[Federal Register Volume 78, Number 11 (Wednesday, January 16, 2013)]
[Notices]
[Pages 3489-3494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-00796]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68619; File No. SR-BATS-2012-044]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Granting Approval of Proposed Rule Change to Amend BATS Rule 14.11, 
Entitled ``Other Securities,'' and To List and Trade Shares of Certain 
ProShares Products

January 10, 2013.

I. Introduction

    On November 5, 2012, BATS Exchange, Inc. (``Exchange'' or ``BATS'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend BATS Rule 14.11, entitled ``Other 
Securities,'' and to list and trade shares of certain ProShares 
products. The proposed rule change was published for comment in the 
Federal Register on November 26, 2012.\3\ The Commission received no 
comments on the proposal. This order grants approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68257 (November 19, 
2012), 77 FR 70500 (``Notice'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to amend its rules to allow listing of 
certain exchange-traded products based on provisions substantially 
similar to those on NYSE MKT LLC (formerly the American Stock Exchange 
LLC or ``AMEX'') and NYSE Arca Equities, Inc. (``NYSE Arca''). 
Specifically, the Exchange proposes to modify BATS Rule 14.11(f), which 
governs the listing of Trust Issued Receipts (``TIRs''), to adopt new 
criteria for listing TIRs that invest in ``Investment Shares'' or 
``Financial Instruments,'' as proposed to be defined. The Exchange 
proposes to add subparagraph (4) to Rule 14.11(f). The proposed 
subparagraph (4) is based on Commentary .07 of AMEX Rule 1202 and 
Commentary .02 of NYSE Arca Rule 8.200 and is intended to accommodate 
future listing and trading of TIRs that invest in Investment Shares or 
Financial Instruments. Any new listing or trading of an issue of such 
TIRs, however, will be subject to the approval of a proposed rule 
change by the Commission pursuant to Section 19(b)(2) of the Act \4\ 
and Rule 19b-4 thereunder.\5\ In addition, the Exchange proposes to 
amend Rule 14.11 to allow TIRs to trade until the end of the Exchange's 
after market session, which ends at 5:00 p.m. E.T.,. The Exchange also 
proposes to make certain changes so that its rules conform to the 
listing rules of other exchanges and to make certain non-substantive 
changes and corrections to existing rule text.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ 17 CFR 240.19b-4.
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    In addition to the above enumerated proposed changes, the Exchange 
further proposes to list and trade shares (``Shares'') of the following 
pursuant to proposed Rule 14.11(f): ProShares Managed Futures Strategy; 
ProShares Commodity Managed Futures Strategy; and ProShares Financial 
Managed Futures Strategy (each a ``Fund,'' and together, ``Funds'').\6\ 
Each Fund is a series of the ProShares Trust II (``Trust''), a Delaware 
statutory trust. ProShare Capital Management LLC (``Sponsor'') is the 
Trust's Sponsor, and Wilmington Trust Company is the Trust's trustee. 
Brown Brothers Harriman & Co. serves as the administrator 
(``Administrator''), custodian, and transfer agent of the Funds. SEI 
Investments Distribution Co. serves as distributor of the Shares.\7\
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    \6\ See the Trust's Registration Statement on Form S-1, dated 
November 29, 2011, as amended (File No. 333-178212) (``Registration 
Statement'').
    \7\ The Commission approved the listing and trading of shares of 
the Funds on NYSE Arca. See Securities Exchange Act Release No. 
66334 (February 6, 2012), 77 FR 7219 (February 10, 2012) (SR-
NYSEArca-2011-94) (order approving NYSE Arca listing and trading of 
the Shares of the Funds). Although the Shares of the Funds were 
approved for listing and trading on NYSE Arca, the Shares have not 
commenced trading.
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Proposed Listing Rules

