Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment Nos. 2 and 4 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 2 and 4, To List and Trade Shares of the 2x Long VIX Futures ETF Under BZX Rule 14.11(f)(4) (Trust Issued Receipts), 13922-13927 [2021-05028]
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Federal Register / Vol. 86, No. 46 / Thursday, March 11, 2021 / Notices
The Exchange believes the proposed
rule changes do not impose any burden
on intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Particularly,
the proposed change to the standard
removing liquidity fee applies to all
liquidity removing orders equally, and
thus applies to all Members equally.
Similarly, the proposed tier changes
apply to all Members equally in that all
Members are eligible for the amended
Growth Tier 3, Non-Displayed Step-Up
Tier, and Remove Volume Tier, and
have a reasonable opportunity to meet
the tiers’ criteria and will all
automatically and uniformly receive the
corresponding enhanced rebate on their
respective qualifying orders if such
criteria is met. Additionally, the
proposed changes to the tier criteria are
designed to attract additional overall
order flow to the Exchange. The
Exchange believes that the amended tier
criteria would incentivize market
participants to grow their overall order
flow submitted to the Exchange, both
liquidity adding and removing order
flow, bringing with it improved price
transparency. The Exchange believes
greater overall order flow and pricing
transparency benefits all market
participants on the Exchange by
providing more trading opportunities,
enhancing market quality, and
continuing to encourage Members to
send orders, thereby contributing
towards a robust and well-balanced
market ecosystem, which benefits all
market participants.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 32 and paragraph (f) of Rule
19b–4 33 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
32 15
33 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether 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–
CboeEDGX–2021–013 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–CboeEDGX–2021–013. 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–CboeEDGX–2021–013 and
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should be submitted on or before April
1, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–05023 Filed 3–10–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91265; File No. SR–
CboeBZX–2020–053]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
Amendment Nos. 2 and 4 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 2 and 4, To List and
Trade Shares of the 2x Long VIX
Futures ETF Under BZX Rule
14.11(f)(4) (Trust Issued Receipts)
March 5, 2021.
I. Introduction
On June 23, 2020, 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 list and trade shares
(‘‘Shares’’) of the 2x Long VIX Futures
ETF (‘‘Fund’’), a series of VS Trust
(‘‘Trust’’), under BZX Rule 14.11(f)(4)
(Trust Issued Receipts). On June 26,
2020, the Exchange filed Amendment
No. 1 to the proposed rule change. The
proposed rule change, as modified by
Amendment No. 1, was published for
comment in the Federal Register on July
10, 2020.3 On August 13, 2020, pursuant
to Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On October 7,
2020, the Commission instituted
34 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 89234
(July 6, 2020), 85 FR 41644. Comments on the
proposed rule change can be found at: https://
www.sec.gov/comments/sr-cboebzx-2020-053/
srcboebzx2020053.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 89545,
85 FR 51124 (August 19, 2020). The Commission
designated October 8, 2020, as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
1 15
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Federal Register / Vol. 86, No. 46 / Thursday, March 11, 2021 / Notices
proceedings pursuant to Section
19(b)(2)(B) of the Act 6 to determine
whether to approve or disapprove the
proposed rule change.7 On December
15, 2020, the Commission designated a
longer period for Commission action on
the proposed rule change.8 On February
1, 2021, the Exchange filed Amendment
No. 2 to the proposed rule change,
which replaced and superseded the
proposed rule change as modified by
Amendment No. 1.9 On February 19,
2021, filed partial Amendment No. 4 to
the proposed rule change.10 The
Commission is publishing this notice to
6 15
U.S.C. 78s(b)(2)(B).
Securities Exchange Act Release No. 90118,
85 FR 64563 (October 13, 2020) (‘‘OIP’’).
8 See Securities Exchange Act Release No. 90671,
85 FR 83136 (December 21, 2020) (designating
March 7, 2021 as the date by which the Commission
shall approve or disapprove the proposal).
9 In Amendment No. 2, the Exchange: (i) Updated
the information regarding the Fund’s registration
statement; (ii) clarified that the Index (defined
below) seeks to reflect the returns that are
potentially available from holding an unleveraged
long position in first- and second- month VIX
Futures Contracts (defined below) by measuring its
daily performance from the weighted average price
of VIX Futures Contracts; (iii) stated that the
Sponsor (defined below) will seek to minimize the
market impact of rebalances across all exchange
traded products based on VIX Futures Contracts
(‘‘VIX ETPs’’) that it sponsors (‘‘Funds’’) on the
price of VIX Futures Contracts by limiting such
Funds’ participation, on any given day, in VIX
Futures Contracts to no more than ten percent
(10%) of the contracts traded on Cboe Futures
Exchange during any Rebalance Period (defined
below); (iv) stated that, in the event the Funds
expect to hit this 10% threshold during the primary
Rebalance Period from 3:45 p.m. to 4:00 p.m. E.T.,
the Funds would extend their respective rebalances
into additional Rebalance Periods and the Trade At
Settlement (‘‘TAS’’) market; (v) stated that, to limit
participation during periods of market illiquidity,
the Sponsor may vary the manner and period over
which all funds it sponsors are rebalanced,
including the Fund, and that Funds will be
allocated executions based on their percentage of
notional transaction volume required; (vi) stated
that the Index’s use of a weighted average price
reference and the Sponsor’s commitment to cap
participation in the VIX futures market during any
Rebalance Period to no more than 10% for all
Funds should, among other things, help reduce the
market impact of all exposure to the VIX futures
market; (vii) stated that, in reviewing VIX Futures
Contracts trading back to March 26, 2004, the Fund
expects that it would have participated in an
Extended Rebalance Period (defined below) on one
or more days only in February 2018 and March
2020; and (viii) made technical, clarifying, and
conforming changes. Amendment No. 2 is available
at: https://www.sec.gov/comments/sr-cboebzx-2020053/srcboebzx2020053-8324963-228603.pdf.
10 On February 16, 2021, the Exchange submitted
Amendment No. 3 to the proposed rule change, and
on February 19, 2021, the Exchange withdrew
Amendment No. 3 to the proposed rule change. In
Amendment No. 4, the Exchange added a
representation that the Fund will notify both the
Exchange and the Commission in the event that the
Fund participates in an Extended Rebalance Period
as soon as practicable, but no later than 9:00 a.m.
E.T. on the trading day following the event.
Amendment No. 4 is available at: https://
www.sec.gov/comments/sr-cboebzx-2020-053/
srcboebzx2020053-8393734-229405.pdf.
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7 See
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solicit comments on Amendment Nos. 2
and 4 from interested persons, and is
approving the proposed rule change, as
modified by Amendment Nos. 2 and 4,
on an accelerated basis.
II. Description of the Proposed Rule
Change, as Modified by Amendment
Nos. 2 and 4 11
The Exchange proposes to list and
trade Shares of the Fund 12 under BZX
Rule 14.11(f)(4), which governs the
listing and trading of Trust Issued
Receipts 13 on the Exchange. Volatility
Shares LLC (‘‘Sponsor’’), a Delaware
limited liability company and a
commodity pool operator, serves as the
Sponsor of the Trust.14 Tidal ETF
Services LLC serves as the
administrator; U.S. Bank National
Association serves as custodian of the
Fund and the Shares; U.S. Bancorp
Fund Services, LLC serves as the subadministrator and transfer agent; and
Wilmington Trust Company is the sole
trustee of the Trust.
The Fund seeks to provide a return
that is 200% of the return of its
benchmark index for a single day. The
benchmark for the Fund is the Long VIX
Futures Index (LONGVOL) (‘‘Index’’).15
11 Additional information regarding the Fund, the
Trust, and the Shares, including investment
strategies, creation and redemption procedures, and
portfolio holdings can be found in Amendment No.
2, supra note 9.
12 The Fund has submitted a registration
statement on Form S–1 under the Securities Act of
1933, dated July 13, 2020 (File No. 377–03292)
(‘‘Registration Statement’’). The Registration
Statement for the Fund is not yet effective, and the
Fund will not trade on the Exchange until such
time that the Registration Statement is effective.
13 Rule 14.11(f)(4) applies to Trust Issued
Receipts that invest in ‘‘Financial Instruments,’’
defined in Rule 14.11(f)(4)(A)(iv) as any
combination of investments, including cash;
securities; options on securities and indices; futures
contracts; options on futures contracts; forward
contracts; equity caps, collars and floors; and swap
agreements.
