be able to utilize available OTC Derivatives to
efficiently gain exposure to the multiple commodities that underlie the
Reference Benchmark, as well as commodity futures contracts similar to
those found in the Reference Benchmark. The Exchange states that OTC
Derivatives can be tailored to provide specific exposure to the Fund's
Reference Benchmark, as well as commodity futures contracts similar to
those found in the Reference Benchmark, allowing the Fund to more
efficiently meet its investment objective.\31\ The Exchange further
states that if the Fund were to gain commodity exposure exclusively
through the use of listed futures, the Fund's holdings in Listed
Derivatives would be subject to position limits and accountability
levels established by an exchange, and such limitations would restrict
the Fund's ability to gain efficient exposure to the commodities in the
Reference Benchmark, or futures contracts similar to those found in the
Reference Benchmark, thereby impeding the Fund's ability to satisfy its
investment objective.
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\30\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that,
on an initial and continuing basis, no more than 20% of the assets
in the portfolio may be invested in OTC derivatives (calculated as
the aggregate gross notional value of the OTC derivatives).
\31\ As an example, the Exchange states that the Reference
Benchmark is composed of 20 futures contracts across 20 physical
commodities, which may not be sufficiently liquid and would not
provide the commodity exposure the Fund requires to meet its
investment objective if the Fund were to invest in the futures
directly. The Exchange states that a total return swap can be
structured to provide exposure to the same futures contracts as
exist in the Reference Benchmark, as well as commodity futures
contracts similar to those found in the Reference Benchmark, while
providing sufficient efficiency to allow the Fund to more easily
meet its investment objective.
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The Exchange states that the Adviser represents that the Fund's
holdings in OTC Derivatives will satisfy the criteria applicable to
holdings in Listed Derivatives in Commentary .01(d)(2) to NYSE Arca
Rule 8.600-E on an initial and continued listing basis.\32\ Thus, with
respect to the Fund's holdings in OTC Derivatives, the aggregate gross
notional value of OTC Derivatives based on any five or fewer underlying
reference assets will not exceed 65% of the weight of the portfolio
(including gross notional exposures), and the aggregate gross notional
value of OTC Derivatives based on any single underlying reference asset
will not exceed 30% of the weight of the portfolio (including gross
notional exposures). The Exchange also represents that the Adviser and
its affiliates actively monitor counterparty credit risk exposure
(including for OTC derivatives) and evaluate counterparty credit
quality on a continuous basis. Finally, the Exchange states that the
Adviser represents that futures contracts on all commodities in the
Reference Benchmark are traded on futures exchanges that are members of
the Intermarket Surveillance Group.
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\32\ Commentary .01(d)(2) to NYSE Arca Rule 8.600-E provides
that, with respect to a fund's portfolio, 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).
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2018-98, as Modified by Amendment No. 2, and Grounds for
Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \33\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
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\33\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\34\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' \35\
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\34\ Id.
\35\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the 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 Rule 19b-4 under the Act,\36\ any request for an
opportunity to make an oral presentation.\37\
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\36\ 17 CFR 240.19b-4.
\37\ Section 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).
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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 April 16, 2019.
Any person who wishes to file a rebuttal to any other person's
submission must file that rebuttal by April 30, 2019. The Commission
asks that commenters address the sufficiency of the Exchange's
statements in support of the proposal, which are set forth in Amendment
No. 2,\38\ in addition to any other comments they may wish to submit
about the proposed rule change.
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\38\ See supra note 7.
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In this regard, the Commission seeks comment on the Exchange's
statements that the Fund will not comply with the requirement in
Commentary .01(e) to NYSE Arca Rule 8.600-E that
[[Page 11379]]
investments in OTC Derivatives be limited to 20% of the assets of the
Fund's portfolio. Instead, the Fund's investments in OTC Derivatives
would be limited to 60% of the Fund's assets. Such OTC Derivatives may
be forwards, options, and swaps on commodities (which commodities are
from the same sectors as those included in the Reference Benchmark);
currencies; U.S. and non-U.S. equity securities; fixed income
securities (as defined in Commentary .01(b) to NYSE Arca Rule 8.600-E,
but excluding Short-Term Fixed Income Securities); interest rates; and
financial rates; or a basket or index of any of the foregoing. The
Commission specifically seeks comment on whether the Fund's proposed
investments in OTC Derivatives are consistent with the requirement that
the rules of a national securities exchange be ``designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade,'' and ``to protect investors and the
public interest.'' \39\ Has the Exchange has provided sufficient
information relating to OTC Derivatives, including the underlying
reference assets of such OTC Derivatives, for the Commission to
determine that trading of the Fund's Shares would be consistent with
the Act?
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\39\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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-2018-98 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-2018-98. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2018-98 and should be submitted
by April 16, 2019. Rebuttal comments should be submitted by April 30,
2019.
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\40\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05704 Filed 3-25-19; 8:45 am]
BILLING CODE 8011-01-P