    The Exchange proposes to adopt definitions for the terms 
``Investment Shares,'' ``futures contract,'' ``forward contract,'' and 
``Financial Instruments'' for purposes of Rule 14.11(f)(4).\8\
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    \8\ See Notice, supra note 3, for more information on the 
proposed defined terms.
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    The proposed listing requirements include a designation 
requirement. Specifically, the proposed rules provide that the Exchange 
may list and trade TIRs investing in Investment Shares or Financial 
Instruments and that each issue of a TIR based on a particular 
Investment Share or Financial Instrument shall be designated as a 
separate series and identified by a unique symbol.
    When the Exchange is the primary listing exchange for a trust that 
issues TIRs that invest in Investment Shares or Financial Instruments, 
the trust will be subject to the initial and continued listing criteria 
under proposed Rule 14.11(f)(4), as well as Rules 14.11(f)(1) and (2), 
as proposed to be amended. In particular, the proposed initial listing 
criteria provide that the Exchange will establish a minimum number of 
receipts required to be outstanding at the time of commencement of 
trading on the Exchange. The proposed continued listing criteria 
provide that the Exchange may consider delisting or removal from 
listing TIRs under any of the following circumstances:
     If following the initial twelve month period following the 
commencement of trading of the receipts, (1) the trust has more than 60 
days remaining until termination and there are fewer than 50 record 
and/or beneficial holders of TIRs for 30 or more consecutive trading 
days; (2) the trust has fewer than 50,000 receipts issued and 
outstanding; or (3) the market value of all receipts issued and 
outstanding is less than $1 million.
     If the level or value of an underlying index or portfolio 
is no longer calculated or available on at least a 15-second delayed 
basis or the Exchange stops providing a hyperlink on its Web site to 
any such asset or investment value.
     If the Intraday Indicative Value (``IIV'') is no longer 
made available on at least a 15-second delayed basis.
     If such other event shall occur or condition exists which 
in the opinion of the Exchange makes further dealings on the Exchange 
inadvisable.
    In addition, the Exchange will remove TIRs from listing and trading 
upon termination of a trust. A trust may terminate in accordance with 
the provisions of the trust prospectus,

[[Page 3490]]

which may provide for termination if the value of securities in the 
trust falls below a specified amount. The Exchange represents that it 
prohibits the initial and/or continued listing of any security that is 
not in compliance with Rule 10A-3 under the Exchange Act.\9\
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    \9\ 17 CFR 240.10A-3.
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    Further, the Exchange proposes to require that the term of a trust 
shall be as stated in the prospectus; however, such entity may be 
terminated earlier under such circumstances as may be specified in the 
prospectus. The Exchange also proposes to add the defined term 
``Trustee'' to Rule 14.11(f)(1), along with certain requirements for 
the Trustee.\10\
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    \10\ See Notice, supra note 3, for more information on such 
requirements for the Trustee.
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    The Exchange also proposes to add to Rule 14.11 a new subparagraph 
(f)(4)(C)(v), which states that voting rights shall be as set forth in 
the applicable trust prospectus.
    In addition, the Exchange proposes a new sub-paragraph (D), which 
sets forth certain restrictions on Members acting as registered Market 
Makers in TIRs that invest in Investment Shares or Financial 
Instruments to facilitate surveillance. Rule 14.11(f)(4)(D)(i) will 
require that a registered Market Maker in TIRs must file with the 
Exchange, in a manner prescribed by the Exchange, and keep current, a 
list identifying all accounts for trading the underlying physical asset 
or commodity, related futures or options on futures, or any other 
related derivatives, which the registered Market Maker may have or over 
which it may exercise investment discretion. The rule will also 
prohibit a registered Market Maker in the TIRs from trading in the 
underlying physical asset or commodity, related futures or options on 
futures, or any other related derivatives, in an account in which the 
registered Market Maker, directly or indirectly, controls trading 
activities or has a direct interest in the profits or losses thereof, 
which has not been reported to the Exchange as required by the rule. 
Finally, Rule 14.11(f)(4)(D)(ii) will require that Market Makers 
handling shares of TIRs provide the Exchange with such books, records, 
or other information pertaining to transactions in the same, as may be 
requested by the Exchange.
    The Exchange also proposes to adopt Rule 14.11(f)(4)(E) related to 
limitation of liability.\11\ The Exchange further proposes to adopt 
Rule 14.11(f)(4)(F), which would require the Exchange to file separate 
proposals under Section 19(b) of the Act before listing and trading 
TIRs based on separate Investment Shares or Financial Instruments.
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    \11\ See Notice, supra note 3, for additional details on the 
proposed provision related to limitation of liability.
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    In addition to the new subparagraph (f)(4) to Rule 14.11, the 
Exchange proposes to make additional substantive modifications to Rule 
14.11(f) in order to conform to AMEX and NYSE Arca rules related to 
TIRs. First, the Exchange proposes to delete current subparagraph 
(f)(2)(B) of Rule 14.11, which sets forth criteria that are not 
included in the equivalent TIR rules of AMEX (AMEX Rule 1202) and NYSE 
Arca (NYSE Arca Rule 8.200). Subparagraph (f)(2)(B) of Exchange Rule 
14.11 governs the eligibility of certain component securities that have 
already been included as component securities in the applicable series 
of TIRs or have been received as part of a merger, consolidation, 
corporate combination, or other event. Rather than apply different 
criteria to such securities, the Exchange proposes to apply the 
criteria of Rule 14.11(f)(2)(G) (to be re-numbered as (f)(3)) to all 
component securities of a TIR listed on the Exchange. Since this change 
will help to align the Exchange's rules applicable to TIRs with the 
rules of AMEX and NYSE Arca, it should help to alleviate confusion 
amongst issuers.
    Second, in order to align the Exchange's rules with NYSE Arca Rule 
8.200, the Exchange proposes to eliminate the requirement of current 
Rule 14.11(f)(2)(E)(iv) that the Exchange receive prior notice and 
provide approval before a change can be made to the trustee of a listed 
TIR
    Third, the Exchange proposes to eliminate the requirement in Rule 
14.11(f)(2)(F) that transactions in TIRs may only be made in round lots 
of 100 receipts or round lot multiples. As with the proposed changes 
above, this change will align the Exchange's rules with AMEX Rule 1202 
and NYSE Arca Rule 8.200, which do not limit transactions in TIRs to 
round lots. Further, to the extent a specific TIR should be limited to 
trading in round lots, the Exchange has general authority pursuant to 
Exchange Rule 11.2 to limit transactions accordingly.\12\
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    \12\ As set forth in Exchange Rule 11.2, ``[a]ll securities 
designated for trading are eligible for odd-lot, round-lot and 
mixed-lot executions, unless otherwise indicated by the Exchange or 
limited pursuant to [the Exchange's] Rules.''
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    The Exchange also proposes certain other technical changes, which 
can be found in the Notice.\13\
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    \13\ See Notice, supra note 3, for additional details on such 
technical changes.
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Trading Rules

