[Federal Register Volume 84, Number 198 (Friday, October 11, 2019)]
[Notices]
[Pages 54935-54941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22253]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87243; File No. SR-CboeBZX-2019-084]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
to the Listing and Trading of Shares of the FT Cboe Vest U.S. Equity
Buffer ETFs and the FT Cboe Vest U.S. Equity Deep Buffer ETFs Under the
First Trust Exchange-Traded Fund VIII
October 7, 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 September 23, 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 is filing with the Commission a proposed rule change
to list and trade shares of the FT Cboe Vest U.S. Equity Buffer ETFs
and the FT Cboe Vest U.S. Equity Deep Buffer ETFs under the First Trust
Exchange-Traded Fund VIII (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 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 twelve monthly FT Cboe Vest U.S. Equity Buffer ETFs (collectively,
the ``Buffer Funds'') and FT Cboe Vest U.S. Equity Deep Buffer ETFs
(collectively, the ``Deep Buffer Funds'') (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 actively managed. 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 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 a proposal previously approved by the
Commission \6\ and the descriptions of the portfolio or reference
assets are substantially similar to those included in the Original
Approval and do not raise any new issues that the Commission has not
previously contemplated. The only other notable differences between
this proposal and the Original Approval, which the Exchange believes
are non-substantive, are that: (i) The Original Approval approved the
listing and trading of three series of monthly funds, while this
proposal only proposes to list and trade two series of monthly funds;
(ii) the Deep Buffer Funds will provide a buffer against SPY losses
between 5% and 30% as compared to between 5% and 35% against S&P 500
Index losses in the Original Approval; and (iii) the investment
objective of the Funds is based on the returns (before fees, expenses,
and taxes) of SPY as compared to the S&P 500 Index in the Original
Approval.
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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).
\6\ See Securities Exchange Act Release No. 83679 (July 20,
2018), 83 FR 35505 (July 26, 2018) (SR-BatsBZX-2017-72) (the
``Original Approval''). The only substantive difference between this
proposal and the Original Approval is that this proposal would allow
the Funds to hold FLexible EXchange Options (``FLEX Options'') on
the SPDR S&P 500 ETF Trust (``SPY'') in addition to FLEX Options on
the S&P 500 Price Return Index (the ``S&P 500 Index''), while the
Original Approval only allowed for FLEX Options on the S&P 500
Index.
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The Shares will be offered by the Trust, which was organized as a
Massachusetts business trust on February 22, 2016. The Trust is
registered with the Commission as an investment company and has filed a
registration statement on Form N-1A (``Registration Statement'') with
the Commission on behalf of the August and November Funds.\7\ Each Fund
[[Page 54936]]
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\ First Trust Advisors L.P. (the ``Adviser'') is the
investment adviser to the Funds. Cboe Vest Financial LLC is the sub-
adviser (the ``Sub-Adviser'') to the Funds. 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, but both are currently affiliated with the
same broker-dealer and have implemented and will maintain ``fire
walls'' with respect to such broker-dealer regarding access to
information concerning the composition and/or changes to a Fund's
portfolio. 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.
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\7\ See Registration Statement on Form N-1A for the Trust (File
Nos. 333-210186 and 811-23147). The descriptions 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.
28468 (October 27, 2008) (File No. 812-13477).
\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 (before fees, expenses, and taxes) that match those of SPY over
a period of approximately one year, while providing a level of
protection from SPY losses. The Funds are each actively managed funds
that employ a ``target outcome strategy'' that:
(1) For the Buffer Funds, seeks to provide investors with returns
(before fees, expenses, and taxes) that match those of SPY, up to a
pre-determined upside cap (as specified both (i) before fees, expenses,
and taxes, and (ii) after fees and expenses) (the ``Buffer Cap
Level''), while providing a buffer against the first 10% (before fees,
expenses, and taxes) of SPY losses (the ``Buffer Strategy'');
(2) for the Deep Buffer Funds, seeks to provide investors with
returns (before fees, expenses, and taxes) that match those of SPY, up
to a pre-determined upside cap (as specified both (i) before fees,
expenses, and taxes, and (ii) after fees and expenses) (the ``Deep
Buffer Cap Level''), while providing a buffer against SPY losses
between 5% and 30% (before fees, expenses, and taxes) (the ``Deep
Buffer Strategy'' and, collectively with the Buffer Strategy, the
``Strategies'').
