Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of Amendment No. 5 To Proposed Rule Change, as Modified by Amendments Nos. 1, 3, and 4 thereto, To Amend Rule 14.11(i) To Adopt Generic Listing Standards for Managed Fund Shares
Federal Register, Volume 81 Issue 113 (Monday, June 13, 2016)
Federal Register Volume 81, Number 113 (Monday, June 13, 2016)
Notices
Pages 38247-38257
From the Federal Register Online via the Government Publishing Office www.gpo.gov
FR Doc No: 2016-13825
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-78005; File No. SR-BATS-2015-100
Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of Amendment No. 5 To Proposed Rule Change, as Modified by Amendments Nos. 1, 3, and 4 thereto, To Amend Rule 14.11(i) To Adopt Generic Listing Standards for Managed Fund Shares
June 7, 2016.
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Introduction
On November 18, 2015, BATS Exchange, Inc. (now known as Bats BZX Exchange, Inc., ``Exchange'' or ``BZX'') \1\ filed with the Securities and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ a proposed rule change to amend Rule 14.11(i) by, among other things, adopting generic listing standards for Managed Fund Shares. The proposed rule change was published for comment in the Federal Register on November 25, 2015.\4\ On January 4, 2016, 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\ On February 9, 2016, the Exchange filed Amendment No. 1 to the proposed rule change,\6\ which replaced the originally filed proposed rule change in its entirety.\7\ On February 11, 2016, the Exchange both filed and withdrew Amendment No. 2 to the proposed rule change. On February 11, 2016, the Exchange filed Amendment No. 3 to the proposed rule change.\8\ On February 17, 2016, the Exchange filed Amendment No. 4 to the proposed rule change.\9\ On February 22, 2016, the Commission issued notice of filing of Amendment Nos. 1, 3, and 4 to the proposed rule change and instituted proceedings under Section 19(b)(2)(B) of the Act \10\ to determine whether to approve or disapprove the proposed rule change, as modified by Amendment Nos. 1, 3, and 4 thereto.\11\ In the Order
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Instituting Proceedings, the Commission solicited comments to specified matters related to the proposal.\12\ On May 20, 2016, the Commission designated a longer period for Commission action on the proposed rule change.\13\ The Commission has not received any comments on the proposed rule change, as modified by Amendment Nos. 1, 3, and 4 thereto.
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\1\ In March 2016, BATS changed its name from ``BATS Exchange, Inc.'' to ``Bats BZX Exchange, Inc.'' See Securities Act Release No. 77307 (Mar. 7, 2016), 81 FR 12996 (Mar. 11, 2016) (SR-BATS-2016-25) (publishing notice of the name change to Bats BZX Exchange, Inc.).
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 76478 (Nov. 19, 2015), 80 FR 73841 (``Notice'').
\5\ See Securities Exchange Act Release No. 76820, 81 FR 989 (Jan. 8, 2016). The Commission designated February 23, 2016 as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change. See id.
\6\ Amendment No. 1: (1) Clarifies the proposed treatment of convertible securities under the proposed generic listing criteria; (2) modifies the proposed criterion regarding American Depositary Receipts (``ADRs'') to provide that no more than 10% of the equity weight of the portfolio shall consist of non-exchange traded (rather than unsponsored) ADRs; (3) modifies the proposed portfolio limit on listed derivatives to require that at least 90% of the weight of such holdings invested in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options, and swaps for which the Exchange may obtain information via the Intermarket Surveillance Group (``ISG'') from other members or affiliates of the ISG or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement (``CSSA''); (4) provides that a portfolio's investments in listed and over-the-counter derivatives will be calculated for purposes the proposed limits on such holdings as the total absolute notional value of the derivatives; (5) makes certain other conforming and clarifying changes. The amendments to the proposed rule change are available at: http://www.sec.gov/comments/sr-bats-2015-100/bats2015100.shtml.
\7\ See Amendment No. 1, supra note 6, at 4.
\8\ Amendment No. 3 deletes from the proposal the following two sentences: (1) ``Such limitation will not apply to listed swaps because swaps are listed on swap execution facilities (``SEFs''), the majority of which are not members of ISG.'' and (2) ``Such limitation would not apply to listed swaps because swaps are listed on SEFs, the majority of which are not members of ISG.'' Amendment No. 3 also corrects an erroneous statement in Item 11 to indicate that an Exhibit 4 was included in Amendment No. 1.
