[Federal Register Volume 84, Number 170 (Tuesday, September 3, 2019)]
[Notices]
[Pages 46051-46057]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18869]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86773; File No. SR-CboeBZX-2019-077]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change To List
and Trade Shares of the Innovator S&P 500 Total Buffer ETF Series Under
the Innovator ETFs Trust, Under Rule 14.11(i)
August 27, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 13, 2019, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Exchange
filed the proposal as a ``non-controversial'' proposed rule change
pursuant to Section 19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(iii).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes a rule change to list and trade shares of the
Innovator S&P 500 Total Buffer ETF Series under the Innovator ETFs
Trust (the ``Trust''), under Rule 14.11(i) (``Managed Fund 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
[[Page 46052]]
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 proposes to list and trade shares (``Shares'') of up
to thirty-six Innovator S&P 500 Total Buffer ETF Series (each a
``Fund'' and, collectively, the ``Funds'') under Rule 14.11(i), which
governs the listing and trading of Managed Fund Shares on the
Exchange.\5\ Each Fund will be an actively managed exchange traded
fund.
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\5\ The Commission originally approved BZX Rule 14.11(i) in
Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR
55148 (September 6, 2011) (SR-BATS-2011-018) and subsequently
approved generic listing standards for Managed Fund Shares under
Rule 14.11(i) in Securities Exchange Act Release No. 78396 (July 22,
2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100).
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The Exchange submits this proposal in order to allow each Fund to
hold listed derivatives in a manner that does not comply with Rule
14.11(i)(4)(C)(iv)(b), as further described below. The Exchange notes
that this proposal and the statements or representations herein
regarding the description of the portfolio or reference assets,
limitations on portfolio holdings or reference assets, dissemination
and availability of index, reference asset, and intraday indicative
values, or the applicability of Exchange listing rules are
substantively identical to those statements and representations
included in a proposal previously approved by the Commission.\6\
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\6\ See Securities Exchange Act Release No. 83679 (July 26,
2018), 83 FR 35505 (July 26, 2018) (SR-BatsBZX-2017-72) (the
``Original Approval''). The only difference between this proposal
and the Original Approval is that the defined outcome period is
three years as opposed to one year in the Original Approval and the
buffer level that the Funds intend to achieve, neither of which the
Exchange believes to be substantive. The representations related to
the Funds, each Fund's underlying portfolio, the limitations on
portfolio holdings, and the applicability of Exchange rules are
identical to the corresponding funds from the Original Approval (the
``Corresponding Funds'').
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The Shares will be offered by Innovator ETFs Trust (formerly
Academy Funds Trust) (the ``Trust''), which was established as a
Delaware statutory trust on October 17, 2007. The Trust is registered
with the Commission as an investment company and has filed, for the
first Innovator S&P 500 Total Buffer ETF Series, a registration
statement on Form N-1A (``Registration Statement'') with the
Commission.\7\ Each Fund intends to qualify each year as a regulated
investment company (a ``RIC'') under Subchapter M of the Internal
Revenue Code of 1986, as amended.\8\ Innovator Capital Management, LLC
(the ``Adviser'') is the investment adviser to the Funds and Milliman
Financial Risk Management LLC (the ``Sub-Adviser'') is the sub-adviser.
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.\9\ 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. Neither the Adviser nor
the Sub-Adviser is a registered broker-dealer, and neither the Adviser
nor the Sub-Adviser are affiliated with broker-dealers. In addition,
Adviser and Sub-Adviser personnel who make decisions regarding a 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 or Sub-Adviser becomes
registered as a broker-dealer or newly affiliated with a 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. Similarly, to
the extent that a Fund is based on a benchmark index, in the event that
the index provider of the benchmark index (the ``Index Provider'')
becomes registered as a broker-dealer or newly 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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\7\ See Post-Effective Amendment No. 237 to Registration
Statement on Form N-1A for the Trust, which was filed with the
Commission on July 12, 2018 (File Nos. 333-146827 and 811-22135).
The description of the Funds and the Shares contained herein are
based on information in the Registration Statement. There are no
permissible holdings for the Funds that are not described in this
proposal. 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''). See
Investment Company Act Release No. 32854 (October 6, 2017) (File No.
