[Federal Register Volume 84, Number 98 (Tuesday, May 21, 2019)]
[Notices]
[Pages 23103-23105]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10509]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85860; File No. SR-NYSEArca-2019-02]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change Relating to the Listing and Trading of the Shares of the
ProShares UltraPro 3x Natural Gas ETF and ProShares UltraPro 3x Short
Natural Gas ETF Under NYSE Arca Rule 8.200-E
May 15, 2019.
On January 28, 2019, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') 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 of the ProShares UltraPro
3x Natural Gas ETF and ProShares UltraPro 3x Short Natural Gas ETF
under NYSE Arca Rule 8.200-E. The proposed rule change was published
for comment in the Federal Register on February 15, 2019.\3\
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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. 85088 (Feb. 11,
2019), 84 FR 4573 (``Notice'').
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On March 26, 2019, pursuant to Section 19(b)(2) of the 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 approve or disapprove the proposed
rule change.\5\ The Commission has received no comment letters on the
proposal.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 85417 (Mar. 26,
2019), 84 FR 12304 (Apr. 1, 2019). The Commission designated May 16,
2019, as the date by which the Commission shall approve or
disapprove, or institute proceedings to determine whether to approve
or disapprove, the proposed rule change.
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The Commission is publishing this order to institute proceedings
pursuant to Section 19(b)(2)(B) of the Act \6\ to determine whether to
approve or disapprove the proposed rule change.
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\6\ 15 U.S.C. 78s(b)(2)(B).
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I. Exchange's Description of the Proposal \7\
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\7\ The Commission notes that additional information regarding,
among other things, the Shares, Funds, investment objective,
permitted investments, investment strategies and methodology,
investment restrictions, creation and redemption procedures,
availability of information, trading rules and halts, and
surveillance procedures, can be found in the Notice (see supra note
3) and the Registration Statement (see infra note 9), as applicable.
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The Exchange proposes to list and trade shares (``Shares'') of the
ProShares UltraPro 3x Natural Gas ETF and ProShares UltraPro 3x Short
Natural Gas ETF (individually ``Fund'' and, collectively, ``Funds'')
under NYSE Arca Rule 8.200-E, Commentary .02, which governs the listing
and trading of Trust Issued Receipts.\8\ Each Fund is a series of the
ProShares Trust II (``Trust''), a Delaware statutory trust. \9\ The
Trust and the Funds are managed and controlled by ProShare Capital
Management LLC (``ProShare Capital'' or ``Sponsor''). ProShare Capital
is registered as a commodity pool operator with the Commodity Futures
Trading Commission and is a member of the National Futures Association.
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\8\ Commentary .02 to NYSE Arca Rule 8.200-E applies to Trust
Issued Receipts that invest in ``Financial Instruments.'' The term
``Financial Instruments,'' as defined in Commentary .02(b)(4) to
NYSE Arca Rule 8.200-E, means any combination of investments,
including cash; securities; options on securities and indices;
futures contracts; options on futures contracts; forward contracts;
equity caps, collars, and floors; and swap agreements.
\9\ The Trust is registered under the Securities Act of 1933. On
May 19, 2017, the Trust filed with the Commission a registration
statement on Form S-1 under the Securities Act of 1933 relating to
the Funds (File No. 333-218136) (``Registration Statement'').
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ProShares UltraPro 3x Natural Gas ETF
The investment objective of this Fund is to seek daily investment
results, before fees and expenses, that correspond to three times (3x)
the performance of the Bloomberg Natural Gas Subindex\SM\
(``Benchmark'').\10\ This Fund seeks to achieve its investment
objective for a single day, not for any other period.\11\
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\10\ The Benchmark is intended to reflect the performance of a
rolling position in natural gas futures contracts listed on the New
York Mercantile Exchange (``NYMEX''), including the impact of
rolling, without regard to income earned on cash positions. The
Benchmark is a ``rolling index,'' which means that the Index
performance includes the impact of closing out futures contracts
that are nearing expiration and replacing them with futures
contracts with later expirations. This process is commonly referred
to as ``rolling.''
\11\ The return of a Fund for a period longer than a single
trading day is the result of its return for each day compounded over
the period and thus will usually differ from a Fund's multiple times
the return of the Benchmark for the same period.
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[[Page 23104]]
ProShares UltraPro 3x Short Natural Gas ETF
The investment objective of this Fund is to seek daily investment
results, before fees and expenses, that correspond to three times the
inverse (-3x) of the performance of the Benchmark. This Fund seeks to
achieve its investment objective for a single day, not for any other
period.
Investment Strategies of the Funds
In seeking to achieve the Funds' investment objectives, the Sponsor
will utilize a mathematical approach to determine the type, quantity,
and mix of investment positions that ProShare Capital believes, in
combination, should produce daily returns consistent with the Funds'
respective objectives.
Each Fund will seek to meet its respective investment objective by
investing, under normal market conditions,\12\ in futures contracts
traded in the United States and listed options on such contracts
(collectively, ``Futures Contracts'').\13\ The Funds will not invest
directly in natural gas. The Funds' investments in Futures Contracts
will be used to produce economically ``leveraged'' or ``inverse
leveraged'' investment results for the Funds.
