[Federal Register Volume 83, Number 154 (Thursday, August 9, 2018)]
[Notices]
[Pages 39486-39488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17008]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83775; File No. SR-CboeBZX-2018-018]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To List and Trade Shares of the Principal Morley 
Short Duration Index ETF Under Rule 14.11(c)(4)

August 3, 2018.

I. Introduction

    On April 23, 2018, 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 
Principal Morley Short Duration Index ETF (``Fund''). The proposed rule 
change was published for comment in the Federal Register on May 8, 
2018.\3\ On June 20, 2018, 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 
approve or disapprove the proposed rule change.\4\ The Commission has 
received no comment letters on the proposed rule change. This order 
institutes proceedings under Section 19(b)(2)(B) of the Act \5\ to 
determine whether to approve or disapprove 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. 83152 (May 2, 2018), 
83 FR 20892.
    \4\ See Securities Exchange Act Release No. 83479, 83 FR 29838 
(June 26, 2018). The Commission designated August 6, 2018 as the 
date by which the Commission shall approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change.
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade the Shares pursuant to BZX 
Rule 14.11(c)(4), which governs the listing and trading of index fund 
shares based on fixed income securities indexes. The Fund would seek to 
provide investment results that replicate, before expenses, the 
performance of The ICE BofA Merrill Lynch Low Duration U.S. ABS & CMBS 
Equal Par Index (``Index'').\6\
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    \6\ The Index value, calculated and disseminated at least once 
daily, as well as the components of the Index and their percentage 
weighting, will be available from major market data vendors.
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A. The Exchange's Description of the Index

    The Index is designed to provide exposure to investment-grade 
securitized products issued in the U.S., including ABS \7\ and CMBS.\8\
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    \7\ ``ABS'' means fixed and floating rate debt securities 
secured by non-mortgage assets.
    \8\ ``CMBS'' means fixed rate debt securities secured by first 
mortgages on commercial real estate.
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    To qualify for inclusion in the Index, eligible securities must be 
a component of The ICE BofA Merrill Lynch US ABS & CMBS Index (``Feeder 
Index''). Such securities are then selected and weighted based upon the 
Index methodology discussed below.
1. The Feeder Index's Methodology
    In order to be included in the Feeder Index, a security (whether 
ABS or CMBS) must meet the following criteria (``Basic Criteria''):
     Be rated investment-grade (based on an average of Moody's, 
S&P Global, and Fitch);
     have a term of at least one year remaining until final 
stated maturity; and have at least one month to the last expected cash 
flow; and
     inverse floating rate, interest only, and principal only 
securities are excluded.
    In addition to the Basic Criteria, an ABS must meet the following 
criteria:
     Must issue a fixed or floating rate coupon;
     must have an original deal size for the collateral group 
\9\ of at least $250 million;
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    \9\ A collateral group describes the assets (receivables) that 
are held by the special purpose vehicle (``SPV'') issuing the ABS 
securities. The collateral group provides the source of payment for 
the SPV's liabilities (i.e., ABS securities). Typically, an SPV will 
include assets greater than its liabilities as a form of credit 
enhancement.
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     must have a current outstanding deal size for the 
collateral group greater than or equal to 10% of the original deal 
size; and
     a minimum current outstanding tranche size of $50 million 
for senior tranches and $10 million current amount outstanding for 
mezzanine and subordinated tranches.
    In addition to the Basic Criteria, a CMBS (which may include U.S. 
agency CMBS) must also meet the following criteria:
     Must issue a fixed coupon schedule;
     must have an original deal size for the collateral group 
of at least $250 million;
     must have a current outstanding deal size for the 
collateral group that is greater than or equal to 10% of the original 
deal size; and

[[Page 39487]]

     must have a minimum outstanding tranche size of $50 
million for senior tranches and $10 million for mezzanine and 
subordinated tranches.
2. The Index's Methodology
    Securities in the Feeder Index are screened for inclusion/exclusion 
in the Index based on the following criteria:
     ABS related to home equity and manufactured housing are 
excluded;
     CMBS securities that are rated less than AAA credit 
quality (based on an average of Moody's, S&P Global and Fitch) are 
excluded;
     CMBS securities that are issued prior to December 31, 2010 
are excluded; and
     Securities must have a modified duration to worst that is 
less than or equal to 5 years for initial inclusion in the Index, 
although once included, the security remains in the Index provided the 
remaining criteria are met.
    The qualifying securities are assigned equal par amounts with a 70% 
allocation given to ABS securities and a 30% allocation given to CMBS 
securities. The Index rebalances on a monthly basis.