Pursuant to the Strategies, each Fund will invest primarily in
exchange-traded options contracts that reference either the S&P 500
Index or ETFs \10\ that track the S&P 500 Index. Target 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. As such, the Exchange is proposing to list up to
twelve monthly series of each of the Buffer Funds and Deep Buffer
Funds, as named above.
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\10\ For purposes of this proposal, the term ETF means Portfolio
Depositary Receipts, Index Fund Shares, and Managed Fund Shares as
defined in Rule 14.11(b), (c), and (i), respectively, and their
equivalents on other national securities exchanges.
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The Exchange submits this proposal in order to allow each Fund to
hold listed derivatives, in particular FLEX Options on SPY and/or FLEX
Options on the S&P 500 Index (collectively, ``S&P 500 FLEX Options''),
in a manner that does not comply with Rule 14.11(i)(4)(C)(iv)(b).\11\
Otherwise, the Funds will meet all other listing requirements of the
Generic Listing Standards \12\ for Managed Fund Shares on an initial
and continued listing basis under Rule 14.11(i).
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\11\ 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
would not meet the generic listing standards because they would 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).
\12\ 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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FT Cboe Vest U.S. Equity Buffer ETFs
Under Normal Market Conditions,\13\ each Buffer Fund will attempt
to achieve its investment objective by employing a ``target outcome
strategy'' that will seek to provide investment returns (before fees,
expenses, and taxes) during the outcome period that
[[Page 54937]]
match the gains of SPY, up to the Buffer Cap Level, while shielding
investors from SPY losses of up to 10% (before fees, expenses, and
taxes). Pursuant to the Buffer Strategy, each Buffer Fund will invest
primarily in S&P 500 FLEX Options or standardized options contracts
listed on a U.S. exchange that reference either the S&P 500 Index or
ETFs that track the S&P 500 Index.
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\13\ 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.
In addition, for each Fund, on a temporary basis, including for
defensive purposes, during the initial invest-up period (i.e., the
six-week period following the commencement of trading of Shares on
the Exchange) and during periods of high cash inflows or outflows
(i.e., rolling periods of seven calendar days during which inflows
or outflows of cash, in the aggregate, exceed 10% of such Fund's net
assets as of the opening of business on the first day of such
periods), such Fund may depart from its principal investment
strategies; for example, it may hold a higher than normal proportion
of its assets in cash. During such periods, a Fund may not be able
to achieve its investment objective. A Fund may adopt a defensive
strategy when the Adviser and/or the Sub-Adviser believes securities
in which such Fund normally invests have elevated risks due to
market, political or economic factors and in other extraordinary
circumstances.
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The portfolio managers will invest in a portfolio of S&P 500 FLEX
Options that, when held for the specified period, seeks to produce
returns (before fees, expenses, and taxes) that, over the outcome
period, match the positive returns of SPY up to the Buffer Cap Level.
Pursuant to the Buffer Strategy, each Buffer Fund's portfolio managers
will seek to produce the following outcomes during the outcome period:
If SPY appreciates over the outcome period, the
combination of FLEX Options held by the Buffer Fund will provide upside
participation that is intended to match that of SPY, up to the Buffer
Cap Level;
If SPY decreases over the outcome period, the combination
of FLEX Options held by the Buffer Fund will provide a payoff at
expiration that is intended to compensate for losses experienced by SPY
(if any), in an amount not to exceed 10% before fees, expenses, and
taxes;
If SPY has decreased in value by more than 10%, the Buffer
Fund will experience all subsequent losses on a one-to-one basis.
The Buffer 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 Buffer Fund's portfolio have
terms that, when layered upon each other, are designed to buffer
against losses or match the gains of SPY. 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 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. That is, any obligations of a Buffer Fund created by its
writing of FLEX Options will be covered by offsetting positions in
other purchased FLEX Options. On the FLEX Options expiration date, each
Buffer Fund intends to sell the FLEX Options prior to their expiration
and use the resulting proceeds to purchase new FLEX Options for the
next outcome period. By purchasing new FLEX Options annually, each
Buffer Fund seeks to ensure that investments made in a given month
during the current year buffer against negative returns of SPY up to
pre-determined levels in that same month of the following year. The
Buffer Funds do not offer any protection against declines in SPY
exceeding 10% on an annualized basis. Shareholders will bear all SPY
losses exceeding 10% on a one-to-one basis.
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. 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 and is
determined based on the price of the FLEX Options acquired by the
Buffer Fund at that time.
