[Federal Register Volume 84, Number 190 (Tuesday, October 1, 2019)]
[Notices]
[Pages 52152-52155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21246]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87108; File No. SR-CboeBZX-2019-067]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendment
Nos. 2 and 3, to List and Trade Shares of the Innovator-100 Buffer ETF
Series, Innovator Russell 2000 Buffer ETF Series, Innovator-100 Power
Buffer ETF Series, Innovator Russell 2000 Power Buffer ETF Series,
Innovator-100 Ultra Buffer ETF Series, and Innovator Russell 2000 Ultra
Buffer ETF Series Under Rule 14.11(i)
September 25, 2019.
I. Introduction
On July 18, 2019, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade the shares (``Shares'') of the Innovator-100 Buffer ETF
Series and Innovator Russell 2000 Buffer ETF Series (collectively, the
``Buffer Funds''), Innovator-100 Power Buffer ETF Series and Innovator
Russell 2000 Power Buffer ETF Series (collectively, the ``Power Buffer
Funds''), and Innovator-100 Ultra Buffer ETF Series and Innovator
Russell 2000 Ultra Buffer ETF Series (collectively, the ``Ultra Buffer
Funds,'' and together with the Buffer Funds and Power Buffer Funds, the
``Funds'') under BZX Rule 14.11(i). The proposed rule change was
published for comment in the Federal Register on August 5, 2019.\3\ On
August 29, 2019, the Exchange filed Amendment No. 1 to the proposed
rule change. On September 17, 2019, the Commission extended the time
period within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
approve or disapprove the proposed rule change.\4\ On September 19,
2019, the Exchange filed Amendment No. 2 to the proposed rule change,
which amended and superseded the proposed rule change as modified by
Amendment No. 1.\5\ On September 24, 2019, the Exchange filed partial
Amendment No. 3 to the proposed rule change.\6\ The Commission has
received no comments on the proposed rule change. This order approves
the proposed rule change, as modified by Amendment Nos. 2 and 3.
---------------------------------------------------------------------------
\1\ 15 U.S.C.78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 86511 (July 30,
2019), 84 FR 38078.
\4\ See Securities Exchange Act Release No. 86996, 84 FR 49779
(September 23, 2019) (extending the time period to November 3,
2019).
\5\ In Amendment No. 2, the Exchange: (1) Deleted its
representation about the index provider implementing and maintaining
a firewall; (2) modified the downside protection in the Buffer Funds
from 10% to 9%; (3) clarified descriptions about the investment
methodology of the Funds; (4) modified descriptive terms on the
liquidity and competitive market for options on the reference
indexes; (5) identified options exchanges trading standardized and
FLexible EXchange Options (``FLEX Options'') on the reference
indexes (6) updated volume information on standardized options in
the reference indexes; and (7) made other technical, non-substantive
changes.
\6\ The amendments to the proposed rule change are available at:
https://www.sec.gov/comments/sr-cboebzx-2019-067/srcboebzx2019067.htm. In partial Amendment No. 3, the Exchange
clarified a description related to the Buffer Funds. Because
Amendment Nos. 2 and 3 do not materially alter the substance of the
proposed rule change or raise unique or novel regulatory issues,
Amendment Nos. 2 and 3 are not subject to notice and comment.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
Nos. 2 and 3
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(i), which governs the listing and trading of Managed Fund Shares
on the Exchange. In total, the Exchange is proposing to list and trade
Shares of up to twelve monthly series of each of the Funds. The Shares
will be offered by Innovator ETFs Trust (``Trust''), a Delaware
statutory trust.\7\ The
[[Page 52153]]
investment adviser to the Funds is Innovator Capital Management, LLC
(``Adviser''), and the sub-adviser to the Funds is Milliman Financial
Risk Management LLC (``Sub-Adviser'').
---------------------------------------------------------------------------
\7\ The Trust is registered with the Commission as an investment
company and has filed a registration statement for each Fund with
the Commission on Form N-1A (File Nos. 333-146827 and 811-22135)
(``Registration Statement'') under the Securities Act of 1933 (15
U.S.C. 77a), dated February 6, 2019. According to the Exchange, the
description of the operation of the Funds and the Shares herein is
based, in part, on the Registration Statement.
---------------------------------------------------------------------------
The investment objective of the Funds is to provide investors with
returns that match those of the Nasdaq-100 Index (the ``Nasdaq-100
Price Index'') or the Russell 2000 Price Index (the ``Russell 2000
Price Index'') (collectively, the ``Reference Indexes'') over a period
of approximately one year, while providing a level of protection from
losses in the applicable Reference Index.
