[Federal Register Volume 84, Number 215 (Wednesday, November 6, 2019)]
[Notices]
[Pages 59849-59854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24188]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87434; File No. SR-NYSEArca-2019-12]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, To List and Trade
Shares of the iShares Commodity Curve Carry Strategy ETF Under NYSE
Arca Rule 8.600-E
I. Introduction
On March 1, 2019, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade shares (``Shares'') of the iShares Commodity Curve Carry
Strategy ETF, a series of the iShares U.S. ETF Trust. The proposed rule
change was published for comment in the Federal Register on March 20,
2019.\3\ On April 18, 2019, the Exchange filed Amendment No. 1 to the
proposed rule change, which replaced and superseded the proposed rule
change as originally filed.\4\ On May 1, 2019, pursuant to Section
19(b)(2) of the Act,\5\ the Commission designated a longer period
within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
approve or disapprove the proposed rule change.\6\ On June 18, 2019,
the Commission published Amendment No. 1 for notice and comment and
instituted proceedings under Section 19(b)(2)(B) of the Act \7\ to
determine whether to approve or disapprove the proposed rule change, as
modified by Amendment No. 1.\8\ On September 10, 2019, the Exchange
filed Amendment No. 2 to the proposed rule change, which replaced and
superseded the proposed rule
[[Page 59850]]
change, as modified by Amendment No. 1.\9\ On September 12, 2019, the
Commission designated a longer period for Commission action on the
proceedings to determine whether to approve or disapprove the proposed
rule change.\10\ The Commission has received no comment letters on the
proposal.
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\1\ 15 U.S.C.78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 85312 (March 14,
2019), 84 FR 10369.
\4\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2019-12/srnysearca201912-5393880-184151.pdf.
\5\ 15 U.S.C. 78s(b)(2).
\6\ See Securities Exchange Act Release No. 85758, 84 FR 19978
(May 7, 2019). The Commission designated June 18, 2019 as the date
by which the Commission would approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to approve or disapprove the proposed rule change.
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ See Securities Exchange Act Release No. 86136, 84 FR 29555
(June 24, 2019).
\9\ In Amendment No. 2, the Exchange: (1) Modified its
description of the Reference Benchmark (as defined below); (2)
modified the description and definition of Short-Term Fixed Income
Securities (as defined below); (3) limited the Fund's holdings in
non-convertible corporate debt securities to 30% of the weight of
Fund's collective holdings in cash equivalents and Short-Term Fixed
Income Securities; and (4) made other technical and conforming
changes. Amendment No. 2 is available at: https://www.sec.gov/comments/sr-nysearca-2019-12/srnysearca201912-6099440-191987.pdf.
\10\ See Securities Exchange Act Release No. 86945, 84 FR 49158
(September 18, 2019). The Commission extended the date by which the
Commission shall approve or disapprove the proposed rule change to
November 15, 2019.
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The Commission is publishing this notice to solicit comments on the
proposed rule change, as modified by Amendment No. 2, from interested
persons and is approving the proposed rule change, as modified by
Amendment No. 2, on an accelerated basis.
II. Summary of the Exchange's Description of the Proposal, as Modified
by Amendment No. 2 11
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\11\ For a complete description of the Exchange's proposal, as
amended, see Amendment No. 2, supra note 9.
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The Exchange proposes to list and trade the Shares under NYSE Arca
Rule 8.600-E, which governs the listing and trading of Managed Fund
Shares on the Exchange. The Shares will be offered by iShares U.S. ETF
Trust (``Trust''), which is registered with the Commission as an open-
end management investment company.\12\ The Fund is a series of the
Trust.
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\12\ According to the Exchange, on December 3, 2018, the Trust
filed with the Commission its registration statement on Form N-1A
under the Securities Act of 1933 and under the Investment Company
Act of 1940 (``1940 Act'') relating to the Fund (File Nos. 333-
179904 and 811-22649) (``Registration Statement''). In addition, the
Exchange states that the Commission has issued an order upon which
the Trust may rely, granting certain exemptive relief under the 1940
Act. See Investment Company Act Release No. 29571 (January 24, 2011)
(File No. 812-13601).
