[Federal Register Volume 82, Number 248 (Thursday, December 28, 2017)]
[Notices]
[Pages 61596-61598]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-28076]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82388; File No. SR-BatsBZX-2017-54]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change, as Modified by Amendment No. 2 Thereto, To List 
and Trade Shares of the iShares Inflation Hedged Corporate Bond ETF, a 
Series of the iShares U.S. ETF Trust, Under Rule 14.11(i), Managed Fund 
Shares

December 22, 2017.

I. Introduction

    On September 7, 2017, Bats BZX Exchange, Inc. (``BZX'' or 
``Exchange'') 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 list and trade Shares 
(``Shares'') of the iShares Inflation Hedged Corporate Bond ETF 
(``Fund'') under Exchange Rule 14.11(i) (``Managed Fund Shares''). The 
Commission published notice of the proposed rule change in the Federal 
Register on September 27, 2017.\3\ On November 7, 2017, pursuant to 
Section 19(b)(2) of the Exchange 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 
December 8, 2017, the Exchange submitted Amendment No. 1 to the 
proposed rule change, which replaced and superseded the proposed rule 
change as originally filed. On December 15, 2017, the Exchange withdrew 
Amendment No.1 and submitted Amendment No. 2 to the proposed rule 
change, which replaced and superseded the proposed rule change.\6\ The 
Commission has received no comments on the proposed rule change. This 
order institutes proceedings under Section 19(b)(2)(B) of the Act \7\ 
to determine whether to

[[Page 61597]]

approve or disapprove the proposed rule change, as modified by 
Amendment No. 2.
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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. 81671 (September 21, 
2017), 82 FR 45103.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 82025, 82 FR 52763 
(November 14, 2017). The Commission designated December 26, 2017, as 
the date by which it should approve or disapprove, or institute 
proceedings to determine whether to disapprove, the proposed rule 
change.
    \6\ In Amendment No. 2, the Exchange: (1) Identified the adviser 
of the Fund and made certain representations relating to the adviser 
and its personnel, including (a) that the adviser has implemented 
``fire walls'' with respect to its broker-dealer affiliates 
regarding access to information concerning the composition of and/or 
changes to the Fund's portfolio; and (b) personnel who make 
decisions regarding the Fund's portfolio are subject to procedures 
designed to prevent the use and dissemination of material nonpublic 
information regarding the Fund's portfolio; (2) clarified the 
investment strategy and holdings of the Fund, including that (a) all 
listed Inflation Swaps (as defined herein) held by the Fund will be 
traded on a U.S. Swap Execution Facility (``SEF'') registered with 
the Commodity Futures Trading Commission (``CFTC''); and (b) that 
all total return swaps held by the Fund will be traded over-the-
counter (``OTC'') and will generally reference Treasury Inflation-
Protected Securities, the Consumer Price Index, or a corporate bond 
index; (3) represented that the Fund's investments in derivative 
instruments will be made in accordance with the Investment Company 
Act of 1940 (``1940 Act'') and consistent with the Fund's investment 
objective and policies, and that the Fund would take certain actions 
to mitigate and disclose leveraging risk; (4) stated that price 
information for cash equivalents will be available from major market 
data vendors; (5) provided additional justification for why the 
Fund's proposed investments are consistent with the Exchange Act; 
(6) made additional representations regarding the ability of the 
Exchange to surveil trading in the Shares and certain of the 
underlying investments, including that the Exchange has a policy 
prohibiting the distribution of material non-public information by 
its employees; and (7) made other clarifications, corrections, and 
technical changes. Amendment No. 2 is available at https://www.sec.gov/comments/sr-batsbzx-2017-54/batsbzx201754.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposed Rule Change, as Modified by 
Amendment No. 2 \8\
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    \8\ For more information regarding the Fund and the Shares, see 
Amendment No. 2, supra note 6.
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    The Exchange proposes to list and trade Shares of the Fund under 
Rule 14.11(i), which governs the listing and trading of Managed Fund 
Shares on the Exchange. The Shares will be offered by the iShares U.S. 
ETF Trust (``Trust''), which is registered with the Commission as an 
open-end investment company.\9\ BlackRock Fund Advisors (``Adviser'') 
will be the investment adviser to the Fund.\10\
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    \9\ The Trust is registered under the 1940 Act. The Trust has 
filed a registration statement on behalf of the Fund on Form N-1A 
with the Commission. See Registration Statement on Form N-1A for the 
Trust, dated April 6, 2017 (File Nos. 333-179904 and 811-22649). In 
addition, the Exchange states that the Commission has issued an 
order granting certain exemptive relief to the Adviser under the 
1940 Act. See Investment Company Act Release No. 29571 (January 24, 
2011) (File No. 812-13601).
    \10\ The Adviser is not a registered broker-dealer, but is 
affiliated with multiple broker-dealers and has implemented ``fire 
walls'' with respect to such broker-dealers regarding access to 
information concerning the composition of and/or changes to the 
Fund's portfolio. In addition, Adviser personnel who make decisions 
regarding the Fund's portfolio are subject to procedures designed to 
prevent the use and dissemination of material nonpublic information 
regarding the Fund's portfolio. In the event that (a) the Adviser 
becomes registered as a broker-dealer or newly affiliated with 
another broker-dealer, or (b) any new adviser or sub-adviser is a 
registered broker-dealer or becomes affiliated with a broker-dealer, 
it will implement a fire wall with respect to its relevant personnel 
or such broker-dealer affiliate, as applicable, regarding access to 
information concerning the composition of and/or changes to the 
portfolio, and will be subject to procedures designed to prevent the 
use and dissemination of material non-public information regarding 
such portfolio.
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    According to the Exchange, the Fund will be an actively managed 
exchange-traded fund that seeks to mitigate the inflation risk of a 
portfolio with exposure to U.S. dollar-denominated investment-grade 
corporate bonds.