A. Buffer Funds
The Buffer Funds are actively managed funds that seek to provide
investment returns that match the gains of the applicable Reference
Index, up to a maximized annual return (the ``Buffer Cap Level''),\8\
while guarding against a decline in the Reference Index for the first
9%. Specifically, the Buffer Fund is designed to provide the following
results during the outcome period:
---------------------------------------------------------------------------
\8\ The Exchange states that the Buffer Cap Level will be
determined with respect to each Buffer Fund on the inception date of
the Buffer Fund and at the beginning of each outcome period. See
Amendment No. 2, supra note 5, at 10-11.
---------------------------------------------------------------------------
If the Reference Index appreciates over the outcome
period: The Buffer Fund is designed to provide a total return that
matches the total return of the applicable Reference Index, up to the
applicable Buffer Cap Level;
If the Reference Index decreases over the outcome period
by 9% or less: The Buffer Fund is designed to provide a total return of
zero; and
If the Reference Index depreciates over the outcome period
by greater than 9%: The Buffer Fund is designed to provide a total
return loss that is 9% less than the percentage loss on the Reference
Index with a maximum loss of approximately 91%.\9\
---------------------------------------------------------------------------
\9\ The Exchange states that the Buffer Funds do not offer any
protection against declines in the Reference Index exceeding 9% on
an annualized basis. See id. at 10. Shareholders will bear all
Reference Index losses exceeding 9% on a one-to-one basis. See id.
---------------------------------------------------------------------------
The Buffer Fund is designed to produce these outcomes by including
theoretically ``purchased'' and ``written'' FLEX Options that, when
layered upon each other, are designed to buffer against losses of the
applicable Reference Index and cap the level of possible gains.
Under Normal Market Conditions,\10\ each Buffer Fund will attempt
to achieve its investment objective by taking positions that provide
performance exposure that match the gains of the applicable Reference
Index. Each Buffer Fund will invest primarily in exchange-traded
options contracts that reference either the Reference Index or exchange
traded funds (``ETFs'') that track the Reference Index.\11\ Any FLEX
Options written by a Buffer Fund that create an obligation to sell or
buy an asset will be offset with a position in FLEX Options purchased
by the Buffer Fund to create the right to buy or sell the same asset
such that the Buffer Fund will always be in a net long position. As the
FLEX Options mature at the end of each outcome period, they are
replaced.
---------------------------------------------------------------------------
\10\ As defined in BZX 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.
\11\ The FLEX Options owned by each of the Buffer Funds will
have the same terms (i.e., same strike price and expiration) for all
investors of a Buffer Fund within an outcome period. See Amendment
No. 2, supra note 5, at 10.
---------------------------------------------------------------------------
B. Power Buffer Funds
The Power Buffer Funds are actively managed funds that seek to
provide investment returns that match the gains of the applicable
Reference Index, up to a maximized annual return (the ``Power Buffer
Cap Level''),\12\ while guarding against a decline in the Reference
Index for the first 15%. Specifically, the Power Buffer Fund is
designed to provide the following results during the outcome period:
---------------------------------------------------------------------------
\12\ The Exchange states that the Power Buffer Cap Level will be
determined with respect to each Power Buffer Fund on the inception
date of the Power Buffer Fund and at the beginning of each outcome
period. See Amendment No. 2, supra note 5, at 12-13.
---------------------------------------------------------------------------
If the Reference Index appreciates over the outcome
period: The Power Buffer Fund is designed to provide a total return
that matches the total return of the applicable Reference Index, up to
the applicable Power Buffer Cap Level;
If the Reference Index decreases over the outcome period
by 15% or less: The Power Buffer Fund is designed to provide a total
return of zero; and
If the Reference Index depreciates over the outcome period
by greater than 15%: The Power Buffer Fund is designed to provide a
total return loss that is 15% less than the percentage loss on the
Reference Index with a maximum loss of approximately 85%.\13\
---------------------------------------------------------------------------
\13\ The Exchange states that the Power Buffer Funds do not
offer any protection against declines in the Reference Index
exceeding 15% on an annualized basis. See id. at 12. Shareholders
will bear all Reference Index losses exceeding 15% on a one-to-one
basis. See id.
---------------------------------------------------------------------------
The Power Buffer Fund is designed to produce these outcomes by
including theoretically ``purchased'' and ``written'' FLEX Options
that, when layered upon each other, are designed to buffer against
losses of the applicable Reference Index and cap the level of possible
gains.