812-14781).
\8\ 26 U.S.C. 851.
\9\ 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 investment objective of the Funds is to provide investors with
returns that match those of the S&P 500 Price Return Index (the ``S&P
500 Index'') up to an upside cap over a period of approximately three
years, while providing a buffer from S&P 500 Index losses.
The Funds are each actively managed funds that employ a ``defined
outcome strategy'' that seeks to provide investment returns that match
the gains of the S&P 500 Index, up to a
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maximized return (the ``Cap Level''), while guarding against a decline
in the S&P 500 Index, before fees and expenses (the ``Total Buffer
Strategy''). Pursuant to this strategy, each Fund will invest primarily
in exchange-traded options contracts that reference either the S&P 500
Index or ETFs that track the S&P 500 Index. Defined outcome strategies
are designed to participate in market gains and losses within pre-
determined ranges over a specified period (i.e. point to point). These
outcomes are predicated on the assumption that an investment vehicle
employing the strategy is held for the designated outcome periods. The
designated outcome period for the Funds is three years. As such, the
Exchange is proposing to list up to thirty-six monthly series of the
Funds.
The Exchange submits this proposal in order to allow each Fund to
hold listed derivatives, in particular FLexible EXchange Options
(``FLEX Options'') on the S&P 500 Index, in a manner that does not
comply with Rule 14.11(i)(4)(C)(iv)(b).\10\ Otherwise, the Funds will
comply with all other listing requirements of the Generic Listing
Standards \11\ for Managed Fund Shares on an initial and continued
listing basis under Rule 14.11(i).
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\10\ 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 Funds
do not meet the generic listing standards because they fail to meet
the requirement of Rule 14.11(i)(4)(C)(iv)(b) that prevents the
aggregate gross notional value of listed derivatives based on any
single underlying reference asset from exceeding 30% of the weight
of the portfolio (including gross notional exposures) and the
requirement 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).
\11\ For purposes of this proposal, the term ``Generic Listing
Standards'' shall mean the generic listing rules for Managed Fund
Shares under Rule 14.11(i)(4)(C).
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Innovator S&P 500 Total Buffer ETFs
Under Normal Market Conditions,\12\ each Fund will attempt to
achieve its investment objective by employing a Total Buffer Strategy
that will seek to provide investment returns during the outcome period
that match the gains of the S&P 500 Index, up to the Cap Level, while
shielding investors from S&P 500 Index losses, before fees and
expenses. Pursuant to the Total Buffer Strategy, each Fund will invest
primarily in FLEX Options or standardized options contracts listed on a
U.S. exchange that reference either the S&P 500 Index or exchange
traded funds (``ETFs'') that track the S&P 500 Index.
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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.
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The portfolio managers will invest in a portfolio of FLEX Options
linked to an underlying asset, the S&P 500 Index, that, when held for
the specified period, seeks to produce returns that, over the outcome
period, match the positive returns of the S&P 500 Index up to the Cap
Level. Pursuant to the Total Buffer Strategy, each Fund's portfolio
managers will seek to produce the following outcomes during the outcome
period:
If the S&P 500 Index appreciates over the outcome period:
The Fund will seek to provide shareholders with a return that increases
by the percentage increase of the S&P 500 Index over the outcome
period, up to the Cap Level before fees and expenses; and
If the S&P 500 Index decreases by any amount over the
outcome period: The Fund will seek to provide a total return of zero
before fees and expenses.
The Funds will produce these outcomes by layering purchased and
written FLEX Options. The customizable nature of FLEX Options allows
for the creation of a strategy that sets desired target outcome
parameters. The FLEX Options comprising a Fund's portfolio have terms
that, when layered upon each other, are designed to buffer against
losses or match the gains of the S&P 500 Index. However, another effect
of the layering of FLEX Options with these terms is a cap on the level
of possible gains.
Any FLEX Options that are written by a Fund that create an
obligation to sell or buy an asset will be offset with a position in
FLEX Options purchased by the Fund to create the right to buy or sell
the same asset such that the Fund will always be in a net long
position. That is, any obligations of a Fund created by its writing of
FLEX Options will be covered by offsetting positions in other purchased
FLEX Options. As the FLEX Options mature at the end of each outcome
period, they are replaced. By replacing FLEX Options at the end of an
outcome period, each Fund seeks to ensure that investments made at the
commencement of any given outcome period will buffer against negative
returns of the S&P 500 Index, before fees and expenses.