    The Exchange deems the TIRs to be equity securities, thus rendering 
trading in the securities subject to the Exchange's existing rules 
governing the trading of equity securities. The TIRs will trade on the 
Exchange from 8:00 a.m. to 5:00 p.m. E.T. (Pre-Opening Session, Regular 
Trading Hours, and After Hours Trading Session). The Exchange 
represents that it has appropriate rules to facilitate transactions in 
the TIRs during all trading sessions. The minimum price increment for 
quoting and entry of orders in equity securities traded on the Exchange 
is $0.01, with the exception of securities that are priced less than 
$1.00, for which the minimum price increment for order entry is 
$0.0001.\14\
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    \14\ See Rule 11.11(a).
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Trading Halts

    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the TIRs. The Exchange represents that it will halt trading 
in the TIRs under the conditions specified in BATS Rule 11.18. Trading 
may be halted because of market conditions or for reasons that, in the 
view of the Exchange, make trading in the TIRs inadvisable. These may 
include: (1) The extent to which trading is not occurring in the TIRs 
and/or the underlying asset or assets; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present. If any of the IIV, the level of the 
underlying index, or the value of the underlying assets of the TIRs is 
not disseminated as required, the Exchange may halt trading during the 
day in which such interruption to the dissemination occurs. If an 
interruption to the dissemination of the IIV, the level of the 
underlying index, or the value of the underlying assets of the TIRs 
persists past the trading day in which it occurred, the Exchange 
represents that it will halt trading no later than the beginning of the 
trading day following the interruption. In addition, if the Exchange 
becomes aware that the Net Asset Value (``NAV'') with respect to a 
series of the TIRs is not disseminated to all market participants at 
the same time, it represents that it will halt trading in such series 
until such time as the NAV is available to all market participants.

Surveillance

    The Exchange represents that its surveillance procedures are 
adequate to address any concerns about the trading

[[Page 3491]]

of the TIRs on the Exchange. Trading of the TIRs on the Exchange will 
be subject to the Exchange's surveillance procedures for derivative 
products. The Exchange may obtain information via the Intermarket 
Surveillance Group (``ISG'') from other exchanges who are members or 
affiliates of the ISG or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement. The Exchange provides 
that it prohibits the distribution of material, non-public information 
by its employees.

Suitability

    Currently, BATS Rule 3.7 governs Recommendations to Customers, and 
Chapter III generally governs Rules of Fair Practice. Prior to the 
commencement of trading of any TIRs, the Exchange represents that it 
will remind its Members of the suitability requirements of BATS Rule 
3.7 in an Information Circular.
    FINRA has implemented increased sales practice and customer margin 
requirements for FINRA members applicable to inverse, leveraged, and 
inverse leveraged securities and options on such securities, as 
described in FINRA Regulatory Notices 09-31 (June 2009), 09-53 (August 
2009) and 09-65 (November 2009) (together, ``FINRA Regulatory 
Notices''). The Exchange provides that its Members that carry customer 
accounts will be required to follow the FINRA guidance set forth in the 
FINRA Regulatory Notices. The Information Circular will reference the 
FINRA Regulatory Notices regarding sales practice and customer margin 
requirements for FINRA members applicable to inverse, leveraged, and 
inverse leveraged securities and options on such securities.
    The Exchange notes that, for inverse, leveraged, and inverse 
leveraged securities, the corresponding funds seek leveraged, inverse, 
or leveraged inverse returns on a daily basis, and do not seek to 
achieve their stated investment objective over a period of time greater 
than one day because compounding prevents the funds from perfectly 
achieving such results. Accordingly, results over periods of time 
greater than one day typically will not be a leveraged multiple 
(+200%), the inverse (-100%) or a leveraged inverse multiple (-200%) of 
the period return of the applicable benchmark and may differ 
significantly from these multiples. The Exchange's Information 
Circular, as well as the applicable registration statement, will 
provide information regarding the suitability of an investment in such 
securities.