Under Normal Market Conditions, each Power Buffer Fund will attempt
to achieve its investment objective by taking positions that provide
performance exposure that match the gains of the applicable Reference
Index. Each Power Buffer Fund will invest primarily in exchange-traded
options contracts that reference either the Reference Index or ETFs
that track the Reference Index.\14\ Any FLEX Options written by a Power
Buffer Fund that create an obligation to sell or buy an asset will be
offset with a position in FLEX Options purchased by the Power Buffer
Fund to create the right to buy or sell the same asset such that the
Power Buffer Fund will always be in a net long position. As the FLEX
Options mature at the end of each outcome period, they are replaced.
---------------------------------------------------------------------------
\14\ The FLEX Options owned by each of the Power Buffer Funds
will have the same terms (i.e., same strike price and expiration)
for all investors of a Power Buffer Fund within an outcome period.
See id.
---------------------------------------------------------------------------
C. Ultra Buffer Funds
The Ultra Buffer Funds are actively managed funds that seek to
provide investment returns that match the gains of the applicable
Reference Index, up to a maximized annual return (the ``Ultra Buffer
Cap Level''),\15\ while guarding against a decline in the Reference
Index of between 5% and 35%. Specifically, the Ultra Buffer Fund is
designed to provide the following results during the outcome period:
---------------------------------------------------------------------------
\15\ The Exchange states that the Ultra Buffer Cap Level will be
determined with respect to each Ultra Buffer Fund on the inception
date of the Ultra Buffer Fund and at the beginning of each outcome
period. See Amendment No. 2, supra note 5, at 12-13.
---------------------------------------------------------------------------
If the Reference Index appreciates over the outcome
period: The Ultra Buffer Fund is designed to provide a total return
that matches the total return of the applicable Reference Index, up to
the applicable Ultra Buffer Cap Level;
If the Reference Index decreases over the outcome period
by 5% or less: The Ultra Buffer Fund is designed to provide a total
return loss that is equal
[[Page 52154]]
to the percentage loss on the Reference Index;
If the Reference Index depreciates over the outcome period
by 5%-35%: The Ultra Buffer Fund is designed to provide a total return
loss of 5%; and
If the Reference Index depreciates over the outcome period
by more than 35%: The Ultra Buffer Fund is designed to provide a total
return loss that is 30% less than the percentage loss on the Reference
Index with a maximum loss of approximately 70%.\16\
---------------------------------------------------------------------------
\16\ The Exchange states that the Ultra Buffer Funds do not
offer any protection against declines in the Reference Index
exceeding 35% on an annualized basis. See id. at 14. Shareholders
will bear all Reference Index losses exceeding 35% on a one-to-one
basis. See id.
---------------------------------------------------------------------------
The Ultra Buffer Fund is designed to produce these outcomes by
including theoretically ``purchased'' and ``written'' FLEX Options
that, when layered upon each other, are designed to buffer against
losses of the applicable Reference Index and cap the level of possible
gains.
Under Normal Market Conditions, each Ultra Buffer Fund will attempt
to achieve its investment objective by taking positions that provide
performance exposure that match the gains of the applicable Reference
Index. Each Ultra Buffer Fund will invest primarily in exchange-traded
options contracts that reference either the Reference Index or ETFs
that track the Reference Index.\17\ Any FLEX Options written by a Ultra
Buffer Fund that create an obligation to sell or buy an asset will be
offset with a position in FLEX Options purchased by the Ultra Buffer
Fund to create the right to buy or sell the same asset such that the
Ultra Buffer Fund will always be in a net long position. As the FLEX
Options mature at the end of each outcome period, they are replaced.
---------------------------------------------------------------------------
\17\ The FLEX Options owned by each of the Ultra Buffer Funds
will have the same terms (i.e., same strike price and expiration)
for all investors of an Ultra Buffer Fund within an outcome period.
See id. at 15.
---------------------------------------------------------------------------
D. Investment Methodology for the Funds
As mentioned above, under Normal Market Conditions, each Fund would
seek to achieve its respective investment objective by investing
primarily in exchange-traded options contracts that reference either
the Reference Index or ETFs that track the Reference Index. Each of the
Funds might invest its net assets (in the aggregate) in other
investments which the Adviser or Sub-Adviser believes would help each
Fund meet its investment objective and that would be disclosed at the
end of each trading day (``Other Assets'').\18\
---------------------------------------------------------------------------
\18\ Other Assets include only cash or cash equivalents, as
defined in BZX Rule 14.11(i)(4)(C)(iii), and standardized options
contracts listed on a U.S. securities exchange that reference either
the Reference Index or that reference ETFs that track the Reference
Index (``Reference ETFs''). As defined in BZX 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.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\19\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment Nos. 2 and 3, is
consistent with Section 6(b)(5) of the Act,\20\ which requires, among
other things, that the Exchange's rules be designed to promote just and
equitable principles of trade, 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. The
Commission also finds that the proposal to list and trade the Shares on
the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\21\ which sets forth Congress' finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers and investors of information with respect to
quotations for and transactions in securities.
