[Federal Register Volume 81, Number 85 (Tuesday, May 3, 2016)]
[Notices]
[Pages 26595-26597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10271]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77722; File No. SR-NASDAQ-2016-034]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of a Proposed Rule Change Regarding Monthly 
Distributions, Excess Returns, and Share Index Factors of Certain 
AccuShares[supreg] Trust I Funds

April 27, 2016.
    On March 2, 2016, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify specific listing requirements applicable 
to shares of certain funds issued by AccuShares[supreg] Trust I 
(``AccuShares Trust''). The proposed rule change was published for 
comment in the Federal Register on March 17, 2016.\3\ The Commission 
received two comments on the proposed rule change.\4\ 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. 77353 (Mar. 11, 
2016), 81 FR 14489 (``Notice'').
    \4\ In a comment letter dated March 27, 2016, an anonymous 
commenter stated: ``Good.'' In another comment letter dated March 
27, 2016, Dan Schumann stated: ``Please do NOT change any rules that 
would limit-stop-prevent the trading of ETF's [sic].'' All comments 
on the proposal are available at: http://www.sec.gov/comments/sr-nasdaq-2016-034/nasdaq2016034.shtml.
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I. Background

    On February 18, 2015, the Commission approved an Exchange proposal 
to adopt NASDAQ Rule 5713, which governs the listing and trading of 
Paired Class Shares, and to list and trade shares of the following 
seven funds issued by the AccuShares Trust pursuant to NASDAQ Rule 
5713: (1) AccuShares S&P GSCI[supreg] Spot Fund; (2) AccuShares S&P 
GSCI[supreg] Agriculture and Livestock Spot Fund; (3) AccuShares S&P 
GSCI[supreg] Industrial Metals Spot Fund; (4) AccuShares S&P 
GSCI[supreg] Crude Oil Spot Fund; (5) AccuShares S&P GSCI[supreg] Brent 
Oil Spot Fund; (6) AccuShares S&P GSCI[supreg] Natural Gas Spot Fund; 
and (7) AccuShares Spot CBOE[supreg] VIX[supreg] Fund (``VIX Fund,'' 
and collectively, ``AccuShares Funds'').\5\
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    \5\ See Securities Exchange Act Release No. 74299 (Feb. 18, 
2015), 80 FR 9778 (Feb. 24, 2015) (SR-NASDAQ-2014-065). The Exchange 
states that currently only shares of the VIX Fund are listed and 
trading. See Notice, supra note 3, 81 FR at 14489 n.4.
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    NASDAQ Rule 5713(c) defines a Paired Class Share as a security: (1) 
That is issued by a trust on behalf of a segregated series (``Fund''), 
as part of a pair of shares of opposing classes whose respective 
underlying values move in opposite directions as the value of the 
Fund's ``Underlying Benchmark'' \6\ varies from its starting level, 
where (a) one constituent of the pair is positively linked to the 
Fund's Underlying Benchmark (``Up Shares''), and (b) the other 
constituent is inversely linked to the Fund's Underlying Benchmark 
(``Down Shares''); (2) that is issued in exchange for cash; (3) the 
issuance proceeds of which are invested and reinvested in highly rated, 
short-term financial instruments that mature within 90 calendar days 
and that serve the functions of (a) covering the Fund's expenses, (b) 
providing income distributions to investors, based on income (after 
expenses) from the financial instruments held by the Fund, (c) 
providing cash proceeds for regular and special distributions to be 
made in cash in lieu of Paired Class Shares, and (d) providing cash 
proceeds to be paid upon the redemption of Paired Class Shares; (4) 
that represents a beneficial interest in the Fund; (5) the value of 
which is determined by the underlying value of the Fund that is 
attributable to the class of which such security is a part, which 
security underlying value will either (a) increase as a result of an 
increase in the Underlying Benchmark and decrease as a result of a 
decrease in the Underlying Benchmark (in the case of an Up Share), or 
(b) increase as a result of a decrease in the Underlying Benchmark and 
decrease as the result of an increase in the Underlying Benchmark (in 
the case of a Down Share); (6) that, when timely aggregated in a 
specified minimum number or amount of securities, along with an equal 
number or amount of the securities of the opposite class that 
constitute the other part of the pair, may be redeemed for a 
distribution of cash on specified dates by authorized parties; and (7) 
that may be subject to