14 The Sponsor is not a broker-dealer or affiliated
with a broker-dealer. In the event that (a) the
Sponsor becomes a broker-dealer or newly affiliated
with a broker-dealer, or (b) any new sponsor is a
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 the portfolio.
15 The Index is sponsored by Cboe Global Indexes
(‘‘Index sponsor’’). The Index sponsor is not a
registered broker-dealer, but is affiliated with a
broker-dealer and has implemented and will
maintain a fire wall with respect to the brokerdealer affiliate regarding access to information
concerning the composition of and/or changes to
the Index. In addition, the Index sponsor has
implemented and will maintain procedures that are
designed to prevent the use and dissemination of
material, non-public information regarding the
Index.
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13923
The Index measures the daily
performance of a theoretical portfolio of
first- and second-month futures
contracts on the Cboe Volatility Index
(‘‘VIX’’).16 The Index is comprised of
VIX futures contracts (‘‘VIX Futures
Contracts’’).17 Specifically, the Index
components represent the prices of the
two near-term VIX Futures Contracts,
replicating a position that rolls the
nearest month VIX Futures Contract to
the next month VIX Futures Contract on
a daily basis in equal fractional
amounts, resulting in a constant
weighted average maturity of
approximately one month.18 The Index
seeks to reflect the returns that are
potentially available from holding an
unleveraged long position in first- and
second-month VIX Futures Contracts by
measuring its daily performance from
the weighted average price of VIX
Futures Contracts.19
To pursue its investment objective,
the Fund will primarily invest in VIX
Futures Contracts based on components
of the Index. The Fund will primarily
acquire long exposure to the VIX
through VIX Futures Contracts, such
that the Fund has exposure intended to
approximate 200% of the return of the
Index at the time of the net asset value
(‘‘NAV’’) calculation of the Fund.20
However, in the event that the Fund is
unable to meet its investment objective
solely through investment in VIX
16 The Exchange states that the VIX is an index
designed to measure the implied volatility of the
S&P 500 over 30 days in the future. The VIX is
calculated based on the prices of certain put and
call options on the S&P 500. The VIX is reflective
of the premium paid by investors for certain options
linked to the level of the S&P 500.
17 The Exchange states that VIX Futures Contracts
are measures of the market’s expectation of the level
of VIX at certain points in the future, and as such,
will behave differently than current, or spot, VIX.
While the VIX represents a measure of the current
expected volatility of the S&P 500 over the next 30
days, the prices of VIX Futures Contracts are based
on the current expectation of what the expected 30day volatility will be at a particular time in the
future (on the expiration date).
18 The Exchange states that the roll period usually
begins on the Wednesday falling 30 calendar days
before the S&P 500 option expiration for the
following month (‘‘Cboe VIX Monthly Futures
Settlement Date’’) and runs to the Tuesday prior to
the subsequent month’s Cboe VIX Monthly Futures
Settlement Date.
19 The Exchange states that because VIX Futures
Contracts correlate to future volatility readings of
VIX, while the VIX itself correlates to current
volatility, the Index and the Fund should be
expected to perform significantly different from the
VIX over all periods of time. Further, unlike the
Index, the VIX, which is not a benchmark for the
Fund, is calculated based on the prices of certain
put and call options on the S&P 500. According to
the Exchange, while the Index does not correspond
to the VIX, the value of the Index, and by extension
the Fund, will generally rise as the VIX rises and
fall as the VIX falls.
20 The Exchange states the Fund’s NAV will be
calculated at 4:00 p.m. E.T.
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Futures Contracts, it may invest in overthe-counter (‘‘OTC’’) swaps referencing
the Index or referencing particular VIX
Futures Contracts comprising the Index
(‘‘VIX Swap Agreements’’) 21 or in listed
VIX options contracts (‘‘VIX Options
Contracts,’’ and, together with VIX
Futures Contracts and VIX Swap
Agreements, ‘‘VIX Derivative
Products’’). The Fund may also invest in
Cash or Cash Equivalents 22 that may
serve as collateral to the Fund’s
investments in VIX Derivative
Products.23
The Fund will seek to remain fully
invested in VIX Derivative Products
(and Cash and Cash Equivalents as
collateral) that provide exposure to the
Index consistent with its investment
objective without regard to market
conditions, trends or direction. The
Fund’s investment objective is a daily
investment objective; that is, the Fund
seeks to track the Index on a daily basis,
21 The Exchange states the VIX Swap Agreements
in which the Fund may invest may or may not be
cleared. The Exchange states that the Fund will
only enter into VIX Swap Agreements with
counterparties that the Sponsor reasonably believes
are capable of performing under the contract and
will post collateral as required by the counterparty.
The Exchange further states that the Fund will seek,
where possible, to use counterparties, as applicable,
whose financial status is such that the risk of
default is reduced and that the Sponsor will
evaluate the creditworthiness of counterparties on
a regular basis. The Exchange states that, in
addition to information provided by credit agencies,
the Sponsor will review approved counterparties
using various factors, which may include the
counterparty’s reputation, the Sponsor’s past
experience with the counterparty and the price/
market actions of debt of the counterparty.
According to the Exchange, the Fund may use
various techniques to minimize OTC counterparty
credit risk including entering into arrangements
with counterparties whereby both sides exchange
collateral on a mark-to-market basis. The Exchange
states that collateral posted by the Fund to a
counterparty in connection with uncleared VIX
Swap Agreements is generally held for the benefit
of the counterparty in a segregated tri-party account
at the custodian to protect the counterparty against
non-payment by the Fund.
22 For purposes of the proposal, ‘‘Cash and Cash
Equivalents’’ are short-term instruments with
maturities of less than 3 months, including 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.
23 According to the Exchange, the Fund will
collateralize its obligations with Cash and Cash
Equivalents consistent with the Investment
Company Act of 1940 and interpretations
thereunder.
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not over longer periods.24 Accordingly,
each day, the Fund will position its
portfolio so that it can seek to track the
Index. The direction and extent of the
Index’s movements each day will
dictate the direction and extent of the
Fund’s portfolio rebalancing. For
example, if the level of the Index falls
on a given day, net assets of the Fund
would fall. As a result, exposure to the
Index, through futures positions held by
the Fund, would need to be decreased.
The opposite would be the case if the
level of the Index rises on a given day.
The time and manner in which the
Fund will rebalance its portfolio is
defined by the Index methodology but
may vary from the Index methodology
depending upon market conditions and
other circumstances including the
potential impact of the rebalance on the
price of the VIX Futures Contracts. The
Sponsor will seek to minimize the
market impact of rebalances across all
Funds 25 on the price of VIX Futures
Contracts by limiting the Funds’
participation, on any given day, in VIX
Futures Contracts to no more than ten
percent (10%) of the VIX Futures
Contracts traded on Cboe Futures
Exchange, Inc. (‘‘CFE’’) during any
‘‘Rebalance Period,’’ defined as any
fifteen minute period of continuous
market trading.26 To limit participation
during periods of market illiquidity, the
Sponsor, on any given day, may vary the
manner and period over which all funds
it sponsors are rebalanced, and as such,
the manner and period over which the
Fund is rebalanced. The Sponsor
believes that the Fund will enter an
Extended Rebalance Period most often
during periods of extraordinary market
24 The Exchange states that the return of the Fund
for a period longer than a single day is the result
of its return for each day compounded over the
period and usually would differ in amount and
possibly even direction from the Fund’s multiple
times the return of the Fund’s benchmark for the
same period.
25 For purposes of the filing, the Exchange states
that the Funds include the Fund and the –1x Short
VIX Futures ETF as proposed in SR–CboeBZX–
2020–070, but may in the future include additional
VIX ETPs sponsored by the Sponsor or its affiliates.
See Securities Exchange Act Release No. 89901
(September 17, 2020), 85 FR 59843 (September 23,
2020).
26 In the event that the Funds expect to hit the
ten percent threshold during the primary Rebalance
Period from 3:45 p.m. to 4:00 p.m. E.T., the Funds
will extend their respective rebalances into
additional Rebalance Periods and the TAS market.
It is expected that this extension will provide the
Funds with the flexibility to: begin rebalancing in
an earlier period, end rebalancing in a later period,
and execute contracts in TAS (each an ‘‘Extended
Rebalance Period’’ and collectively the ‘‘Extended
Rebalance Period’’) while remaining below the ten
percent cap during any fifteen minute period of
continuous market trading. The Funds will be
allocated executions based on their percentage of
notional transaction volume required.