Description of the Shares and the Funds

    The Funds will seek to provide investment results (before fees and 
expenses) that correspond to the performance of the S&P Dynamic Futures 
Index (``DFI'' or ``Index'') or to a sub-index of the Index (``Sub-
Index''). The ProShares Managed Futures Strategy will seek to provide 
investment results (before fees and expenses) that correspond to the 
performance of the DFI. The ProShares Commodity Managed Futures 
Strategy will seek to provide investment results (before fees and 
expenses) that correspond to the performance of the S&P Dynamic 
Commodities Futures Index (``DCFI''), a Sub-Index of the DFI. The 
ProShares Financial Managed Futures Strategy will seek to provide 
investment results (before fees and expenses) that correspond to the 
performance of the S&P Dynamic Financial Futures Index (``DFFI''), 
another Sub-Index of the DFI.
    As mentioned above, the Commission has previously approved the 
listing and trading of the Funds on NYSE Arca.\15\ Since approving the 
listing and trading of the Funds on NYSE Arca, the structure of the 
Index and its Sub-Indexes have not changed, and the underlying 
components remain the same. However, how the Index is administered has 
changed in the following manner:
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    \15\ See supra note 7.
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     Rebalancing and positioning now occur on a component by 
component basis, rather than by sector.
     Energy components can now be held in long or short 
positions, rather than just long or flat (as further described 
herein).\16\
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    \16\ As previously approved, all sectors other than energy could 
go long and short.
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     Components are set to their annual weights on a monthly 
basis, as opposed to the previous sector structure in which the 
component weights floated throughout the year within the sector 
weights, which were reset monthly.
Other than the foregoing, no other aspect of the Index or Sub-Indexes 
is changing.
    The Index and each Sub-Index were developed by Standard & Poor's 
and are long/short rules-based investable indexes designed to capture 
the economic benefit derived from both rising and declining trends in 
futures prices.\17\ The Index is composed of unleveraged positions in 
U.S. exchange-traded futures contracts on sixteen different tangible 
commodities (``Commodity Futures Contracts''), as well as U.S. 
exchange-traded futures contracts on eight different financials, such 
as major currencies and U.S. Treasury securities (``Financial Futures 
Contracts'' and together with the Commodity Futures Contracts, ``Index 
Components'').\18\ Commodity Futures Contracts and Financial Futures 
Contracts each comprise a Sub-Index of the Index: the DCFI and the 
DFFI, respectively (together, ``Sub-Indexes'').
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    \17\ Standard & Poor's is not a broker-dealer, is not affiliated 
with a broker-dealer, and has implemented procedures designed to 
prevent the use and dissemination of material, non-public 
information regarding the Index and Sub-Indexes.
    \18\ The Index Components are traded on the Chicago Mercantile 
Exchange, Inc. (``CME''), COMEX (a division of CME), Chicago Board 
of Trade (``CBOT,'' a division of CME), NYMEX (a division of CME), 
and ICE Futures US (``ICE'') (collectively, ``Futures Exchanges'').
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    Previously, the Index and the DCFI were designed such that the 
energy components would only be set long or flat (i.e., zero weight), 
rather than long or short. The rationale for this was the heightened 
potential for significant losses in the event of a supply disruption of 
certain energy markets. The Index and the DCFI have been redesigned to 
allow energy components to be set long or short. The primary 
considerations in this determination were:
     Potential losses are mitigated by the limited weight 
attributable to any single energy component.
     The magnitude of energy market price movements during 
previous major market supply disruptions (e.g., the Gulf Wars) does not 
support restricting short energy positions.
    In order to achieve the investment objective of the Funds, the 
Sponsor will invest in: (i) Exchange-traded futures contracts of the 
type comprising the Index or Sub-Indexes, as applicable (``Futures 
Contracts''); \19\ and/or (ii) under limited circumstances (as further 
described herein), swap agreements whose value is derived from the 
level of the Index, a Sub-Index, one or more Index Components, or, in 
the case of currency-based Financial Futures Contracts, the exchange 
rates underlying such Financial Futures Contracts, or invest in other 
futures contracts or swaps if such instruments tend to exhibit trading 
prices or returns that correlate with the Index or Sub-Indexes or any 
Index Component and will further the investment objective of the Fund. 
Each Fund may also invest in cash or cash equivalents such as U.S. 
Treasury securities or other high credit quality short-term fixed-
income or similar securities (including shares of money market funds, 
bank deposits,

