Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Allow the JPMorgan Core Plus Bond ETF of the J.P. Morgan Exchange-Traded Fund Trust To Hold Certain Instruments in a Manner That May Not Comply With Rule 14.11(i), Managed Fund Shares, 17902-17906 [2019-08400]
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17902
Federal Register / Vol. 84, No. 81 / Friday, April 26, 2019 / Notices
Information Officer, Securities and
Exchange Commission, c/o Candace
Kenner, 100 F Street NE, Washington,
DC 20549, or by sending an email to:
PRA_Mailbox@sec.gov. Comments must
be submitted to OMB within 30 days of
this notice.
Dated: April 23, 2019.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–08469 Filed 4–25–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85701; File No. SR–
CboeBZX–2019–016]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Allow the
JPMorgan Core Plus Bond ETF of the
J.P. Morgan Exchange-Traded Fund
Trust To Hold Certain Instruments in a
Manner That May Not Comply With
Rule 14.11(i), Managed Fund Shares
April 22, 2019.
I. Introduction
On March 5, 2019, Cboe BZX
Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’)
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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 85349
(March 18, 2019), 84 FR 10874.
4 In Amendment No. 1, the Exchange: (a) Clarified
that (i) the Shares are currently listed and traded
on the Exchange pursuant to the generic listing
standards applicable to Managed Fund Shares
under BZX Rule 14.11(i) (‘‘Generic Listing
Standards’’), (ii) the Fund currently meets the
Generic Listing Standards, and (iii) the Fund will
continue to meet the Generic Listing Standards
unless and until the proposed rule change is
approved; (b) clarified that the Exchange will
measure derivatives holdings using gross notional
value of the derivatives as required by the Generic
Listing Standards (rather than using mark-to-market
value of derivatives); (c) stated that in response to
adverse market, economic, or political conditions,
the Fund reserves the right to invest in cash and
Cash Equivalents (as defined below), without
limitation, as determined by the Adviser; (d)
clarified the types of mortgage-backed securities
that are permitted investments of the Fund; (e)
clarified that, consistent with the requirements of
BZX Rule 14.11(i)(4)(C)(ii)(e), the Fund will limit
aggregate investments in asset-backed securities and
Private MBS (as defined below) to 20% of the
weight of the fixed income portion of the Fund’s
portfolio; (f) represented that the Fund’s holdings
in Cash Equivalents and over-the-counter (‘‘OTC’’)
derivative instruments will be in compliance with
the limitations provided in BZX Rules
14.11(i)(4)(C)(iii) and 14.11(i)(4)(C)(v), respectively,
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19b–4 thereunder,2 a proposed rule
change to amend the listing
requirements applicable to shares
(‘‘Shares’’) of the JPMorgan Core Plus
Bond ETF (‘‘Fund’’), which Shares are
currently listed on the Exchange
pursuant to the generic listing standards
applicable to Managed Fund Shares
under BZX Rule 14.11(i) (Managed
Fund Shares). The proposed rule change
was published for comment in the
Federal Register on March 22, 2019.3
On March 28, 2019, the Exchange filed
Amendment No. 1 to the proposed rule
change, which amended and replaced
the proposed rule change as originally
filed.4 The Commission has received no
comments on the proposed rule change.
The Commission is publishing this
notice to solicit comments on
Amendment No. 1 from interested
persons, and is approving the proposed
rule change, as modified by Amendment
No. 1, on an accelerated basis.
II. Description of the Proposal, as
Modified by Amendment No. 1 5
The Shares are currently listed on the
Exchange pursuant to the Generic
Listing Standards and began trading on
January 30, 2019. The Shares are offered
by the J.P. Morgan Exchange-Traded
Fund Trust (‘‘Trust’’), which is
and that both listed and OTC derivative instruments
will be in compliance with the limitations of BZX
Rule 14.11(i)(4)(C)(vi); (g) clarified that because the
Fund will not purchase Equity Holdings (as defined
below) and will only hold such instruments if they
are issued to the Fund by virtue of its holdings in
Bonds (as defined below), Equity Holdings are
excluded from the description of the Fund’s
permitted investments; (h) clarified that while
listed derivatives positions are limited to 20% of
the Fund’s net assets, the gross notional exposure
related to such positions can be significantly larger,
and thus, the Fund may have gross notional
exposure to Eurodollar and G–7 Sovereign Futures
and Options (as defined below) in excess of 65%;
(i) provided updated data on open interest in
Eurodollar and G–7 Sovereign Futures and Options;
(j) represented that the Fund will adhere to its
stated investment objective under Normal Market
Conditions (as defined below); (k) represented that
the Exchange, the Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’), on behalf of the
Exchange, or both may obtain information regarding
trading in the Shares and the underlying listed
instruments held by the Fund with the Intermarket
Surveillance Group (‘‘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; (l)
provided additional justification as to why the
proposed changes to the Fund’s investments are
consistent with the Act even though the Fund’s
proposed holdings would no longer meet certain of
the Generic Listing Standards; and (m) made other
clarifications, corrections, and technical changes to
the proposal. Amendment No. 1 to the proposed
rule change is available at: https://www.sec.gov/
comments/sr-cboebzx-2019-016/srcboebzx20190165299386-183807.pdf.
5 Additional information regarding the Fund, the
Trust (as defined below), and the Shares can be
found in Amendment No. 1 and the Registration
Statement. See supra note 4 and infra note 6.
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registered as an open-end management
investment company under the
Investment Company Act of 1940
(‘‘1940 Act’’).6 J.P Morgan Investment
Management, Inc. is the investment
adviser (‘‘Adviser’’) to the Fund.7
JPMorgan Chase Bank, N.A. is the
administrator, custodian, and transfer
agent for the Trust. JPMorgan
Distribution Services, Inc. serves as the
distributor for the Trust.
The Exchange states that the Fund is
an actively managed exchange-traded
fund that seeks a high level of current
income by investing primarily in a
diversified portfolio of high-, medium-,
and low-grade debt securities.8 The
Exchange states that, while the Fund
currently meets all of the Generic
Listing Standards, the Adviser would
like to increase the flexibility of the
Fund’s holdings in a way that might not
meet such requirements. As such, the
Exchange has submitted this proposal in
order to allow the Shares to continue
listing and trading on the Exchange
while holding certain instruments in a
manner that may not comply with the
Generic Listing Standards, as further
described below.