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Fmt 4703
Sfmt 4703
conditions or illiquidity in VIX Futures
Contracts. In the event that the Fund
participates in an Extended Rebalance
Period, the Fund represents that it will
notify the Exchange and the
Commission of such participation as
soon as practicable, but no later than
9:00 a.m. E.T. on the trading day
following the event.
III. Discussion and Commission
Findings
After careful review of the proposed
rule change, as modified by Amendment
Nos. 2 and 4, as well as the comment
received, the Commission finds that the
proposed rule change, as modified by
Amendment Nos. 2 and 4, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange.27 In
particular, the Commission finds that
the proposed rule change, as modified
by Amendment Nos. 2 and 4, is
consistent with Section 6(b)(5) of the
Act,28 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.
A. Market Impact Considerations
In the OIP, the Commission sought
additional comment to assess whether
the proposal is consistent with the
requirements in Section 6(b)(5) of the
Act, and, specifically requested
comment on the Fund’s operation
during periods with large percentage
increases in volatility and the potential
market impact of the Fund’s daily
rebalance.29 As discussed below, the
Commission finds that the Exchange’s
proposal regarding the rebalancing
methodology of the Fund, as amended,
is designed to protect investors and the
public interest.
An exchange-traded product (‘‘ETP’’)
like the Fund would need to rebalance
its holdings daily. For an ETP that
tracks a benchmark index, like the
Fund, the greater the movement in the
reference index, the more demand
would be associated with its daily
rebalance. Because of the potential for
large, sudden moves in VIX levels, there
is a potential for large spikes in
rebalancing demand for VIX ETPs.
27 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).
28 15 U.S.C. 78f(b)(5).
29 See OIP, supra note 7, 85 FR at 64565.
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Following the OIP, the Exchange
amended its proposal to state that the
Sponsor will seek to minimize the
market impact of rebalances across all
Funds on the price of VIX Futures
Contracts by limiting the Funds’
participation, on any given day, in VIX
Futures Contracts to no more than ten
percent of the VIX Futures Contracts
traded on CFE during any Rebalance
Period.30
In support of its amended proposal,
the Exchange states that the Sponsor’s
proposed methodology for the Funds
seeks to reduce the dependence of VIX
ETPs on TAS by seeking to execute part
of the Funds’ daily rebalance outside of
TAS and believes that this approach
will spread VIX futures trading activity
over a longer period of time each day
and should help to reduce market
impact during periods of market turmoil
or disruption.31 In addition, the
Exchange states that the Sponsor
expects that allowing the Funds to
participate in an Extended Rebalance
Period will minimize the impact of the
Funds’ rebalance on the price of VIX
Futures Contracts, and particularly
minimize any impact of large rebalances
during periods of market illiquidity.32
The Exchange states that defining an
explicit rebalancing methodology and
limiting the Funds’ participation in the
VIX Futures Contracts should reduce
the impact of the Fund’s rebalancing on
the price of VIX Futures Contracts.33
The Exchange further represents that in
the event that the Fund participates in
an Extended Rebalance Period, the Fund
will notify the Exchange and the
Commission of such participation as
soon as practicable, but no later than
9:00 a.m. E.T. on the trading day
following the event.34
In addition, the Exchange states that
the Index’s use of a weighted average
price of VIX Futures Contracts to
measure its daily performance, as
described above, is expected to shift
part of the present dependence of VIX
ETPs on the TAS market, and reduce the
potential impact of very short-term
mispricing or manipulation on the daily
price of the Funds.35 The Exchange
states that the weighted average price
reference will also offer the Sponsor a
larger window of time to rebalance the
Fund, and the option to expand the
30 See Amendment No. 2, supra note 9, at 11. In
its original proposal, the Exchange did not include
a participation limitation.
31 See id. at 12–13.
32 See id. at 13.
33 Id.
34 See Amendment No. 4, supra note 10.
35 See Amendment No. 2, supra note 9, at 12.
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Rebalance Period to limit market
impact.36
The Commission believes that the
Exchange’s proposal regarding the
rebalancing methodology of the Fund is
reasonably designed to help mitigate the
potential market impact of the Fund’s
daily rebalance demand during periods
when there are large percentage
increases in volatility.37 The Fund’s
proposed rebalancing process, including
the Sponsor’s commitment to cap
participation in the VIX Futures
Contracts market during any Rebalance
Period to no more than 10% for all
Funds, should help to temper the
impact of the Funds’ rebalances on the
price of VIX Futures Contracts,
particularly during periods of market
volatility or illiquidity. The Commission
believes the 10% participation cap
strikes an appropriate balance between
allowing the Funds to rebalance within
a reasonably short period of time and
managing the potential market impact of
a large rebalance. Therefore, the
Commission believes the Exchange’s
proposal is adequately designed to
address the market impact concern
articulated in the OIP. The Commission
finds that the proposal is consistent
with Section 6(b)(5) of the Act,
including the protection of investors
and the public interest.
B. Other Considerations
A commenter opposes the proposal,
predicting that a long position in the
Shares will lose money during long bull
markets.38 The commenter presents
annual returns for an exchange-traded
note with a similar leverage ratio, and
asserts that it is ‘‘almost impossible to
make money long side, even for shortterm.’’ 39 The commenter also states that
a 2x long product like the Fund does not
‘‘make sense as a product’’ because of
the volatility of volatility and that the
Commission should instead approve an
inverse leveraged ETP.40 The
Commission is not persuaded by the
commenter’s contentions and continues
to believe that the Exchange has
demonstrated, as explained elsewhere
in this order, that the proposal is
consistent with Section 6(b)(5) of the
Act. In particular, the Commission does
36 See
id.
Commission’s findings in this order are
based on the specific proposed rule change filed
with the Commission, including how the proposed
rule operates under the current market conditions
discussed in this order. The Commission recognizes
that, over time, market conditions in VIX ETP
markets, and the related VIX futures market, may
change.
38 See letter from John Motson dated July 10,
2020.
39 See id.
40 See id.
37 The
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13925
not believe that an assessment of
whether another exchange-traded
product was a profitable investment is
relevant to a decision of whether the
proposal to list and trade the Shares is
consistent with the Act. The
Commission believes that the
Exchange’s proposal adequately
addresses the commenter’s concerns,
including those relating to investor
understanding or suitability. As
described below,41 the Exchange states,
that, prior to the commencement of
trading, it will issue an Information
Circular detailing the special
characteristics and risks associated with
trading the Shares, which will also,
among other things, detail the
Exchange’s rules regarding suitability
obligations and the duty of due
diligence for Members 42 recommending
transactions in the Shares to customers.
The Commission believes that the
proposal is reasonably designed to
promote fair disclosure of information
that may be necessary to price the
Shares appropriately and to prevent
trading in the Shares when a reasonable
degree of certain pricing transparency
cannot be assured and, as such, finds
that the proposal is designed to prevent
fraudulent and manipulative acts and
practices and protect investors and the
public interest. Specifically, the
Exchange will obtain a representation
from the Sponsor of the Shares that the
NAV will be calculated daily and that
the NAV and the Fund’s holdings will
be made available to all market
participants at the same time. On each
Business Day,43 before commencement
of trading in Shares during Regular
Trading Hours,44 the Fund will disclose
on its website the holdings that will
form the basis for the Fund’s calculation
of NAV at the end of the Business Day.
This website disclosure of the portfolio
composition of the Fund will occur at
the same time as the disclosure by the
Fund of the portfolio composition to
41 See infra note 46 and accompanying text. In
addition, as discussed below, the Exchange also
states the Financial Industry Regulatory Authority
(‘‘FINRA’’) has implemented increased sales
practice and customer margin requirements for
FINRA members applicable to inverse, leveraged
and inverse leveraged securities (which include the
Shares).
42 As defined in BZX Rule 1.5(n), the term
‘‘Member’’ means any registered broker or dealer
that has been admitted to membership in the
Exchange.
43 A ‘‘Business Day’’ means any day other than a
day when any of BZX, Cboe, CFE or other exchange
material to the valuation or operation of the Fund,
or the calculation of the VIX, options contracts
underlying the VIX, VIX Futures Contracts or the
Index is closed for regular trading.
44 As defined in BZX Rule 1.5(w), the term
‘‘Regular Trading Hours’’ means the time between
9:30 a.m. and 4:00 p.m. E.T.
