[Federal Register Volume 84, Number 56 (Friday, March 22, 2019)]
[Notices]
[Pages 10874-10880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05460]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85349; File No. SR-CboeBZX-2019-016]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Allow the JPMorgan Core Plus Bond
ETF of the J.P. Morgan Exchange-Traded Fund Trust To Hold Certain
Instruments in a Manner That May Not Comply With Rule 14.11(i), Managed
Fund Shares
March 18, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 5, 2019, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposed [sic] rule change to allow the JPMorgan Core
Plus Bond ETF (the ``Fund'') of the J.P. Morgan Exchange-Traded Fund
Trust (the ``Trust'' or the ``Issuer'') to hold certain instruments in
a manner that may not comply with Rule 14.11(i) (``Managed Fund
Shares''). The shares of the Fund are referred to herein as the
``Shares.''
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange submits this proposal in order to allow the Shares,
which are currently listed on the Exchange under Rule 14.11(i) \3\ and
began trading on January 30, 2019, to continue listing and trading on
the Exchange while holding certain instruments in a manner that may not
comply with three of the quantitative requirements under the Generic
Listing Standards, as defined below [sic]. Two such exceptions are
substantively identical or more restrictive \4\ than representations in
another rule filing that was approved by the Commission \5\ and one
exception relates to a de minimis portion of the Fund's holdings and
therefore also does not raise any substantive issues for the Commission
to consider. Specifically, the Exchange submits this proposal in order
to allow the Fund to hold instruments in a manner that may not comply
with Rule 14.11(i)(4)(C)(ii)(d),\6\
[[Page 10875]]
Rule 14.11(i)(4)(C)(iv)(b),\7\ and/or Rule 14.11(i)(4)(C)(i) as further
described below.\8\ Otherwise, the Fund will continue to comply with
all other listing requirements on an initial and continued listing
basis under Rule 14.11(i).
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\3\ The Commission approved Rule 14.11(i) in Securities Exchange
Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6,
2011) (SR-BATS-2011-018).
\4\ The Exchange notes that certain of the exceptions and
substitute requirements approved in the Approval Order are measured
using mark-to-market. The Exchange is not proposing to measure any
of the exceptions to the Generic Listing Standards proposed herein
using mark-to-market and, as such, all of the proposed
representations about the Fund's holdings are either identical or
more restrictive than those approved in the Approval Order.
\5\ See Securities Exchange Act Release No. 84047 (September 6,
2018), 83 FR 46200 (September 12, 2018) (SR-NASDAQ-2017-128) (the
``Approval Order'').
\6\ Rule 14.11(i)(4)(C)(ii)(d) provides that ``component
securities that in aggregate account for at least 90% of the fixed
income weight of the portfolio must be either: (a) From issuers that
are required to file reports pursuant to Sections 13 and 15(d) of
the Act; (b) from issuers that have a worldwide market value of its
outstanding common equity held by non-affiliates of $700 million or
more; (c) 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; (d) exempted
securities as defined in Section 3(a)(12) of the Act; or (e) from
issuers that are a government of a foreign country or a political
subdivision of a foreign country.'' The Exchange instead is
proposing that the fixed income portion of the portfolio excluding
ABS and Private MBS, as defined below, will satisfy this 90%
requirement.
\7\ Rule 14.11(i)(4)(C)(iv)(b) provides that ``the aggregate
gross notional value of listed derivatives based on any five or
fewer underlying reference assets shall not exceed 65% of the weight
of the portfolio (including gross notional exposures), and the
aggregate gross notional value of listed derivatives based on any
single underlying reference asset shall not exceed 30% of the weight
of the portfolio (including gross notional exposures).'' The
Exchange is proposing that the Fund would meet neither the 65% nor
the 30% requirements of Rule 14.11(i)(4)(C)(iv)(b). Specifically,
the Exchange is proposing that the Fund be exempt from this
requirement as it relates to the Fund's holdings in futures and
options (including options on futures) referencing Eurodollars and
sovereign debt issued by the United States (i.e., Treasury
Securities) and other ``Group of Seven'' countries (Group of Seven
or G-7 countries include the United States, Canada, France, Germany,
Italy, Japan and the United Kingdom), where such futures and options
contracts are listed on an exchange that is an ISG member or an
exchange with which the Exchange has a comprehensive surveillance
sharing agreement (``Eurodollar and G-7 Sovereign Futures and
Options''). The Fund may also hold other listed derivatives, which
will include only the following: Debt futures, interest rate
futures, index futures, foreign exchange futures, equity options,
equity futures, Treasury options, options on Treasury futures,
interest rate swaps, foreign exchange options, foreign exchange
swaps, credit default swaps (including single-name and index
reference pools), loan credit default swap indices, and inflation-
linked swaps, however such holdings will, when calculated
independently of the Fund's holdings in Eurodollar and G-7 Sovereign
Futures and Options, meet the requirements of Rule
14.11(i)(4)(C)(iv)(a) and (b).