\9\ Amendment No. 4 deletes from the proposal the following sentence: ``Thus, if the limitation applied to swaps, there would effectively be a cap of 10% of the portfolio invested in listed swaps.'' Amendment No. 4 also amends two representations as follows (added language in brackets): The Exchange or FINRA, on behalf of the Exchange, will communicate as needed regarding trading in Managed Fund Shares and their underlying components with other markets that are members of the ISG, including all U.S. securities exchanges and futures exchanges on which the components are traded, or with which the Exchange has in place a CSSA. In addition, the Exchange or FINRA, on behalf of the Exchange, may obtain information regarding trading in Managed Fund Shares and their underlying components from other markets that are members of the ISG, including all U.S. securities exchanges and futures exchanges on which the components are traded, or with which the Exchange has in place a CSSA.''
\10\ 15 U.S.C. 78s(b)(2)(B).
\11\ See Securities Exchange Act Release No. 77202, 81 FR 9889 (Feb. 26, 2016) (``Order Instituting Proceedings''). Specifically, the Commission instituted proceedings to allow for additional analysis of the proposed rule change'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.'' See id., 81 FR at 9897.
\12\ See id.
\13\ See Securities Exchange Act Release No. 77871, 81 FR 33567 (May 26, 2016) (designating July 22, 2016 as the date by which the Commission must either approve or disapprove the proposed rule change).
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Pursuant to Section 19(b)(1) of the Act \14\ and Rule 19b-4 thereunder,\15\ notice is hereby given that, on June 3, 2016, the Exchange filed Amendment No. 5 to the proposed rule change,\16\ which replaced the originally filed proposed rule change in its entirety. The proposed rule change, as modified by Amendment No. 5 thereto, is as described in Items II and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 5 thereto, from interested persons.
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\14\ 15 U.S.C. 78s(b)(1).
\15\ 17 CFR 240.19b-4.
\16\ Amendment No. 5: (1) Clarifies the context of ``system failures'' in the definition of Normal Market Conditions; (2) clarifies the scope of ``equity'' securities to also include U.S. Component Stocks, Non-U.S. Component Stocks, Derivative Securities Products, and Linked Securities listed pursuant to equivalent rules of another national securities exchange; (3) clarifies the exclusion of U.S. Department of Treasury securities and government-sponsored entity securities from the minimum diversification requirements applicable to fixed income securities; (4) provides that the calculation for complying with the percentage limitations with respect to listed derivatives and OTC derivatives (as defined herein) will be based on aggregate gross notional values of the derivatives; (5) provides additional minimum diversification requirements with respect to listed derivatives, to be calculated based on aggregate gross notional values, including gross notional exposures; (6) clarifies that, to the extent that listed or OTC derivatives (as defined herein) are used to gain exposure to individual equities and/or fixed income securities, or to indexes of equities and/or indexes of fixed income securities, the aggregate gross notional value of such exposure is required to meet the criteria set forth in Rule 14.11(i)(4)(C)(i) and (ii) (including gross notional exposures), respectively; (7) provides examples on how the percentage limitations applicable to listed and OTC derivatives (as defined herein) would be calculated; and (8) confirms that (a) an issuer would be required to represent to the Exchange that it will advise the Exchange of any failure by a series of Managed Fund Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will surveil for compliance with the continued listing requirements, and (b) if the series of Managed Fund Shares is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures.
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Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange is proposing a rule change to adopt generic listing standards for shares listed under BZX Rule 14.11(i) (``Managed Fund Shares'').
The text of the proposed rule change is available at the Exchange's Web site at www.batstrading.com, at the principal office of the Exchange, and at the Commission's Public Reference Room.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item V below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant parts of such statements.
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Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change
1. Purpose
This Amendment No. 5 to SR-BATS-2015-100 amends and replaces in its entirety Amendment No. 1 to the proposal (and subsequent amendments thereto), which was filed on February 10, 2016, which amended and replaced in its entirety the proposal as originally submitted on November 15, 2015. The Exchange submits this Amendment No. 5 in order to clarify certain points about the proposal, to describe more accurately how investments in derivative securities will be treated, and provide an example of how portfolio exposure will be calculated.