A. The Fund’s Primary Investments
The Fund seeks to achieve its
investment objective by investing, under
6 According to the Exchange, on January 23, 2019,
the Trust filed with the Commission its registration
statement on Form N–1A under the Securities Act
of 1933 (15 U.S.C. 77a), and under the 1940 Act
relating to the Fund (File Nos. 333–191837 and
811–22903) (‘‘Registration Statement’’). In addition,
according to the Exchange, the Commission has
issued an order granting certain exemptive relief to
the Trust under the 1940 Act. See Investment
Company Act Release No.31990 (February 9, 2016)
(File No. 812–13761).
7 The Exchange represents that 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 of and/or changes to
the Fund’s portfolio. In addition, the Exchange
represents that the Adviser’s 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 brokerdealer, 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
of and/or changes to the portfolio, and will be
subject to procedures designed to prevent the use
and dissemination of material non-public
information regarding such portfolio.
8 The Exchange states that the Fund plans to
employ a strategy very similar to that currently
employed by JPMorgan Core Plus Bond Fund, a
mutual fund operated by the Adviser since March
5, 1993.
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Normal Market Conditions,9 at least
80% of its net assets in ‘‘Bonds,’’ as
defined herein. For purposes of the
proposal, the Exchange defines the term
‘‘Bond’’ to include only the following
instruments:
• Corporate bonds;
• U.S. government and agency debt
securities;
• asset-backed securities (‘‘ABS’’); 10
• municipal securities;
• credit linked notes;
• participation notes;
• collateralized debt obligations;
• agency, non-agency, and stripped
mortgage-related and mortgage-backed
securities (‘‘MBS’’) (including
adjustable rate mortgage loans); 11
• convertible securities (including
contingent convertible securities);
• preferred stock;
• loan participations and assignments;
• commitments to loan assignments;
9 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. The Exchange states that in response
to adverse market, economic, or political
conditions, the Fund reserves the right to invest in
cash and Cash Equivalents, as defined below,
without limitation, as determined by the Adviser.
10 According to the Exchange, ABS are securitized
products in connection with which the securities
issued, which may be issued by either a U.S. or a
foreign entity, are collateralized by any type of
financial asset, such as a consumer or student loan,
a lease, or a secured or unsecured receivable. The
Exchange states that for purposes of the filing, ABS
exclude: (i) MBS (as defined below); (ii) a small
business administration backed ABS traded ‘‘To Be
Announced’’ or in a specified pool transaction as
defined in FINRA Rule 6710(x); and (iii) U.S. or
foreign collateralized debt obligations.
11 The Exchange states that MBS are securities
that represent direct or indirect participations in, or
are collateralized by and payable from, mortgage
loans secured by real property and which may be
issued or guaranteed by government-sponsored
entities (‘‘GSEs’’), such as Fannie Mae or Freddie
Mac, or issued or guaranteed by agencies of the U.S.
government, such as the Government National
Mortgage Association (‘‘Ginnie Mae’’). The
Exchange states that for purposes of the proposal,
MBS include only collateralized mortgage
obligations (‘‘CMOs’’), which are debt obligations
collateralized by mortgage loans or mortgage passthrough securities. Typically, CMOs are
collateralized by Ginnie Mae, Fannie Mae or
Freddie Mac certificates, but they may also be
collateralized by whole loans or pass-through
securities issued by private issuers (i.e., issuers
other than U.S. government agencies or GSEs)
(‘‘Private MBS’’). Payments of principal and of
interest on the mortgage-related instruments
collateralizing the MBS, and any reinvestment
income thereon, provide the funds to pay debt
service on the CMOs. In a CMO, a series of bonds
or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a ‘‘tranche’’ of
securities, is issued at a specified fixed or floating
coupon rate and has a stated maturity or final
distribution date.
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• variable and floating rate instruments;
• commercial paper; and
• foreign and emerging market debt
securities.
The Exchange states that the Adviser
intends to hold ABS and MBS as part of
a strategy designed to manage portfolio
risk by diversifying away from corporate
debt and to take advantage of certain
market environments. Consistent with
the requirements of BZX Rule
14.11(i)(4)(C)(ii)(e), the Fund will limit
aggregate investments in ABS and
Private MBS (together, ‘‘ABS/Private
MBS’’) to 20% of the weight of the fixed
income portion of the Fund’s portfolio.
The Adviser will invest across the
credit spectrum to provide the Fund
exposure to various credit ratings.
Under Normal Market Conditions, at
least 65% of the Fund’s assets will be
invested in securities that, at the time of
purchase, are rated investment grade by
a nationally recognized statistical rating
organization or in securities that are
unrated but are deemed by the Adviser
to be of comparable quality. Among
others, such securities include U.S. or
foreign MBS and U.S. or foreign ABS.
Under Normal Market Conditions, the
Fund will not invest more than 35% of
its assets in securities rated below
investment grade. The Fund’s average
weighted maturity will ordinarily range
between five and twenty years.
B. Other Permitted Investments of the
Fund
Under Normal Market Conditions, the
Fund may also invest up to 20% of its
net assets in the following:
• Cash and certain Cash Equivalents 12
that are not otherwise captured
under the definition of Bond;
• the following listed derivative
instruments:
Æ Futures and options (including
options on futures) referencing
Eurodollars and sovereign debt issued
by the United States (i.e., treasury
securities) and other ‘‘Group of Seven’’
12 As defined in Exchange Rule
14.11(i)(4)(C)(iii)(b), Cash Equivalents are shortterm instruments with maturities of less than three
months, which includes only the following: (i) U.S.
Government securities, including bills, notes, and
bonds differing as to maturity and rates of interest,
which are either issued or guaranteed by the U.S.
Treasury or by U.S. Government agencies or
instrumentalities; (ii) certificates of deposit issued
against funds deposited in a bank or savings and
loan association; (iii) bankers acceptances, which
are short-term credit instruments used to finance
commercial transactions; (iv) repurchase
agreements and reverse repurchase agreements; (v)
bank time deposits, which are monies kept on
deposit with banks or savings and loan associations
for a stated period of time at a fixed rate of interest;
(vi) commercial paper, which are short-term
unsecured promissory notes; and (vii) money
market funds.
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17903
countries,13 where such futures and
options contracts are listed on an
exchange that is an ISG member or an
exchange with which the Exchange has
a comprehensive surveillance sharing
agreement (‘‘Eurodollar and G–7
Sovereign Futures and Options’’);
Æ the following additional types of
futures: Debt futures, interest rate
futures, index futures, foreign exchange
futures, and equity futures;
Æ the following additional types of
options: Equity options, Treasury
options, options on Treasury futures,
and foreign exchange options; and
Æ the following types of swaps:
Interest rate swaps, foreign exchange
swaps, credit default swaps (including
single-name and index reference pools)
(‘‘CDS’’), loan credit default swap
indices, and inflation-linked swaps; and
• the following OTC derivative
instruments:
Æ The following types of options:
Index options and foreign exchange
options;
Æ swaptions;
Æ the following types of swaps: CDS,
foreign exchange swaps, loan credit
default swap indices, inflationlinked swaps, interest rate swaps,
and non-dollar swaps;
Æ non-deliverable forward contracts;
and
Æ foreign exchange forward contracts.