\8\ The Adviser, as defined below, notes that the Fund may by
virtue of its holdings be issued certain equity instruments
(``Equity Holdings'') that may not meet the requirements of Rule
14.11(i)(4)(C)(i). The Fund will not purchase such instruments and
will dispose of such holdings as the Adviser determines is in the
best interest of the Fund's shareholders. Such holdings will not
constitute more than 10% of the Fund's net assets. The Adviser
expects that the Fund will generally acquire such instruments
through issuances that it receives by virtue of its other holdings,
such as corporate actions or convertible securities.
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The Fund is an actively managed exchange-traded fund that will seek
a high level of current income by investing primarily in a diversified
portfolio of high-, medium-, and low-grade debt securities.\9\ The
Shares are offered by the Trust, which was established as a Delaware
statutory trust. The Trust is registered with the Commission as an
open-end investment company and has filed an effective registration
statement on behalf of the Fund on Form N-1A (``Registration
Statement'') with the Commission.\10\
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\9\ The Fund plans to employ a strategy very similar to that
currently employed by JPMorgan Core Plus Bond Fund, a mutual fund
operated by the Adviser since March 5th, 1993.
\10\ See Registration Statement on Form N-1A for the Trust,
dated January 23, 2019 (File Nos. 333-191837 and 811-22903). The
descriptions of the Fund and the Shares contained herein are based,
in part, on information in the Registration Statement. The
Commission has issued an order granting certain exemptive relief to
the Trust under the Investment Company Act of 1940 (15 U.S.C. 80a-1)
(``1940 Act'') (the ``Exemptive Order''). Investment Company Act
Release No. 31990 (February 9, 2016) (File No. 812-13761).
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Description of the Shares and the Fund
The Shares are offered by the Trust, which was established as a
Delaware statutory trust. J.P Morgan Investment Management, Inc. is the
investment adviser (the ``Adviser'') to the Fund. JPMorgan Chase Bank,
N.A. is the administrator, custodian, and transfer agent for the Trust.
JPMorgan Distribution Services, Inc. serves as the distributor
(``Distributor'') for the Trust.
Rule 14.11(i)(7) provides that, if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a
broker-dealer, such investment adviser shall erect and maintain a
``fire wall'' between the investment adviser and the broker-dealer with
respect to access to information concerning the composition and/or
changes to such investment company portfolio.\11\ In addition, Rule
14.11(i)(7) further requires that personnel who make decisions on the
investment company's portfolio composition must be subject to
procedures designed to prevent the use and dissemination of material
nonpublic information regarding the applicable investment company
portfolio. Rule 14.11(i)(7) is similar to Rule 14.11(b)(5)(A)(i),
however, Rule 14.11(i)(7) in connection with the establishment of a
``fire wall'' between the investment adviser and the broker-dealer
reflects the applicable open-end fund's portfolio, not an underlying
benchmark index, as is the case with index-based funds. The Adviser is
not a registered broker-dealer, but is affiliated with multiple broker-
dealers and has implemented and will maintain ``fire walls'' with
respect to such broker-dealers regarding access to information
concerning the composition 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 and maintain a fire
wall with respect to its relevant personnel or such broker-dealer
affiliate, as applicable, regarding access to information concerning
the composition 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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\11\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.