The FLEX Options owned by each of the Funds will have the same
terms (i.e. same strike price and expiration) for all investors of a
Fund within an outcome period. The Cap Level will be determined with
respect to each Fund on the inception date of the Fund and at the
beginning of each outcome period and is determined based on the price
of the FLEX Options acquired by the Fund at that time.
Investment Methodology for the Funds
Under Normal Market Conditions, each Fund will invest primarily in
U.S. exchange-listed FLEX Options on the S&P 500 Index. Each of the
Funds may invest its net assets (in the aggregate) in other investments
which the Adviser or Sub-Adviser believes will help each Fund to meet
its investment objective and that will be disclosed at the end of each
trading day (``Other Assets''). Other Assets include only the
following: Cash or cash equivalents, as defined in Rule
14.11(i)(4)(C)(iii) \13\ and standardized options contracts listed on a
U.S. securities exchange that reference either the S&P 500 Index or
that reference ETFs that track the S&P 500 Index (``Reference ETFs'').
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\13\ As defined in Rule 14.11(i)(4)(C)(iii), cash equivalents
include 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.
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S&P 500 Index FLEX Options
The market for options contracts on the S&P 500 Index traded on
Cboe Exchange, Inc. (``Cboe Options'') is among the most liquid markets
in the world. In 2018, more than 1.48 million options contracts on the
S&P 500 Index were traded per day on Cboe Options, which is more than
$350 billion in notional volume traded on a daily basis. While FLEX
Options are traded differently than standardized options contracts, the
Exchange believes that this liquidity bolsters the market for FLEX
Options, as described below. Every FLEX Option order submitted to an
exchange is exposed to a competitive auction process for price
discovery. The process begins with a request for quote (``RFQ'') in
which the interested party establishes the terms of the FLEX
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Options contract. The RFQ solicits interested market participants,
including on-floor market makers, remote market makers trading
electronically, and member firm traders, to respond to the RFQ with
bids or offers through a competitive process. This solicitation
contains all of the contract specifications-underlying, size, type of
option, expiration date, strike price, exercise style and settlement
basis. During a specified amount of time, responses to the RFQ are
received and at the end of that time period, the initiator can decide
whether to accept the best bid or offer. The process occurs under the
rules of the applicable listing exchange which means that customer
transactions are effected according to the principles of a fair and
orderly market following trading procedures and policies developed by
the applicable self-regulatory organization.
The Exchange believes that sufficient protections are in place to
protect against market manipulation of the Funds' Shares and S&P 500
FLEX Options for several reasons: (i) The diversity, liquidity, and
market cap of the securities underlying the S&P 500 Index; (ii) the
competitive quoting process for FLEX Options; (iii) the significant
liquidity in the market for options on the S&P 500 Index results in a
well-established price discovery process that provides meaningful
guideposts for FLEX Option pricing; and (iv) surveillance by the
Exchange, Cboe Options, other U.S. options exchanges, and the Financial
Industry Regulatory Authority (``FINRA'') designed to detect violations
of the federal securities laws and self-regulatory organization
(``SRO'') rules. The Exchange has in place a surveillance program for
transactions in ETFs to ensure the availability of information
necessary to detect and deter potential manipulations and other trading
abuses, thereby making the Shares less readily susceptible to
manipulation. Further, the Exchange believes that because the assets in
each Fund's portfolio, which are comprised primarily of S&P 500 FLEX
Options, will be acquired in extremely liquid and highly regulated
markets,\14\ the Shares are less readily susceptible to manipulation.
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\14\ All exchange-listed securities that the Funds may hold will
trade on a market that is a member of the Intermarket Surveillance
Group (``ISG'') and the Funds will not hold any non-exchange-listed
equities or options, however, not all of the components of the
portfolio for the Funds may trade on exchanges that are members of
the ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement. For a list of the current members of
ISG, see www.isgportal.org.