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authorized participants, so that all
market participants will be provided
portfolio composition information at the
same time, and the same portfolio
information will be provided on the
public website as in electronic files
provided to authorized participants.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the Consolidated Tape Association. As
required by BZX Rule 14.11(f)(4), an
updated Intraday Indicative Value
(‘‘IIV’’) will be calculated and widely
disseminated by one or more major
market data vendors every 15 seconds
throughout Regular Trading Hours. The
IIV will be published on the Exchange’s
website and will be available through
on-line information services such as
Bloomberg and Reuters. Information
regarding market price and trading
volume of the Shares will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services. The
Fund’s website will include a form of
the prospectus for the Fund and
additional data relating to NAV and
other applicable quantitative
information. In addition, the level of the
Index will be published at least every 15
seconds in real time from 9:30 a.m. to
4:00 p.m. E.T. and at the close of trading
on each Business Day by Bloomberg and
Reuters.
Quotation and last-sale information
regarding VIX Futures Contracts and
VIX Options Contracts will be available
from the exchanges on which such
instruments are traded. Quotation and
last-sale information relating to VIX
Options Contracts will also be available
via the Options Price Reporting
Authority. Quotation and last-sale
information for VIX Swap Agreements
will be available from nationally
recognized data services providers, such
as Reuters and Bloomberg, through
subscription agreements or from a
broker-dealer who makes markets in
such instruments. Pricing information
regarding Cash Equivalents in which the
Fund may invest is generally available
through nationally recognized data
services providers, such as Reuters and
Bloomberg, through subscription
agreements. The closing prices and
settlement prices of the Index
Components (i.e., the first- and secondmonth VIX Futures Contracts) will be
readily available from the websites of
CFE (https://www.cfe.cboe.com),
automated quotation systems, published
or other public sources, or on-line
information services such as Bloomberg
or Reuters. The CFE also provides
delayed futures information on current
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and past trading sessions and market
news free of charge on its website.
Complete real-time data for component
VIX Futures Contracts underlying the
Index, including the specific contract
specifications of Index Components
(i.e., first-month and second-month VIX
Futures Contracts), is available by
subscription from Reuters and
Bloomberg.
The Commission believes that the
Exchange’s rules regarding trading halts
further help to ensure the maintenance
of fair and orderly markets for the
Shares, which is consistent with the
protection of investors and the public
interest. Trading in the Shares may be
halted because of market conditions or
for reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable. These may include: (1) The
extent to which trading is not occurring
in the securities and/or the financial
instruments composing the daily
disclosed portfolio of the Fund; or (2)
whether other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present. In addition, the
Exchange will halt trading in the Shares
under the conditions specified in BZX
Rule 11.18 (Trading Halts Due to
Extraordinary Market Volatility). BZX
Rule 14.11(f)(4)(c)(ii) enumerates
additional circumstances under which
the Exchange will consider the
suspension of trading in and will
commence delisting proceedings for the
Shares.
The Commission finds that the
Exchange’s proposal regarding
safeguarding material non-public
information relating to the Fund’s
portfolio is designed to prevent
fraudulent and manipulative acts and
practices and to protect investors and
the public interest. Specifically, the
Exchange states that the Sponsor is not
a broker-dealer or affiliated with a
broker-dealer. In the event that (a) the
Sponsor becomes a broker-dealer or
newly affiliated with a broker-dealer, or
(b) any new sponsor is a 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 the portfolio. Moreover,
trading of the Shares will be subject to
BZX Rule 14.11(f)(4)(D), which sets
forth certain restrictions on Members
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Fmt 4703
Sfmt 4703
acting as registered Market Makers 45 in
Trust Issued Receipts to facilitate
surveillance. In addition, the Exchange
has a general policy prohibiting the
distribution of material, non-public
information by its employees.
Furthermore, the Commission finds
that the Exchange’s proposal regarding
surveillance of the Shares and the
underlying investments is designed to
prevent fraudulent and manipulative
acts and practices and to protect
investors and the public interest. The
Exchange or 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 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. The Exchange states that
trading of the Shares through the
Exchange will be subject to the
Exchange’s surveillance procedures for
derivative products, and these
procedures are adequate to properly
monitor Exchange trading of the Shares
during all trading sessions and to deter
and detect violations of Exchange rules
and applicable federal securities laws.
In addition, all of the VIX Futures
Contracts and VIX Options Contracts
held by the Fund will trade on markets
that are a member of ISG or affiliated
with a member of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.
The Commission finds that the
Exchange’s rules relating to trading of
the Shares on the Exchange are 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. Specifically, the
Exchange states that:
(1) The Exchange deems the Shares to be
equity securities, thus rendering trading in
the Shares subject to the Exchange’s existing
rules governing the trading of equity
securities;
(2) The Shares will conform to the initial
and continued listing criteria under BZX
Rule 14.11(f);
(3) Pursuant to BZX Rule 14.11(a), all
statements and representations made in the
filing regarding the Index composition,
description of the portfolio or reference
45 As defined in BZX Rule 1.5(l), the term
‘‘Market Maker’’ means a Member that acts as a
Market Maker pursuant to Chapter XI of the BZX
Rules.
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assets, limitations on portfolio holdings or
reference assets, dissemination and
availability of the Index, reference assets, and
IIV, or the applicability of Exchange listing
rules specified in the filing shall constitute
continued listing requirements for the
Shares. The issuer will advise the Exchange
of any failure by the Fund 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.
(4) The Exchange has the appropriate rules
to facilitate transactions in the Shares during
all trading sessions;
(5) Prior to the commencement of trading,
the Exchange will inform its Members in an
Information Circular of the special
characteristics and risks associated with
trading the Shares; 46
(6) FINRA has implemented increased
sales practice and customer margin
requirements for FINRA members applicable
to inverse, leveraged and inverse leveraged
securities (which include the Shares) and
options on such securities, as described in
FINRA Regulatory Notices 09–31 (June 2009),
09–53 (August 2009), and 09–65 (November
2009). Members that carry customer accounts
will be required to follow the FINRA
guidance set forth in these notices;
(7) For initial and continued listing, the
Fund and the Trust must be in compliance
with Rule 10A–3 under the Act; 47 and
(8) A minimum of 100,000 Shares of the
Fund will be outstanding at the
commencement of trading on the Exchange.
khammond on DSKJM1Z7X2PROD with NOTICES
Accordingly, the Commission finds
that the proposed rule change, as
46 The Exchange states that the Information
Circular will discuss the following: (a) The
procedures for purchases and redemptions of
Shares in Creation Units (and that Shares are not
individually redeemable); (b) BZX Rule 3.7, which
imposes suitability obligations on Members with
respect to recommending transactions in the Shares
to customers; (c) Interpretation and Policy .01 of
BZX Rule 3.7 which imposes a duty of due
diligence on its Members to learn the essential facts
relating to every customer prior to trading the
Shares, and specifically provides that ‘‘[n]o Member
shall recommend to a customer a transaction in any
such product unless the Member has a reasonable
basis for believing at the time of making the
recommendation that the customer has such
knowledge and experience in financial matters that
he may reasonably be expected to be capable of
evaluating the risks of the recommended
transaction and is financially able to bear the risks
of the recommended position;’’ (d) how information
regarding the IIV and the Fund’s holdings is
disseminated; (e) the risks involved in trading the
Shares during the Pre-Opening and After Hours
Trading Sessions (as such terms are defined in BZX
Rules) when an updated IIV will not be calculated
or publicly disseminated; (f) the requirement that
Members deliver a prospectus to investors
purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction;
and (g) trading information.
47 17 CFR 240.10A–3.
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modified by Amendment Nos. 2 and 4,
is consistent with Section 6(b)(5) of the
Act 48 and the rules and regulations
thereunder applicable to a national
securities exchange.
to make available publicly. All
submissions should refer to File
Number SR–CboeBZX–2020–053 and
should be submitted on or before April
1, 2021.
IV. Solicitation of Comments on
Amendment Nos. 2 and 4 to the
Proposed Rule Change
V. Accelerated Approval of the
Proposed Rule Change, as Modified by
Amendment Nos. 2 and 4
Interested persons are invited to
submit written views, data, and
arguments concerning whether
Amendment Nos. 2 and 4 are 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–2020–053 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–CboeBZX–2020–053. 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
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment Nos. 2 and 4,
prior to the thirtieth day after the date
of publication of notice of the filing of
Amendment Nos. 2 and 4 in the Federal
Register. In Amendment No. 2, among
other things,49 the Exchange represents
that the Funds’ participation, on any
given day, in VIX Futures Contracts,
will be limited to no more than ten
percent of the VIX Futures Contracts
traded on CFE during any Rebalance
Period, and in the event that the Funds
expect to hit the ten percent threshold
during the primary Rebalance Period,
the Funds would extend their respective
rebalances into an Extended Rebalance
Period. In Amendment No. 4, the
Exchange represents that the Fund will
notify both the Exchange and the
Commission in the event that the Fund
participates in an Extended Rebalance
Period as soon as practicable, but no
later than 9:00 a.m. E.T. on the trading
day following the event. The changes to
the proposal and additional information
in Amendment Nos. 2 and 4 assist the
Commission in evaluating the
Exchange’s proposal and in determining
that it is consistent with the Act.