JPMorgan Core Plus Bond ETF
According to the Registration Statement, the Fund is an actively
managed exchange-traded fund that will seek a high level of current
income by investing primarily in a diversified portfolio of high-,
medium-, and low-grade debt securities. The Fund seeks to achieve its
investment objective by investing, under Normal Market Conditions,\12\
at least 80% of its net
[[Page 10876]]
assets in Bonds.\13\ The Adviser will invest across the credit spectrum
to provide the Fund exposure to various credit ratings. Under Normal
Market Conditions, at least 65% of the Fund's assets will be invested
in securities that, at the time of purchase, are rated investment grade
by a nationally recognized statistical rating organization or in
securities that are unrated but are deemed by the Adviser to be of
comparable quality. Among others, such securities include U.S. or
foreign mortgage-backed securities (``MBS''), which are securities that
represent direct or indirect participations in, or are collateralized
and by and payable from, mortgage loans secured by real property and
which may be issued or guaranteed by government-sponsored entities
(``GSEs'') \14\ such as Fannie Mae (formally known as the Federal
National Mortgage Association) or Freddie Mac (formally known as the
Federal Home Loan Mortgage Corporation) or issued or guaranteed by
agencies of the U.S. government, such as the Government National
Mortgage Association (``Ginnie Mae''); \15\ and U.S. or foreign asset-
backed securities (``ABS'').\16\ Under Normal Market Conditions, the
Fund will not invest more than 35% of its assets in securities rated
below investment grade. The Fund's average weighted maturity will
ordinarily range between five and twenty years.
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\12\ As defined in Rule 14.11(i)(3)(E), 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.
\13\ For purposes of this proposal, the term ``Bond'' includes
only the following: Corporate bonds, U.S. government and agency debt
securities, asset-backed securities, municipal securities, credit
linked notes, participation notes, collateralized debt obligations,
agency, non-agency and stripped mortgage-related and mortgage-backed
securities (including adjustable rate mortgage loans), convertible
securities (including contingent convertible securities), preferred
stock, loan participations and assignments, commitments to loan
assignments, variable and floating rate instruments, commercial
paper, and foreign and emerging market debt securities. The Adviser
intends to hold asset-backed securities, mortgage-related and
mortgage-backed securities as part of a strategy designed to manage
portfolio risk by diversifying away from corporate debt and to take
advantage of certain market environments.
\14\ A ``GSE'' is a type of financial services corporation
created by the United States Congress. GSEs include Fannie Mae and
Freddie Mac, but not Sallie Mae, which is no longer a government
entity.
\15\ MBS include collateralized mortgage obligations (``CMOs''),
which are debt obligations collateralized by mortgage loans or
mortgage pass-through securities. Typically, CMOs are collateralized
by Ginnie Mae, Fannie Mae or Freddie Mac certificates, but they may
also be collateralized by whole loans or pass-through securities
issued by private issuers (i.e., issuers other than U.S. government
agencies or GSEs) (``Private MBS''). Payments of principal and of
interest on the mortgage-related instruments collateralizing the
MBS, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs. In a CMO, a series of bonds or
certificates is issued in multiple classes. Each class of CMOs,
often referred to as a ``tranche'' of securities, is issued at a
specified fixed or floating coupon rate and has a stated maturity or
final distribution date.
\16\ ABS are securitized products in connection with which the
securities issued, which may be issued by either a U.S. or a foreign
entity, are collateralized by any type of financial asset, such as a
consumer or student loan, a lease, or a secured or unsecured
receivable. For purposes of this filing, ABS exclude: (i) MBS; (ii)
a small business administration backed ABS traded ``To Be
Announced'' or in a specified pool transaction as defined in FINRA
Rule 6710(x); and (iii) U.S. or foreign collateralized debt
obligations. Consistent with the requirements of Rule
14.11(i)(4)(C)(ii)(e), the Fund will limit investments in ABS and
Private MBS (together, ``ABS/Private MBS'') to 20% of the weight of
the fixed income portion of the Fund's portfolio.
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Under Normal Market Conditions, the Fund may also invest up to 20%
of its net assets in the following: Cash and certain Cash Equivalents
\17\ that are not otherwise captured under the definition of Bond,
listed derivative instruments, as described above, and OTC derivative
instruments \18\ The Fund's holdings in Cash Equivalents and OTC
derivative instruments will be in compliance with the limitations
provided in Rules 14.11(i)(4)(C)(iii), 14.11(i)(4)(C)(v), and
14.11(i)(4)(C)(vi).