[[Page 26596]]

mandatory redemption of all Paired Class Shares under specified 
circumstances.
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    \6\ An ``Underlying Benchmark'' is an index or other numerical 
variable whose value reflects the value of assets, prices, price 
volatility, or other economic interests. See NASDAQ Rule 5713(e).
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    The custodian of an Accushares Fund uses a mathematical formula to 
calculate the liquidation value attributable to each of its classes of 
Paired Class Shares (``Class Value'') and to each share of each class 
(``Class Value per Share'') at the end of each Regular Market Session. 
The Class Value per Share of each Accushares Fund's Up Shares will have 
a fixed one-to-one positive linear relationship with the fund's 
Underlying Benchmark (``Up Share Index Factor''), and the Class Value 
per Share of each fund's Down Shares will have a fixed one-to-one 
inverse linear relationship with the fund's Underlying Benchmark 
(``Down Share Index Factor,'' and together with the Up Share Index 
Factor, collectively, ``Share Index Factors''). The Down Share Index 
Factor will equal negative one times the Up Share Index Factor. Share 
Index Factors are used to determine the Class Value and Class Value Per 
Share of each Accushares Fund.\7\
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    \7\ See Notice, supra note 3, 81 FR at 14491.
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    The sponsor of an Accushares Fund establishes an Accushares Fund's 
Share Index Factors at the inception of the fund's operation, and, 
after any regular or special distribution, the fund resets its Share 
Index Factors. For the VIX Fund, regular distributions are on the 15th 
of every month.

II. Summary of the Proposed Rule Change

    In this proposal, NASDAQ proposes the following changes applicable 
to the listing and trading of shares of certain AccuShares Funds.

A. Frequency of Regular Distributions 8
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    \8\ See id., 81 FR at 14491-92.
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    With respect to the listing requirements for the AccuShares 
S&P[supreg] GSCI[supreg] Industrial Metals Spot Fund, AccuShares 
S&P[supreg] GSCI[supreg] Crude Oil Spot Fund, and AccuShares 
S&P[supreg] GSCI[supreg] Brent Oil Spot Fund (collectively, 
``Distribution Funds''), the Exchange proposes to change the frequency 
of regular distributions from quarterly to monthly.

B. Changes to the Underlying Benchmark 9
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    \9\ See id., 81 FR at 14492-93.
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    With respect to the listing requirements for the AccuShares 
S&P[supreg] GSCI[supreg] Crude Oil Spot Fund and the AccuShares 
S&P[supreg] GSCI[supreg] Natural Gas Spot Fund, the Exchange proposes 
to change the respective Underlying Benchmarks, as follows: (1) For the 
AccuShares S&P[supreg] GSCI[supreg] Crude Oil Spot Fund, the Exchange 
proposes to change this fund's Underlying Benchmark from the ``S&P GSCI 
Crude Oil Spot Index'' to the ``S&P GSCI Crude Oil Excess Return 
Index;'' \10\ and (2) for the AccuShares S&P[supreg] GSCI[supreg] 
Natural Gas Spot Fund, the Exchange proposes to change this fund's 
Underlying Benchmark from the ``S&P GSCI Natural Gas Spot Index'' to 
the ``S&P GSCI Natural Gas Excess Return Index.'' \11\
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    \10\ As a result of the proposed change to the Underlying 
Benchmark, the Exchange also proposes to change the name of this 
fund to ``AccuShares S&P[supreg] GSCI[supreg] Crude Oil Excess 
Return Fund.''
    \11\ As a result of the proposed change to the Underlying 
Benchmark, the Exchange also proposes to change the name of this 
fund to ``AccuShares S&P[supreg] GSCI[supreg] Natural Gas Excess 
Return Fund.''
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    According to the Exchange, both the spot and the excess return 
variants of each respective Underlying Benchmark are computed from the 
same underlying futures contracts at the same point in time. The 
difference between the two variants occurs only on 5 trading days: The 
5th through the 9th trading days of each month (``five-day period''). 
During the five-day period, each Underlying Benchmark, whether monthly 
return or excess return, moves its reference from the front-month 
expiry contract to the next following contract (that is, the futures 
contract for the next consecutive expiry month) in five equal 
installments of 20% per day to capture the cost or the benefit from 
rolling the nearby front-month expiry contract into the next following 
expiry contract. In the excess return variant, the cost or benefit of 
transacting out of the current or front-month expiry contract and into 
the next or following futures contract is added to (or subtracted from) 
the index value. In contrast, in the spot variant, this cost or benefit 
is not added to (or subtracted from) the index value, and therefore 
gives rise to the need for anticipatory hedging that is market makers 
and authorized participants expect to result in increased bid/offer 
spreads.

C. Changes to the VIX Fund 12
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    \12\ See id., 81 FR at 14493.
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    The Exchange proposes, with respect to the VIX Fund, that: (1) The 
Share Index Factors be reset each Tuesday (as well as after regular and 
special distributions); and (2) the regular distributions be made on 
the third Tuesday of every month (rather than on the 15th of every 
month) so that each monthly distribution date and the end of each 
monthly measuring period coincide with a Share Index Factor reset.