[[Page 3492]]

bank money market accounts, certain variable rate-demand notes, and 
repurchase agreements collateralized by government securities) for 
direct investment or as collateral for the Futures Contracts or swap 
agreements. The Sponsor does not expect that the Funds will invest 
directly in any commodity or currency.
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    \19\ Futures Contracts will be the same type of contracts as the 
Index Components, but the expiration dates of such Futures Contracts 
may differ from the expiration dates of the Index Components at any 
given point in time.
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    Each Fund will seek to achieve its investment objective by 
investing, under normal market circumstances,\20\ in exchange-traded 
Futures Contracts. In the event position accountability rules or 
position limits with respect to a Futures Contract are reached with 
respect to a Fund, the Sponsor may, in its commercially reasonable 
judgment, cause such Fund to obtain exposure through swaps whose value 
is derived from the level of the Index, a Sub-Index, one or more Index 
Components, or, in the case of currency-based Financial Futures 
Contracts, the exchange rates underlying such Financial Futures 
Contracts, or invest in other futures contracts or swaps if such 
instruments tend to exhibit trading prices or returns that correlate 
with the Index, the Sub-Indexes, or any Index Component and will 
further the investment objective of the Funds.\21\ The Funds may also 
invest in swaps if the market for a specific Futures Contract 
experiences emergencies (e.g., natural disaster, terrorist attack, or 
an act of God) or disruptions (e.g., a trading halt or a flash crash) 
that would prevent the Funds from obtaining the appropriate amount of 
investment exposure to the affected Futures Contracts or other futures 
contracts directly.\22\
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    \20\ The term ``under normal market circumstances'' includes, 
but is not limited to, the absence of extreme volatility or trading 
halts in the futures markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption, or any similar intervening 
circumstance.
    \21\ To the extent practicable, the Funds will invest in swaps 
cleared through the facilities of a centralized clearing house.
    \22\ The Sponsor will also attempt to mitigate the Funds' credit 
risk by transacting only with large, well-capitalized institutions 
using measures designed to determine the creditworthiness of a 
counterparty. The Sponsor will take various steps to limit 
counterparty credit risk, as described in the Registration 
Statement.
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The Index and the Sub-Indexes

    The Index is composed of the Index Components, representing 
unleveraged long or short positions in U.S. exchange-traded futures 
contracts in the commodity and financial markets.\23\ Index Components 
are chosen based on fundamental characteristics and liquidity. The 
Commodity Futures Contracts comprise the DCFI as described below, and 
the Financial Futures Contracts comprise the DFFI, as described below.
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    \23\ As set forth in the Index weighting scheme example below, 
the commodity portion of the Index consists of multiple commodities 
(e.g., Energy, Industrial Metals) and each commodity is assigned a 
percentage weight. Similarly, the financial markets portion of the 
Index consists of multiple foreign currency and U.S. Treasury 
sectors (e.g., Australian dollar, U.S. Treasury Notes), each with an 
assigned component weight.
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    Weightings of the Commodity Futures Contracts are based on 
generally known world production levels, as adjusted to limit the 
impact of the energy-related Index Components. Weightings of the 
Financial Futures Contracts are based on, but not directly proportional 
to, gross domestic product (``GDP'').\24\
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    \24\ For initial 2012 weighting schemes for the Index and each 
Sub-Index and information about the exchange and trading hours for 
each Futures Contract, see Notice, supra note 3.
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    The positions the Index (and accordingly, each Sub-Index) takes in 
the Index Components are not long-only, but are set by component long 
or short, based on the relation of the current price input of each 
Index Component with a seven-month weighted moving average of the price 
inputs of the same Index Component.