---------------------------------------------------------------------------
\19\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\20\ 15 U.S.C. 78f(b)(5).
\21\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------
According to the Exchange, 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.\22\ 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.\23\
In addition, price information about cash equivalents will be 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.\24\
---------------------------------------------------------------------------
\22\ See Amendment No. 2, supra note 5, at 21.
\23\ See id.
\24\ See id.
---------------------------------------------------------------------------
The Commission also believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. Under BZX Rule 14.11(i)(4)(B)(iv), if the Exchange becomes
aware that the Net Asset Value (``NAV'') or the Disclosed Portfolio is
not disseminated to all market participants at the same time, the
Exchange is required to halt trading in such series of Managed Fund
Shares. In addition, the Exchange represents that if the Funds or the
Shares are not in compliance with the applicable listing requirements
for Managed Funds Shares under BZX Rule 14.11(i), the Exchange will
commence delisting procedures under BZX Rule 14.12 (Failure to Meet
Listing Standards).\25\ The Exchange also states that it has a general
policy prohibiting the distribution of material, non-public information
by its employees.\26\ Further, the Trust has represented that it will
provide and maintain a publicly available tool on its website that will
provide existing and prospective Fund shareholders with certain
information for each of the Funds including, among other things,
current NAV, start and end dates of the current outcome period, and the
remaining buffer available for a shareholder purchasing Shares at the
current NAV or the amount of losses that a shareholder purchasing
Shares at the current NAV would incur before benefitting from the
protection of the buffer.\27\
---------------------------------------------------------------------------
\25\ See id. at 25.
\26\ See id.
\27\ See id. at 22.
---------------------------------------------------------------------------
The Shares do not qualify for generic listing because the Funds
will not satisfy the requirement of BZX Rule 14.11(i)(4)(C)(iv)(b) that
the aggregate gross notional value of listed derivatives based on any
five or fewer underlying reference assets shall not exceed 65% of
[[Page 52155]]
the weight of the portfolio and the aggregate gross notional value of
listed derivatives based on any single underlying reference asset not
exceed 30% of the weight of the portfolio (including gross notional
exposures). Instead, the Funds will hold listed derivatives primarily
on a single reference asset, the Nasdaq-100 Index or the Russell 2000
Price Index.\28\ Despite the exposure of the listed derivatives to a
single reference asset, the Commission nevertheless believes that
certain representations by the Exchange help to mitigate concerns about
the prices of the Shares being susceptible to manipulation.
Specifically, the Exchange represents that the market for options
contracts for each Reference Index are liquid and derive their value
from actively traded Reference Index components. Additionally, all of
the options 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.\29\
---------------------------------------------------------------------------
\28\ The Funds also may invest in options overlying Reference
ETFs. See id. at 15. The Exchange states that each of the applicable
Reference Indexes meet the generic listing standards applicable to
indexes underlying series of Index Fund Shares listed on the
Exchange, which include diversity, liquidity, and market cap
requirements that are designed to ensure that an underlying index is
not susceptible to manipulation. See id. at 17, n.14.
\29\ For a list of the current members of ISG, see
www.isgportal.org.
---------------------------------------------------------------------------
Additionally, in support of this proposal, the Exchange represents
that:
(1) The Funds and the Shares will satisfy all of the requirements
applicable to Managed Fund Shares under BZX Rule 14.11(i), as well as
the Generic Listing Standards other than BZX Rule
14.11(i)(4)(C)(iv)(b).
(2) Trading in the Shares will be subject to the existing trading
surveillances administered by the Exchange, as well as cross-market
surveillances administered by FINRA, on behalf of the Exchange, which
are designed to detect violations of Exchange rules and applicable
federal securities laws.
(3) For initial and continued listing, the Funds will be in
compliance with Rule 10A-3 under the Act.\30\
---------------------------------------------------------------------------
\30\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(4) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.\31\
---------------------------------------------------------------------------
\31\ See Amendment No. 2, supra note 5, at 20.
---------------------------------------------------------------------------
This approval order is based on all of the Exchange's statements
and representations, including those set forth above and in Amendment
Nos. 2 and 3.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 2 and 3 thereto, is
consistent with Section 6(b)(5) of the Act \32\ and the rules and
regulations thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\33\ that the proposed rule change (SR-CboeBZX-2019-067), as
modified by Amendment Nos. 2 and 3, be, and it hereby is, approved.
---------------------------------------------------------------------------
\33\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
---------------------------------------------------------------------------
\34\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21246 Filed 9-30-19; 8:45 am]
BILLING CODE 8011-01-P