The Exchange proposes to amend Rule 14.11(i) to adopt generic listing standards for Managed Fund Shares. Under the Exchange's current rules, a proposed rule change must be filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') for the listing and trading of each new series of Managed Fund Shares. The Exchange believes that it is appropriate to codify certain rules within Rule 14.11(i) that would generally eliminate the need for such proposed rule changes, which would create greater efficiency and promote uniform standards in the listing process. Prior to listing pursuant to proposed amended Rule 14.11(i), an issuer would be required to represent to the Exchange that it will advise the Exchange of any failure by a series of Managed Fund Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Exchange Act, the Exchange will surveil 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 Exchange Rule 14.12.
Background
Rule 14.11(i) sets forth certain rules related to the listing and trading of Managed Fund Shares.\17\ Under Rule 14.11(i)(3)(A), the term ``Managed Fund Share'' means a security that:
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\17\ See Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR-BATS-2011-018) (Order Approving Proposed Rule Change to Adopt Rules for the Qualification, Listing and Delisting of Companies on the Exchange) (the ``Approval Order''). The Approval Order approved the rules permitting the listing of both Tier I and Tier II securities on the Exchange and the requirements associated therewith, which includes the listing and trading of Index Fund Shares and Managed Fund Shares, trading hours and halts, and listing fees originally applicable to Managed Fund Shares.
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(a) Represents an interest in a registered investment company (``Investment Company'') organized as an open-end management investment company or similar entity, that invests in a portfolio of securities selected by the Investment Company's investment adviser (hereafter ``Adviser'') consistent with the Investment Company's investment objectives and policies;
(b) is issued in a specified aggregate minimum number in return for a deposit of a specified portfolio of securities and/or a cash amount with a value equal to the next determined net asset value; and
(c) when aggregated in the same specified minimum number, may be redeemed at a holder's request, which holder will be paid a specified portfolio of securities and/or cash with a value equal to the next determined net asset value.
Effectively, Managed Fund Shares are securities issued by an actively-managed open-end Investment Company (i.e., an exchange-traded fund (``ETF'') that is actively managed). Because Managed Fund Shares are actively-managed, they do not seek to replicate the performance of a specified passive index of securities. Instead, they
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generally use an active investment strategy to seek to meet their investment objectives. In contrast, an open-end Investment Company that issues Index Fund Shares, listed and traded on the Exchange pursuant to Rule 14.11(c), seeks to provide investment results that generally correspond to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index, or combination thereof.
All Managed Fund Shares listed pursuant to Rule 14.11(i) are included within the definition of ``security'' or ``securities'' as such terms are used in the Rules of the Exchange and, as such, are subject to the full panoply of Exchange rules and procedures that currently govern the trading of securities on the Exchange.\18\
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\18\ See Rule 14.11(i)(2).
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In addition, Rule 14.11(i) currently provides for the criteria that Managed Fund Shares must satisfy for initial and continued listing on the Exchange, including, for example, that a minimum number of Managed Fund Shares are required to be outstanding at the time of commencement of trading on the Exchange. However, the current process for listing and trading new series of Managed Fund Shares on the Exchange requires that the Exchange submit a proposed rule change with the Commission. In this regard, Rule 14.11(i)(2)(A) specifies that the Exchange will file separate proposals under Section 19(b) of the Act (hereafter, a ``proposed rule change'') before the listing of Managed Fund Shares, which, in conjunction with the proposal to create generic listing standards for Managed Fund Shares, the Exchange is proposing to delete.
Proposed Changes to Rule 14.11(i)
The Exchange is proposing to amend Rule 14.11(i) to specify that the Exchange may approve Managed Fund Shares for listing pursuant to SEC Rule 19b-4(e) under the Act, which pertains to derivative securities products (``SEC Rule 19b-4(e)'').\19\ SEC Rule 19b-4(e)(1) provides that the listing and trading of a new derivative securities product by a self-regulatory organization (``SRO'') is not deemed a proposed rule change, pursuant to paragraph (c)(1) of Rule 19b-4,\20\ if the Commission has approved, pursuant to section 19(b) of the Act, the SRO's trading rules, procedures and listing standards for the product class that would include the new derivative securities product and the SRO has a surveillance program for the product class. This is the current method pursuant to which ``passive'' ETFs are listed under Rule 14.11.
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\19\ 17 CFR 240.19b-4(e). As provided under SEC Rule 19b-4(e), the term ``new derivative securities product'' means any type of option, warrant, hybrid securities product or any other security, other than a single equity option or a security futures product, whose value is based, in whole or in part, upon the performance of, or interest in, an underlying instrument.