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\12\ The term ``normal market conditions'' includes, but is not
limited to, the absence of trading halts in the applicable financial
markets generally; operational issues (e.g., systems failure)
causing dissemination of inaccurate market information; or force
majeure type events such as natural or manmade disaster, act of God,
armed conflict, act of terrorism, riot or labor disruption or any
similar intervening circumstance. See NYSE Arca Rule 8.600-E(c)(5).
\13\ A Futures Contract is a standardized contract traded on, or
subject to the rules of, an exchange that calls for the future
delivery of a specified quantity and type of a particular underlying
asset at a specified time and place or alternatively may call for
cash settlement. The notional size and calendar term Futures
Contracts on a particular underlying asset are identical and are not
subject to any negotiation, other than with respect to price and the
number of contracts traded between the buyer and seller.
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Each Fund also may obtain exposure to the Benchmark through
investment in over-the-counter (``OTC'') swap transactions and forward
contracts referencing such Benchmark (``Financial Instruments''). For
example, a Fund may invest in Financial Instruments in the event
position, price or accountability limits are reached with respect to
Futures Contracts \14\ or exposure limits are reached with a particular
futures commission merchant or if the market for a specific futures
contract experiences emergencies (e.g., natural disaster, terrorist
attack or an act of God) or disruptions (e.g., a trading halt) or in
situations where the Sponsor deems it impractical or inadvisable to buy
or sell Futures Contracts (such as during periods of market volatility
or illiquidity).
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\14\ Many designated contract markets, such as the NYMEX, have
established accountability levels and position limits on the maximum
net long or net short futures contracts in commodity interests that
any person or group of persons under common trading control may
hold, own or control. In addition, NYMEX also sets price fluctuation
limits on futures contracts. Options do not have individual price
limits but rather are linked to the price limit of Futures
Contracts.
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Each Fund will also hold cash or cash equivalents, such as U.S.
Treasury securities or other high credit quality, short-term fixed-
income or similar securities (such as shares of money market funds and
collateralized repurchase agreements), pending investment in Futures
Contracts or Financial Instruments or as collateral for the Funds'
investments.
In addition, to the extent a Fund enters into swap agreements and
other over-the-counter transactions, it will do so only with large,
established and well capitalized financial institutions that meet the
Sponsor's credit quality standards and monitoring policies. Each Fund
will use various techniques to minimize credit risk including early
termination or reset and payment, using different counterparties and
limiting the net amount due from any individual counterparty.
The Funds do not intend to hold Futures Contracts through
expiration, but instead intend to ``roll'' or close their respective
positions before expiration. When the market for these contracts is
such that the prices are higher in the more distant delivery months
than in the nearer delivery months, the sale during the course of the
``rolling process'' of the more nearby contract would take place at a
price that is lower than the price of the more distant contract. This
pattern of higher futures prices for longer expiration Futures
Contracts is referred to as ``contango.'' Alternatively, when the
market for these contracts is such that the prices are higher in the
nearer months than in the more distant months, the sale during the
course of the ``rolling process'' of the more nearby contract would
take place at a price that is higher than the price of the more distant
contract. This pattern of higher futures prices for shorter expiration
Futures Contracts is referred to as ``backwardation.'' The presence of
contango in certain Futures Contracts at the time of rolling could
adversely affect a Fund with long positions, and positively affect a
Fund with short positions. Similarly, the presence of backwardation in
certain Futures Contracts \11\ at the time of rolling such contracts
could adversely affect a Fund with short positions and positively
affect a Fund with long positions.
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\11\ The Funds may invest in options on Futures Contracts.
Unlike Futures Contracts, which the Funds intend to roll before
expiration, the Funds intend to hold ``in-the-money'' options on
Futures Contracts to expiration. The Funds would exercise in-the-
money options on Futures Contracts at expiration of the options
contract and they would settle through receipt or delivery of the
underlying Futures Contracts. Out-of-the money options will be held
to expiration and will be expired worthless. Options on Futures
Contracts are subject to the effects of contango and backwardation
to the same general extent as their underlying Futures Contracts.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2019-02 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \15\ 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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\15\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\16\ 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.'' \17\
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\16\ Id.
\17\ 15 U.S.C. 78f(b)(5).
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III. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested
[[Page 23105]]
persons concerning whether the proposal 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.\18\
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\18\ Section 19(b)(2) of the Act, as amended by the Securities
Act 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 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 June 11, 2019. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 25,
2019. The Commission asks that commenters address the sufficiency of
the Exchange's statements in support of the proposal, in addition to
any other comments they may wish to submit about the proposed rule
change.
In particular, the Exchange states that each Fund may obtain
exposure to the Benchmark through investment in OTC Financial
Instruments under certain conditions, including situations where the
Sponsor deems it impractical or inadvisable to buy or sell Futures
Contracts (such as during periods of market volatility or illiquidity).
The Commission seeks commenters' views on whether the Exchange has
described in sufficient detail the conditions where the Sponsor deems
it impractical or inadvisable to buy or sell Futures Contracts to
enable the Funds to obtain exposure to the Benchmark through investment
in OTC Financial Instruments.
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-NYSEArca-2019-02 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-NYSEArca-2019-02. 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-NYSEArca-2019-02 and should be submitted
by June 11, 2019. Rebuttal comments should be submitted by June 25,
2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12) & 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10509 Filed 5-20-19; 8:45 am]
BILLING CODE 8011-01-P