A. Fund Investments

    Under Normal Market Conditions,\11\ the Fund seeks to achieve its 
investment objective by investing at least 80% of its net assets in the 
iShares iBoxx $ Investment Grade Corporate Bond ETF (``Underlying 
Fund''), in U.S. dollar-denominated investment-grade corporate bonds, 
in one or more other exchange-traded funds (``ETFs'') that principally 
invest in U.S. dollar-denominated investment-grade corporate bonds,\12\ 
and in Inflation Hedging Instruments (as defined below).
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    \11\ The term ``Normal Market Conditions'' is defined in Rule 
14.11(i)(3)(E).
    \12\ The Exchange states that for the purposes of this proposed 
rule change, the term ETF includes Portfolio Depositary Receipts, 
Index Fund Shares, and Managed Fund Shares as defined in Rule 
14.11(b), (c), and (i), respectively, and their equivalents on other 
national securities exchanges.
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    The Fund will gain exposure to U.S. dollar-denominated investment-
grade corporate bonds primarily through investing in the Underlying 
Fund. As an alternative, the Fund may gain such exposure by investing 
in U.S. dollar-denominated investment-grade corporate bonds or other 
ETFs that are listed on a U.S. national securities exchange that 
principally invest in U.S. dollar-denominated investment-grade 
corporate bonds.
    The Fund will attempt to mitigate the inflation risk of the Fund's 
exposure to U.S. dollar-denominated investment-grade corporate bonds 
primarily through the use of either OTC or listed inflation swaps 
(i.e., contracts in which the Fund will make fixed-rate payments based 
on notional amount while receiving floating-rate payments determined 
from an inflation index) (``Inflation Swaps''),\13\ which are managed 
on an active basis. As an alternative, the Fund may also attempt to 
mitigate inflation risk through investing in other products designed to 
transfer inflation risk from one party to another, including, but not 
limited to, Treasury Inflation-Protected Securities (``TIPS''), total 
return swaps,\14\ credit default swaps,\15\ and U.S. Treasury futures 
(collectively with Inflation Swaps, ``Inflation Hedging Instruments''). 
The Fund may hold up to 50% of the weight of its portfolio (including 
gross notional exposure) in Inflation Hedging Instruments.
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    \13\ The Exchange states that all Inflation Swaps held by the 
Fund will be listed and/or centrally cleared in order to reduce 
counterparty risk. In addition, all listed Inflation Swaps held by 
the Fund will be traded on a U.S. SEF registered with the CFTC.
    \14\ All total return swaps held by the Fund will traded OTC and 
will generally reference TIPS, the Consumer Price Index, or a 
corporate bond index. The Exchange represents that the Fund will 
attempt to limit counterparty risk in non-cleared swap contracts by 
entering into such contracts only with counterparties the Adviser 
believes are creditworthy and by limiting the Fund's exposure to 
each counterparty. The Adviser will monitor the creditworthiness of 
each counterparty and the Fund's exposure to each counterparty on an 
ongoing basis.
    \15\ Credit default swaps held by the Fund will be traded on a 
U.S. SEF registered with the CFTC.
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    The Fund may also hold certain fixed income securities and cash and 
cash equivalents in order to collateralize its derivatives positions.