\20\ 17 CFR 240.19b-4(c)(1). As provided under SEC Rule 19b-
4(c)(1), a stated policy, practice, or interpretation of the SRO shall be deemed to be a proposed rule change unless it is reasonably and fairly implied by an existing rule of the SRO.
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The Exchange would also specify within Rule 14.11(i)(4)(C) that components of Managed Fund Shares listed pursuant to SEC Rule 19b-4(e) must satisfy the requirements of Rule 14.11(i) on an initial and continued basis, which includes certain specific criteria that the Exchange is proposing to include within Rule 14.11(i)(4)(C), as described in greater detail below. As proposed, the Exchange would continue to file separate proposed rule changes before the listing and trading of Managed Fund Shares with components that do not satisfy the additional criteria described below or components other than those specified below. For example, if the components of a Managed Fund Share exceeded one of the applicable thresholds, the Exchange would file a separate proposed rule change before listing and trading such Managed Fund Share. Similarly, if the components of a Managed Fund Share included a security or asset that is not specified below, the Exchange would file a separate proposed rule change.
The Exchange would also amend the definition of the term ``Disclosed Portfolio'' under Rule 14.11(i)(3)(B) in order to require that the Web site for each series of Managed Fund Shares listed on the Exchange disclose the following information regarding the Disclosed Portfolio, to the extent applicable: Ticker symbol, CUSIP or other identifier, a description of the holding, identity of the asset upon which the derivative is based, the strike price for any options, the quantity of each security or other asset held as measured by select metrics, maturity date, coupon rate, effective date, market value and percentage weight of the holding in the portfolio.\21\
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\21\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly included disclosure requirements with respect to each portfolio holding, as applicable to the type of holding. See, e.g., Securities Exchange Act Release No. 72666 (July 3, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-2013-122) (the ``PIMCO Total Return Use of Derivatives Approval'').
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The Exchange would also add to Rule 14.11(i)(4)(A) by specifying that all Managed Fund Shares must have a stated investment objective, which must be adhered to under normal market conditions.\22\
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\22\ The Exchange would also add a new defined term under Rule 14.11(i)(3)(E) to specify that the term ``normal market conditions'' includes, but is not limited to, the absence of trading halts in the applicable financial markets generally; operational issues causing dissemination of inaccurate market information or system failures; or force majeure type events such as natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance.
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Finally, the Exchange would also amend the continued listing requirement in Rule 14.11(i)(4)(B) by changing the requirement that an Intraday Indicative Value for Managed Fund Shares be widely disseminated by one or more major market data vendors at least every 15 seconds during the time when the Managed Fund Shares trade on the Exchange to a requirement that an Intraday Indicative Value be widely disseminated by one or more major market data vendors at least every 15 seconds during Regular Trading Hours, as defined in Exchange Rule 1.5(w).
Proposed Managed Fund Share Portfolio Standards
The Exchange is proposing standards that would pertain to Managed Fund Shares to qualify for listing and trading pursuant to SEC Rule 19b-4(e). These standards would be grouped according to security or asset type. The Exchange notes that the standards proposed for a Managed Fund Share portfolio that holds equity securities, Derivative Securities Products, and Linked Securities are based in large part on the existing equity security standards applicable to Index Fund Shares in Exchange Rule 14.11(c)(3). The standards proposed for a Managed Fund Share portfolio that holds fixed income securities are based in large part on the existing fixed income security standards applicable to Index Fund Shares in Rule 14.11(c)(4). Many of the standards proposed for other types of holdings in a Managed Fund Share portfolio are based on previous proposed rule changes for specific series of Managed Fund Shares.\23\
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\23\ Securities Exchange Act Release Nos. 74193 (February 3, 2015), 80 FR 7066 (February 9, 2015) (SR-BATS-2014-054) (the ``iShares Short Maturity Municipal Bond Approval''); 74297 (February 18, 2015), 80 FR 9788 (February 24, 2015) (SR-BATS-2014-056) (the ``iShares U.S. Fixed Income Balanced Risk Approval''); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011-