Determining the Long/Short Positioning of the Index Components

    The rules for the Index and each Sub-Index regarding long or short 
positions are summarized as follows:
     Long positions are tracked when an Index Component's 
current one-month price change is greater than or equal to the 
exponential weighted average of the past seven monthly price inputs.
     Short positions are tracked when an Index Component's 
current one-month price change is less than the exponential weighted 
average of the past seven monthly price inputs.
    Monthly long or short positions are determined on the second to 
last DFI business day of the month (defined as the position 
determination date, or PDD) when the monthly percentage change of an 
Index Component's price is compared to past monthly price changes, 
exponentially weighted to give greatest weight to the most recent 
return and least weight to the return seven months prior.\25\ The 
weighted sum of the percentage changes of all Index Component prices 
equals the daily movement of the Index.
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    \25\ See Notice, supra note 3, for more information about how an 
exponential average is created for comparison purposes.
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Index Component Rebalancing

    Index Component weights are fixed each year and rebalanced back to 
their annual base weight monthly. During this monthly rebalancing, the 
Index will also ``roll'' certain of its positions from the current 
contract to a contract further from settlement.\26\
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    \26\ The Index is composed of Index Components, which are 
futures contracts. In order to maintain consistent exposure to the 
Index Components, each Index Component contract must be sold prior 
to its expiration date and replaced by a contract maturing at a 
specified date in the future. This process is known as rolling. 
Index Component contracts are rolled periodically. The rolls are 
implemented pursuant to a roll schedule over a five-day period from 
the first through the fifth Index business days of the month. An 
Index business day is any day on which the majority of the Index 
Components are open for official trading and official settlement 
prices are provided, excluding holidays and weekends.
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    Additional details regarding the Trust, Funds, Shares, trading 
policies and investment strategies of the Funds, creations and 
redemption procedures, fees, investment risks, Index and Sub-Indexes, 
NAV calculation, the dissemination and availability of information 
about the underlying assets, trading halts, applicable trading rules, 
surveillance, and the Information Bulletin, among other things, can be 
found in the Notice and/or the Registration Statement, as 
applicable.\27\
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    \27\ See Notice and Registration Statement, supra notes 3 and 6, 
respectively.
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III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \28\ and the rules and regulations thereunder applicable to a 
national securities exchange.\29\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\30\ 
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 foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \28\ 15 U.S.C. 78f.
    \29\ 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).
    \30\ 15 U.S.C. 78f(b)(5).
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Proposed Changes to Rule 14.11

    The Commission finds the proposal to align Rule 14.11 to the rules 
of AMEX and NYSE Arca (including the related non-substantive, 
conforming, and

[[Page 3493]]

technical changes) consistent with Sections 6(b)(5) of the Act. As 
discussed above, the proposed changes to Rule 14.11 and the proposed 
adoption of Rule 14.11(f) would conform to similar standards for the 
listing and trading of TIRs on AMEX and NYSE Arca. The Commission notes 
that the listing requirements as proposed would be at least as 
stringent as those of AMEX and NYSE Arca. In addition, the proposed 
rule change is based on representations governing suitability, 
surveillance, the issuance of Information Circulars, and circumstances 
pursuant to which trading should be halted, among more general trading 
rules governing TIRs. The Commission believes these aspects of the 
proposal present no novel issues or significant regulatory concerns. 
The proposed rules should enhance competition in the marketplace to the 
benefit of investors.

