[Federal Register Volume 85, Number 85 (Friday, May 1, 2020)]
[Notices]
[Pages 25490-25493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09248]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88752; File No. SR-CboeBZX-2020-035]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Regarding
the Listing Rule of the Hartford Core Bond ETF
April 27, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 16, 2020, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'')
filed with the Securities and Exchange Commission (``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
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing
with the Securities and Exchange Commission (``Commission'') a proposed
rule change to allow the Hartford Core Bond ETF (the ``Fund''), a
series of the Hartford Funds Exchange-Traded Trust (the ``Trust''), to
expand the over-the-counter (``OTC'') derivative product types the Fund
may hold and also to allow the Fund to hold credit default swap indices
that are either listed or OTC derivatives.
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
[[Page 25491]]
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 adopted a rule to permit the listing and trading the
Shares.\5\ On February 20, 2020, the Exchange commenced trading in the
Shares. The Exchange now proposes to continue listing and trading the
Shares pursuant to Rule 14.11(i) and expand the realm of derivatives in
which the Fund may invest pursuant to the Initial Filing and allow the
Fund to hold credit default swap indices that are either listed or OTC
derivatives. As proposed, the Shares would continue to comply with all
of the generic listing standards with the exception of the requirement
of Rule 14.11(i)(4)(C)(ii)(d),\6\ as described in the Initial Filing.
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\5\ See Securities Exchange Act No. 88107 (January 31, 2020) 85
FR 6988 (February 6, 2020) (SR-CboeBZX-2020-008) (the ``Initial
Filing'').
\6\ Rule 14.11(i)(4)(C)(ii)(d) provides that ``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.''
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As noted in the Initial Filing, the Exchange proposed a Rule
amendment in order to allow the listing and trading of the Shares which
would not meet the requirements of Rule 14.11(i)(4)(C)(ii)(d), which
requires that component securities that in aggregate account for at
least 90% of the fixed income weight of the portfolio must satisfy at
least one of five conditions. Therefore, the Exchange proposed that the
fixed income portion of the portfolio excluding Non-Agency ABS and MBS
\7\ would satisfy the 90% requirement. In the Initial Filing, the
Exchange also provided that the Fund would generally invest up to 20%,
but may exceed 20%, of its assets in cash and Cash Equivalents,\8\
certain listed derivatives,\9\ and certain OTC derivatives.\10\
Further, the Exchange provided that the Fund's holdings in cash and
Cash Equivalents, listed derivatives, and OTC derivatives would be in
compliance with all generic listing standards, including those in Rules
14.11(i)(4)(C)(iii), 14.11(i)(4)(C)(iv), 14.11(i)(4)(C)(v), and
14.11(i)(4)(C)(vi).
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\7\ As noted in the Initial Filing, non-Agency ABS and MBS
refers to non-agency, non-GSE (i.e., a type of financial services
corporation created by the United States Congress, which include
Fannie Mae and Freddie Mac), and privately-issued mortgage-related
and other asset-backed securities.
\8\ As defined in Exchange Rule 14.11(i)(4)(C)(iii)(b), Cash
Equivalents are short-term instruments with maturities of less than
three months, which includes only the following: (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.
\9\ As noted in the Initial Filing, listed derivatives include
only the following instruments: Treasury futures, U.S. interest rate
futures, and Eurodollar futures.
\10\ As noted in the Initial Filing, OTC derivatives include
only the following instruments: Interest rate swaps, currency
forwards, and credit default swap indices.
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Pursuant to the Initial Filing the Fund is permitted to invest in
the following listed derivatives:
Treasury futures;
U.S. interest rate futures; and
Eurodollar futures.
Additionally, pursuant to the Initial Filing, the Fund is permitted
to invest in the following OTC Derivatives:
Interest rate swaps;
Currency forwards; and
Credit default swap indices.
Now, the Exchange proposes to amend that credit default swap
indices will continue to be held by the Fund, but may be listed
derivatives or OTC derivatives. Therefore, the Exchange proposes that
the Fund may invest in the following listed derivatives:
Treasury futures;
U.S. interest rate futures;
Eurodollar futures; and
Credit default swap indices.
Additionally, the Exchange proposes to expand the types of OTC
derivatives in which the Fund may invest to be the following
instruments:
Interest rate swaps and consumer price index (``CPI'')
swaps, credit default swaps, and total return swaps;
Interest rate options, options on interest rate swaps
(``swaptions''), and options on credit default swaps;
Currency forwards and bond forwards; and
Credit default swap indices.\11\
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\11\ As noted in the Initial Filing, intraday price quotations
for OTC derivatives are available from major broker-dealer firms and
from third-parties, which may provide prices free with a time delay
or in real-time for a paid fee.