The Exchange states that the Fund’s
holdings in Cash Equivalents and OTC
derivative instruments will be in
compliance with the limitations
provided in BZX Rules
14.11(i)(4)(C)(iii) 14 and
14.11(i)(4)(C)(v),15 respectively. In
addition, the Exchange states that the
Fund’s holdings in both listed and OTC
derivative instruments will be in
compliance with the limitations of BZX
Rule 14.11(i)(4)(C)(vi).16
The Exchange states that the Fund, by
virtue of its Bond holdings, may be
issued certain equity instruments
(‘‘Equity Holdings’’) that may not meet
the requirements of Rule
13 The Exchange states that Group of Seven (or
‘‘G–7’’) countries include the United States, Canada,
France, Germany, Italy, Japan and the United
Kingdom.
14 Rule 14.11(i)(4)(C)(iii) contains Generic Listing
Standards for cash and Cash Equivalents.
15 Rule 14.11(i)(4)(C)(v) requires that the aggregate
gross notional value of OTC derivatives not exceed
20% of the weight of the portfolio (including gross
notional exposures).
16 Rule 14.11(i)(4)(C)(iv) provides that to the
extent listed or OTC derivatives are used to gain
exposure to individual equities and/or fixed income
securities, or to indexes of equities and/or indexes
of fixed income securities, the aggregate gross
notional value of such exposure will meet the
Generic Listing Standards applicable to equities and
fixed income securities (including gross notional
exposures), respectively.
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14.11(i)(4)(C)(i).17 The Adviser expects
that the Fund will generally acquire
such instruments through issuances that
it receives by virtue of its other
holdings, such as corporate actions or
convertible securities. The Exchange
states that the Fund will not purchase
such instruments and the Fund will
dispose of such holdings as the Adviser
determines is in the best interest of the
Fund’s shareholders. The Exchange
states that such Equity Holdings will not
constitute more than 10% of the Fund’s
net assets.18
C. The Fund’s Investment Restrictions
The Exchange states that the Fund’s
investments, including derivatives, will
be consistent with the 1940 Act and the
Fund’s investment objective and
policies and will not be used to enhance
leverage (although certain derivatives
and other investments may result in
leverage).19 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
the derivatives described above and the
Fund’s use of derivative instruments
will be collateralized.
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D. Application of the Generic Listing
Standards
The Exchange has submitted this
proposal in order to allow the Fund to
hold instruments in a manner that may
not comply with the Generic Listing
Standards, as further described below.
The Exchange represents that, except as
described below, the Fund would
continue to satisfy all of the Generic
Listing Standards under BZX Rule
14.11(i)(4)(C) and to comply with all
17 Rule 14.11(i)(4)(C)(i) contains Generic Listing
Standards for equity securities.
18 The Exchange states that the Fund will not
purchase Equity Holdings and, as such, they are
excluded from both the 80% and the 20% buckets
described above.
19 The Exchange states that 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. 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 of directors 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. The Exchange states that these
procedures have been adopted consistent with
Section 18 of the 1940 Act and related Commission
guidance.
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other applicable continued listing
requirements for Managed Fund Shares
under BZX Rule 14.11(i). The Exchange
represents that the Fund, which is
currently listed and trading pursuant to
the Generic Listing Standards, will
continue to meet the Generic Listing
Standards unless and until this proposal
is approved.
The Exchange proposes that the Fund
will not comply with Rule
14.11(i)(4)(C)(ii)(d), which requires that
‘‘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 Act; (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 Act; or (e) from
issuers that are a government of a
foreign country or a political
subdivision of a foreign country.’’ The
Exchange instead proposes that the
fixed income portion of the portfolio,
excluding ABS and Private MBS, will
satisfy this 90% requirement.
In addition, the Exchange proposes
that the Fund will not comply with Rule
14.11(i)(4)(C)(iv)(b), which 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).’’ Specifically,
the Exchange proposes that the Fund be
exempt from these requirements as they
relate to the Fund’s holdings in
Eurodollar and G–7 Sovereign Futures
and Options.20 The Exchange states that
the Fund’s holdings in other listed
derivatives, when calculated
independently of the Fund’s holdings in
Eurodollar and G–7 Sovereign Futures
and Options, will meet the requirements
of Rule 14.11(i)(4)(C)(iv)(b).
Finally, the exchange proposes that
the Fund will not comply with Rule
20 The Exchange states that, while listed
derivatives positions are limited to 20% of the
Fund’s net assets, the gross notional exposure
related to such positions can be significantly larger.
As such, the Fund may have gross notional
exposure to Eurodollar and G–7 Sovereign Futures
and Options in excess of 65%.
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14.11(i)(4)(C)(i), which contains Generic
Listing Standards for equity securities in
the portfolio. As discussed above, the
Fund, by virtue of its other holdings,
may be issued Equity Holdings that may
not meet the requirements of Rule
14.11(i)(4)(C)(i). The Exchange
represents that the Fund will not
purchase such instruments and will
dispose of such holdings as the Adviser
determines is in the best interest of the
Fund’s shareholders. In addition, the
Exchange represents that the Equity
Holdings will not constitute more than
10% of the Fund’s net assets.
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 1, is
consistent with the Act and the rules
and regulations thereunder applicable to
a national securities exchange.21 In
particular, the Commission finds that
the proposed rule change, as modified
by Amendment No. 1, is consistent with
Section 6(b)(5) of the Act,22 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.
The Shares would continue to satisfy
all of the Generic Listing Standards
except for the requirements of Rule
14.11(i)(4)(C)(ii)(d), Rule
14.11(i)(4)(C)(iv)(b), and Rule
14.11(i)(4)(C)(i), as described
specifically herein.23
As discussed above, the Fund will not
meet the requirement that securities
comprising at least 90% of the fixed
income weight of the Fund’s portfolio
meet one of the criteria set forth in BZX
Rule 14.11(i)(4)(C)(ii)(d) because the
ABS/Private MBS that the Fund may
invest in would not satisfy such
requirement.24 Instead, the Exchange
proposes that the fixed income portion
21 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
22 15 U.S.C. 78f(b)(5).