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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. Trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Managed Fund Shares. All
statements and representations made in this filing regarding (a) the
description of the portfolio, reference assets, and index, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange rules shall constitute continued listing
requirements for listing the Shares on the Exchange. The issuer has
represented to the Exchange that it will advise the Exchange of any
failure by a Fund or the related 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 a Fund or the related Shares are not
in compliance with the applicable listing requirements, then, with
respect to such Fund or Shares, the Exchange will commence delisting
procedures under Exchange Rule 14.12. FINRA conducts certain cross-
market surveillances on behalf of the Exchange pursuant to a regulatory
services agreement. The Exchange is responsible for FINRA's performance
under this regulatory services agreement. If a Fund is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures with respect to such Fund under Exchange
Rule 14.12.
The Exchange or FINRA, on behalf of the Exchange, will communicate
as needed regarding trading in the Shares and exchange-traded options
contracts with other markets and other entities that are members of the
ISG and may obtain trading information regarding trading in the Shares
and exchange-traded options contracts from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares and exchange-traded options contracts from
markets and other entities that are members of ISG or with which the
Exchange has in place a comprehensive surveillance sharing agreement.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
As noted above, options on the S&P 500 Index are among the most
liquid options in the world and derive their value from the actively
traded S&P 500 Index components. The contracts are cash-settled with no
delivery of stocks or ETFs, and trade in competitive auction markets
with price and quote transparency. The Exchange believes the highly
regulated options markets and the broad base and scope of the S&P 500
Index make securities that derive their value from that index less
susceptible to market manipulation in view of market capitalization and
liquidity of the S&P 500 Index components, price and quote
transparency, and arbitrage opportunities.
The Exchange believes that the liquidity of the markets for S&P 500
Index securities, options on the S&P 500 Index, and other related
derivatives is sufficiently great to deter fraudulent or manipulative
acts associated with the Funds' Shares price. The Exchange also
believes that such liquidity is sufficient to support the creation and
redemption mechanism. Coupled with the extensive surveillance programs
of the SROs described above, the Exchange does not believe that trading
in the Funds' Shares would present manipulation concerns.
The Exchange represents that, except for the limitations on listed
derivatives in BZX Rule 14.11(i)(4)(C)(iv)(b), the Funds' proposed
investments will satisfy, on an initial and continued listing basis,
all of the generic listing standards under BZX Rule 14.11(i)(4)(C) and
all other applicable requirements for Managed Fund Shares under Rule
14.11(i). The Trust is required to comply with Rule 10A-3 under the Act
for the initial and continued listing of the Shares of the Funds. A
minimum of 100,000 Shares will be outstanding at the commencement of
trading on the Exchange. In addition, the Exchange represents that the
Shares of the Funds will comply with all other requirements applicable
to Managed Fund Shares, which includes the dissemination of key
information such as the Disclosed Portfolio,\15\ Net Asset Value,\16\
and the Intraday Indicative Value,\17\ suspension of trading or
removal,\18\ trading halts,\19\ surveillance,\20\ minimum price
variation for quoting and order entry,\21\ and the information
circular,\22\ as set forth in Exchange rules applicable to Managed Fund
Shares. Further, all statements or representations regarding the
description of the portfolio or reference
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assets, limitations on portfolio holdings or reference assets,
dissemination and availability of index, reference asset, and intraday
indicative values, or the applicability of Exchange listing rules shall
constitute continued listing requirements for the Funds. Moreover, all
of the options contracts held by the Funds 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. 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. RFQ information
for FLEX Options will be available directly from the applicable options
exchange. The intra-day, closing and settlement prices of exchange-
traded options will be readily available from the options exchanges,
automated quotation systems, published or other public sources, or
online information services such as Bloomberg or Reuters. Price
information on cash equivalents is available from major broker-dealer
firms or market data vendors, as well as from automated quotation
systems, published or other public sources, or online information
services.
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\15\ See Rule 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
\16\ See Rule 14.11(i)(4)(A)(ii).
\17\ See Rule 14.11(i)(4)(B)(i).
\18\ See Rule 14.11(i)(4)(B)(iii).
\19\ See Rule 14.11(i)(4)(B)(iv).
\20\ See Rule 14.11(i)(2)(C).
\21\ See Rule 14.11(i)(2)(B).