Listing and Trading of the Shares

    The Commission finds that the aspect of the proposal to list and 
trade the Shares on the Exchange is also consistent with Section 
11A(a)(1)(C)(iii) of the Act,\31\ which sets forth Congress' finding 
that it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure the 
availability to brokers, dealers, and investors of information with 
respect to quotations for, and transactions in, securities.
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    \31\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The Commission notes that the Funds and the Shares must comply with 
the requirements of proposed BATS Rule 14.11(f) to be listed and traded 
on the Exchange. Quotation and last-sale information for the Shares 
will be available via the Consolidated Tape Association (``CTA'') high-
speed line.
    The IIV, which reflects a current estimated intraday value of 
Futures Contracts and other applicable holdings, cash, and receivables, 
less liabilities of each Fund, will be widely disseminated on a per 
Share basis by one or more major market data vendors at least every 15 
seconds during the Exchange's Regular Trading Hours.\32\ The IIV will 
be updated during Regular Trading Hours when applicable Futures 
Exchanges are trading any Futures Contracts held by the Funds. However, 
the IIV that will be disseminated between 11:50 a.m. E.T. and the end 
of Regular Trading Hours will be impacted by static values for certain 
Futures Contracts.\33\ For each Fund, the IIV will be calculated 
throughout Regular Trading Hours, using the prior day's closing NAV of 
such Fund as a base, and updated throughout the trading day as each 
Fund's Futures Contracts, cash equivalents, swap agreements, if 
applicable, and other applicable holdings change in value.
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    \32\ According to the Exchange, several major market data 
vendors display and/or make widely available IIVs published via the 
CTA or other data feeds.
    \33\ The value of the IIV will be based on the underlying 
Futures Contracts. Once a particular Futures Contract settles, a 
static closing value for that Futures Contract will be used to 
calculate the IIV, which will continue to update based on any other 
futures contracts that have not reached their settlement time. The 
IIV should not be viewed as an actual real-time update of the NAV 
because NAV is calculated only once each trading day at 3:00 p.m. 
E.T. In addition, the IIV also should not be viewed as a precise 
value of the Shares.
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    Each Fund's total portfolio composition will be disclosed on such 
Fund's Web site or another relevant Web site as determined by the Trust 
and/or the Exchange. The Trust will provide Web site disclosure of 
portfolio holdings daily and will include, as applicable, the names, 
notional value (in U.S. dollars) and number of Futures Contracts or 
units of swaps held by a Fund, if any, cash equivalents, and the amount 
of cash held in the portfolio of each Fund. This public Web site 
disclosure of the portfolio composition of the Funds will occur at the 
same time as the disclosure by the Sponsor of the portfolio composition 
to authorized participants, so that all market participants are 
provided portfolio composition information at the same time.
    The NAV for the Funds will be calculated daily by the Administrator 
at 3:00 p.m. E.T. and will be disseminated daily to market 
participants. Additionally, the Exchange will make available on its Web 
site daily trading volume of the Shares. Daily trading volume 
information will also be available in the financial section of 
newspapers, their related Web sites or other financial Web sites, 
through subscription services, which can be accessed by authorized 
participants and other investors, as well as through other electronic 
services, including major public Web sites.
    The intraday, closing, and settlement prices of the Futures 
Contracts are also readily available, as applicable, from the 
respective Futures Exchanges. The Web site for the Funds will include a 
form of the prospectus for the Funds, additional data relating to NAV, 
and other applicable quantitative information. The daily closing Index 
level and the percentage change in the daily closing Index level for 
the Index and each Sub-Index will be publicly available from one or 
more major market data vendors. Data regarding the Index and each Sub-
Index, updated every 15 seconds during Regular Trading Hours, is also 
available from Standard & Poor's on a subscription basis. Several 
independent data vendors also package and disseminate Index and Sub-
Index data in various value-added formats (including vendors displaying 
both Index constituents and Index levels and vendors displaying Index 
levels only). Data regarding the Index Components is also available 
from the Web sites of the Futures Exchanges. Data regarding the 
commodities, currencies, and Treasury securities underlying the Index 
Components is publicly available from various financial information 
service providers.
    The Commission believes that the proposal to list and trade the 
Shares is reasonably designed to promote fair disclosure of information 
that may be necessary to price the Shares appropriately and to prevent 
trading when a reasonable degree of transparency cannot be assured. The 
Commission notes that the Exchange will obtain a representation (prior 
to listing of Shares of each Fund) from the Trust that the NAV per 
Share will be calculated daily and made available to all market 
participants at the same time. In addition, if the Exchange becomes 
aware that the NAV with respect to a series of the TIRs is not 
disseminated to all market participants at the same time, it will halt 
trading in such series until such time as the NAV is available to all 
market participants.\34\ Trading in the Shares will also be subject to 
BATS Rule 11.18, which sets forth circumstances under which Shares of 
the Funds may be halted.\35\ If any of the IIV, the level of the 
underlying index, or the value of the underlying assets of the TIRs is 
not being disseminated as required, the Exchange may halt trading 
during the day in which such interruption to the dissemination occurs. 
If an interruption to the dissemination of the IIV, the value of the 
underlying index, or the value of the underlying assets of the TIRs 
persists past the trading day in which it occurred, the Exchange will 
halt trading no later than the beginning of the trading day following 
the

[[Page 3494]]