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\17\ As defined in Exchange Rule 14.11(i)(4)(C)(iii)(b), Cash
Equivalents are short-term instruments with maturities of less than
three months, which includes only the following: (i) U.S. Government
securities, including bills, notes, and bonds differing as to
maturity and rates of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S. Government agencies or
instrumentalities; (ii) certificates of deposit issued against funds
deposited in a bank or savings and loan association; (iii) bankers
acceptances, which are short-term credit instruments used to finance
commercial transactions; (iv) repurchase agreements and reverse
repurchase agreements; (v) bank time deposits, which are monies kept
on deposit with banks or savings and loan associations for a stated
period of time at a fixed rate of interest; (vi) commercial paper,
which are short-term unsecured promissory notes; and (vii) money
market funds.
\18\ For purposes of this filing, OTC derivative instruments
will include only the following: Index options, foreign exchange
options, swaptions, credit default swaps (including single-name and
index reference pools), foreign exchange swaps, loan credit default
swap indices, inflation-linked swaps, interest rate swaps, non-
dollar swaps, non-deliverable forward contracts and foreign exchange
forward contracts.
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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).\19\ 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 (i.e., 2Xs and 3Xs) of the Fund's primary broad-
based securities benchmark index (as defined in Form N-1A). The Fund
will only use those derivatives described above. The Fund's use of
derivative instruments will be collateralized.
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\19\ 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. 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, as
permitted by applicable regulations, enter into certain offsetting
positions) to cover its obligations under derivative instruments.
These procedures have been adopted consistent with Section 18 of the
1940 Act and related Commission guidance. See 15 U.S.C. 80a-18;
Investment Company Act Release No. 10666 (April 18, 1979), 44 FR
25128 (April 27, 1979); Dreyfus Strategic Investing, Commission No-
Action Letter (June 22, 1987); Merrill Lynch Asset Management, L.P.,
Commission No-Action Letter (July 2, 1996).
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Discussion
Based on the characteristics of the Fund and the representations
made above, the Exchange believes it is appropriate to allow the Fund
to hold certain listed derivatives, fixed income instruments, and
equity securities in a manner that may not comply with the Generic
Listing Standards. The Exchange notes that the representations for the
Fund related to Rule 14.11(i)(4)(C)(ii)(d) and Rule
14.11(i)(4)(C)(iv)(b) are substantively identical or more restrictive
than representations in the Approval Order.
The Fund will not meet the requirements of Rule
14.11(i)(4)(C)(ii)(d) because certain ABS and Private MBS by their
nature cannot satisfy the requirements. As described above, the
Exchange is instead proposing that the fixed income portion of the
portfolio excluding ABS and Private MBS will satisfy this 90%
requirement. The Exchange believes that this alternative limitation is
appropriate because Rule 14.11(i)(4)(C)(ii)(d) is not designed for
structured finance vehicles such as ABS and Private MBS. The Exchange
also notes that the Fund's portfolio is consistent with the policy
issues underlying the rule as a result of the diversification provided
by the investments and the Adviser's selection process, which closely
monitors investments to ensure maintenance of credit and liquidity
standards. As noted above, the other fixed income instruments held by
the Fund will meet the requirements of Rule 14.11(i)(4)(C)(ii)(d).
The Exchange is also proposing that the Fund would meet neither the
65% nor the 30% requirements of Rule 14.11(i)(4)(C)(iv)(b) because the
Fund
[[Page 10877]]
may maintain significant positions in Eurodollar and G-7 Sovereign
Futures and Options. Such instruments provide cost efficient methods to
achieve such exposure. The Exchange notes that Eurodollar and G-7
Sovereign Futures and Options are highly liquid investments \20\ and
are not subject to the concentration risk that the rule is intended to
address because of such liquidity. Further, the Exchange notes that the
significantly diminished risk of Treasury Securities is reflected in
their exclusion from the concentration requirements applicable to fixed
income securities in Rule 14.11(i)(4)(C)(ii)(b). The Exchange proposes
that the Fund will comply with the concentration requirements in Rule
14.11(i)(4)(C)(iv)(b) except with respect to the Fund's investment in
Eurodollar and G-7 Sovereign Futures and Options. The Exchange believes
that this alternative limitation is appropriate to provide the Fund
with sufficient flexibility and because of the highly liquid and
transparent nature of Eurodollar and G-7 Sovereign Futures and Options.