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BlackRock Fund Advisors (``Adviser'') will be the investment
adviser for the Fund.\13\ BlackRock Investments, LLC will be the
distributor for the Fund's Shares. State Street Bank and Trust Company
will serve as the administrator, custodian and transfer agent for the
Fund.
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\13\ According to the Exchange, the Adviser is not registered as
a broker-dealer but is affiliated with a broker-dealer and has
implemented and will maintain a fire wall with respect to its
broker-dealer affiliate regarding access to information concerning
the composition and/or changes to the portfolio. In the event (a)
the 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 its broker-dealer affiliate
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. The Exchange also represents
that the Adviser and its related personnel are subject to the
provisions of Rule 204A-1 under the Investment Advisers Act of 1940
relating to codes of ethics.
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A. Fund Investments
According to the Exchange, the investment objective of the Fund
will be to seek to provide exposure, on a total return basis, to a
group of commodities with higher carry than a broad universe of
commodities. The Fund will be actively managed and will seek to achieve
its investment objective in part \14\ by, under normal market
conditions,\15\ investing in listed and over-the-counter (``OTC'')
swaps, including total return swaps referencing the ICE BofAML
Commodity Carry Total Return Index (``Reference Benchmark'').\16\ The
Fund is expected to establish new swaps contracts on an ongoing basis
and replace expiring contracts.\17\ Swaps subsequently entered into by
the Fund may have terms that differ from the swaps the Fund previously
held. The Fund expects generally to pay a fixed payment rate and
certain swap related fees to the swap counterparty and receive the
total return of the Reference Benchmark, including, in the event of
negative performance by the Reference Benchmark, negative return (i.e.,
a payment from the Fund to the swap counterparty). In seeking total
return, the Fund additionally will aim to generate interest income and
capital appreciation through a cash management strategy consisting
primarily of cash, cash equivalents,\18\ and fixed income securities
other than cash equivalents, as described below.
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\14\ The Fund's investment objective will also be achieved by
investing in cash, cash equivalents, Commodity Investments, Fixed
Income Securities and Short-Term Fixed Income Securities (each as
defined or described below).
\15\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5).
\16\ Although the Fund may hold swaps on the Reference
Benchmark, or direct investments in the same futures contracts as
those included in the Reference Benchmark, the Fund is not obligated
to invest in any futures contracts included in, and does not seek to
replicate the performance of, the Reference Benchmark.
\17\ Swaps on the Reference Benchmark are included in
``Commodity Investments'' as defined below.
\18\ Cash equivalents are the short-term instruments enumerated
in Commentary .01(c) to NYSE Arca Rule 8.600-E.
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The Reference Benchmark is currently composed of 18 futures
contracts on physical agricultural, energy, precious metals, and
industrial metals commodities listed on U.S. regulated futures
exchanges or non-U.S. futures exchanges with which the Exchange has in
place a comprehensive surveillance sharing agreement (``CSSA'').\19\
The Fund expects to obtain a substantial amount of its exposure to the
carry strategy by entering into total return swaps that pay the returns
of the commodity futures contracts referenced in the Reference
Benchmark. The Reference Benchmark includes the 10 futures contracts on
commodities having the highest degree of backwardation or lowest degree
of contango \20\ among the Reference Benchmark universe.\21\
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\19\ The commodity futures included in the Reference Benchmark
are traded on the CME Group, ICE Futures U.S., ICE Futures Europe,
Inc. and the London Metal Exchange (``LME''). ICE Futures U.S., ICE
Futures Europe, Inc., and CME are members of the Intermarket
Surveillance Group (``ISG''). The Exchange represents that it has in
place a CSSA with the LME.
\20\ According to the Exchange, if the price for the new futures
contract is less than the price of the expiring contract, then the
market for the commodity is said to be in ``backwardation,'' and the
term ``contango'' is used to describe a market in which the price
for a new futures contract is more than the price of the expiring
contract.