Accordingly, the Commission finds
good cause, pursuant to Section 19(b)(2)
of the Act,50 to approve the proposed
rule change, as modified by Amendment
Nos. 2 and 4, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,51 that the
proposed rule change (SR–CboeBZX–
2020–053), as modified by Amendment
Nos. 2 and 4, be, and hereby is,
approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.52
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–05028 Filed 3–10–21; 8:45 am]
BILLING CODE 8011–01–P
49 See
50 15
supra note 9.
U.S.C. 78s(b)(2).
51 Id.
48 15
PO 00000
U.S.C. 78f(b)(5).
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]]>Agencies
[Federal Register Volume 86, Number 46 (Thursday, March 11, 2021)]
[Notices]
[Pages 13922-13927]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05028]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91265; File No. SR-CboeBZX-2020-053]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment Nos. 2 and 4 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 2 and
4, To List and Trade Shares of the 2x Long VIX Futures ETF Under BZX
Rule 14.11(f)(4) (Trust Issued Receipts)
March 5, 2021.
I. Introduction
On June 23, 2020, 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
list and trade shares (``Shares'') of the 2x Long VIX Futures ETF
(``Fund''), a series of VS Trust (``Trust''), under BZX Rule
14.11(f)(4) (Trust Issued Receipts). On June 26, 2020, the Exchange
filed Amendment No. 1 to the proposed rule change. The proposed rule
change, as modified by Amendment No. 1, was published for comment in
the Federal Register on July 10, 2020.\3\ On August 13, 2020, pursuant
to Section 19(b)(2) of the Act,\4\ the Commission designated a longer
period within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\5\ On October 7, 2020, the
Commission instituted
[[Page 13923]]
proceedings pursuant to Section 19(b)(2)(B) of the Act \6\ to determine
whether to approve or disapprove the proposed rule change.\7\ On
December 15, 2020, the Commission designated a longer period for
Commission action on the proposed rule change.\8\ On February 1, 2021,
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.\9\ On February 19, 2021, filed partial Amendment No. 4
to the proposed rule change.\10\ The Commission is publishing this
notice to solicit comments on Amendment Nos. 2 and 4 from interested
persons, and is approving the proposed rule change, as modified by
Amendment Nos. 2 and 4, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 89234 (July 6,
2020), 85 FR 41644. Comments on the proposed rule change can be
found at: https://www.sec.gov/comments/sr-cboebzx-2020-053/srcboebzx2020053.htm.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 89545, 85 FR 51124
(August 19, 2020). The Commission designated October 8, 2020, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 90118, 85 FR 64563
(October 13, 2020) (``OIP'').
\8\ See Securities Exchange Act Release No. 90671, 85 FR 83136
(December 21, 2020) (designating March 7, 2021 as the date by which
the Commission shall approve or disapprove the proposal).
\9\ In Amendment No. 2, the Exchange: (i) Updated the
information regarding the Fund's registration statement; (ii)
clarified that the Index (defined below) seeks to reflect the
returns that are potentially available from holding an unleveraged
long position in first- and second- month VIX Futures Contracts
(defined below) by measuring its daily performance from the weighted
average price of VIX Futures Contracts; (iii) stated that the
Sponsor (defined below) will seek to minimize the market impact of
rebalances across all exchange traded products based on VIX Futures
Contracts (``VIX ETPs'') that it sponsors (``Funds'') on the price
of VIX Futures Contracts by limiting such Funds' participation, on
any given day, in VIX Futures Contracts to no more than ten percent
(10%) of the contracts traded on Cboe Futures Exchange during any
Rebalance Period (defined below); (iv) stated that, in the event the
Funds expect to hit this 10% threshold during the primary Rebalance
Period from 3:45 p.m. to 4:00 p.m. E.T., the Funds would extend
their respective rebalances into additional Rebalance Periods and
the Trade At Settlement (``TAS'') market; (v) stated that, to limit
participation during periods of market illiquidity, the Sponsor may
vary the manner and period over which all funds it sponsors are
rebalanced, including the Fund, and that Funds will be allocated
executions based on their percentage of notional transaction volume
required; (vi) stated that the Index's use of a weighted average
price reference and the Sponsor's commitment to cap participation in
the VIX futures market during any Rebalance Period to no more than
10% for all Funds should, among other things, help reduce the market
impact of all exposure to the VIX futures market; (vii) stated that,
in reviewing VIX Futures Contracts trading back to March 26, 2004,
the Fund expects that it would have participated in an Extended
Rebalance Period (defined below) on one or more days only in
February 2018 and March 2020; and (viii) made technical, clarifying,
and conforming changes. Amendment No. 2 is available at: https://www.sec.gov/comments/sr-cboebzx-2020-053/srcboebzx2020053-8324963-228603.pdf.
\10\ On February 16, 2021, the Exchange submitted Amendment No.
3 to the proposed rule change, and on February 19, 2021, the
Exchange withdrew Amendment No. 3 to the proposed rule change. In
Amendment No. 4, the Exchange added a representation that the Fund
will notify both the Exchange and the Commission in the event that
the Fund participates in an Extended Rebalance Period as soon as
practicable, but no later than 9:00 a.m. E.T. on the trading day
following the event. Amendment No. 4 is available at: https://www.sec.gov/comments/sr-cboebzx-2020-053/srcboebzx2020053-8393734-229405.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
Nos. 2 and 4 11
---------------------------------------------------------------------------
\11\ Additional information regarding the Fund, the Trust, and
the Shares, including investment strategies, creation and redemption
procedures, and portfolio holdings can be found in Amendment No. 2,
supra note 9.
---------------------------------------------------------------------------
The Exchange proposes to list and trade Shares of the Fund \12\
under BZX Rule 14.11(f)(4), which governs the listing and trading of
Trust Issued Receipts \13\ on the Exchange. Volatility Shares LLC
(``Sponsor''), a Delaware limited liability company and a commodity
pool operator, serves as the Sponsor of the Trust.\14\ Tidal ETF
Services LLC serves as the administrator; U.S. Bank National
Association serves as custodian of the Fund and the Shares; U.S.
Bancorp Fund Services, LLC serves as the sub-administrator and transfer
agent; and Wilmington Trust Company is the sole trustee of the Trust.
---------------------------------------------------------------------------
\12\ The Fund has submitted a registration statement on Form S-1
under the Securities Act of 1933, dated July 13, 2020 (File No. 377-
03292) (``Registration Statement''). The Registration Statement for
the Fund is not yet effective, and the Fund will not trade on the
Exchange until such time that the Registration Statement is
effective.
\13\ Rule 14.11(f)(4) applies to Trust Issued Receipts that
invest in ``Financial Instruments,'' defined in Rule
14.11(f)(4)(A)(iv) as any combination of investments, including
cash; securities; options on securities and indices; futures
contracts; options on futures contracts; forward contracts; equity
caps, collars and floors; and swap agreements.
\14\ The Sponsor is not a broker-dealer or affiliated with a
broker-dealer. In the event that (a) the Sponsor becomes a broker-
dealer or newly affiliated with a broker-dealer, or (b) any new
sponsor is a 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 the portfolio.
---------------------------------------------------------------------------
The Fund seeks to provide a return that is 200% of the return of
its benchmark index for a single day. The benchmark for the Fund is the
Long VIX Futures Index (LONGVOL) (``Index'').\15\ The Index measures
the daily performance of a theoretical portfolio of first- and second-
month futures contracts on the Cboe Volatility Index (``VIX'').\16\ The
Index is comprised of VIX futures contracts (``VIX Futures
Contracts'').\17\ Specifically, the Index components represent the
prices of the two near-term VIX Futures Contracts, replicating a
position that rolls the nearest month VIX Futures Contract to the next
month VIX Futures Contract on a daily basis in equal fractional
amounts, resulting in a constant weighted average maturity of
approximately one month.\18\ The Index seeks to reflect the returns
that are potentially available from holding an unleveraged long
position in first- and second-month VIX Futures Contracts by measuring
its daily performance from the weighted average price of VIX Futures
Contracts.\19\
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\15\ The Index is sponsored by Cboe Global Indexes (``Index
sponsor''). The Index sponsor is not a registered broker-dealer, but
is affiliated with a broker-dealer and has implemented and will
maintain a fire wall with respect to the broker-dealer affiliate
regarding access to information concerning the composition of and/or
changes to the Index. In addition, the Index sponsor has implemented
and will maintain procedures that are designed to prevent the use
and dissemination of material, non-public information regarding the
Index.