23 See supra Section II.D.
24 The Exchange states that ABS/Private MBS are
generally issued by special purpose vehicles, so the
criteria in Rule 14.11(i)(4)(C)(ii)(d) regarding an
issuer’s market capitalization and the remaining
principal amount of an issuer’s securities are
typically unavailable with respect to ABS/Private
MBS, even though such ABS/Private MBS may own
significant assets. See Amendment No. 1, at 46, n.
36.
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of the portfolio excluding ABS/Private
MBS would satisfy this 90%
requirement. The Exchange states that
the Fund’s investment portfolio will be
diverse, and that the Adviser closely
monitors investments to ensure
maintenance of credit and liquidity
standards.25 The Commission believes
the diversification of the Fund’s
portfolio, and the fact that the fixed
income portion of the portfolio,
excluding ABS and Private MBS, will
comply with Rule 14.11(i)(4)(C)(ii)(d),
should mitigate manipulation concerns
relating to the Shares. The Commission
notes that it recently approved a similar
exception to the Generic Listing
Standards for an issue of Managed Fund
Shares permitted to invest in fixed
income securities.26 The Commission
also notes that, consistent with the
requirements of BZX Rule
14.11(i)(4)(C)(ii)(e), the Fund will limit
aggregate investments in ABS/Private
MBS to 20% of the weight of the fixed
income portion of the Fund’s portfolio.
Also as discussed above, the Fund’s
investments in Eurodollar and G–7
Sovereign Futures and Options will not
comply with the 65% and 35%
concentration limits in BZX Rule
14.11(4)(C)(iv)(b). The Commission
believes that manipulation concerns
relating to the Shares are sufficiently
mitigated because Eurodollar and G–7
Sovereign Futures and Options are
highly liquid and will be listed on an
exchange that is an ISG member or an
exchange with which the Exchange has
a comprehensive surveillance sharing
agreement. In addition, the Exchange
represents that all other listed
derivatives that the Fund may invest in
will comply with the concentration
requirements set forth in the Generic
Listing Standards.27 The Commission
notes that it recently approved a similar
exception to the Generic Listing
Standards for an issue of Managed Fund
Shares permitted to invest in Eurodollar
and G–7 Sovereign Futures and
Options.28
Finally, the Fund’s investments in
Equity Holdings will not comply with
the Generic Listing Standards for equity
securities set forth in BZX Rule
14.11(i)(4)(C)(i). The Commission
believes that manipulation concerns
relating to the Shares are sufficiently
mitigated because the Equity Holdings
would be acquired only by virtue of the
25 See
Amendment No. 1, at 46–47.
Securities Exchange Act Release No. 84047
(September 6, 2018), 83 FR 46200 (September 12,
2018) (SR–Nasdaq–2017–128) (approving the listing
and trading of shares of the Western Asset Total
Return ETF).
27 See Amendment No. 1, at 47–48.
28 See supra note 26.
26 See
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17:28 Apr 25, 2019
Jkt 247001
Fund’s other holdings and the Fund
would not purchase the Equity
Holdings, the Fund would dispose of
the Equity Holdings as the Adviser
determines is in the best interest of the
Fund’s shareholders, and the Equity
Holdings would be limited to 10% of
the Fund’s assets.29
In support of this proposal, the
Exchange has also made the following
representations:
(1) The Shares will be subject to BZX
Rule 14.11(i), which sets forth the
continued listing criteria applicable to
Managed Fund Shares. Other than as
described above, the Fund will continue
to satisfy all of the Generic Listing
Standards under BZX Rule 14.11(i)(4)(c)
and all other continued listing
requirements of BZX Rule 14.11(i).
(2) The Exchange’s 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.
(3) The Exchange, FINRA, on behalf of
the Exchange, or both will
communicate, and may obtain
information, regarding trading in the
Shares and the underlying listed
instruments, including listed derivatives
and certain Equity Holdings, 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.
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. Trade price
and other information relating to
municipal securities is available
through the Municipal Securities
Rulemaking Board’s Electronic
Municipal Market Access system.
(4) 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).
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
described above and the Fund’s use of
derivative instruments will be
collateralized.
(5) 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 reference asset, and
intraday indicative values, and the
applicability of Exchange rules specified
in this filing shall constitute continued
listing requirements for the Fund.
(6) The issuer 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.
(7) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(8) The issuer of the Fund is required
to comply with Rule 10A–3 under the
Act 30 for the initial and continued
listing of the Shares.
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
Amendment No. 1.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
No. 1, is consistent with Section 6(b)(5)
of the Act 31 and Section
11A(a)(1)(C)(iii) of the Act 32 and the
rules and regulations thereunder
applicable to a national securities
exchange.
IV. Solicitation of Comments on
Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 1 to the proposed rule
change is consistent with the Act.
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–
CboeBZX–2019–016 on the subject line.
30 See
17 CFR 240.10A–3.
U.S.C. 78f(b)(5).
32 15 U.S.C. 78k–1(a)(1)(C)(iii).
31 15
29 See
PO 00000
Amendment No. 1, at 48.
Frm 00134
Fmt 4703
Sfmt 4703
17905
E:\FR\FM\26APN1.SGM
26APN1
17906
Federal Register / Vol. 84, No. 81 / Friday, April 26, 2019 / Notices
amozie on DSK9F9SC42PROD with NOTICES
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–CboeBZX–2019–016. 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–CboeBZX–2019–016, and
should be submitted on or before May
17, 2019.
V. Accelerated Approval of the
Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 1 in the Federal
Register. The Commission notes that
Amendment No. 1 clarifies the proposed
investments of the Fund, including any
limitations on such investments.
Amendment No. 1 also provides other
clarifications and additional
information to the proposed rule
change.33 The changes and additional
information in Amendment No. 1 assist
the Commission in finding that the
33 See
supra note 4.
VerDate Sep<11>2014
17:28 Apr 25, 2019
Jkt 247001
proposal is consistent with the Act.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,34 to approve the proposed
rule change, as modified by Amendment
No. 1, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,35 that the
proposed rule change (SR–CboeBZX–
2019–016), as modified by Amendment
No. 1, be, and it hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.36
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–08400 Filed 4–25–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–85700; File No. SR–
EMERALD–2019–18]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend Exchange
Rule 100, Definitions
April 22, 2019.
Pursuant to the provisions of 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 April 17, 2019, MIAX Emerald, LLC
(‘‘MIAX Emerald’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) a
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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing a proposal to
amend Exchange Rule 100, Definitions,
to make a minor non-substantive edit to
the rule text.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/emerald at MIAX Emerald’s
34 15
U.S.C. 78s(b)(2).