B. Investment Restrictions

    The Exchange represents that the Fund's investments, including 
derivatives, will be consistent with the 1940 Act and the Fund's 
investment objective and policies and will not be used to enhance 
leverage (although certain derivatives and other investments may result 
in leverage).\16\ That is, while the Fund will be permitted to borrow 
as permitted under the 1940 Act, the Fund's investments will not be 
used to seek performance that is the multiple or inverse multiple 
(e.g., 2Xs or 3Xs) of the Fund's primary broad-based securities 
benchmark index (as defined in Form N-1A).
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    \16\ The Fund will include appropriate risk disclosure in its 
offering documents, including leveraging risk. Leveraging risk is 
the risk that certain transactions of a fund, including a fund's use 
of derivatives, may give rise to leverage, causing a fund to be more 
volatile than if it had not been leveraged. The Fund's investments 
in in derivative instruments will be made in accordance with the 
1940 Act and consistent with the Fund's investment objective and 
policies. To mitigate leveraging risk, the Fund will segregate or 
earmark liquid assets determined to be liquid by the Adviser in 
accordance with procedures established by the Trust's Board and in 
accordance with the 1940 Act or otherwise cover the transactions 
that give rise to such risk. These procedures have been adopted 
consistent with Section 18 of the 1940 Act and related Commission 
guidance.
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    The Fund will only use those derivatives described above and 
included in the defined term Inflation Hedging Instruments. The Fund's 
use of derivative instruments will be collateralized. The Fund will 
only use derivative instruments in order to attempt to mitigate the 
inflation risk of the U.S. dollar-denominated investment-grade 
corporate bonds exposure.

C. Application of Generic Listing Standards

    The Exchange proposes to list and trade the Shares under Rule 
14.11(i), which provides generic listing standards for Managed Fund 
Shares. According to the Exchange, certain of the Fund's investments 
may not comply with all of the generic listing requirements of Rule 
14.11(i). Specifically, the Fund will meet all the requirements of Rule 
14.11(i) on an initial and ongoing basis except for those set forth in 
Rules 14.11(i)(4)(C)(iv)(a), 14.11(i)(4)(C)(iv)(b), and 
14.11(i)(4)(C)(v).
    Rule 14.11(i)(4)(C)(iv)(a) requires that, on both an initial and 
continuing basis, in the aggregate, at least 90% of the weight of the 
portfolio holdings invested in futures, exchange-traded options, and 
listed swaps (calculated using the aggregate gross notional value of 
such holdings) shall consist of futures, options, and swaps for which 
the Exchange may obtain information via the Intermarket Surveillance 
Group (``ISG'') from other members or affiliates

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of the ISG or for which the principal market is a market with which the 
Exchange has a comprehensive surveillance sharing agreement. The 
Exchange states that the Fund's investments in certain listed credit 
default swaps and listed Inflation Swaps will not comply with this 
requirement.
    Rule 14.11(i)(4)(C)(iv)(b) requires that the aggregate gross 
notional value of listed derivatives based on any single underlying 
reference asset not exceed 30% of the weight of the portfolio 
(including gross notional exposures). The Exchange states that the 
Fund's investments in listed derivatives, which include U.S. Treasury 
futures, credit default swaps, and certain Inflation Swaps, will not 
comply with this requirement.\17\
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    \17\ Rule 14.11(i)(4)(C)(iv)(b) also requires that the aggregate 
gross notional value of listed derivatives based on any five or 
fewer underlying reference assets not exceed 65% of the weight of 
the portfolio (including gross notional exposures). The Exchange 
states that the Fund will meet this requirement.
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    Rule 14.11(i)(4)(C)(v) requires that, on both an initial and 
continuing basis, the aggregate gross notional value of OTC derivatives 
shall not exceed 20% of the weight of the portfolio (including gross 
notional exposures). The Exchange states that the Fund's holdings in 
OTC derivatives, which include total return swaps and OTC Inflation 
Swaps, will not comply with this requirement.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
BatsBZX-2017-54 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \18\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \18\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\19\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \20\
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    \19\ Id.
    \20\ 15 U.S.C. 78f(b)(5).
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    Under the proposal, the Fund may hold up to 50% of the weight of 
its portfolio (including gross notional exposure) in Inflation Hedging 
Instruments, which include, but are not limited to, TIPS, listed and 
OTC Inflation Swaps, OTC total return swaps, listed credit default 
swaps, and U.S. Treasury futures.\21\ The Commission notes that the 
definition of Inflation Hedging Instruments is not exhaustive and may 
include certain investments that are not enumerated in the filing. The 
Commission seeks commenters' views on the sufficiency of the 
information that is provided with respect to Inflation Hedging 
Instruments, which could comprise up to 50% of the weight of the Fund's 
portfolio, to support a determination that the listing and trading of 
the Shares would be consistent with Section 6(b)(5) of the Act.
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    \21\ See Amendment No. 2, supra note 6.
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IV. Procedure: Request for Written Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended by Amendment No. 2, is consistent with Section 
6(b)(5) of the Act or any other provision of the Act, or the rules and 
regulations thereunder. Although there do not appear to be any issues 
relevant to approval or disapproval that would be facilitated by an 
oral presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4, any request for an opportunity to 
make an oral presentation.\22\
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    \22\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by January 18, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
February 1, 2018.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BatsBZX-2017-54 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 Numbers SR-BatsBZX-2017-54. 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 (http://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-BatsBZX-2017-54 and should be submitted 
on or before January 18, 2018. Rebuttal comments should be submitted by 
February 1, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-28076 Filed 12-27-17; 8:45 am]
 BILLING CODE 8011-01-P