Further, the G-7 Sovereign Futures and Options in which the Fund
invests will be listed on an exchange that is an ISG member or an
exchange with which the Exchange has a comprehensive surveillance
sharing agreement.
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\20\ The Exchange notes that the Commission has previously
granted exemptions under the Act to facilitate the trading of
futures on sovereign debt issued by each of the Group of Seven
countries (among other countries) and that such exemptions were
based in part on the Commission's assessment of the sufficiency of
the credit ratings and liquidity of such sovereign debt. See
Approval Order; 17 CFR 240.3a12-8; Securities Exchange Act Release
No. 41453 (May 26, 1999), 64 FR 29550 (June 2, 1999). According to
publicly available information, eurodollars and Treasury Securities
eurodollar futures and options traded through CME Group had an
average daily open interest of approximately 53 million contracts
and futures and options on Treasury Securities had an average daily
open interest of approximately 15 million contracts during the first
three quarters of 2017. As of September 2017, the open interest in
futures and options on Canadian sovereign debt traded on The
Montreal Exchange was approximately 560,000 contracts. As of July
2015, the open interest in futures on German sovereign debt traded
on Eurex was approximately 3,000,000 contracts and the open interest
in options on German sovereign debt futures traded on Eurex was
approximately 3,000,000 contracts. The open interest peaks in 2017
for futures on long-term and short-term Italian sovereign debt
traded on Eurex was approximately 450,000 and 270,000 contracts,
respectively. As of July 2017, the open interest in futures on long-
term French sovereign debt traded on Eurex was approximately 600,000
contracts. As of the third quarter of 2014, the open interest in
futures on long-term British sovereign debt traded on the
Intercontinental Exchange was approximately 400,000 contracts. As of
July 2016, the open interest in futures on 10-year Japanese
sovereign debt traded on the Osaka Exchange was approximately 80,000
contracts.
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The Exchange also believes that the exception to Rule
14.11(i)(4)(C)(i) related to the Fund's equity holdings is de minimis
and does not raise any substantive issues for the Commission to review
because: (i) Such holdings will not constitute more than 10% of the
Fund's net assets; and (ii) the Fund will not purchase equities \21\
and will dispose of such holdings as the Adviser determines is in the
best interest of the Fund's shareholders.
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\21\ As noted above, the Adviser expects that the Fund will
generally acquire such instruments through issuances that it
receives by virtue of its other holdings, such as corporate actions
or convertible securities.
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In addition, the Exchange represents that: (1) Except as described
above, the Fund will continue to satisfy all of the generic listing
standards under Rule 14.11(i)(4); (2) the continued listing standards
under Rule 14.11(i) will apply to the shares of the Fund; and (3) the
issuer of the Fund is required to comply with Rule 10A-3 \22\ under the
Act for the initial and continued listing of the Shares. In addition,
the Exchange represents that the Fund will meet and be subject to all
other requirements of the Generic Listing Rules and other applicable
continued listing requirements for Managed Fund Shares under Exchange
Rule 14.11(i), including those requirements regarding the Disclosed
Portfolio (as defined in the Exchange rules) and the requirement that
the Disclosed Portfolio and the net asset value (``NAV'') will be made
available to all market participants at the same time,\23\ intraday
indicative value,\24\ suspension of trading or removal,\25\ trading
halts,\26\ disclosure,\27\ and firewalls.\28\
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\22\ 17 CFR 240.10A-3.
\23\ See Exchange Rules 14.11(i)(4)(A)(ii) and
14.11(i)(4)(B)(ii).
\24\ See Exchange Rule 14.11(i)(4)(B)(i).
\25\ See Exchange Rule 14.11(i)(4)(B)(iii).
\26\ See Exchange Rule 14.11(i)(4)(B)(iv).
\27\ See Exchange Rule 14.11(i)(6).
\28\ See Exchange Rule 14.11(i)(7).
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The Shares
The Fund will issue and redeem Shares on a continuous basis at the
NAV per Share only in large blocks of a specified number of Shares or
multiples thereof (``Creation Units'') in transactions with authorized
participants who have entered into agreements with the Distributor. The
Fund currently anticipates that a Creation Unit will consist of 50,000
Shares, though this number may change from time to time. The exact
number of Shares that will constitute a Creation Unit will be disclosed
in the respective Registration Statement of the Fund. Once created,
Shares of the Fund trade on the secondary market in amounts less than a
Creation Unit.
