[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