[Federal Register Volume 85, Number 244 (Friday, December 18, 2020)]
[Notices]
[Pages 82536-82539]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27840]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90659; File No. SR-CboeBZX-2020-070]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Instituting Proceedings to Determine Whether to Approve or Disapprove a
Proposed Rule Change to List and Trade Shares of the -1x Short VIX
Futures ETF, a Series of VS Trust, Under Rule 14.11(f)(4) (``Trust
Issued Receipts'')
December 14, 2020.
I. Introduction
On September 4, 2020, Cboe BZX Exchange, Inc. (``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the -1x
Short VIX Futures ETF (``Fund''), a series of VS Trust (``Trust''),
under BZX Rule 14.11(f)(4) (Trust Issued Receipts). The proposed rule
change was published for comment in the Federal Register on September
23, 2020.\3\ On October 30, 2020, pursuant to Section 19(b)(2) of the
Act,\4\ 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 disapprove the
proposed rule change.\5\ The Commission has received no comments on the
proposed rule change. The Commission is publishing this order to
solicit comments on the proposed rule change from interested persons
and to institute proceedings pursuant to Section 19(b)(2)(B) of the Act
\6\ to determine whether to approve or disapprove the proposed rule
change.
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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. 89901 (Sept. 17,
2020), 85 FR 59836 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 90292, 85 FR 70678
(Nov. 5, 2020). The Commission designated December 22, 2020, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund \7\
under BZX
[[Page 82537]]
Rule 14.11(f)(4), which governs the listing and trading of Trust Issued
Receipts \8\ on the Exchange. The Fund seeks to provide daily
investment results (before fees and expenses) that correspond to the
performance of the Short VIX Futures Index (SHORTVOL) (``Index'').\9\
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\7\ The Trust has filed a registration statement on Form S-1
under the Securities Act of 1933, dated August 26, 2020 (File
No.333-248430) (``Registration Statement''). The Fund will not trade
on the Exchange until the Registration Statement is effective.
\8\ Rule 14.11(f)(4) applies to Trust Issued Receipts that
invest in ``Financial Instruments,'' defined in Rule
14.11(f)(4)(A)(iv) as any combination of investments, including
cash; securities; options on securities and indices; futures
contracts; options on futures contracts; forward contracts; equity
caps, collars and floors; and swap agreements.
\9\ The Index is sponsored by Cboe Global Indexes. The Index
sponsor is not a registered broker-dealer, but is affiliated with a
broker-dealer and has implemented and will maintain a fire wall with
respect to the broker-dealer affiliate regarding access to
information concerning the composition of and/or changes to the
Index. In addition, the Index Sponsor has implemented and will
maintain procedures that are designed to prevent the use and
dissemination of material, non-public information regarding the
Index.
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Volatility Shares LLC (``Sponsor''), a Delaware limited liability
company and a commodity pool operator, serves as the Sponsor of the
Trust.\10\ Tidal ETF Services LLC serves as the administrator; U.S.
Bank National Association serves as custodian of the Fund and the
Shares; U.S. Bancorp Fund Services, LLC serves as the sub-administrator
and transfer agent; and Wilmington Trust Company is the sole trustee of
the Trust.
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\10\ The Sponsor is not a broker-dealer or affiliated with a
broker-dealer. In the event that (a) the Sponsor becomes a broker-
dealer or newly affiliated with a broker-dealer, or (b) any new
sponsor is a 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 the portfolio.
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The Index measures the daily inverse performance of a theoretical
portfolio of first- and second-month futures contracts on the Cboe
Volatility Index (``VIX'').\11\ The Index is comprised of VIX futures
contracts (``VIX Futures Contracts'').\12\ Specifically, the Index
components represent the prices of the two near-term VIX Futures
Contracts, replicating a position that rolls the nearest month VIX
Futures Contract to the next month VIX Futures Contract on a daily
basis in equal fractional amounts, resulting in a constant weighted
average maturity of approximately one month.\13\ The Index seeks to
reflect the returns that are potentially available from holding an
unleveraged short position in first- and second- month VIX Futures
Contracts.\14\
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\11\ The VIX is an index designed to measure the implied
volatility of the S&P 500 over 30 days in the future. The VIX is
calculated based on the prices of certain put and call options on
the S&P 500. The VIX is reflective of the premium paid by investors
for certain options linked to the level of the S&P 500.