\16\ The Exchange states that the VIX is an index designed to
measure the implied volatility of the S&P 500 over 30 days in the
future. The VIX is calculated based on the prices of certain put and
call options on the S&P 500. The VIX is reflective of the premium
paid by investors for certain options linked to the level of the S&P
500.
\17\ The Exchange states that VIX Futures Contracts are measures
of the market's expectation of the level of VIX at certain points in
the future, and as such, will behave differently than current, or
spot, VIX. While the VIX represents a measure of the current
expected volatility of the S&P 500 over the next 30 days, the prices
of VIX Futures Contracts are based on the current expectation of
what the expected 30-day volatility will be at a particular time in
the future (on the expiration date).
\18\ The Exchange states that the roll period usually begins on
the Wednesday falling 30 calendar days before the S&P 500 option
expiration for the following month (``Cboe VIX Monthly Futures
Settlement Date'') and runs to the Tuesday prior to the subsequent
month's Cboe VIX Monthly Futures Settlement Date.
\19\ The Exchange states that because VIX Futures Contracts
correlate to future volatility readings of VIX, while the VIX itself
correlates to current volatility, the Index and the Fund should be
expected to perform significantly different from the VIX over all
periods of time. Further, unlike the Index, the VIX, which is not a
benchmark for the Fund, is calculated based on the prices of certain
put and call options on the S&P 500. According to the Exchange,
while the Index does not correspond to the VIX, the value of the
Index, and by extension the Fund, will generally rise as the VIX
rises and fall as the VIX falls.
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To pursue its investment objective, the Fund will primarily invest
in VIX Futures Contracts based on components of the Index. The Fund
will primarily acquire long exposure to the VIX through VIX Futures
Contracts, such that the Fund has exposure intended to approximate 200%
of the return of the Index at the time of the net asset value (``NAV'')
calculation of the Fund.\20\ However, in the event that the Fund is
unable to meet its investment objective solely through investment in
VIX
[[Page 13924]]
Futures Contracts, it may invest in over-the-counter (``OTC'') swaps
referencing the Index or referencing particular VIX Futures Contracts
comprising the Index (``VIX Swap Agreements'') \21\ or in listed VIX
options contracts (``VIX Options Contracts,'' and, together with VIX
Futures Contracts and VIX Swap Agreements, ``VIX Derivative
Products''). The Fund may also invest in Cash or Cash Equivalents \22\
that may serve as collateral to the Fund's investments in VIX
Derivative Products.\23\
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\20\ The Exchange states the Fund's NAV will be calculated at
4:00 p.m. E.T.
\21\ The Exchange states the VIX Swap Agreements in which the
Fund may invest may or may not be cleared. The Exchange states that
the Fund will only enter into VIX Swap Agreements with
counterparties that the Sponsor reasonably believes are capable of
performing under the contract and will post collateral as required
by the counterparty. The Exchange further states that the Fund will
seek, where possible, to use counterparties, as applicable, whose
financial status is such that the risk of default is reduced and
that the Sponsor will evaluate the creditworthiness of
counterparties on a regular basis. The Exchange states that, in
addition to information provided by credit agencies, the Sponsor
will review approved counterparties using various factors, which may
include the counterparty's reputation, the Sponsor's past experience
with the counterparty and the price/market actions of debt of the
counterparty. According to the Exchange, the Fund may use various
techniques to minimize OTC counterparty credit risk including
entering into arrangements with counterparties whereby both sides
exchange collateral on a mark-to-market basis. The Exchange states
that collateral posted by the Fund to a counterparty in connection
with uncleared VIX Swap Agreements is generally held for the benefit
of the counterparty in a segregated tri-party account at the
custodian to protect the counterparty against non-payment by the
Fund.
\22\ For purposes of the proposal, ``Cash and Cash Equivalents''
are short-term instruments with maturities of less than 3 months,
including 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.
\23\ According to the Exchange, the Fund will collateralize its
obligations with Cash and Cash Equivalents consistent with the
Investment Company Act of 1940 and interpretations thereunder.
---------------------------------------------------------------------------
The Fund will seek to remain fully invested in VIX Derivative
Products (and Cash and Cash Equivalents as collateral) that provide
exposure to the Index consistent with its investment objective without
regard to market conditions, trends or direction. The Fund's investment
objective is a daily investment objective; that is, the Fund seeks to
track the Index on a daily basis, not over longer periods.\24\
Accordingly, each day, the Fund will position its portfolio so that it
can seek to track the Index. The direction and extent of the Index's
movements each day will dictate the direction and extent of the Fund's
portfolio rebalancing. For example, if the level of the Index falls on
a given day, net assets of the Fund would fall. As a result, exposure
to the Index, through futures positions held by the Fund, would need to
be decreased. The opposite would be the case if the level of the Index
rises on a given day.
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\24\ The Exchange states that the return of the Fund for a
period longer than a single day is the result of its return for each
day compounded over the period and usually would differ in amount
and possibly even direction from the Fund's multiple times the
return of the Fund's benchmark for the same period.
---------------------------------------------------------------------------
The time and manner in which the Fund will rebalance its portfolio
is defined by the Index methodology but may vary from the Index
methodology depending upon market conditions and other circumstances
including the potential impact of the rebalance on the price of the VIX
Futures Contracts. The Sponsor will seek to minimize the market impact
of rebalances across all Funds \25\ on the price of VIX Futures
Contracts by limiting the Funds' participation, on any given day, in
VIX Futures Contracts to no more than ten percent (10%) of the VIX
Futures Contracts traded on Cboe Futures Exchange, Inc. (``CFE'')
during any ``Rebalance Period,'' defined as any fifteen minute period
of continuous market trading.\26\ To limit participation during periods
of market illiquidity, the Sponsor, on any given day, may vary the
manner and period over which all funds it sponsors are rebalanced, and
as such, the manner and period over which the Fund is rebalanced. The
Sponsor believes that the Fund will enter an Extended Rebalance Period
most often during periods of extraordinary market conditions or
illiquidity in VIX Futures Contracts. In the event that the Fund
participates in an Extended Rebalance Period, the Fund represents that
it will notify the Exchange and the Commission of such participation as
soon as practicable, but no later than 9:00 a.m. E.T. on the trading
day following the event.
---------------------------------------------------------------------------
\25\ For purposes of the filing, the Exchange states that the
Funds include the Fund and the -1x Short VIX Futures ETF as proposed
in SR-CboeBZX-2020-070, but may in the future include additional VIX
ETPs sponsored by the Sponsor or its affiliates. See Securities
Exchange Act Release No. 89901 (September 17, 2020), 85 FR 59843
(September 23, 2020).
\26\ In the event that the Funds expect to hit the ten percent
threshold during the primary Rebalance Period from 3:45 p.m. to 4:00
p.m. E.T., the Funds will extend their respective rebalances into
additional Rebalance Periods and the TAS market. It is expected that
this extension will provide the Funds with the flexibility to: begin
rebalancing in an earlier period, end rebalancing in a later period,
and execute contracts in TAS (each an ``Extended Rebalance Period''
and collectively the ``Extended Rebalance Period'') while remaining
below the ten percent cap during any fifteen minute period of
continuous market trading. The Funds will be allocated executions
based on their percentage of notional transaction volume required.
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III. Discussion and Commission Findings
After careful review of the proposed rule change, as modified by
Amendment Nos. 2 and 4, as well as the comment received, the Commission
finds that the proposed rule change, as modified by Amendment Nos. 2
and 4, is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\27\ In
particular, the Commission finds that the proposed rule change, as
modified by Amendment Nos. 2 and 4, is consistent with Section 6(b)(5)
of the Act,\28\ 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.
---------------------------------------------------------------------------
\27\ 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).