U.S.C. 78s(b)(2).
36 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
principal office, 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 Exchange proposes to amend
Exchange Rule 100, Definitions, to make
a minor non-substantive edit to the
definition for an Electronic Exchange
Member in order to provide consistency
and clarity within the rule text.
Currently, the rule text for an
Electronic Exchange Member in
Exchange Rule 100 provides: The term
‘‘Electronic Exchange Member means
the holder of a Trading Permit who is
not a Market Maker. Electronic
Exchange Members are deemed
‘‘members’’ under the Exchange Act.3
The Exchange proposes to amend the
definition for an Electronic Exchange
Member in Exchange Rule 100 to insert
the abbreviation for Electronic Exchange
Member as an ‘‘EEM’’ to provide
consistency and clarity within the rule
text. With the proposed change, the
definition for an Electronic Exchange
Member would provide: The term
‘‘Electronic Exchange Member’’ or
‘‘EEM’’ means the holder of a Trading
Permit who is not a Market Maker.
Electronic Exchange Members are
deemed ‘‘members’’ under the Exchange
Act.
The proposed change would align the
rule text for the definition of an
Electronic Exchange Member with the
rest of the rule text for MIAX Emerald.
2. Statutory Basis
The Exchange believes that its
proposed rule change is consistent with
Section 6(b) of the Act 4 in general, and
furthers the objectives of Section 6(b)(5)
of the Act 5 in particular, in that it is
35 15
PO 00000
Frm 00135
Fmt 4703
Sfmt 4703
3 See
Exchange Rule 100.
U.S.C. 78f(b).
5 15 U.S.C. 78f(b)(5).
4 15
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]]>Agencies
[Federal Register Volume 84, Number 81 (Friday, April 26, 2019)]
[Notices]
[Pages 17902-17906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08400]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85701; File No. SR-CboeBZX-2019-016]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Allow the
JPMorgan Core Plus Bond ETF of the J.P. Morgan Exchange-Traded Fund
Trust To Hold Certain Instruments in a Manner That May Not Comply With
Rule 14.11(i), Managed Fund Shares
April 22, 2019.
I. Introduction
On March 5, 2019, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'')
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
amend the listing requirements applicable to shares (``Shares'') of the
JPMorgan Core Plus Bond ETF (``Fund''), which Shares are currently
listed on the Exchange pursuant to the generic listing standards
applicable to Managed Fund Shares under BZX Rule 14.11(i) (Managed Fund
Shares). The proposed rule change was published for comment in the
Federal Register on March 22, 2019.\3\ On March 28, 2019, the Exchange
filed Amendment No. 1 to the proposed rule change, which amended and
replaced the proposed rule change as originally filed.\4\ The
Commission has received no comments on the proposed rule change. The
Commission is publishing this notice to solicit comments on Amendment
No. 1 from interested persons, and is approving the proposed rule
change, as modified by Amendment No. 1, 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. 85349 (March 18,
2019), 84 FR 10874.
\4\ In Amendment No. 1, the Exchange: (a) Clarified that (i) the
Shares are currently listed and traded on the Exchange pursuant to
the generic listing standards applicable to Managed Fund Shares
under BZX Rule 14.11(i) (``Generic Listing Standards''), (ii) the
Fund currently meets the Generic Listing Standards, and (iii) the
Fund will continue to meet the Generic Listing Standards unless and
until the proposed rule change is approved; (b) clarified that the
Exchange will measure derivatives holdings using gross notional
value of the derivatives as required by the Generic Listing
Standards (rather than using mark-to-market value of derivatives);
(c) stated that in response to adverse market, economic, or
political conditions, the Fund reserves the right to invest in cash
and Cash Equivalents (as defined below), without limitation, as
determined by the Adviser; (d) clarified the types of mortgage-
backed securities that are permitted investments of the Fund; (e)
clarified that, consistent with the requirements of BZX Rule
14.11(i)(4)(C)(ii)(e), the Fund will limit aggregate investments in
asset-backed securities and Private MBS (as defined below) to 20% of
the weight of the fixed income portion of the Fund's portfolio; (f)
represented that the Fund's holdings in Cash Equivalents and over-
the-counter (``OTC'') derivative instruments will be in compliance
with the limitations provided in BZX Rules 14.11(i)(4)(C)(iii) and
14.11(i)(4)(C)(v), respectively, and that both listed and OTC
derivative instruments will be in compliance with the limitations of
BZX Rule 14.11(i)(4)(C)(vi); (g) clarified that because the Fund
will not purchase Equity Holdings (as defined below) and will only
hold such instruments if they are issued to the Fund by virtue of
its holdings in Bonds (as defined below), Equity Holdings are
excluded from the description of the Fund's permitted investments;
(h) clarified that while listed derivatives positions are limited to
20% of the Fund's net assets, the gross notional exposure related to
such positions can be significantly larger, and thus, the Fund may
have gross notional exposure to Eurodollar and G-7 Sovereign Futures
and Options (as defined below) in excess of 65%; (i) provided
updated data on open interest in Eurodollar and G-7 Sovereign
Futures and Options; (j) represented that the Fund will adhere to
its stated investment objective under Normal Market Conditions (as
defined below); (k) represented that the Exchange, the Financial
Industry Regulatory Authority, Inc. (``FINRA''), on behalf of the
Exchange, or both may obtain information regarding trading in the
Shares and the underlying listed instruments held by the Fund with
the Intermarket Surveillance Group (``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; (l) provided additional justification as to why the
proposed changes to the Fund's investments are consistent with the
Act even though the Fund's proposed holdings would no longer meet
certain of the Generic Listing Standards; and (m) made other
clarifications, corrections, and technical changes to the proposal.
Amendment No. 1 to the proposed rule change is available at: https://www.sec.gov/comments/sr-cboebzx-2019-016/srcboebzx2019016-5299386-183807.pdf.
---------------------------------------------------------------------------
II. Description of the Proposal, as Modified by Amendment No. 1
5
---------------------------------------------------------------------------
\5\ Additional information regarding the Fund, the Trust (as
defined below), and the Shares can be found in Amendment No. 1 and
the Registration Statement. See supra note 4 and infra note 6.