\22\ See Rule 14.11(i)(6).
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Lastly, the issuer represents that it will provide and maintain a
publicly available web tool for each of the Funds on its website that
provides existing and prospective shareholders with important
information to help inform investment decisions. The information
provided includes the start and end dates of the current outcome
period, the time remaining in the outcome period, the Fund's current
net asset value, the Fund's cap for the outcome period and the maximum
investment gain available up to the cap for a shareholder purchasing
Shares at the current net asset value. For each of the Funds, the web
tool also provides information regarding each Fund's buffer. This
information includes the remaining buffer available for a shareholder
purchasing Shares at the current net asset value or the amount of
losses that a shareholder purchasing Shares at the current net asset
value would incur before benefitting from the protection of the buffer.
The cover of each Fund's prospectus, as well as the disclosure
contained in ``Principal Investment Strategies,'' provides the specific
web address for each Fund's web tool.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \23\ in general and Section 6(b)(5) of the Act \24\ 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, because, as noted above, the Shares will meet each of
the initial and continued listing criteria in BZX Rule 14.11(i) with
the exception of Rule 14.11(i)(4)(C)(iv)(b), which requires 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).\25\ Rule
14.11(i)(4)(C)(iv)(b) is intended to ensure that a fund is not subject
to manipulation by virtue of significant exposure to a manipulable
underlying reference asset by establishing concentration limits among
the underlying reference assets for listed derivatives held by a
particular fund.
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\23\ 15 U.S.C. 78f.
\24\ 15 U.S.C. 78f(b)(5).
\25\ As noted above, the Exchange is submitting this proposal
because the Funds would not meet the requirements of Rule
14.11(i)(4)(C)(iv)(b) which prevents the aggregate gross notional
value of listed derivatives based on any single underlying reference
asset from exceeding 30% of the weight of the portfolio (including
gross notional exposures) and the aggregate gross notional value of
listed derivatives based on any five or fewer underlying reference
assets from exceeding 65% of the weight of the portfolio (including
gross notional exposures).
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The Exchange believes that sufficient protections are in place to
protect against market manipulation of the Funds' Shares and S&P 500
FLEX Options for several reasons: (i) The diversity, liquidity, and
market cap of the securities underlying the S&P 500 Index; (ii) the
competitive quoting process for FLEX Options; (iii) the significant
liquidity in the market for options on the S&P 500 Index results in a
well-established price discovery process that provides meaningful
guideposts for FLEX Option pricing; and (iv) surveillance by the
Exchange, Cboe Options, other U.S. options exchanges, and FINRA
designed to detect violations of the federal securities laws and SRO
rules. The Exchange has in place a surveillance program for
transactions in ETFs to ensure the availability of information
necessary to detect and deter potential manipulations and other trading
abuses, thereby making the Shares less readily susceptible to
manipulation. Further, the Exchange believes that because the assets in
each Fund's portfolio, which are comprised primarily of S&P 500 FLEX
Options, will be acquired in extremely liquid and highly regulated
markets, the Shares are less readily susceptible to manipulation.
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. Trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Managed Fund Shares. All
statements and representations made in this filing regarding (a) the
description of the portfolio, reference assets, and index, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange rules shall constitute continued listing
requirements for listing the Shares on the Exchange. The issuer has
represented to the Exchange that it will advise the Exchange of any
failure by a Fund or the related 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 a Fund or the related Shares are not
in compliance with the applicable listing requirements, then, with
respect to such Fund or Shares, the Exchange will commence delisting
procedures under Exchange Rule 14.12. FINRA conducts certain cross-
market surveillances on behalf of the Exchange pursuant to a regulatory
services agreement. The Exchange is responsible for FINRA's performance
under this regulatory services agreement. If a Fund is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures with respect to such Fund under Exchange
Rule 14.12.
The Exchange or FINRA, on behalf of the Exchange, will communicate
as needed regarding trading in the Shares and exchange-traded options
contracts with other markets and other entities that are members of the
ISG and may obtain trading information regarding trading in the Shares
and exchange-traded options contracts from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares and
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exchange-traded options contracts from markets and other entities that
are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. In addition, the Exchange
also has a general policy prohibiting the distribution of material,
non-public information by its employees. As noted above, options on the
S&P 500 Index are among the most liquid options in the world and derive
their value from the actively traded S&P 500 Index components. The
contracts are cash-settled with no delivery of stocks or ETFs, and
trade in competitive auction markets with price and quote transparency.