\21\ The Reference Benchmark universe can have a minimum of 12
and a maximum of 25 contracts on physical agricultural, energy,
precious metals, and industrial metals commodities. Reference
Benchmark universe constituent futures contracts and weights are set
annually and the weights are rebalanced monthly, taking into account
the liquidity of the constituent futures contracts and the value of
the global production of each underlying commodity.
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The Fund (through its Subsidiary (as defined below)) may hold the
following listed derivative instruments: futures, options, and swaps on
the Reference Benchmark or commodities (which commodities are from the
same sectors as those included in the Reference Benchmark); currencies;
U.S. and non-U.S. equity securities; fixed income securities (as
defined in Commentary .01(b) to NYSE Arca Rule 8.600-E, but excluding
Short-Term Fixed Income Securities (as defined below)); interest rates;
U.S. Treasuries; or a basket or index of any of the foregoing
(collectively, ``Listed Derivatives''). Listed Derivatives will comply
with the criteria in Commentary .01(d) of NYSE Arca Rule 8.600-E.
The Fund (through its Subsidiary) may hold the following OTC
derivative instruments: Forwards, options, and swaps on the Reference
Benchmark or commodities (which commodities are
[[Page 59851]]
from the same sectors as those included in the Reference Benchmark);
currencies; U.S. and non-U.S. equity securities; fixed income
securities (as defined in Commentary .01(b) to NYSE Arca Rule 8.600-E,
but excluding Short-Term Fixed Income Securities); interest rates; or a
basket or index of any of the foregoing (collectively, ``OTC
Derivatives,'' \22\ and together with Listed Derivatives, ``Commodity
Investments'').\23\
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\22\ Examples of OTC Derivatives the Fund may invest in include
swaps on commodity futures contracts similar to those found in the
Reference Benchmark and options that correlate to the investment
returns of commodities without investing directly in physical
commodities.
\23\ As discussed below under ``Application of Generic Listing
Requirements,'' the Fund's and the Subsidiary's holdings in OTC
Derivatives will not comply with the criteria in Commentary .01(e)
of NYSE Arca Rule 8.600-E.
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The Fund may hold cash, cash equivalents, and fixed income
securities other than cash equivalents, as described further below.
Specifically, the Fund may invest in Short-Term Fixed Income
Securities (as defined below) other than cash equivalents on an ongoing
basis for cash management purposes.\24\ Short-Term Fixed Income
Securities will have a maturity of no longer than 397 days and include
only the following: (i) Money market instruments; (ii) obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities (including government-sponsored enterprises); (iii)
negotiable certificates of deposit, bankers' acceptances, fixed-time
deposits and other obligations of U.S. and non-U.S. banks (including
non-U.S. branches) and similar institutions; (iv) commercial paper; (v)
non-convertible corporate debt securities (e.g., bonds and debentures);
(vi) repurchase agreements; and (vii) sovereign debt obligations of
non-U.S. countries excluding emerging market countries \25\ (``Non-U.S.
Sovereign Debt'') (collectively, ``Short-Term Fixed Income
Securities''). Any of these securities may be purchased on a current or
forward-settled basis.\26\
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\24\ As discussed under ``Application of Generic Listing
Requirements'' below, investments in Short-Term Fixed Income
Securities will not comply with the requirements of Commentary
.01(b)(1)-(4) to NYSE Arca Rule 8.600-E.
\25\ According to the Exchange, an ``emerging market country''
is a country that, at the time the Fund invests in the related fixed
income instruments, is classified as an emerging or developing
economy by any supranational organization such as the International
Bank of Reconstruction and Development or any affiliate thereof or
the United Nations, or related entities, or is considered an
emerging market country for purposes of constructing a major
emerging market securities index.
\26\ To the extent that the Fund and the Subsidiary invest in
cash and Short-Term Fixed Income Securities that are cash
equivalents (i.e., that have maturities of less than 3 months) as
specified in Commentary .01(c) to NYSE Arca Rule 8.600-E, such
investments will comply with Commentary .01(c) and may be held
without limitation. Non-convertible corporate debt securities and
Non-U.S. Sovereign Debt are not included as cash equivalents in
Commentary .01(c).