---------------------------------------------------------------------------
The Shares are currently listed on the Exchange pursuant to the
Generic Listing Standards and began trading on January 30, 2019. The
Shares are offered by the J.P. Morgan Exchange-Traded Fund Trust
(``Trust''), which is registered as an open-end management investment
company under the Investment Company Act of 1940 (``1940 Act'').\6\ J.P
Morgan Investment Management, Inc. is the investment adviser
(``Adviser'') to the Fund.\7\ JPMorgan Chase Bank, N.A. is the
administrator, custodian, and transfer agent for the Trust. JPMorgan
Distribution Services, Inc. serves as the distributor for the Trust.
---------------------------------------------------------------------------
\6\ According to the Exchange, on January 23, 2019, the Trust
filed with the Commission its registration statement on Form N-1A
under the Securities Act of 1933 (15 U.S.C. 77a), and under the 1940
Act relating to the Fund (File Nos. 333-191837 and 811-22903)
(``Registration Statement''). In addition, according to the
Exchange, the Commission has issued an order granting certain
exemptive relief to the Trust under the 1940 Act. See Investment
Company Act Release No.31990 (February 9, 2016) (File No. 812-
13761).
\7\ The Exchange represents that 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 of and/or changes to the Fund's portfolio. In addition,
the Exchange represents that the Adviser's 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 of and/or changes to the portfolio, and will be subject
to procedures designed to prevent the use and dissemination of
material non-public information regarding such portfolio.
---------------------------------------------------------------------------
The Exchange states that the Fund is an actively managed exchange-
traded fund that seeks a high level of current income by investing
primarily in a diversified portfolio of high-, medium-, and low-grade
debt securities.\8\ The Exchange states that, while the Fund currently
meets all of the Generic Listing Standards, the Adviser would like to
increase the flexibility of the Fund's holdings in a way that might not
meet such requirements. As such, the Exchange has submitted this
proposal in order to allow the Shares to continue listing and trading
on the Exchange while holding certain instruments in a manner that may
not comply with the Generic Listing Standards, as further described
below.
---------------------------------------------------------------------------
\8\ The Exchange states that the Fund plans to employ a strategy
very similar to that currently employed by JPMorgan Core Plus Bond
Fund, a mutual fund operated by the Adviser since March 5, 1993.
---------------------------------------------------------------------------
A. The Fund's Primary Investments
The Fund seeks to achieve its investment objective by investing,
under
[[Page 17903]]
Normal Market Conditions,\9\ at least 80% of its net assets in
``Bonds,'' as defined herein. For purposes of the proposal, the
Exchange defines the term ``Bond'' to include only the following
instruments:
---------------------------------------------------------------------------
\9\ 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.
The Exchange states that in response to adverse market, economic, or
political conditions, the Fund reserves the right to invest in cash
and Cash Equivalents, as defined below, without limitation, as
determined by the Adviser.
Corporate bonds;
U.S. government and agency debt securities;
asset-backed securities (``ABS''); \10\
---------------------------------------------------------------------------
\10\ According to the Exchange, ABS are securitized products in
connection with which the securities issued, which may be issued by
either a U.S. or a foreign entity, are collateralized by any type of
financial asset, such as a consumer or student loan, a lease, or a
secured or unsecured receivable. The Exchange states that for
purposes of the filing, ABS exclude: (i) MBS (as defined below);
(ii) a small business administration backed ABS traded ``To Be
Announced'' or in a specified pool transaction as defined in FINRA
Rule 6710(x); and (iii) U.S. or foreign collateralized debt
obligations.
---------------------------------------------------------------------------
municipal securities;
credit linked notes;
participation notes;
collateralized debt obligations;
agency, non-agency, and stripped mortgage-related and
mortgage-backed securities (``MBS'') (including adjustable rate
mortgage loans); \11\
---------------------------------------------------------------------------
\11\ The Exchange states that MBS are securities that represent
direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property and which may
be issued or guaranteed by government-sponsored entities (``GSEs''),
such as Fannie Mae or Freddie Mac, or issued or guaranteed by
agencies of the U.S. government, such as the Government National
Mortgage Association (``Ginnie Mae''). The Exchange states that for
purposes of the proposal, MBS include only collateralized mortgage
obligations (``CMOs''), which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs
are collateralized by Ginnie Mae, Fannie Mae or Freddie Mac
certificates, but they may also be collateralized by whole loans or
pass-through securities issued by private issuers (i.e., issuers
other than U.S. government agencies or GSEs) (``Private MBS'').
Payments of principal and of interest on the mortgage-related
instruments collateralizing the MBS, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs. In a
CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a ``tranche'' of
securities, is issued at a specified fixed or floating coupon rate
and has a stated maturity or final distribution date.
---------------------------------------------------------------------------
convertible securities (including contingent convertible
securities);
preferred stock;
loan participations and assignments;
commitments to loan assignments;
variable and floating rate instruments;
commercial paper; and
foreign and emerging market debt securities.
The Exchange states that the Adviser intends to hold ABS and MBS as
part of a strategy designed to manage portfolio risk by diversifying
away from corporate debt and to take advantage of certain market
environments. Consistent with the requirements of BZX Rule
14.11(i)(4)(C)(ii)(e), the Fund will limit aggregate investments in ABS
and Private MBS (together, ``ABS/Private MBS'') to 20% of the weight of
the fixed income portion of the Fund's portfolio.
The Adviser will invest across the credit spectrum to provide the
Fund exposure to various credit ratings. Under Normal Market
Conditions, at least 65% of the Fund's assets will be invested in
securities that, at the time of purchase, are rated investment grade by
a nationally recognized statistical rating organization or in
securities that are unrated but are deemed by the Adviser to be of
comparable quality. Among others, such securities include U.S. or
foreign MBS and U.S. or foreign ABS. Under Normal Market Conditions,
the Fund will not invest more than 35% of its assets in securities
rated below investment grade. The Fund's average weighted maturity will
ordinarily range between five and twenty years.
B. Other Permitted Investments of the Fund
Under Normal Market Conditions, the Fund may also invest up to 20%
of its net assets in the following:
Cash and certain Cash Equivalents \12\ that are not otherwise
captured under the definition of Bond;
---------------------------------------------------------------------------
\12\ As defined in Exchange Rule 14.11(i)(4)(C)(iii)(b), Cash
Equivalents are short-term instruments with maturities of less than
three months, which includes only the following: (i) U.S. Government
securities, including bills, notes, and bonds differing as to
maturity and rates of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S. Government agencies or
instrumentalities; (ii) certificates of deposit issued against funds
deposited in a bank or savings and loan association; (iii) bankers
acceptances, which are short-term credit instruments used to finance
commercial transactions; (iv) repurchase agreements and reverse
repurchase agreements; (v) bank time deposits, which are monies kept
on deposit with banks or savings and loan associations for a stated
period of time at a fixed rate of interest; (vi) commercial paper,
which are short-term unsecured promissory notes; and (vii) money
market funds.