\12\ VIX Futures Contracts are measures of the market's
expectation of the level of VIX at certain points in the future, and
as such, will behave differently than current, or spot, VIX. While
the VIX represents a measure of the current expected volatility of
the S&P 500 over the next 30 days, the prices of VIX Futures
Contracts are based on the current expectation of what the expected
30-day volatility will be at a particular time in the future (on the
expiration date).
\13\ The roll period usually begins on the Wednesday falling 30
calendar days before the S&P 500 option expiration for the following
month (``Cboe VIX Monthly Futures Settlement Date'') and runs to the
Tuesday prior to the subsequent month's Cboe VIX Monthly Futures
Settlement Date.
\14\ The Exchange states that because VIX Futures Contracts
correlate to future volatility readings of VIX, while the VIX itself
correlates to current volatility, the Index and the Fund should be
expected to perform significantly different from the inverse of the
VIX over all periods of time. Further, unlike the Index, the VIX,
which is not a benchmark for the Fund, is calculated based on the
prices of certain put and call options on the S&P 500. While the
Index does not correspond to the inverse of the VIX, as it seeks
short exposure to VIX, the value of the Index, and by extension the
Fund, will generally rise as the VIX falls and fall as the VIX
rises.
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To pursue its investment objective, the Fund would primarily invest
in VIX Futures Contracts based on components of the Index. The Fund
would primarily acquire short exposure to the VIX through VIX Futures
Contracts, such that the Fund has exposure intended to approximate the
Index at the time of the net asset value (``NAV'') calculation of the
Fund.\15\ However, in the event that the Fund is unable to meet its
investment objective solely through investment in VIX Futures
Contracts, it may invest in over-the-counter swaps referencing the
Index or referencing particular VIX Futures Contracts comprising the
Index (``VIX Swap Agreements'') \16\ or in listed VIX options contracts
(``VIX Options Contracts,'' and, together with VIX Futures Contracts
and VIX Swap Agreements, ``VIX Derivative Products''). The Fund may
also invest in Cash or Cash Equivalents \17\ that may serve as
collateral to the Fund's investments in VIX Derivative Products.\18\
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\15\ The Exchange states the Fund's NAV will be calculated at
4:00 p.m. E.T.
\16\ The VIX Swap Agreements in which the Fund may invest may or
may not be cleared. The Fund would only enter into VIX Swap
Agreements with counterparties that the Sponsor reasonably believes
are capable of performing under the contract and will post
collateral as required by the counterparty. The Fund would seek,
where possible, to use counterparties, as applicable, whose
financial status is such that the risk of default is reduced;
however, the risk of losses resulting from default is still
possible. The Sponsor would evaluate the creditworthiness of
counterparties on a regular basis. In addition to information
provided by credit agencies, the Sponsor would review approved
counterparties using various factors, which may include the
counterparty's reputation, the Sponsor's past experience with the
counterparty and the price/market actions of debt of the
counterparty. The Fund may use various techniques to minimize OTC
counterparty credit risk including entering into arrangements with
counterparties whereby both sides exchange collateral on a mark-to-
market basis. Collateral posted by the Fund to a counterparty in
connection with uncleared VIX Swap Agreements is generally held for
the benefit of the counterparty in a segregated tri-party account at
the custodian to protect the counterparty against non-payment by the
Fund.
\17\ For purposes of the proposal, ``Cash and Cash Equivalents''
are short-term instruments with maturities of less than 3 months,
including 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.
\18\ The Fund would collateralize its obligations with Cash and
Cash Equivalents consistent with the 1940 Act and interpretations
thereunder.
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The Fund would not be actively managed but rather would seek to
remain fully invested in VIX Derivative Products (and Cash and Cash
Equivalents as collateral) that provide exposure to the Index
consistent with its investment objective without regard to market
conditions, trends or direction. The Fund's investment objective is a
daily investment objective; that is, the Fund seeks to track the Index
on a daily basis, not over longer periods.\19\ Accordingly, each day,
the Fund will position its portfolio so that it can seek to track the
Index. The direction and extent of the Index's movements each day will
dictate the direction and extent of the Fund's portfolio rebalancing.