Additional information regarding the Shares and the Fund, including
investment strategies, risks, creation and redemption procedures, fees
and expenses, portfolio holdings disclosure policies, distributions,
taxes and reports to be distributed to beneficial owners of the Shares
can be found in the Registration Statement or on the website for the
Fund (www.JPMorgan.com), as applicable.
Availability of Information
As noted above, the Fund will comply with the requirements for
Managed Fund Shares related to Disclosed Portfolio, NAV, and the
Intraday Indicative Value. Additionally, the intra-day, closing and
settlement prices of exchange-traded portfolio assets, including
futures, swaps, listed options, and certain Equity Holdings, will be
readily available from the exchanges on which such products are listed,
automated quotation systems, published or other public sources, or
online information services such as Bloomberg or Reuters. Quotation and
last sale information for U.S. exchange-listed options contracts
cleared by The Options Clearing Corporation will be available via the
Options Price Reporting Authority. Intraday price quotations on Bonds,
OTC derivative instruments, and OTC Equity Holdings are available from
major broker-dealer firms and from third-parties, which may provide
prices free with a time delay or in real-time for a paid fee. Price
information for Cash Equivalents will be available from major market
data vendors.
The Disclosed Portfolio will be available on the Fund's website
(www.jpmorgan.com/etfs) free of charge. The Fund's website includes a
form of the prospectus for the Fund and additional information related
to NAV and other applicable quantitative information. Information
regarding market price and trading volume of the Shares will be
continuously available throughout the day on brokers' computer screens
and other electronic services. Quotation and last sale information on
the Shares will be available through the Consolidated Tape Association.
Information regarding the previous day's closing price and trading
volume for the Shares will be published daily in the financial section
of newspapers. Trading in the Shares may be halted for market
conditions or for reasons that, in the view of the Exchange, make
trading inadvisable. The Exchange deems the Shares to be equity
securities, thus rendering trading
[[Page 10878]]
in the Shares subject to the Exchange's existing rules governing the
trading of equity securities. The Exchange has appropriate rules to
facilitate trading in the shares during all trading sessions.
Surveillance
Trading of the Shares through the Exchange will be subject to the
Exchange's surveillance procedures for derivative products, including
Managed Fund Shares. All of the futures contracts and listed options
contracts, as well as certain Equity Holdings held by the Fund will
trade on markets that are a member of Intermarket Surveillance Group
(``ISG'') or affiliated with a member of ISG or with which the Exchange
has in place a comprehensive surveillance sharing agreement.\29\ The
Exchange, FINRA, on behalf of the Exchange, or both will communicate
regarding trading in the Shares and the underlying listed instruments,
including listed derivatives and certain Equity Holdings, held by the
Fund with the ISG, other markets or entities who are members or
affiliates of the ISG, or with which the Exchange has entered into a
comprehensive surveillance sharing agreement. Additionally, the
Exchange or FINRA, on behalf of the Exchange, are able to access, as
needed, trade information for certain fixed income instruments reported
to FINRA's Trade Reporting and Compliance Engine (``TRACE''). Trade
price and other information relating to municipal securities is
available through the Municipal Securities Rulemaking Board's (the
``MSRB'') Electronic Municipal Market Access (``EMMA'') system. All
statements and representations made in this filing regarding the
description of the portfolio or reference assets, limitations on
portfolio holdings or reference assets, dissemination and availability
of reference asset, and intraday indicative values, and the
applicability of Exchange rules specified in this filing shall
constitute continued listing requirements for the Fund. The issuer has
represented to the Exchange that it will advise the Exchange of any
failure by the Fund or the Shares to comply with the continued listing
requirements, and, pursuant to its obligations under Section 19(g)(1)
of the Act, the Exchange will surveil for compliance with the continued
listing requirements. If the Fund or the Shares are not in compliance
with the applicable listing requirements, the Exchange will commence
delisting procedures under Exchange Rule 14.12.
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\29\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com. The Exchange notes that not all
components of the Disclosed Portfolio for the Fund may trade on
markets that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement.