The Exchange believes the highly regulated options markets and the
broad base and scope of the S&P 500 Index make securities that derive
their value from that index less susceptible to market manipulation in
view of market capitalization and liquidity of the S&P 500 Index
components, price and quote transparency, and arbitrage opportunities.
The Exchange believes that the liquidity of the markets for S&P 500
Index securities, options on the S&P 500 Index, and other related
derivatives is sufficiently great to deter fraudulent or manipulative
acts associated with the Funds' Shares price. The Exchange also
believes that such liquidity is sufficient to support the creation and
redemption mechanism. Coupled with the extensive surveillance programs
of the SROs described above, the Exchange does not believe that trading
in the Funds' Shares would present manipulation concerns.
The Exchange represents that, except as described above, the Funds
will meet and be subject to all other requirements of the Generic
Listing Standards and other applicable continued listing requirements
for Managed Fund Shares under Rule 14.11(i), including those
requirements regarding the Disclosed Portfolio,\26\ Intraday Indicative
Value,\27\ suspension of trading or removal,\28\ trading halts,\29\
disclosure,\30\ and firewalls.\31\ The Trust is required to comply with
Rule 10A-3 under the Act for the initial and continued listing of the
Shares of each Fund. Moreover, all of the options contracts held by the
Funds 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.
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\26\ See Rule 14.11(i)(4)(B)(ii).
\27\ See Rule 14.11(i)(4)(B)(i).
\28\ See Rule 14.11(i)(4)(B)(iii).
\29\ See Rule 14.11(i)(4)(B)(iv).
\30\ See Rule 14.11(i)(6).
\31\ See Rule 14.11(i)(7).
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Finally, this proposal and the statements or representations herein
regarding the limitations on portfolio holdings or reference assets,
dissemination and availability of index, reference asset, and intraday
indicative values, and the applicability of Exchange listing rules are
substantively identical to those statements and representations
included in the Original Approval and the descriptions of the portfolio
or reference assets are substantially similar to those included in the
Original Approval. The only difference between this proposal and the
Original Approval is that the defined outcome period is three years as
opposed to one year in the Original Approval and the buffer level that
the Funds intend to achieve, neither of which the Exchange believes to
be substantive because they relate only to the investment objective of
the Funds. As such, the Exchange believes the proposed rule change will
not significantly affect the protection of investors or the public
interest because the proposal contains no new issues that the
Commission has not previously contemplated.
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 facilitate the listing and trading of an
additional type of Managed Fund Shares that 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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \32\ and Rule 19b-
4(f)(6) thereunder.\33\
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\32\ 15 U.S.C. 78s(b)(3)(A).
\33\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \34\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \35\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has requested that the Commission waive the 30-day operative delay so
that the proposed rule change may become operative upon filing. The
Exchange represents that the statements or representations made in the
proposed rule change regarding the limitations on portfolio holdings or
reference assets, dissemination and availability of index, reference
asset, and intraday indicative values, and the applicability of
Exchange listing rules are substantively identical to the statements
and representations included in the Original Approval, and the
descriptions of the portfolio or reference assets are substantially
similar to those included in the Original Approval. Further, waiver of
the operative delay would allow the Exchange to facilitate the
Adviser's ability to list the product on the Exchange as soon as
possible, which may enhance competition among market participants, to
the benefit of investors and the marketplace. The Commission believes
that waiver of the 30-day operative delay is consistent with the
protection of investors and the public interest. Accordingly, the
Commission hereby waives the operative delay and designates the
proposed rule change operative upon filing.\36\
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\34\ 17 CFR 240.19b-4(f)(6).
\35\ 17 CFR 240.19b-4(f)(6)(iii).
\36\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the
[[Page 46057]]
Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule change should be
approved or 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-2019-077 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-2019-077. 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-2019-077, and should be
submitted on or before September 24, 2019.
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\37\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18869 Filed 8-30-19; 8:45 am]
BILLING CODE 8011-01-P