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The Fund also may invest in fixed income securities as defined in
Commentary .01(b) to NYSE Arca Rule 8.600-E,\27\ other than cash
equivalents and Short-Term Fixed Income Securities, with remaining
maturities longer than 397 days (``Fixed Income Securities''). Such
Fixed Income Securities will comply with requirements of Commentary
.01(b) to NYSE Arca Rule 8.600-E.\28\
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\27\ Commentary .01(b) to NYSE Arca Rule 8.600-E defines fixed
income securities as debt securities that are notes, bonds,
debentures or evidence of indebtedness that include, but are not
limited to, U.S. Department of Treasury securities (``Treasury
Securities''), government-sponsored entity securities (``GSEs''),
municipal securities, trust preferred securities, supranational debt
and debt of a foreign country or a subdivision thereof, investment
grade and high yield corporate debt, bank loans, mortgage and asset
backed securities, and commercial paper.
\28\ Among the Fixed Income Securities in which the Fund may
invest are commodity-linked notes.
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The Fund may also hold ETNs \29\ and ETFs.\30\
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\29\ ETNs are securities as described in NYSE Arca Rule 5.2-
E(j)(6) (Equity Index-Linked Securities, Commodity-Linked
Securities, Currency-Linked Securities, Fixed Income Index-Linked
Securities, Futures-Linked Securities and Multifactor Index-Linked
Securities). All ETNs will be listed and traded in the U.S. on a
national securities exchange. The Fund will not invest in inverse or
leveraged (e.g., 2X, -2X, 3X or -3X) ETNs.
\30\ For purposes of the filing, the term ``ETFs'' includes
Investment Company Units (as described in NYSE Arca Rule 5.2-
E(j)(3)); Portfolio Depositary Receipts (as described in NYSE Arca
Rule 8.100-E); and Managed Fund Shares (as described in NYSE Arca
Rule 8.600-E). All ETFs will be listed and traded in the U.S. on a
national securities exchange. The Fund will not invest in inverse or
leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
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The Fund's exposure to Commodity Investments is obtained by
investing through a wholly-owned subsidiary organized in the Cayman
Islands (``Subsidiary'').\31\ The Fund controls the Subsidiary, and the
Subsidiary is advised by the Adviser and has the same investment
objective as the Fund. In compliance with the requirements of Sub-
Chapter M of the Internal Revenue Code of 1986, the Fund may invest up
to 25% of its total assets in the Subsidiary. The Subsidiary is not an
investment company registered under the 1940 Act and is a company
organized under the laws of the Cayman Islands. The Trust's Board of
Trustees (``Board'') has oversight responsibility for the investment
activities of the Fund, including its investment in the Subsidiary, and
the Fund's role as sole shareholder of the Subsidiary.
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\31\ The Exchange represents that all statements related to the
Fund's investments and restrictions are applicable to the Fund and
Subsidiary collectively.
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The Fund's Commodity Investments held in the Subsidiary are
intended to provide the Fund with exposure to broad commodities. The
Subsidiary may hold cash and cash equivalents.
B. Investment Restrictions
The Fund and the Subsidiary will not invest in securities or other
financial instruments that have not been described in the proposed rule
change.
The Fund's holdings in non-convertible corporate debt securities
shall not exceed 30% of the weight of Fund's holdings in cash
equivalents and Short-Term Fixed Income Securities, collectively.
The Fund's investments, including derivatives, will be consistent
with the Fund's investment objective and will not be used to enhance
leverage (although certain derivatives and other investments may result
in leverage). That is, the Fund's investments will not be used to seek
performance that is the multiple or inverse multiple (e.g., 2X or -3X)
of the Reference Benchmark.