FT Cboe Vest U.S. Equity Deep Buffer ETFs
Under Normal Market Conditions, each Deep Buffer Fund will attempt
to achieve its investment objective by employing a ``target outcome
strategy'' that will seek to provide investment returns (before fees,
expenses, and taxes) during the outcome period that match the gains of
SPY, up to the Deep Buffer Cap Level, while shielding investors from
SPY losses of between 5% and 30% (before fees, expenses, and taxes).
Pursuant to the Deep Buffer Strategy, each Deep Buffer Fund will invest
primarily in S&P 500 FLEX Options or standardized options contracts
listed on a U.S. exchange that reference either the S&P 500 Index or
ETFs that track the S&P 500 Index.
The portfolio managers will invest in a portfolio of S&P 500 FLEX
Options that, when held for the specified period, seeks to produce
returns (before fees, expenses, and taxes) that, over the outcome
period, match the returns of SPY up to the Deep Buffer Cap Level.
Pursuant to the Deep Buffer Strategy, each Deep Buffer Fund's portfolio
managers will seek to produce the following outcomes during the outcome
period:
If SPY appreciates over the outcome period, the
combination of FLEX Options held by the Deep Buffer Fund will provide
upside participation that is intended to match that of SPY, up to the
Deep Buffer Cap Level;
If SPY decreases over the outcome period by up to 5% or
less, the combination of FLEX Options held by the Deep Buffer Fund will
provide a payoff at expiration that is intended to match that of SPY up
to -5% over the outcome period before fees, expenses, and taxes;
If SPY decreases over the outcome period by more than 5%
but less than or equal to 30%, the combination of FLEX Options held by
the Deep Buffer Fund will provide a payoff at expiration that decreases
by the percentage decrease of SPY, up to -5% over the outcome period
before fees, expenses, and taxes; and
If SPY has decreased in value by more than 30%, the
combination of FLEX Options held by the Deep Buffer Fund will provide a
payoff at expiration that is 25% less than the percentage loss on SPY
with a maximum loss of approximately 75% over the outcome period before
fees, expenses, and taxes.
The Deep Buffer 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 Deep Buffer Fund's
portfolio have terms that, when layered upon each other, are designed
to buffer against losses or match the gains of SPY. 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 Deep Buffer Fund that create
an obligation to sell or buy an asset will be offset with a position in
FLEX Options purchased by the Deep Buffer Fund to create the right to
buy or sell the same asset such that the Deep Buffer Fund will always
be in a net long position. That is, any obligations of a Deep Buffer
Fund created by its writing of FLEX Options will be covered by
offsetting positions in other purchased FLEX Options. On the FLEX
Options expiration date, each Deep Buffer Fund intends to sell the FLEX
Options prior to their expiration and use the resulting proceeds to
purchase new FLEX Options for the next outcome period. By purchasing
new FLEX Options annually, each Deep Buffer Fund seeks to ensure that
investments made in a given month during the current year buffer
against negative returns of SPY up to pre-determined levels in that
same month of the following year. Other than the 25% protection against
declines from 5% to 30%, the Deep Buffer Funds do not offer any
protection against declines in SPY exceeding 30% on an annualized
basis. Shareholders will bear all SPY losses exceeding 30% on a one-to-
one basis.
The FLEX Options owned by each of the Deep Buffer Funds will have
the same terms (i.e., same strike price and
[[Page 54938]]
expiration) for all investors of a Deep Buffer Fund within an outcome
period. The Deep Buffer Cap Level will be determined with respect to
each Deep Buffer Fund on the inception date of the Deep Buffer Fund and
at the beginning of each outcome period and is determined based on the
price of the FLEX Options acquired by the Deep Buffer Fund at that
time.
Investment Methodology for the Funds
Under Normal Market Conditions, each Fund will invest substantially
all of its assets in U.S. exchange-listed S&P 500 FLEX Options. Each of
the Funds may invest its net assets (in the aggregate) in other
investments which the Adviser and/or the 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) \14\ 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.
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\14\ 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 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 August 2019, approximately 1.488 million options
contracts on the S&P 500 Index were traded per day, which is more than
$430 billion in notional volume traded on a daily basis. Similarly,
more than 75 million options contracts referencing SPY were traded in
August 2019, representing more than $105 billion in notional volume 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 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 and SPY
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,\15\ the Shares are less readily
susceptible to manipulation.
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\15\ 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
[[Page 54939]]
distribution of material, non-public information by its employees.
As noted above, options on the S&P 500 Index and SPY are among the
most liquid options in the world and derive their value from the
actively traded S&P 500 Index components. The contracts 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,
the market cap and liquidity of SPY, price and quote transparency, and
arbitrage opportunities.