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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 Shares of the Fund. The Exchange will halt trading in
the Shares under the conditions specified in 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 Shares inadvisable. These may
include: (1) The extent to which trading is not occurring in the
securities and/or the financial instruments composing the Disclosed
Portfolio of the Fund; or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present. Trading in the Shares also will be subject to Rule
14.11(i)(4)(B)(iv), which sets forth circumstances under which trading
in the Shares of a Fund may be halted.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. The Exchange allows
trading in the Shares from 8:00 a.m. until 8:00 p.m. Eastern Time. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in Rule 11.11(a), the minimum
price variation for quoting and entry of orders in Managed Fund Shares
traded on the Exchange is $0.01, with the exception of securities that
are priced less than $1.00, for which the minimum price variation for
order entry is $0.0001.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \30\ in general and Section 6(b)(5) of the Act \31\ in
particular in that it is 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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\30\ 15 U.S.C. 78f.
\31\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that excluding ABS and Private MBS in
calculating Rule 14.11(i)(4)(C)(ii)(d) is consistent with the Act
because the Fund's portfolio will be consistent with the policy issues
underlying the rule as a result of the diversification provided by the
investments and the Adviser's selection process, which closely monitors
investments to ensure maintenance of credit and liquidity standards.
Further, the other fixed income instruments, excluding ABS and Private
MBS, held by the Fund will satisfy the 90% requirement under Rule
14.11(i)(4)(C)(ii)(d).
The Exchange believes that the proposal that the Fund would meet
neither the 65% nor the 30% requirements of Rule 14.11(i)(4)(C)(iv)(b)
is consistent with the Act because such instruments are highly liquid
investments and are not subject to the concentration risk that the rule
is intended to address because of such liquidity. Further, the Exchange
notes that the significantly diminished risk of Treasury Securities is
reflected in their exclusion from the concentration requirements
applicable to fixed income securities in Rule 14.11(i)(4)(C)(ii)(b).
The Fund will comply with the concentration requirements in Rule
14.11(i)(4)(C)(iv)(b) except with respect to the Fund's investment in
Eurodollar and G-7 Sovereign Futures and Options. The Exchange believes
that this alternative limitation is appropriate to provide the Fund
with sufficient flexibility and because of the highly liquid and
transparent nature of Eurodollar and G-7 Sovereign Futures and Options.
Further, the G-7 Sovereign Futures and Options in which the Fund
invests will be listed on an exchange that is an ISG member or an
exchange with which the Exchange has a comprehensive surveillance
sharing agreement.
The Exchange also believes that the exception to Rule
14.11(i)(4)(C)(i) related to the Fund's equity holdings is consistent
with the Act because it is de minimis and does not raise any
substantive issues for the Commission to review because: (i) Such
holdings will not constitute more than 10% of the Fund's net assets;
and (ii) the Fund will not purchase equities and will dispose of such
holdings as the Adviser determines is in the best interest of the
Fund's shareholders.
The Exchange also believes that the proposal is consistent with the
Act because the proposed exceptions to the Generic Listing Standards
for the Fund related to Rule 14.11(i)(4)(C)(ii)(d) and Rule
14.11(i)(4)(C)(iv)(b) are substantively identical or more
[[Page 10879]]
restrictive than representations that have already been approved by the
Commission.
The Exchange further believes that the proposed rule change is
designed to prevent fraudulent and manipulative acts and practices in
that the Shares will continue to be listed and traded on the Exchange
pursuant to the continued listing criteria in Rule 14.11(i). The
Exchange believes that its surveillance procedures 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 the applicable federal securities laws. Rule 14.11(i)(7) provides
that, if the investment adviser to the investment company issuing
Managed Fund Shares is affiliated with a broker-dealer, such investment
adviser shall erect a ``fire wall'' between the investment adviser and
the broker-dealer with respect to access to information concerning the
composition and/or changes to such investment company portfolio. The
Adviser is not a registered broker-dealer, but is affiliated with
multiple broker-dealers and has implemented and will maintain ``fire
walls'' with respect to such broker-dealers regarding access to
information concerning the composition 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. All of the futures contracts and listed options
contracts, as well as certain Equity Holdings held by the Fund will
trade on markets that are a member of ISG or affiliated with a member
of ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement.\32\ The Exchange, FINRA, on behalf of
the Exchange, or both will communicate regarding trading in the Shares
and the underlying listed instruments, including listed derivatives and
certain Equity Holdings, held by the Fund with the ISG, other markets
or entities who are members or affiliates of the ISG, or with which the
Exchange has entered into a comprehensive surveillance sharing
agreement. Additionally, the Exchange or FINRA, on behalf of the
Exchange, are able to access, as needed, trade information for certain
fixed income instruments reported to FINRA's TRACE. Trade price and
other information relating to municipal securities is available through
the MSRB EMMA system.