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Rule 14.11(i)(4)(C)(v) is intended to mitigate concerns around the
manipulability of a particular underlying reference asset or
derivatives contract. As the proposal does not seek to allow the Fund
to hold more than 20% of the weight of the portfolio (including gross
notional exposures) in OTC derivatives, the Exchange believes the
concerns around the manipulability of a particular underlying reference
asset or derivatives contract are mitigated. Further, by allowing the
Fund additional flexibility to further diversify its holdings to
provide exposure to a broader array of OTC derivatives would allow the
Fund to better achieve its investment objective, and, as such, benefit
both investors and the Fund. As proposed, the Fund will continue to
meet all generic listings standards related to OTC derivatives,
including those in Rules 14.11(i)(4)(C)(v) and 14.11(i)(4)(C)(vi).
The Fund's investments, including those in derivatives, will
continue to be consistent with the 1940 Act and the Fund's investment
objective. Moreover, the Exchange represents that the Shares of the
Fund will continue to comply with all other requirements applicable to
Managed Fund Shares, which include the dissemination of key information
such as the Disclosed Portfolio,\12\ Net Asset Value,\13\ and the
Intraday Indicative Value,\14\ suspension of trading or removal,\15\
trading halts,\16\ surveillance,\17\ minimum price variation for
quoting and order entry,\18\ the information circular,\19\ and
firewalls \20\ as set forth in Exchange rules applicable to Managed
Fund Shares and the orders approving such rules.
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\12\ See Rule 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
\13\ See Rule 14.11(i)(4)(A)(ii).
\14\ See Rule 14.11(i)(4)(B)(i).
\15\ See Rule 14.11(i)(4)(B)(iii).
\16\ See Rule 14.11(i)(4)(B)(iv).
\17\ See Rule 14.11(i)(2)(C).
\18\ See Rule 14.11(i)(2)(B).
\19\ See Rule 14.11(i)(6).
\20\ See Rule 14.11(i)(7).
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2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \21\ in general and Section 6(b)(5) of the Act \22\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to
[[Page 25492]]
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 in that the Shares will meet
each of the continued listing criteria in BZX Rule 14.11(i) with the
exception of Rule 14.11(i)(4)(C)(ii)(d), as provided in the Initial
Filing.
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\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposal to expand the types of
derivatives in which the Fund may invest as discussed herein will allow
the Fund additional flexibility to further diversify its holdings to
better achieve its investment objective, and, as such, benefit both
investors and the Fund. Further, as the proposal does not seek to allow
the Fund to hold more than 20% of the weight of the portfolio
(including gross notional exposures) in OTC derivatives, the Exchange
believes the concerns around the manipulability of a particular
underlying reference asset or derivatives contract are mitigated. The
Exchange also believes the proposal to clarify that credit default swap
indices that the Fund may hold may be listed or OTC derivatives will
eliminate any potential investor confusion as to the types of
derivatives the Fund may hold. Lastly, the Fund's investments in cash
and Cash Equivalents, listed derivatives, and OTC derivatives will
continue to be in compliance with all generic listing standards,
including those in Rules 14.11(i)(4)(C)(iii), 14.11(i)(4)(C)(iv),
14.11(i)(4)(C)(v), and 14.11(i)(4)(C)(vi). The Fund will comply with
all representations made in the Initial Filing, aside from the changes
specifically discussed herein related to permitted derivatives.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change, rather, will facilitate the strategy of an
actively-managed exchange-traded product that will allow the Fund to
better compete in the marketplace, thus enhancing competition among
both market participants and listing venues, 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 \23\ and Rule 19b-
4(f)(6) thereunder.\24\
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\23\ 15 U.S.C. 78s(b)(3)(A).
\24\ 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 under Rule 19b-4(f)(6) \25\ normally
does not become operative for 30 days after the date of the filing.
However, pursuant to Rule 19b-4(f)(6)(iii),\26\ the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay to allow the Fund to
immediately modify its permitted investments in derivatives. The
Exchange represents that all derivatives would be held in compliance
with BZX's generic listing standards, including those in Rules
14.11(i)(4)(C)(iii), 14.11(i)(4)(C)(iv), 14.11(i)(4)(C)(v), and
14.11(i)(4)(C)(vi), and therefore the proposal raises no novel or
substantive issues. Therefore, the Commission believes that waiver of
the 30-day operative delay is consistent with the protection of
investors and the public interest and hereby waives the 30-day
operative delay and designates the proposed rule change operative upon
filing.\27\
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\25\ 17 CFR 240.19b-4(f)(6).
\26\ 17 CFR 240.19b-4(f)(6)(iii).
\27\ For purposes only of waiving the operative delay, the
Commission 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.
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-2020-035 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-2020-035. 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-2020-035 and should be submitted
on or before May 22, 2020.
[[Page 25493]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-09248 Filed 4-30-20; 8:45 am]
BILLING CODE 8011-01-P