C. Use of Derivatives by the Fund
Investments in derivative instruments will be made in accordance
with the Fund's investment objective and policies. To limit the
potential risk associated with such transactions, the Fund will enter
into offsetting transactions or segregate or ``earmark'' assets
determined to be liquid by the Adviser in accordance with procedures
established by the Board. In addition, the Fund has included
appropriate risk disclosure in its offering documents, including
leveraging risk. Leveraging risk is the risk that certain transactions
of the Fund, including the Fund's use of derivatives, may give rise to
leverage, causing the Fund to be more volatile than if it had not been
leveraged.
According to the Exchange, the Adviser believes there will be
minimal, if any, impact to the arbitrage mechanism as a result of the
Fund's use of derivatives. Additionally, the Adviser understands that
market makers and participants should be able to value derivatives as
long as the positions are disclosed with relevant information. The
Adviser further believes that the price at which Shares of the Fund
trade will continue to be disciplined by arbitrage opportunities
created by the ability to purchase or redeem Shares of the Fund at
their net asset value
[[Page 59852]]
(``NAV''), which should ensure that Shares of the Fund will not trade
at a material discount or premium in relation to their NAV.
The Exchange states that the Adviser does not believe there will be
any significant impacts to the settlement or operational aspects of the
Fund's arbitrage mechanism due to the use of derivatives.
D. Application of Generic Listing Requirements
The Exchange states that the portfolio for the Fund will not meet
all of the ``generic'' listing requirements of Commentary .01 to NYSE
Arca Rule 8.600-E applicable to the listing of Managed Fund Shares. The
Exchange represents that, other than Commentary .01(b)(1)-(4) (with
respect to Short-Term Fixed Income Securities) and .01(e) (with respect
to OTC Derivatives) to NYSE Arca Rule 8.600-E, the Fund's portfolio
will meet all other requirements of NYSE Arca Rule 8.600-E.
According to the Exchange, the Fund's investments in Short-Term
Fixed Income Securities will not comply with the requirements set forth
in Commentary .01(b)(1)-(4) to NYSE Arca Rule 8.600-E.\32\ The Exchange
states that while the requirements set forth in Commentary .01(b)(1)-
(4) include rules intended to ensure that the fixed income securities
included in a fund's portfolio are sufficiently large and diverse, and
have sufficient publicly available information regarding the issuances,
the Exchange asserts that any concerns related to non-compliance are
mitigated by the types of instruments that the Fund would hold. The
Exchange represents that the Fund's Short-Term Fixed Income Securities
primarily would include those instruments that are included in the
definition of cash and cash equivalents,\33\ but are not considered
cash and cash equivalents because they have maturities of three months
or longer. The Exchange also states that all Short-Term Fixed Income
Securities, including non-convertible corporate debt securities \34\
and Non-U.S. Sovereign Debt (which are not cash equivalents as
enumerated in Commentary .01(c) to NYSE Arca Rule 8.600-E), are less
susceptible than other types of fixed income instruments both to price
manipulation and volatility and that the holdings as proposed are
generally consistent with the policy concerns which Commentary
.01(b)(1)-(4) is intended to address. According to the Exchange,
because the Short-Term Fixed Income Securities will consist of high-
quality fixed income securities described above, the policy concerns
that Commentary .01(b)(1)-(4) are intended to address are otherwise
mitigated and that the Fund should be permitted to hold these
securities in a manner that may not comply with Commentary .01(b)(1)-
(4).