\28\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Market Impact Considerations
In the OIP, the Commission sought additional comment to assess
whether the proposal is consistent with the requirements in Section
6(b)(5) of the Act, and, specifically requested comment on the Fund's
operation during periods with large percentage increases in volatility
and the potential market impact of the Fund's daily rebalance.\29\ As
discussed below, the Commission finds that the Exchange's proposal
regarding the rebalancing methodology of the Fund, as amended, is
designed to protect investors and the public interest.
---------------------------------------------------------------------------
\29\ See OIP, supra note 7, 85 FR at 64565.
---------------------------------------------------------------------------
An exchange-traded product (``ETP'') like the Fund would need to
rebalance its holdings daily. For an ETP that tracks a benchmark index,
like the Fund, the greater the movement in the reference index, the
more demand would be associated with its daily rebalance. Because of
the potential for large, sudden moves in VIX levels, there is a
potential for large spikes in rebalancing demand for VIX ETPs.
[[Page 13925]]
Following the OIP, the Exchange amended its proposal to state that the
Sponsor will seek to minimize the market impact of rebalances across
all Funds on the price of VIX Futures Contracts by limiting the Funds'
participation, on any given day, in VIX Futures Contracts to no more
than ten percent of the VIX Futures Contracts traded on CFE during any
Rebalance Period.\30\
---------------------------------------------------------------------------
\30\ See Amendment No. 2, supra note 9, at 11. In its original
proposal, the Exchange did not include a participation limitation.
---------------------------------------------------------------------------
In support of its amended proposal, the Exchange states that the
Sponsor's proposed methodology for the Funds seeks to reduce the
dependence of VIX ETPs on TAS by seeking to execute part of the Funds'
daily rebalance outside of TAS and believes that this approach will
spread VIX futures trading activity over a longer period of time each
day and should help to reduce market impact during periods of market
turmoil or disruption.\31\ In addition, the Exchange states that the
Sponsor expects that allowing the Funds to participate in an Extended
Rebalance Period will minimize the impact of the Funds' rebalance on
the price of VIX Futures Contracts, and particularly minimize any
impact of large rebalances during periods of market illiquidity.\32\
The Exchange states that defining an explicit rebalancing methodology
and limiting the Funds' participation in the VIX Futures Contracts
should reduce the impact of the Fund's rebalancing on the price of VIX
Futures Contracts.\33\ The Exchange further represents that in the
event that the Fund participates in an Extended Rebalance Period, the
Fund will notify the Exchange and the Commission of such participation
as soon as practicable, but no later than 9:00 a.m. E.T. on the trading
day following the event.\34\
---------------------------------------------------------------------------
\31\ See id. at 12-13.
\32\ See id. at 13.
\33\ Id.
\34\ See Amendment No. 4, supra note 10.
---------------------------------------------------------------------------
In addition, the Exchange states that the Index's use of a weighted
average price of VIX Futures Contracts to measure its daily
performance, as described above, is expected to shift part of the
present dependence of VIX ETPs on the TAS market, and reduce the
potential impact of very short-term mispricing or manipulation on the
daily price of the Funds.\35\ The Exchange states that the weighted
average price reference will also offer the Sponsor a larger window of
time to rebalance the Fund, and the option to expand the Rebalance
Period to limit market impact.\36\
---------------------------------------------------------------------------
\35\ See Amendment No. 2, supra note 9, at 12.
\36\ See id.
---------------------------------------------------------------------------
The Commission believes that the Exchange's proposal regarding the
rebalancing methodology of the Fund is reasonably designed to help
mitigate the potential market impact of the Fund's daily rebalance
demand during periods when there are large percentage increases in
volatility.\37\ The Fund's proposed rebalancing process, including the
Sponsor's commitment to cap participation in the VIX Futures Contracts
market during any Rebalance Period to no more than 10% for all Funds,
should help to temper the impact of the Funds' rebalances on the price
of VIX Futures Contracts, particularly during periods of market
volatility or illiquidity. The Commission believes the 10%
participation cap strikes an appropriate balance between allowing the
Funds to rebalance within a reasonably short period of time and
managing the potential market impact of a large rebalance. Therefore,
the Commission believes the Exchange's proposal is adequately designed
to address the market impact concern articulated in the OIP. The
Commission finds that the proposal is consistent with Section 6(b)(5)
of the Act, including the protection of investors and the public
interest.
---------------------------------------------------------------------------
\37\ The Commission's findings in this order are based on the
specific proposed rule change filed with the Commission, including
how the proposed rule operates under the current market conditions
discussed in this order. The Commission recognizes that, over time,
market conditions in VIX ETP markets, and the related VIX futures
market, may change.
---------------------------------------------------------------------------
B. Other Considerations
A commenter opposes the proposal, predicting that a long position
in the Shares will lose money during long bull markets.\38\ The
commenter presents annual returns for an exchange-traded note with a
similar leverage ratio, and asserts that it is ``almost impossible to
make money long side, even for short-term.'' \39\ The commenter also
states that a 2x long product like the Fund does not ``make sense as a
product'' because of the volatility of volatility and that the
Commission should instead approve an inverse leveraged ETP.\40\ The
Commission is not persuaded by the commenter's contentions and
continues to believe that the Exchange has demonstrated, as explained
elsewhere in this order, that the proposal is consistent with Section
6(b)(5) of the Act. In particular, the Commission does not believe that
an assessment of whether another exchange-traded product was a
profitable investment is relevant to a decision of whether the proposal
to list and trade the Shares is consistent with the Act. The Commission
believes that the Exchange's proposal adequately addresses the
commenter's concerns, including those relating to investor
understanding or suitability. As described below,\41\ the Exchange
states, that, prior to the commencement of trading, it will issue an
Information Circular detailing the special characteristics and risks
associated with trading the Shares, which will also, among other
things, detail the Exchange's rules regarding suitability obligations
and the duty of due diligence for Members \42\ recommending
transactions in the Shares to customers.
---------------------------------------------------------------------------
\38\ See letter from John Motson dated July 10, 2020.
\39\ See id.
\40\ See id.
\41\ See infra note 46 and accompanying text. In addition, as
discussed below, the Exchange also states the Financial Industry
Regulatory Authority (``FINRA'') has implemented increased sales
practice and customer margin requirements for FINRA members
applicable to inverse, leveraged and inverse leveraged securities
(which include the Shares).
\42\ As defined in BZX Rule 1.5(n), the term ``Member'' means
any registered broker or dealer that has been admitted to membership
in the Exchange.
---------------------------------------------------------------------------
The Commission believes that the proposal is reasonably designed to
promote fair disclosure of information that may be necessary to price
the Shares appropriately and to prevent trading in the Shares when a
reasonable degree of certain pricing transparency cannot be assured
and, as such, finds that the proposal is designed to prevent fraudulent
and manipulative acts and practices and protect investors and the
public interest. Specifically, the Exchange will obtain a
representation from the Sponsor of the Shares that the NAV will be
calculated daily and that the NAV and the Fund's holdings will be made
available to all market participants at the same time. On each Business
Day,\43\ before commencement of trading in Shares during Regular
Trading Hours,\44\ the Fund will disclose on its website the holdings
that will form the basis for the Fund's calculation of NAV at the end
of the Business Day. This website disclosure of the portfolio
composition of the Fund will occur at the same time as the disclosure
by the Fund of the portfolio composition to
[[Page 13926]]
authorized participants, so that all market participants will be
provided portfolio composition information at the same time, and the
same portfolio information will be provided on the public website as in
electronic files provided to authorized participants. Quotation and
last-sale information regarding the Shares will be disseminated through
the facilities of the Consolidated Tape Association. As required by BZX
Rule 14.11(f)(4), an updated Intraday Indicative Value (``IIV'') will
be calculated and widely disseminated by one or more major market data
vendors every 15 seconds throughout Regular Trading Hours. The IIV will
be published on the Exchange's website and will be available through
on-line information services such as Bloomberg and Reuters. Information
regarding market price and trading volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. The Fund's
website will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative
information. In addition, the level of the Index will be published at
least every 15 seconds in real time from 9:30 a.m. to 4:00 p.m. E.T.
and at the close of trading on each Business Day by Bloomberg and
Reuters.
---------------------------------------------------------------------------
\43\ A ``Business Day'' means any day other than a day when any
of BZX, Cboe, CFE or other exchange material to the valuation or
operation of the Fund, or the calculation of the VIX, options
contracts underlying the VIX, VIX Futures Contracts or the Index is
closed for regular trading.