For example, if the level of the Index falls on a given day, net assets
of the Fund would fall. As a result, exposure to the Index, through
futures positions held by the Fund, would need to be decreased. The
opposite would be the case if the level of the Index rises on a given
day.
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\19\ The Exchange states that return of the Fund for a period
longer than a single day is the result of its return for each day
compounded over the period and usually would differ in amount and
possibly even direction from either the inverse of the VIX or the
inverse of a portfolio of short-term VIX Futures Contracts for the
same period. These differences can be significant.
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The time and manner in which the Fund would rebalance its portfolio
is defined by the Index methodology but may vary from the Index
methodology depending upon market conditions and other circumstances
including the potential impact of the rebalance on the price of the VIX
Futures Contracts. The Sponsor would seek to minimize the
[[Page 82538]]
market impact of Fund rebalances on the price of VIX Futures Contracts
by limiting the Fund's participation, on any given day, in VIX Futures
Contracts to no more than one-quarter of the contracts traded on Cboe
Futures Exchange during any ``Rebalance Period'' (defined by the Index
methodology as 3:45 p.m.-4 p.m., E.T.) (``VIX Futures Contracts
Limitation''). If the Fund's portfolio rebalance exceeds one-quarter of
the futures' volume between 3:45 p.m. and 4 p.m., E.T., the Sponsor
would extend the rebalance period (the ``Extended Rebalance Period) to
include, for example, the period between 4 p.m. and 4:15 p.m., E.T. and
the Trade At Settlement market (``TAS'').
The Sponsor expects that allowing the Fund to participate in an
Extended Rebalance Period would minimize the impact on the price of VIX
Futures Contracts, and particularly minimize any impact of large Fund
rebalances during periods of market illiquidity.\20\ The Exchange
states that defining an explicit rebalancing methodology and limiting
the Fund's participation in the VIX Futures Contracts should reduce the
impact of the Fund's rebalancing on the price of VIX Futures Contracts.
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\20\ The Sponsor believes that the Fund would enter an Extended
Rebalance Period most often during periods of extraordinary
volatility or illiquidity in VIX futures contracts.
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III. Proceedings To Determine Whether to Approve or Disapprove SR-
CboeBZX-2020-070 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \21\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposal. Institution of proceedings does not
indicate that the Commission has reached any conclusions with respect
to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
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\21\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\22\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposal's consistency with Section 6(b)(5) of the Act,
which requires, among other things, that the rules of a national
securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' \23\
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\22\ Id.
\23\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposed rule change
is consistent with Section 6(b)(5) or any other provision of the Act,
or the rules and regulations thereunder. Although there do not appear
to be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\24\
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\24\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change should be approved
or disapproved by January 8, 2021. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
January 22, 2021.
The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice,\25\ in addition to any other comments they may wish to
submit about the proposed rule change. In this regard, the Commission
seeks commenters' views regarding whether the Exchange's proposal to
list and trade the Shares, which seek to provide daily investment
results that correspond to the performance of an index that measures
the daily inverse performance of a theoretical portfolio of first- and
second-month VIX Futures Contracts, is adequately designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and to protect investors and the public
interest, and is consistent with the maintenance of a fair and orderly
market under the Act. The Commission also seeks commenters' views
regarding whether the Exchange has adequately described the potential
impact of sudden fluctuations in market volatility on the Index and on
the Fund's operation and performance for the Commission to make a
determination under Section 6(b)(5) of the Act. In particular, the
Commission seeks comment regarding the Fund's operation during periods
with large percentage increases in volatility, and whether the
Sponsor's proposed VIX Futures Contracts Limitation would sufficiently
minimize the market impact of the Fund's daily rebalance.
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\25\ See supra note 3.
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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-2020-070 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-2020-070. 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
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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-2020-070 and should be submitted
by January 8, 2021. Rebuttal comments should be submitted by January
22, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-27840 Filed 12-17-20; 8:45 am]
BILLING CODE 8011-01-P