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\32\ Commentary .01(b)(1)-(4) to NYSE Arca Rule 8.600-E requires
that the components of the fixed income portion of a portfolio meet
the following criteria initially and on a continuing basis: (1)
Components that in the aggregate account for at least 75% of the
fixed income weight of the portfolio each shall have a minimum
original principal amount outstanding of $100 million or more; (2)
no component fixed-income security (excluding Treasury Securities
and GSEs) shall represent more than 30% of the fixed income weight
of the portfolio, and the five most heavily weighted component fixed
income securities in the portfolio (excluding Treasury Securities
and GSEs) shall not in the aggregate account for more than 65% of
the fixed income weight of the portfolio; (3) an underlying
portfolio (excluding exempted securities) that includes fixed income
securities shall include a minimum of 13 non-affiliated issuers,
provided, however, that there shall be no minimum number of non-
affiliated issuers required for fixed income securities if at least
70% of the weight of the portfolio consists of equity securities as
described in Commentary .01(a); and (4) component securities that in
aggregate account for at least 90% of the fixed income weight of the
portfolio must be either (a) from issuers that are required to file
reports pursuant to Sections 13 and 15(d) of the Act; (b) from
issuers that have a worldwide market value of its outstanding common
equity held by non-affiliates of $700 million or more; (c) from
issuers that have outstanding securities that are notes, bonds
debentures, or evidence of indebtedness having a total remaining
principal amount of at least $1 billion; (d) exempted securities as
defined in Section 3(a)(12) of the Act; or (e) from issuers that are
a government of a foreign country or a political subdivision of a
foreign country.
\33\ See supra note 18.
\34\ The Exchange notes that the Fund's holdings in non-
convertible corporate debt securities will not exceed 30% of the
weight of the Fund's holdings in cash equivalents and Short-Term
Fixed Income Securities, collectively.
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The Exchange states that the Fund's portfolio with respect to OTC
Derivatives will not comply with the requirements set forth in
Commentary .01(e) to NYSE Arca Rule 8.600-E.\35\ Specifically, the
Exchange states that up to 60% of the Fund's assets (calculated as the
aggregate gross notional value) may be invested in OTC Derivatives. The
Exchange states that the Adviser believes that it is important to
provide the Fund with additional flexibility to manage risk associated
with its investments and, depending on market conditions, it may be
critical that the Fund be able to utilize available OTC Derivatives to
efficiently gain exposure to the multiple commodities markets that
underlie the Reference Benchmark, as well as commodity futures
contracts similar to those found in the Reference Benchmark. The
Exchange states that OTC Derivatives can be tailored to provide
specific exposure to the Fund's Reference Benchmark, as well as
commodity futures contracts similar to those found in the Reference
Benchmark, allowing the Fund to more efficiently meet its investment
objective.\36\ The Exchange further asserts that, if the Fund were to
gain commodity exposure exclusively through the use of listed futures,
the Fund's holdings in Listed Derivatives would be subject to position
limits and accountability levels established by an exchange, and such
limitations would restrict the Fund's ability to gain efficient
exposure to the commodities in the Reference Benchmark, or futures
contracts similar to those found in the Reference Benchmark, thereby
impeding the Fund's ability to satisfy its investment objective.
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\35\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that,
on an initial and continuing basis, no more than 20% of the assets
in the portfolio may be invested in OTC derivatives (calculated as
the aggregate gross notional value of the OTC derivatives).
\36\ As an example, the Exchange states that the Reference
Benchmark includes 10 futures contracts, which may not be
sufficiently liquid and would not provide the commodity exposure the
Fund requires to meet its investment objective if the Fund were to
invest in the futures directly. The Exchange states that a total
return swap can be structured to provide exposure to the same
futures contracts as exist in the Reference Benchmark, as well as
commodity futures contracts similar to those found in the Reference
Benchmark, while providing sufficient efficiency to allow the Fund
to more easily meet its investment objective.
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The Exchange represents that the Adviser and its affiliates
actively monitor counterparty credit risk exposure (including for OTC
derivatives) and evaluate counterparty credit quality on a continuous
basis. With respect to the Fund's (and the Subsidiary's) investments in
derivatives on the Reference Benchmark or commodities (which
commodities are from the same sectors as those included in the
Reference Benchmark), the Exchange states that the Reference Benchmark
provides broad-based exposure to commodities as an asset class, as it
includes 10 futures contracts from a universe currently composed of 18
physical commodities in agricultural, energy, livestock, precious
metals, and industrial metals. In addition, the Exchange states that
the Adviser represents that futures on all commodities in the Reference
Benchmark are traded on futures exchanges that are members of the ISG
or with which the Exchange has in place a CSSA.