---------------------------------------------------------------------------
the following listed derivative instruments:
[cir] Futures and options (including options on futures)
referencing Eurodollars and sovereign debt issued by the United States
(i.e., treasury securities) and other ``Group of Seven'' countries,\13\
where such futures and options contracts are listed on an exchange that
is an ISG member or an exchange with which the Exchange has a
comprehensive surveillance sharing agreement (``Eurodollar and G-7
Sovereign Futures and Options'');
---------------------------------------------------------------------------
\13\ The Exchange states that Group of Seven (or ``G-7'')
countries include the United States, Canada, France, Germany, Italy,
Japan and the United Kingdom.
---------------------------------------------------------------------------
[cir] the following additional types of futures: Debt futures,
interest rate futures, index futures, foreign exchange futures, and
equity futures;
[cir] the following additional types of options: Equity options,
Treasury options, options on Treasury futures, and foreign exchange
options; and
[cir] the following types of swaps: Interest rate swaps, foreign
exchange swaps, credit default swaps (including single-name and index
reference pools) (``CDS''), loan credit default swap indices, and
inflation-linked swaps; and
the following OTC derivative instruments:
[cir] The following types of options: Index options and foreign
exchange options;
[cir] swaptions;
[cir] the following types of swaps: CDS, foreign exchange swaps,
loan credit default swap indices, inflation-linked swaps, interest rate
swaps, and non-dollar swaps;
[cir] non-deliverable forward contracts; and
[cir] foreign exchange forward contracts.
The Exchange states that the Fund's holdings in Cash Equivalents
and OTC derivative instruments will be in compliance with the
limitations provided in BZX Rules 14.11(i)(4)(C)(iii) \14\ and
14.11(i)(4)(C)(v),\15\ respectively. In addition, the Exchange states
that the Fund's holdings in both listed and OTC derivative instruments
will be in compliance with the limitations of BZX Rule
14.11(i)(4)(C)(vi).\16\
---------------------------------------------------------------------------
\14\ Rule 14.11(i)(4)(C)(iii) contains Generic Listing Standards
for cash and Cash Equivalents.
\15\ Rule 14.11(i)(4)(C)(v) requires that the aggregate gross
notional value of OTC derivatives not exceed 20% of the weight of
the portfolio (including gross notional exposures).
\16\ Rule 14.11(i)(4)(C)(iv) provides that to the extent listed
or OTC derivatives are used to gain exposure to individual equities
and/or fixed income securities, or to indexes of equities and/or
indexes of fixed income securities, the aggregate gross notional
value of such exposure will meet the Generic Listing Standards
applicable to equities and fixed income securities (including gross
notional exposures), respectively.
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The Exchange states that the Fund, by virtue of its Bond holdings,
may be issued certain equity instruments (``Equity Holdings'') that may
not meet the requirements of Rule
[[Page 17904]]
14.11(i)(4)(C)(i).\17\ The Adviser expects that the Fund will generally
acquire such instruments through issuances that it receives by virtue
of its other holdings, such as corporate actions or convertible
securities. The Exchange states that the Fund will not purchase such
instruments and the Fund will dispose of such holdings as the Adviser
determines is in the best interest of the Fund's shareholders. The
Exchange states that such Equity Holdings will not constitute more than
10% of the Fund's net assets.\18\
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\17\ Rule 14.11(i)(4)(C)(i) contains Generic Listing Standards
for equity securities.
\18\ The Exchange states that the Fund will not purchase Equity
Holdings and, as such, they are excluded from both the 80% and the
20% buckets described above.
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C. The Fund's Investment Restrictions
The Exchange states that the Fund's investments, including
derivatives, will be consistent with the 1940 Act and the Fund's
investment objective and policies and will not be used to enhance
leverage (although certain derivatives and other investments may result
in leverage).\19\ 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 the
derivatives described above and the Fund's use of derivative
instruments will be collateralized.
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\19\ The Exchange states that 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. 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 of
directors 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. The Exchange
states that these procedures have been adopted consistent with
Section 18 of the 1940 Act and related Commission guidance.
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D. Application of the Generic Listing Standards
The Exchange has submitted this proposal in order to allow the Fund
to hold instruments in a manner that may not comply with the Generic
Listing Standards, as further described below. The Exchange represents
that, except as described below, the Fund would continue to satisfy all
of the Generic Listing Standards under BZX Rule 14.11(i)(4)(C) and to
comply with all other applicable continued listing requirements for
Managed Fund Shares under BZX Rule 14.11(i). The Exchange represents
that the Fund, which is currently listed and trading pursuant to the
Generic Listing Standards, will continue to meet the Generic Listing
Standards unless and until this proposal is approved.
The Exchange proposes that the Fund will not comply with Rule
14.11(i)(4)(C)(ii)(d), which requires that ``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 Act; (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 Act; or (e) from issuers that are a government of a
foreign country or a political subdivision of a foreign country.'' The
Exchange instead proposes that the fixed income portion of the
portfolio, excluding ABS and Private MBS, will satisfy this 90%
requirement.
In addition, the Exchange proposes that the Fund will not comply
with Rule 14.11(i)(4)(C)(iv)(b), which 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).'' Specifically, the Exchange
proposes that the Fund be exempt from these requirements as they relate
to the Fund's holdings in Eurodollar and G-7 Sovereign Futures and
Options.\20\ The Exchange states that the Fund's holdings in other
listed derivatives, when calculated independently of the Fund's
holdings in Eurodollar and G-7 Sovereign Futures and Options, will meet
the requirements of Rule 14.11(i)(4)(C)(iv)(b).
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\20\ The Exchange states that, while listed derivatives
positions are limited to 20% of the Fund's net assets, the gross
notional exposure related to such positions can be significantly
larger. As such, the Fund may have gross notional exposure to
Eurodollar and G-7 Sovereign Futures and Options in excess of 65%.
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Finally, the exchange proposes that the Fund will not comply with
Rule 14.11(i)(4)(C)(i), which contains Generic Listing Standards for
equity securities in the portfolio. As discussed above, the Fund, by
virtue of its other holdings, may be issued Equity Holdings that may
not meet the requirements of Rule 14.11(i)(4)(C)(i). The Exchange
represents that the Fund will not purchase such instruments and will
dispose of such holdings as the Adviser determines is in the best
interest of the Fund's shareholders. In addition, the Exchange
represents that the Equity Holdings will not constitute more than 10%
of the Fund's net assets.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\21\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Act,\22\ 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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\21\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b)(5).