III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\13\ In particular, and as discussed further below, the 
Commission finds that the proposed rule change is consistent with the 
requirements of Section 6(b)(5) of the Act,\14\ which requires, among 
other things, that the Exchange's rules be designed to promote just and 
equitable principles of trade; to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest.\15\
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    \13\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ The Commission notes that, other than the changes described 
herein, all of the representations in support of the Prior Order 
remain unchanged. See Notice, supra note 3, 81 FR at 14493 (noting 
that, other than the three proposed changes, the ``representations 
made in the original AccuShares Order and AccuShares Proposal remain 
unchanged''). See supra note 5; see also Notice, supra note 3, 81 FR 
at 14489 n.4 (citing to the AccuShares Order and AccuShares 
Proposal).
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    With respect to the proposed changes to the frequency of monthly 
distributions for the Distribution Funds, the Commission believes that 
the proposed changes are reasonably designed to: (1) Allow investors to 
realize and reallocate gains from the Distribution Funds more 
frequently; and (2) appropriately align the changes in the Class Values 
per Share of both the Up Shares and the Down Shares with changes in the 
corresponding Underlying Benchmark values. The Commission believes that 
these more-frequent regular distributions may improve both trading in, 
and hedging of, the shares, because monthly distributions and the 
corresponding monthly Share Index Factor resets would more closely 
align these funds with the most liquid monthly futures contracts. The 
Commission notes that, in support of this proposed change, the Exchange 
makes the following representations: (1) In each instance of a 
distribution, the sponsor will continue to post a notice of the event 
and its details on the sponsor's Web site (www.AccuShares.com); and (2) 
each Accushares Fund engaging in a regular

[[Page 26597]]

distribution (or, a special distribution, corrective distribution, or 
net income distribution) will continue to provide at least three 
business days' advance notice (or longer advance notice as may be 
required by the Exchange) \16\ of such an event, as currently 
required.\17\
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    \16\ The Exchange may determine that longer notice is advisable 
in some circumstances (e.g., an extended market break).
    \17\ See Notice, supra note 3, 81 FR at 14492.
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    With respect to the proposed changes to the Underlying Benchmarks 
for the AccuShares S&P[supreg] GSCI[supreg] Crude Oil Spot Fund and the 
AccuShares S&P[supreg] GSCI[supreg] Natural Gas Spot Fund, the 
Commission agrees that the excess return variant--which, in contrast to 
the spot variant, captures the cost or benefit of transacting out of 
the current or front-month expiry contract and into the next or 
following futures contract--is not a novel or unique index variant and 
is one that is employed by other types of exchange-traded products.\18\ 
The Commission believes that the proposed changes to the Underlying 
Benchmarks for the AccuShares S&P[supreg] GSCI[supreg] Crude Oil Spot 
Fund and the AccuShares S&P[supreg] GSCI[supreg] Natural Gas Spot Fund 
are reasonable because the excess return variant for these Underlying 
Benchmarks, which contains the cost or benefit of the roll forward, is 
reasonably designed to permit more efficient hedging with conventional 
futures contracts.\19\
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    \18\ See id., 81 FR at 14492 n.25 and accompanying text.
    \19\ The Exchange represents that the excess return variant is 
an index variant that (1) has been used by and is familiar to market 
makers and other market participants; and (2) is directly hedgeable 
with conventional futures contracts, which contain the cost or 
benefit of the roll forward. See id., 81 FR at 14492.
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    With respect to the proposal to reset the Share Index Factors of 
the VIX Fund more frequently (i.e., weekly), the Commission believes 
that more frequent resets of the Share Index Factors for the VIX Fund 
are reasonably designed to benefit market participants that trade 
shares of the VIX Fund because the increased frequency may improve the 
arbitrage function of the shares by aligning the setting of the Share 
Index Factors with the expiry of each weekly VIX futures contract, and 
because the Share Index Factor will reset with a frequency closer to 
the daily measurements of spot VIX. The changes to the VIX Fund support 
the prospect of improved and simplified arbitrage and hedging of VIX 
Fund shares because the settlement of the shorter VIX futures will 
coincide with each Share Index Factor reset. In addition, the 
potentially improved hedgeability of the VIX Fund shares as a result of 
the proposed changes is expected to bring the share trading prices 
closer aligned with the corresponding share Class Values, which are 
tied directly to changes in spot VIX values.
    The Commission notes that it received two comments regarding the 
proposed rule change: one comment supporting the proposal; and another 
comment addressing exchange-traded funds generally. The Commission 
notes that the issue raised by the latter comment does not squarely 
address the Paired Class Shares, which are the subject of this proposed 
rule change.\20\
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    \20\ See supra note 4.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \21\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \21\ 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, 
that the proposed rule change (SR-NASDAQ-2016-034) be, and it hereby 
is, approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-10271 Filed 5-2-16; 8:45 am]
 BILLING CODE 8011-01-P