III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change, as
[[Page 59853]]
modified by Amendment No. 2, is consistent with the Act and the rules
and regulations thereunder applicable to a national securities
exchange.\37\ In particular, the Commission finds that the proposed
rule change, as modified by Amendment No. 2, is consistent with Section
6(b)(5) of the Act,\38\ which requires (among other things) that the
Exchange's rules be designed to prevent fraudulent and manipulative
acts and practices, 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.
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\37\ 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).
\38\ 15 U.S.C. 78f(b)(5).
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According to the Exchange, other than Commentary .01(b)(1)-(4) with
respect to Short-Term Fixed Income Securities and Commentary .01(e)
with respect to OTC Derivatives, the Fund's portfolio will meet all
other requirements of Commentary .01 to NYSE Arca Rule 8.600-E, and the
Shares of the Fund will conform to the initial and continued listing
criteria under NYSE Arca Rule 8.600-E.
The Fund's investments in Short-Term Fixed Income Securities will
not meet the requirements for fixed income securities set forth in
Commentary .01(b)(1)-(4) to NYSE Arca Rule 8.600-E.\39\ The Commission,
however, believes that the limited nature of the Fund's investment in,
and certain restrictions on, the Short Term Fixed Income Securities
helps to mitigate concerns regarding the Shares being susceptible to
manipulation because of the Fund's investment in the Short Term Fixed
Income Securities.\40\ Specifically, the Exchange states that Short-
Term Fixed Income Securities primarily will include instruments that
are included in the definition of cash equivalents,\41\ but are not
considered cash equivalents because they have maturities of three
months or longer. As proposed, the Fund's investments in Short-Term
Fixed Income Securities will also include non-convertible corporate
debt securities, but such holdings would be limited to 30% of the
weight of Fund's holdings in cash equivalents and Short-Term Fixed
Income Securities, collectively. In addition, the Fund's investments in
Short-Term Fixed Income Securities would include sovereign debt, but
would exclude sovereign debt obligations of emerging market countries.
Further, the Fund will invest in Short Term Fixed Income Securities for
cash management purposes only, and the Short Term Fixed Income
Securities in which the Fund may invest will have maturities of no
longer than 397 days.\42\
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\39\ See supra note 32.
\40\ The Commission notes that all the fixed income securities
the Fund may invest in other than those included in Short-Term Fixed
Income Securities and cash equivalents will comply with the
requirements of Commentary .01(b) to NYSE Arca Rule 8.600-E, and the
cash equivalents the Fund may invest in will comply with the
requirements of Commentary .01(c). See supra Section II.A.
\41\ See supra note 18.
\42\ See supra Section II.A.
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In addition, the Fund's investments in OTC Derivatives will not
comply with Commentary .01(e) to NYSE Arca Rule 8.600-E, which requires
that no more than 20% of the assets of the Fund be invested in OTC
derivatives (calculated as the aggregate gross notional value of such
OTC derivatives). In the alternative, the Exchange proposes that up to
60% of the Fund's assets (calculated as the aggregate gross notional
value) may be invested in OTC Derivatives.\43\ The Exchange states that
it may be necessary for the Fund to utilize OTC Derivatives in order to
more efficiently hedge its portfolio or to meet its investment
objective.\44\
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\43\ The Exchange represents that the Adviser and its affiliates
actively monitor counterparty credit risk exposure for OTC
derivatives and evaluate counterparty credit quality on a continuous
basis. See supra Section II.D. Moreover, the Exchange states that
investments in derivative instruments will be made in accordance
with the Fund's investment objective and policies. To limit the
potential risk associated with such transactions, the Fund will
enter into offsetting transactions or segregate or ``earmark''
assets determined to be liquid by the Adviser in accordance with
procedures established by the Board. In addition, the Fund has
included appropriate risk disclosure in its offering documents,
including leveraging risk. See supra Section II.C.
\44\ See supra Section II.D.