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The Shares would continue to satisfy all of the Generic Listing
Standards except for the requirements of Rule 14.11(i)(4)(C)(ii)(d),
Rule 14.11(i)(4)(C)(iv)(b), and Rule 14.11(i)(4)(C)(i), as described
specifically herein.\23\
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\23\ See supra Section II.D.
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As discussed above, the Fund will not meet the requirement that
securities comprising at least 90% of the fixed income weight of the
Fund's portfolio meet one of the criteria set forth in BZX Rule
14.11(i)(4)(C)(ii)(d) because the ABS/Private MBS that the Fund may
invest in would not satisfy such requirement.\24\ Instead, the Exchange
proposes that the fixed income portion
[[Page 17905]]
of the portfolio excluding ABS/Private MBS would satisfy this 90%
requirement. The Exchange states that the Fund's investment portfolio
will be diverse, and that the Adviser closely monitors investments to
ensure maintenance of credit and liquidity standards.\25\ The
Commission believes the diversification of the Fund's portfolio, and
the fact that the fixed income portion of the portfolio, excluding ABS
and Private MBS, will comply with Rule 14.11(i)(4)(C)(ii)(d), should
mitigate manipulation concerns relating to the Shares. The Commission
notes that it recently approved a similar exception to the Generic
Listing Standards for an issue of Managed Fund Shares permitted to
invest in fixed income securities.\26\ The Commission also notes that,
consistent with the requirements of BZX Rule 14.11(i)(4)(C)(ii)(e), the
Fund will limit aggregate investments in ABS/Private MBS to 20% of the
weight of the fixed income portion of the Fund's portfolio.
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\24\ The Exchange states that ABS/Private MBS are generally
issued by special purpose vehicles, so the criteria in Rule
14.11(i)(4)(C)(ii)(d) regarding an issuer's market capitalization
and the remaining principal amount of an issuer's securities are
typically unavailable with respect to ABS/Private MBS, even though
such ABS/Private MBS may own significant assets. See Amendment No.
1, at 46, n. 36.
\25\ See Amendment No. 1, at 46-47.
\26\ See Securities Exchange Act Release No. 84047 (September 6,
2018), 83 FR 46200 (September 12, 2018) (SR-Nasdaq-2017-128)
(approving the listing and trading of shares of the Western Asset
Total Return ETF).
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Also as discussed above, the Fund's investments in Eurodollar and
G-7 Sovereign Futures and Options will not comply with the 65% and 35%
concentration limits in BZX Rule 14.11(4)(C)(iv)(b). The Commission
believes that manipulation concerns relating to the Shares are
sufficiently mitigated because Eurodollar and G-7 Sovereign Futures and
Options are highly liquid and will be listed on an exchange that is an
ISG member or an exchange with which the Exchange has a comprehensive
surveillance sharing agreement. In addition, the Exchange represents
that all other listed derivatives that the Fund may invest in will
comply with the concentration requirements set forth in the Generic
Listing Standards.\27\ The Commission notes that it recently approved a
similar exception to the Generic Listing Standards for an issue of
Managed Fund Shares permitted to invest in Eurodollar and G-7 Sovereign
Futures and Options.\28\
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\27\ See Amendment No. 1, at 47-48.
\28\ See supra note 26.
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Finally, the Fund's investments in Equity Holdings will not comply
with the Generic Listing Standards for equity securities set forth in
BZX Rule 14.11(i)(4)(C)(i). The Commission believes that manipulation
concerns relating to the Shares are sufficiently mitigated because the
Equity Holdings would be acquired only by virtue of the Fund's other
holdings and the Fund would not purchase the Equity Holdings, the Fund
would dispose of the Equity Holdings as the Adviser determines is in
the best interest of the Fund's shareholders, and the Equity Holdings
would be limited to 10% of the Fund's assets.\29\
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\29\ See Amendment No. 1, at 48.
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In support of this proposal, the Exchange has also made the
following representations:
(1) The Shares will be subject to BZX Rule 14.11(i), which sets
forth the continued listing criteria applicable to Managed Fund Shares.
Other than as described above, the Fund will continue to satisfy all of
the Generic Listing Standards under BZX Rule 14.11(i)(4)(c) and all
other continued listing requirements of BZX Rule 14.11(i).
(2) The Exchange's 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.
(3) The Exchange, FINRA, on behalf of the Exchange, or both will
communicate, and may obtain information, regarding trading in the
Shares and the underlying listed instruments, including listed
derivatives and certain Equity Holdings, 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. 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. Trade price and other information relating to
municipal securities is available through the Municipal Securities
Rulemaking Board's Electronic Municipal Market Access system.
(4) 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). 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 described above and the
Fund's use of derivative instruments will be collateralized.
(5) 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 reference asset, and intraday indicative values,
and the applicability of Exchange rules specified in this filing shall
constitute continued listing requirements for the Fund.
(6) The issuer 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.
(7) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(8) The issuer of the Fund is required to comply with Rule 10A-3
under the Act \30\ for the initial and continued listing of the Shares.
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\30\ See 17 CFR 240.10A-3.
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This approval order is based on all of the Exchange's
representations, including those set forth above and in Amendment No.
1.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act \31\ and Section 11A(a)(1)(C)(iii) of the Act \32\
and the rules and regulations thereunder applicable to a national
securities exchange.
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\31\ 15 U.S.C. 78f(b)(5).
\32\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule
Change
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 to the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2019-016 on the subject line.
[[Page 17906]]
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-CboeBZX-2019-016. 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-CboeBZX-2019-016, and should be
submitted on or before May 17, 2019.
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
1 in the Federal Register. The Commission notes that Amendment No. 1
clarifies the proposed investments of the Fund, including any
limitations on such investments. Amendment No. 1 also provides other
clarifications and additional information to the proposed rule
change.\33\ The changes and additional information in Amendment No. 1
assist the Commission in finding that the proposal is consistent with
the Act. Accordingly, the Commission finds good cause, pursuant to
Section 19(b)(2) of the Act,\34\ to approve the proposed rule change,
as modified by Amendment No. 1, on an accelerated basis.
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\33\ See supra note 4.
\34\ 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,\35\ that the proposed rule change (SR-CboeBZX-2019-016), as
modified by Amendment No. 1, be, and it hereby is, approved on an
accelerated basis.
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\35\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-08400 Filed 4-25-19; 8:45 am]
BILLING CODE 8011-01-P