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\32\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com. The Exchange notes that not all
components of the Disclosed Portfolio for the Fund may trade on
markets that are members of ISG or with which the Exchange has in
place a comprehensive surveillance sharing agreement.
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According to the Registration Statement, the Fund will invest,
under Normal Market Conditions, at least 80% of its net assets in
Bonds. Additionally, the Fund may hold up to an aggregate amount of 15%
of its net assets in illiquid assets (calculated at the time of
investment), as deemed illiquid by the Adviser under the 1940 Act.\33\
The Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether, in light of current circumstances, an adequate level
of liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
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\33\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act of 1933).
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The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will obtain a representation from the issuer of the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information is publicly available regarding the Fund and the Shares,
thereby promoting market transparency. Moreover, the Intraday
Indicative Value will be disseminated by one or more major market data
vendors at least every 15 seconds during Regular Trading Hours. On each
business day, before commencement of trading in Shares during Regular
Trading Hours, the Fund will disclose on its website the Disclosed
Portfolio that will form the basis for the Fund's calculation of NAV at
the end of the business day. Pricing information will include
additional quantitative information updated on a daily basis,
including, for the Fund: (1) The prior business day's NAV and the
market closing price or mid-point of the Bid/Ask Price,\34\ and a
calculation of the premium or discount of the market closing price or
Bid/Ask Price against the NAV; and (2) data in chart format displaying
the frequency distribution of discounts and premiums of the daily
market closing price or Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four previous calendar quarters.
Additionally, information regarding market price and trading of the
Shares will be continually available on a real-time basis throughout
the day on brokers' computer screens and other electronic services, and
quotation and last sale information for the Shares will be available on
the facilities of the CTA. The website for the Fund will include a form
of the prospectus for the Fund and additional data relating to NAV and
other applicable quantitative information. Trading in Shares of a Fund
will be halted under the conditions specified in Rule 11.18. Trading
may also be halted because of market conditions or for reasons that, in
the view of the Exchange, make trading in the Shares inadvisable.
Finally, trading in the Shares will be subject to Rule
14.11(i)(4)(B)(iv), which sets forth circumstances under which Shares
may be halted. In addition, as noted above, investors will have ready
access to information regarding the Fund's holdings, the Intraday
Indicative Value, the Disclosed Portfolio, and quotation and last sale
information for the Shares.
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\34\ The Bid/Ask Price of a Fund will be determined using the
highest bid and the lowest offer on the Exchange as of the time of
calculation of the Fund's NAV. The records relating to Bid/Ask
Prices will be retained by the Fund or its service providers.
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Additionally, the intra-day, closing and settlement prices of
exchange-traded portfolio assets, including futures, swaps, listed
options, and certain Equity Holdings, will be readily available from
the exchanges on which such products are listed, automated quotation
systems, published or other public sources, or online information
services such as Bloomberg or Reuters. Quotation and last sale
information for U.S. exchange-listed options contracts cleared by The
Options Clearing Corporation will be available via the Options Price
Reporting Authority. Intraday price quotations on Bonds,
[[Page 10880]]
OTC derivative instruments, and OTC Equity Holdings are available from
major broker-dealer firms and from third-parties, which may provide
prices free with a time delay or in real-time for a paid fee. Price
information for Cash Equivalents will be available from major market
data vendors.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG, from other exchanges that are members of
ISG, or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. In addition, the Exchange, or FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income instruments reported to TRACE and the MSRB
EMMA system. As noted above, investors will also have ready access to
information regarding the Fund's holdings, the Intraday Indicative
Value, the Disclosed Portfolio, and quotation and last sale information
for the Shares.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will allow the Adviser to fully implement its
investment strategy, which will enhance competition among market
participants, to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2019-016 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-2019-016. 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-2019-016, and should be
submitted on or before April 12, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05460 Filed 3-21-19; 8:45 am]
BILLING CODE 8011-01-P