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The Commission, however, believes that certain factors help to
mitigate concerns that the Fund's investment in OTC Derivatives will
make the Shares more susceptible to manipulation. Specifically, with
respect to OTC Derivatives on the Reference Benchmark (or on the
commodities underlying the futures contracts included in the Reference
Benchmark), the Exchange represents that the Reference Benchmark
includes 10 futures contracts from a universe currently composed of 18
physical commodities in agriculture, energy, livestock, precious
metals, and industrial metals, and that futures on all of the
commodities in the Reference Benchmark are traded on futures exchanges
that are members of the ISG or with which the Exchange has in place a
CSSA. Moreover, on a daily basis, the Fund will be required to disclose
on its website the information regarding the Disclosed Portfolio
required under NYSE Arca Rule 8.600-E(c)(2), to the extent
applicable,\45\ and the website information will be publicly available
at no charge.\46\
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\45\ NYSE Arca Rule 8.600-E(c)(2) requires that the website for
each series of Managed Fund Shares disclose the following
information regarding the Disclosed Portfolio, to the extent
applicable: (A) Ticker symbol; (B) CUSIP or other identifier; (C)
description of the holding; (D) with respect to holdings in
derivatives, the identity of the security, commodity, index or other
asset upon which the derivative is based; (E) the strike price for
any options; (F) the quantity of each security or other asset held
as measured by (i) par value, (ii) notional value, (iii) number of
shares, (iv) number of contracts, and (v) number of units; (G)
maturity date; (H) coupon rate; (I) effective date; (J) market
value; and (K) percentage weighting of the holding in the portfolio.
\46\ See Amendment No. 2, supra note 9, at 17.
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The Exchange represents that all statements and representations
made in the filing regarding: (1) The description of the portfolio
holdings or reference assets; (2) limitations on portfolio holdings or
reference assets; or (3) the applicability of Exchange listing rules
specified in the rule filing constitute continued listing requirements
for listing the Shares on the Exchange. In addition, the Exchange
represents that the issuer must notify the Exchange of any failure by
the Fund to comply with the continued listing requirements and,
pursuant to its obligations under Section 19(g)(1) of the Act, the
Exchange will monitor \47\ for compliance with the continued listing
requirements. If the Fund is not in compliance with the applicable
listing requirements, the Exchange will commence delisting procedures
under NYSE Arca Rule 5.5-E(m).
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\47\ The Commission notes that certain proposals for the listing
and trading of exchange-traded products include a representation
that the exchange will ``surveil'' for compliance with the continued
listing requirements. See, e.g., Securities Exchange Act Release No.
77499 (April 1, 2016), 81 FR 20428, 20432 (April 7, 2016) (SR-BATS-
2016-04). In the context of this representation, it is the
Commission's view that ``monitor'' and ``surveil'' both mean ongoing
oversight of compliance with the continued listing requirements.
Therefore, the Commission does not view ``monitor'' as a more or
less stringent obligation than ``surveil'' with respect to the
continued listing requirements.
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For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 2, is consistent with Section
6(b)(5) of the Act \48\ and the rules and regulations thereunder
applicable to a national securities exchange.
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\48\ 15 U.S.C. 78f(b)(5).
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[[Page 59854]]
IV. Solicitation of Comments on Amendment No. 2 to the Proposed Rule
Change
Interested persons are invited to submit written views, data, and
arguments concerning whether Amendment No. 2 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-NYSEArca-2019-12 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2019-12. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2019-12 and should be submitted
on or before November 27, 2019.
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 2, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
2 in the Federal Register. The Commission notes that Amendment No. 2
clarified the proposed rule change, including the permitted investments
of the Fund. Such changes did not raise any new issues and assisted the
Commission in evaluating whether the Exchange's proposal to list and
trade the Shares is consistent with the Act. Accordingly, the
Commission finds good cause, pursuant to Section 19(b)(2) of the
Act,\49\ to approve the proposed rule change, as modified by Amendment
No. 2, on an accelerated basis.
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\49\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\50\ that the proposed rule change (SR-NYSEArca-2019-12), as
modified by Amendment No. 2 thereto, be, and it hereby is, approved on
an accelerated basis.
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\50\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
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\51\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24188 Filed 11-5-19; 8:45 am]
BILLING CODE 8011-01-P