The Exchange believes that the liquidity of the markets for SPY,
S&P 500 Index securities, options on the S&P 500 Index and SPY, 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,\16\ Net Asset Value,\17\
and the Intraday Indicative Value,\18\ suspension of trading or
removal,\19\ trading halts,\20\ surveillance,\21\ minimum price
variation for quoting and order entry,\22\ and the information
circular,\23\ as set forth in Exchange rules applicable to Managed Fund
Shares. Further, all statements or representations 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 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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\16\ See Rule 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
\17\ See Rule 14.11(i)(4)(A)(ii).
\18\ See Rule 14.11(i)(4)(B)(i).
\19\ See Rule 14.11(i)(4)(B)(iii).
\20\ See Rule 14.11(i)(4)(B)(iv).
\21\ See Rule 14.11(i)(2)(C).
\22\ See Rule 14.11(i)(2)(B).
\23\ 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 \24\ in general and Section 6(b)(5) of the Act \25\ 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).\26\ 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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\24\ 15 U.S.C. 78f.
\25\ 15 U.S.C. 78f(b)(5).
\26\ 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 and SPY
results in a well-established price discovery process that provides
meaningful guideposts for FLEX Option
[[Page 54940]]
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 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 and SPY are among the most
liquid options in the world and derive their value from the actively
traded S&P 500 Index components. 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, the market cap and liquidity
of SPY, price and quote transparency, and arbitrage opportunities.
The Exchange believes that the liquidity of the markets for S&P 500
Index securities, SPY, options on the S&P 500 Index and SPY, 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,\27\ Intraday Indicative
Value,\28\ suspension of trading or removal,\29\ trading halts,\30\
disclosure,\31\ and firewalls.\32\ 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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\27\ See Rule 14.11(i)(4)(B)(ii).
\28\ See Rule 14.11(i)(4)(B)(i).
\29\ See Rule 14.11(i)(4)(B)(iii).
\30\ See Rule 14.11(i)(4)(B)(iv).
\31\ See Rule 14.11(i)(6).
\32\ 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 substantive difference between this
proposal and the Original Approval is that this proposal would allow
the Funds to hold S&P 500 FLEX Options, while the Original Approval
only allowed for FLEX Options on the S&P 500 Index.\33\ As noted above,
there is significant liquidity in the components of the S&P 500 Index,
options on the S&P 500 Index, and options on SPY, and, as such,
allowing the Funds to hold FLEX Options referencing SPY raises no
additional substantive issues for the Commission to review as compared
to allowing the comparable funds from the Original Approval to hold
FLEX Options referencing the S&P 500 Index. 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.
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\33\ The Exchange also notes that the only other notable
differences between this proposal and the Original Approval, which
it believes are non-substantive, are that: (i) The Original Approval
approved the listing and trading of three series of monthly funds,
while this proposal only proposes to list and trade two series of
monthly funds; (ii) the Deep Buffer Funds provide a buffer against
SPY losses between 5% and 30% as compared to between 5% and 35%
against S&P 500 Index losses in the Original Approval; and (iii) the
investment objective of the Funds is based on the returns (before
fees, expenses, and taxes) of SPY as compared to the S&P 500 Index
in the Original Approval.
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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
[[Page 54941]]
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 \34\ and Rule 19b-
4(f)(6) thereunder.\35\
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\34\ 15 U.S.C. 78s(b)(3)(A).
\35\ 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 \36\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \37\ 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 believes that the proposal and its statements and
representations 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, as well as the descriptions of the portfolio or
reference assets are substantively identical to those statements and
representations included in the Original Approval. The Exchange
believes that there is significant liquidity in the components of the
S&P 500 Index, options on the S&P 500 Index, and options on SPY, and
that allowing the Funds to hold FLEX Options referencing SPY raises no
additional substantive issues for the Commission to review. Further,
the Exchange believes waiver of the operative delay will more quickly
facilitate the Adviser's ability to list the product on the Exchange,
which will 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.\38\
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\36\ 17 CFR 240.19b-4(f)(6).
\37\ 17 CFR 240.19b-4(f)(6)(iii).
\38\ 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 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-2019-084 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-2019-084.
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-2019-084,
and should be submitted on or before November 1, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
Jill M. Peterson,
Assistant Secretary.
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\39\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2019-22253 Filed 10-10-19; 8:45 am]
BILLING CODE 8011-01-P