B. The Exchange's Description of the Fund

    Under Normal Market Conditions,\10\ the Fund will invest at least 
80% of its net assets, plus any borrowings for investment purposes, in 
ABS and CMBS that compose the Index at the time of purchase.
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    \10\ The term ``Normal Market Conditions'' includes, but is not 
limited to, the absence of trading halts in the applicable financial 
markets generally; operational issues causing dissemination of 
inaccurate market information or system failures; or force majeure 
type events such as natural or man-made disaster, act of God, armed 
conflict, act of terrorism, riot or labor disruption, or any similar 
intervening circumstance.
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    While the Fund normally will invest at least 80% of its net assets, 
plus any borrowings for investment purposes, in ABS and CMBS that 
compose the Index, as described above, the Fund may invest its 
remaining assets in securities not included in the Index including only 
the following instruments: ABS and CMBS not included in the Index; cash 
and cash equivalents; \11\ Treasury Securities with a maturity of three 
months or greater; centrally cleared, index-based credit default swaps; 
\12\ and, to the extent permitted by the 1940 Act, other exchange-
traded funds (``ETFs'').\13\
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    \11\ Cash equivalents are short-term instruments with maturities 
of less than three months, including: (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.
    \12\ Centrally cleared swaps are cleared through a central 
clearinghouse and, as such, the counterparty risk traditionally 
associated with over-the-counter swaps is eliminated.
    \13\ ETFs include Index Fund Shares (as described in Rule 
14.11(c)); Portfolio Depositary Receipts (as described in Rule 
14.11(b)); and Managed Fund Shares (as described in Rule 14.11(i)). 
The ETFs all will be listed and traded in the U.S. on registered 
exchanges. The Fund may invest in the securities of ETFs registered 
under the 1940 Act consistent with the requirements of Section 
12(d)(1) of the 1940 Act, or any rule, regulation or order of the 
Commission or interpretation thereof. The Fund will not invest in 
leveraged or inverse leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
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    The portfolio of securities held by the Fund will be disclosed on 
the Fund's website at www.PrincipalETFs.com.

C. Exchange's Policy Discussion

    The Exchange believes that while the proposed rule change does not 
satisfy all of the ``generic'' listing requirements of Rule 
14.11(c)(4), in particular Rules 14.11(c)(4)(B)(i)(b) \14\ and 
14.11(c)(4)(B)(i)(f),\15\ the policy issues that such provisions are 
intended to address are otherwise mitigated. The Exchange believes that 
Rule 14.11(c)(4)(B)(i)(b) is intended to address concerns around the 
size and manipulability of the Index's components. The exchange 
believes that these policy concerns would be mitigated by the fact that 
at least 90% of the weight of the Index will be comprised of securities 
that have a minimum par amount of $10 million and were a constituent of 
an offering where the original deal size was at least $250 million.\16\
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    \14\ Rule 14.11(c)(4)(B)(i)(b) requires that components that in 
the aggregate account for at least 75% of the weight of the index or 
portfolio each have a minimum original principal amount outstanding 
of $100 million or more. As of February 22, 2018, only 57.9% of the 
weight of the Index components had a minimum original principal 
amount outstanding of $100 million or more.
    \15\ Rule 14.11(c)(4)(B)(i)(f) requires that component 
securities that in aggregate account for at least 90% of the Fixed 
Income Securities portion of the weight of the index or portfolio 
must be either: (1) From issuers that are required to file reports 
pursuant to Sections 13 and 15(d) of the Act; (2) from issuers that 
have a worldwide market value of its outstanding common equity held 
by non-affiliates of $700 million or more; (3) from issuers that 
have outstanding securities that are notes, bonds, debentures, or 
evidence of indebtedness having a total remaining principal amount 
of at least $1 billion; (4) exempted securities as defined in 
section 3(a)(12) of the Act; or (5) from issuers that are a 
government of a foreign country or a political subdivision of a 
foreign country. According to the Exchange, as of February 22, 2018, 
only 68.0% of the weight of the Index components met the 
requirements of Rule 14.11(c)(4)(B)(i)(f).
    \16\ The Exchange notes that similar standards have been applied 
to other comparable funds, and cites to Securities Exchange Act 
Release No. 82295 (December 12, 2017), 82 FR 60056 (December 18, 
2017) (SR-NYSEArca-2017-56). Further, according to the Exchange, the 
Index is broad-based and currently includes 2,693 component 
securities. The Exchange also states that, on a continuous basis, 
the Index will contain at least 500 component securities and comply 
with the index methodology description provided above.
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    The Exchange also believes that the availability of information 
regarding the ABS and CMBS that comprise the Index that Rule 
14.11(c)(4)(B)(i)(f) is intended to address would also be mitigated by 
the fact that the Fund will only hold ABS and CMBS for which the bond 
indenture requires the public disclosure of a statement to noteholders 
on a no less frequent than quarterly basis.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2018-018 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \17\ 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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    \17\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\18\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposal'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.\19\ Specifically, in 
light of the Index's composition of ABS and CMBS and the proposed 
continued listing criteria regarding the availability of public 
information applicable to the Shares, the Commission seeks commenters' 
views on whether the

[[Page 39488]]

information provided in the proposed rule change is consistent with the 
requirements of Section 6(b)(5) of the Act.
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    \18\ Id.
    \19\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    Interested persons are invited to submit written views, data, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with Section 6(b)(5) 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.\20\
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    \20\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 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 Acts 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 August 30, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
September 13, 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-CboeBZX-2018-018 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-2018-018. 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-CboeBZX-2018-018 and should be submitted 
on or before August 30, 2018. Rebuttal comments should be submitted by 
September 13, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-17008 Filed 8-8-18; 8:45 am]
 BILLING CODE 8011-01-P