95) (the ``PIMCO Total Return Approval''); the PIMCO Total Return Use of Derivatives Approval; 69244 (March 27, 2013), 78 FR 19766 (April 2, 2013) (SR-NYSEArca-2013-08) (the ``SPDR Blackstone/GSO Senior Loan Approval''); 68870 (February 8, 2013), 78 FR 11245 (February 15, 2013) (SR-NYSEArca-2012-139) (the ``First Trust Preferred Securities and Income Approval''); 69591 (May 16, 2013), 78 FR 30372 (May 22, 2013) (SR-NYSEArca-2013-33) (the ``International Bear Approval''); 61697 (March 12, 2010), 75 FR 13616 (March 22, 2010) (SR-NYSEArca-2010-04) (the ``WisdomTree Real Return Approval''); and 67054 (May 24, 2012), 77 FR 32161 (May 31, 2012) (SR-NYSEArca-2012-25) (the ``WisdomTree Brazil Bond Approval''). Certain standards proposed herein for Managed Fund Shares are also based on previously proposed rule changes for specific index-based series of Index Fund Shares that did not satisfy the standards for those products on their respective listing exchange and for which Commission approval was required prior to listing and trading. See Securities Exchange Act Release Nos. 67985 (October 4, 2012), 77 FR 61804 (October 11, 2012) (SR-NYSEArca-2012-
92); 63881(February 9, 2011), 76 FR 9065 (February 16, 2011) (SR-
NYSEArca-2010-120); 63176 (October 25, 2010), 75 FR 66815 (October 29, 2010) (SR-NYSEArca-2010-94); and 69373 (April 15, 2013), 78 FR 23601 (April 19, 2013) (SR-NYSEArca-2012-108) (the ``NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund Approval'').
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Proposed Rule 14.11(i)(4)(C)(i) would describe the standards for a Managed Fund Share portfolio that holds equity securities, which are defined to be U.S. Component Stocks,\24\ Non-U.S. Component Stocks,\25\ Derivative Securities Products,\26\ and Linked Securities \27\ listed on a national securities exchange. For Derivative Securities Products and Linked Securities, no more than 25% of the equity weight of the portfolio could include leveraged and/or inverse leveraged Derivative Securities Products or Linked Securities. To the extent that a portfolio includes convertible securities, the equity security into which such security is converted shall meet the criteria of this Rule 14.11(i)(4)(C)(i) after converting.
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\24\ For the purposes of Rule 14.11(i) and this proposal, the term ``U.S. Component Stocks'' will have the same meaning as defined in Rule 14.11(c)(1)(D).
\25\ For the purposes of Rule 14.11(i) and this proposal, the term ``Non-U.S. Component Stocks'' will have the same meaning as defined in Rule 14.11(c)(1)(E).
\26\ For the purposes of Rule 14.11(i) and this proposal, the term ``Derivative Securities Products will have the same meaning as defined in Rule 14.11(c)(3)(A)(i)(a) and will include both those Derivative Securities Products listed on the Exchange as well as each of the equivalent security types listed on another national securities exchange.
\27\ Linked Securities are securities listed on the Exchange under Rule 14.11(d) and each of the equivalent security types listed on another national securities exchange.
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As proposed in Rule 14.11(i)(4)(C)(i)(a), the component stocks of the equity portion of a portfolio that are U.S. Component Stocks shall meet the following criteria initially and on a continuing basis:
(1) Component stocks (excluding Derivative Securities Products and Linked Securities) that in the aggregate account for at least 90% of the equity weight of the portfolio (excluding such Derivative Securities Products and Linked Securities) each must have a minimum market value of at least $75 million; \28\
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\28\ The proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(a), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities.
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(2) Component stocks (excluding Derivative Securities Products and Linked Securities) that in the aggregate account for at least 70% of the equity weight of the portfolio (excluding such Derivative Securities Products and Linked Securities) each must have a minimum monthly trading volume of 250,000 shares, or minimum notional volume traded per month of $25,000,000, averaged over the last six months; \29\
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\29\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(b), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities.
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(3) The most heavily weighted component stock (excluding Derivative Securities Products and Linked Securities) must not exceed 30% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted component stocks (excluding Derivative Securities Products and Linked Securities) must not exceed 65% of the equity weight of the portfolio; \30\
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\30\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(c), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities.