\44\ As defined in BZX Rule 1.5(w), the term ``Regular Trading
Hours'' means the time between 9:30 a.m. and 4:00 p.m. E.T.
---------------------------------------------------------------------------
Quotation and last-sale information regarding VIX Futures Contracts
and VIX Options Contracts will be available from the exchanges on which
such instruments are traded. Quotation and last-sale information
relating to VIX Options Contracts will also be available via the
Options Price Reporting Authority. Quotation and last-sale information
for VIX Swap Agreements will be available from nationally recognized
data services providers, such as Reuters and Bloomberg, through
subscription agreements or from a broker-dealer who makes markets in
such instruments. Pricing information regarding Cash Equivalents in
which the Fund may invest is generally available through nationally
recognized data services providers, such as Reuters and Bloomberg,
through subscription agreements. The closing prices and settlement
prices of the Index Components (i.e., the first- and second-month VIX
Futures Contracts) will be readily available from the websites of CFE
(https://www.cfe.cboe.com), automated quotation systems, published or
other public sources, or on-line information services such as Bloomberg
or Reuters. The CFE also provides delayed futures information on
current and past trading sessions and market news free of charge on its
website. Complete real-time data for component VIX Futures Contracts
underlying the Index, including the specific contract specifications of
Index Components (i.e., first-month and second-month VIX Futures
Contracts), is available by subscription from Reuters and Bloomberg.
The Commission believes that the Exchange's rules regarding trading
halts further help to ensure the maintenance of fair and orderly
markets for the Shares, which is consistent with the protection of
investors and the public interest. Trading in the Shares may be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable. These may include:
(1) The extent to which trading is not occurring in the securities and/
or the financial instruments composing the daily disclosed portfolio of
the Fund; or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present. In addition, the Exchange will halt trading in the Shares
under the conditions specified in BZX Rule 11.18 (Trading Halts Due to
Extraordinary Market Volatility). BZX Rule 14.11(f)(4)(c)(ii)
enumerates additional circumstances under which the Exchange will
consider the suspension of trading in and will commence delisting
proceedings for the Shares.
The Commission finds that the Exchange's proposal regarding
safeguarding material non-public information relating to the Fund's
portfolio is designed to prevent fraudulent and manipulative acts and
practices and to protect investors and the public interest.
Specifically, the Exchange states that the Sponsor is not a broker-
dealer or affiliated with a broker-dealer. In the event that (a) the
Sponsor becomes a broker-dealer or newly affiliated with a broker-
dealer, or (b) any new sponsor is a 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 the portfolio. Moreover, trading of the Shares
will be subject to BZX Rule 14.11(f)(4)(D), which sets forth certain
restrictions on Members acting as registered Market Makers \45\ in
Trust Issued Receipts to facilitate surveillance. In addition, the
Exchange has a general policy prohibiting the distribution of material,
non-public information by its employees.
---------------------------------------------------------------------------
\45\ As defined in BZX Rule 1.5(l), the term ``Market Maker''
means a Member that acts as a Market Maker pursuant to Chapter XI of
the BZX Rules.
---------------------------------------------------------------------------
Furthermore, the Commission finds that the Exchange's proposal
regarding surveillance of the Shares and the underlying investments is
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest. The Exchange or 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 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. The
Exchange states that trading of the Shares through the Exchange will be
subject to the Exchange's surveillance procedures for derivative
products, and these procedures are adequate to properly monitor
Exchange trading of the Shares during all trading sessions and to deter
and detect violations of Exchange rules and applicable federal
securities laws. In addition, all of the VIX Futures Contracts and VIX
Options Contracts held by the Fund will trade on markets that are a
member of ISG or affiliated with a member of ISG or with which the
Exchange has in place a comprehensive surveillance sharing agreement.
The Commission finds that the Exchange's rules relating to trading
of the Shares on the Exchange are 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. Specifically,
the Exchange states that:
(1) The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities;
(2) The Shares will conform to the initial and continued listing
criteria under BZX Rule 14.11(f);
(3) Pursuant to BZX Rule 14.11(a), all statements and
representations made in the filing regarding the Index composition,
description of the portfolio or reference
[[Page 13927]]
assets, limitations on portfolio holdings or reference assets,
dissemination and availability of the Index, reference assets, and
IIV, or the applicability of Exchange listing rules specified in the
filing shall constitute continued listing requirements for the
Shares. The issuer will advise the Exchange of any failure by the
Fund 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.
(4) The Exchange has the appropriate rules to facilitate
transactions in the Shares during all trading sessions;
(5) Prior to the commencement of trading, the Exchange will
inform its Members in an Information Circular of the special
characteristics and risks associated with trading the Shares; \46\
---------------------------------------------------------------------------
\46\ The Exchange states that the Information Circular will
discuss the following: (a) The procedures for purchases and
redemptions of Shares in Creation Units (and that Shares are not
individually redeemable); (b) BZX Rule 3.7, which imposes
suitability obligations on Members with respect to recommending
transactions in the Shares to customers; (c) Interpretation and
Policy .01 of BZX Rule 3.7 which imposes a duty of due diligence on
its Members to learn the essential facts relating to every customer
prior to trading the Shares, and specifically provides that ``[n]o
Member shall recommend to a customer a transaction in any such
product unless the Member has a reasonable basis for believing at
the time of making the recommendation that the customer has such
knowledge and experience in financial matters that he may reasonably
be expected to be capable of evaluating the risks of the recommended
transaction and is financially able to bear the risks of the
recommended position;'' (d) how information regarding the IIV and
the Fund's holdings is disseminated; (e) the risks involved in
trading the Shares during the Pre-Opening and After Hours Trading
Sessions (as such terms are defined in BZX Rules) when an updated
IIV will not be calculated or publicly disseminated; (f) the
requirement that Members deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (g) trading information.
---------------------------------------------------------------------------
(6) FINRA has implemented increased sales practice and customer
margin requirements for FINRA members applicable to inverse,
leveraged and inverse leveraged securities (which include the
Shares) and options on such securities, as described in FINRA
Regulatory Notices 09-31 (June 2009), 09-53 (August 2009), and 09-65
(November 2009). Members that carry customer accounts will be
required to follow the FINRA guidance set forth in these notices;
(7) For initial and continued listing, the Fund and the Trust
must be in compliance with Rule 10A-3 under the Act; \47\ and
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\47\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(8) A minimum of 100,000 Shares of the Fund will be outstanding
at the commencement of trading on the Exchange.
Accordingly, the Commission finds that the proposed rule change, as
modified by Amendment Nos. 2 and 4, is consistent with Section 6(b)(5)
of the Act \48\ and the rules and regulations thereunder applicable to
a national securities exchange.
---------------------------------------------------------------------------
\48\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Solicitation of Comments on Amendment Nos. 2 and 4 to the Proposed
Rule Change
Interested persons are invited to submit written views, data, and
arguments concerning whether Amendment Nos. 2 and 4 are 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-2020-053 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-CboeBZX-2020-053. 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-2020-053 and should be submitted
on or before April 1, 2021.
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment Nos. 2 and 4
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment Nos. 2 and 4, prior to the thirtieth
day after the date of publication of notice of the filing of Amendment
Nos. 2 and 4 in the Federal Register. In Amendment No. 2, among other
things,\49\ the Exchange represents that the Funds' participation, on
any given day, in VIX Futures Contracts, will be limited to no more
than ten percent of the VIX Futures Contracts traded on CFE during any
Rebalance Period, and in the event that the Funds expect to hit the ten
percent threshold during the primary Rebalance Period, the Funds would
extend their respective rebalances into an Extended Rebalance Period.
In Amendment No. 4, the Exchange represents that the Fund will notify
both the Exchange and the Commission in the event that the Fund
participates in an Extended Rebalance Period as soon as practicable,
but no later than 9:00 a.m. E.T. on the trading day following the
event. The changes to the proposal and additional information in
Amendment Nos. 2 and 4 assist the Commission in evaluating the
Exchange's proposal and in determining that it is consistent with the
Act. Accordingly, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act,\50\ to approve the proposed rule change, as
modified by Amendment Nos. 2 and 4, on an accelerated basis.
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\49\ See supra note 9.
\50\ 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,\51\ that the proposed rule change (SR-CboeBZX-2020-053), as
modified by Amendment Nos. 2 and 4, be, and hereby is, approved on an
accelerated basis.
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\51\ Id.
\52\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-05028 Filed 3-10-21; 8:45 am]
BILLING CODE 8011-01-P