interruption.\36\ Further, the Commission notes that the Exchange 
states that it prohibits the distribution of material, non-public 
information by its employees.\37\ Finally, with respect to the Index 
and Sub-Indexes, Standard & Poor's is not a broker-dealer, is not 
affiliated with a broker-dealer, and has implemented procedures 
designed to prevent the use and dissemination of material, non-public 
information regarding the Index and Sub-Indexes.
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    \34\ See Notice, supra note 3.
    \35\ See BATS Rule 11.18. The Exchange further represents that 
trading 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 futures contracts and/or the financial 
instruments comprising the Funds; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.
    \36\ See BATS Rule 14.11(f)(4)(C)(ii) (providing additional 
considerations for the removal from listing of TIRs on the 
Exchange).
    \37\ See Notice, supra note 3.
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    The Exchange further represents that the Shares are deemed to be 
equity securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity securities. 
In support of this proposal, the Exchange has made representations, 
including:
    (1) For initial and/or continued listing of the Shares, the Funds 
must be in compliance with Exchange Rule 14.11(f) and Rule 10A-3 under 
the Act.\38\
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    \38\ See 17 CFR 240.10A-3.
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    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange's surveillance procedures applicable to derivative 
products, which include TIRs, are adequate to properly monitor the 
trading of the Shares on the Exchange during all trading sessions and 
to deter and detect violations of Exchange rules and applicable federal 
securities laws. The Exchange is able to obtain information via the ISG 
from other exchanges that are members of ISG or with which the Exchange 
has in place a comprehensive surveillance sharing agreement.\39\ In 
addition, for components traded on exchanges, not more than 10% of the 
weight of a Fund's portfolio in the aggregate shall consist of 
components whose principal trading market is not a member of ISG or is 
a market with which the Exchange does not have a comprehensive 
surveillance sharing agreement. All Futures Contracts will be traded on 
a trading market that is a member of ISG or is a market with which the 
Exchange has a comprehensive surveillance sharing agreement.
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    \39\ See Notice, supra note 3.
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    (4) Prior to the commencement of trading of the Shares, the 
Exchange will inform its members in an Information Circular of the 
special characteristics and risks associated with trading the Shares. 
Specifically, BATS Rule 3.7 provides that, in recommending transactions 
in the Shares, a Member must have reasonable grounds for believing that 
(a) the recommendation is suitable for a customer given reasonable 
inquiry concerning the customer's investment objectives, financial 
situation, needs, and any other information known by such Member, and 
(b) the customer can evaluate the special characteristics, and is able 
to bear the financial risks, of an investment in the securities. In 
connection with the suitability obligation, the Circular will also 
provide that Members must make reasonable efforts to obtain the 
following information: (a) The customer's other securities holdings; 
(b) the customer's financial situation and needs; (c) the customer's 
investment objectives; and (d) such other information used or 
considered to be reasonable by such Member or registered representative 
in making recommendations to the customer.
    (5) Each Fund will seek to achieve its investment objective by 
investing, under normal market circumstances, in exchange-traded 
Futures Contracts. In the event position accountability rules or 
position limits with respect to a Futures Contract are reached with 
respect to a Fund, the Sponsor may, in its commercially reasonable 
judgment, cause such Fund to obtain exposure through swaps whose value 
is derived from the level of the Index, a Sub-Index, one or more Index 
Components, or, in the case of currency-based Financial Futures 
Contracts, the exchange rates underlying such Financial Futures 
Contracts or invest in other futures contracts or swaps if such 
instruments tend to exhibit trading prices or returns that correlate 
with the Index, the Sub-Indexes, or any Index Component and will 
further the investment objective of the Funds. The Funds may also 
invest in swaps if the market for a specific Futures Contract 
experiences emergencies (e.g., natural disaster, terrorist attack, or 
an act of God) or disruptions (e.g., a trading halt or a flash crash) 
that would prevent the Funds from obtaining the appropriate amount of 
investment exposure to the affected Futures Contracts or other futures 
contracts directly.
    (6) To the extent practicable, the Funds will invest in swaps 
cleared through the facilities of a centralized clearing house. In 
addition, the Sponsor will also attempt to mitigate the Funds' credit 
risk by transacting only with large, well-capitalized institutions 
using measures designed to determine the creditworthiness of a 
counterparty. The Sponsor will take various steps to limit counterparty 
credit risk, as described in the Registration Statement.
    (7) The anticipated minimum number of Shares for each Fund to be 
outstanding at the start of trading will be 100,000 Shares.
    (8) The NAV per Share will be calculated daily and made available 
to all market participants at the same time.

This approval order is based on all of the Exchange's representations 
and description of the Funds, including those set forth above and in 
the Notice.\40\
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    \40\ The Commission notes that it does not regulate the market 
for futures in which the Fund plans to take positions, which is the 
responsibility of the Commodity Futures Trading Commission 
(``CFTC''). The CFTC has the authority to set limits on the 
positions that any person may take in futures. These limits may be 
directly set by the CFTC or by the markets on which the futures are 
traded. The Commission has no role in establishing position limits 
on futures even though such limits could impact an exchange-traded 
product that is under the jurisdiction of the Commission.

    For the foregoing reasons, the Commission finds that the proposed 
rule change to amend Rule 14.11 and to list and trade the Shares 
pursuant to Rule 14.11, as proposed to be amended, is consistent with 
Sections 6(b)(5) of the Act \41\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \41\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\42\ that the proposed rule change (SR-BATS-2012-044) be, and it 
hereby is, approved.
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    \42\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00796 Filed 1-15-13; 8:45 am]
BILLING CODE 8011-01-P