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(4) Where the equity portion of the portfolio does not include Non-
U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 13 component stocks; provided, however, that there would be no minimum number of component stocks if (a) one or more series of Derivative Securities Products or Linked Securities constitute, at least in part, components underlying a series of Managed Fund Shares, or (b) one or more series of Derivative Securities Products or Linked Securities account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; \31\
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\31\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(d), except for the omission of the reference to ``index,'' which is not applicable, the addition of the reference to Linked Securities, the reference to the equity portion of the portfolio not including Non-U.S. Component Stocks, and the reference to the 100% limitation applying to the ``equity weight'' of the portfolio--this last difference is included because the proposed standards in Rule 14.11(i)(4)(C) permit the inclusion of non-equity securities, whereas Rule 14.11(c)(3) applies only to equity securities.
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(5) Except as provided in proposed Rule 14.11(i)(4)(C)(i)(a), equity securities in the portfolio must be U.S. Component Stocks listed on a national securities exchange and must be NMS Stocks as defined in Rule 600 of Regulation NMS; \32\ and
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\32\ 17 CFR 240.600. This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(e), except for the addition of ``equity'' to make clear that the standard applies to ``equity securities'' and the omission of the reference to ``index,'' which is not applicable.
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(6) American Depositary Receipts (``ADRs'') may be exchange traded or non-exchange traded. However no more than 10% of the equity weight of the portfolio shall consist of non-exchange traded ADRs.
As proposed in Rule 14.11(i)(4)(C)(i)(b), the component stocks of the equity portion of a portfolio that are Non-U.S. Component Stocks shall meet the following criteria initially and on a continuing basis:
(1) Non-U.S. Component Stocks each shall have a minimum market value of at least $100 million; \33\
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\33\ The proposed text is identical to the corresponding representation from the Non-U.S. Components Release, as defined in footnote 24, below. The proposed text is also identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(a), except for the omission of the reference to ``index,'' which is not applicable, and that each Non-U.S. Component Stock must have a minimum market value of at least $100 million instead of the 70% required under Rule 14.11(c)(3)(A)(ii)(a).
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(2) Non-U.S. Component Stocks each shall have a minimum global monthly trading volume of 250,000 shares, or minimum global notional volume traded per month of $25,000,000, averaged over the last six months; \34\
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\34\ The proposed text is identical to the corresponding representation from the Non-U.S. Components Release, as defined in footnote 24, below. This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(b), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities.
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(3) The most heavily weighted Non-U.S. Component Stock shall not exceed 25% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted Non-U.S. Component Stocks shall not exceed 60% of the equity weight of the portfolio; \35\
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\35\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(c), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities.
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(4) Where the equity portion of the portfolio includes Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 20 component stocks; provided, however, that there shall be no minimum number of component stocks if (a) one or more series of Derivative Securities Products or Linked Securities constitute, at least in part, components underlying a series
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of Managed Fund Shares, or (b) one or more series of Derivative Securities Products or Linked Securities account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; \36\ and
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\36\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(d), except for the omission of the reference to ``index,'' which is not applicable, the addition of the reference to Linked Securities, the reference to the equity portion of the portfolio including Non-U.S. Component Stocks, and the reference to the 100% limitation applying to the ``equity weight'' of the portfolio--this last difference is included because the proposed standards in Rule 14.11(i)(4)(C) permit the inclusion of non-equity securities, whereas Rule 14.11(c)(3) applies only to equity securities.
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(5) Each Non-U.S. Component Stock shall be listed and traded on an exchange that has last-sale reporting.\37\
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\37\ 17 CFR 240.600. This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(e), except for the addition of ``equity'' to make clear that the standard applies to ``equity securities'' and the omission of the reference to ``index,'' which is not applicable.
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The Exchange notes that, as approved by the Commission for certain Managed Fund Shares \38\ and also not required under corresponding Rule 14.11(c)(3)(A)(ii) related to Index Fund Shares,\39\ it is not proposing to require that any of the equity portion of the equity portfolio composed of Non-U.S. Component Stocks be listed on markets that are either a member of the Intermarket Surveillance Group (``ISG'') or a market with which the Exchange has a comprehensive surveillance sharing agreement (``CSSA'').\40\ However, as further detailed below, the Exchange or the Financial Industry Regulatory Authority, Inc. (``FINRA''), on behalf of the Exchange, will communicate as needed regarding trading in Managed Fund Shares with other markets that are members of the ISG, including all U.S. securities exchanges and futures exchanges on which the components are traded.
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\38\ See Securities Exchange Act Release No. 75023 (May 21, 2015), 80 FR 30519 (May 28, 2015) (SR-NYSEArca-2014-100) (the ``Non-
U.S. Components Release'').
\39\ Under Rule 14.11(c)(3)(A)(ii), index fund shares with components that include Non-U.S. Component Stocks can hold a portfolio that is entirely composed of Non-U.S. Component Stocks that are listed on markets that are neither members of ISG, nor with which the Exchange has in place a CSSA.
\40\ ISG is comprised of an international group of exchanges, market centers, and market regulators that perform front-line market surveillance in their respective jurisdictions. See https://www.isgportal.org/home.html.
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Proposed Rule 14.11(i)(4)(C)(ii) would describe the standards for a Managed Fund Share portfolio that holds fixed income securities, which are debt securities \41\ 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 (``GSE Securities''), 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,\42\ and commercial paper. To the extent that a portfolio includes convertible securities, the fixed income security into which such security is converted shall meet the criteria of proposed Rule 14.11(i)(4)(C)(ii) after converting. The components of the fixed income portion of a portfolio shall meet the following criteria initially and on a continuing basis:
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\41\ Debt securities include a variety of fixed income obligations, including, but not limited to, corporate debt securities, government securities, municipal securities, convertible securities, and mortgage-backed securities. Debt securities include investment-grade securities, non-investment-grade securities, and unrated securities. Debt securities also include variable and floating rate securities.
\42\ The Exchange notes that, for purposes of this proposal, the issuer of asset backed securities will be considered the issuer of the underlying debt.
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(1) Components that in the aggregate account for at least 75% of the fixed income weight of the portfolio shall each have a minimum original principal amount outstanding of $100 million or more; \43\
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\43\ This proposed text of 14.11(i)(4)(C)(ii)(a)(1) is based on the corresponding text of 14.11(c)(4)(B)(i)(b).
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(2) No component fixed-income security (excluding Treasury Securities and GSE Securities) could represent more than 30% of the fixed income weight of the portfolio, and the five most heavily weighted fixed income securities in the portfolio (excluding Treasury Securities and GSE Securities) shall not in the aggregate account for more than 65% of the fixed income weight of the portfolio; \44\
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\44\ This proposed rule text is identical to the corresponding text of Rule 14.11(c)(4)(B)(i)(d), except for the omission of the reference to ``index,'' which is not applicable, and the exclusion of ``GSE Securities,'' which is consistent with the corresponding text of NYSE Arca, Inc. (``Arca'') Commentary .02(a)(4) to Rule 5.2(j)(3).
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(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 Rule 14.11(i)(4)(C)(i); \45\
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\45\ This proposed text is similar to the corresponding text of Rule 14.11(c)(4)(B)(i)(e), except for the omission of the reference to ``index,'' which is not applicable and the provision 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 proposed Rule 14.11(i)(4)(C)(i).
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(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; and
(5) Non-agency, non-GSE and privately-issued mortgage-related and other asset-backed securities components of a portfolio shall not account, in the aggregate, for more than 20% of the weight of the fixed income portion of the portfolio.
Proposed Rule 14.11(i)(4)(C)(iii) describes the standards for a Managed Fund Share portfolio that holds cash and cash equivalents.\46\ Specifically, the portfolio may hold short-term instruments with maturities of less than 3 months. There would be no limitation to the percentage of the portfolio invested in such holdings. Short-term instruments would include the following: \47\ (1) 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; (2) certificates of deposit issued against funds deposited in a bank or savings and loan association; (3) bankers' acceptances, which are short-term credit instruments used to finance commercial transactions; (4) repurchase agreements and reverse repurchase agreements; (5) bank time deposits, which are monies kept on deposit with banks or savings
Page 38252
and loan associations for a stated period of time at a fixed rate of interest; (6) commercial paper, which are short-term unsecured promissory notes; and (7) money market funds.
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\46\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly included the ability for such Managed Fund Share holdings to include cash and cash equivalents. See, e.g., iShares U.S. Fixed Income Balanced Risk Approval at 9789, SPDR Blackstone/GSO Senior Loan Approval at 19768-69, and First Trust Preferred Securities and Income Approval at 76150.
\47\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly specified short-term instruments with respect to their inclusion in Managed Fund Share holdings. See, e.g., First Trust Preferred Securities and Income Approval at 76150-
51.
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Proposed Rule 14.11(i)(4)(C)(iv) describes the standards for a Managed Fund Share portfolio that holds listed derivatives, including futures, options and swaps on commodities, currencies and financial instruments (e.g., stocks, fixed income, interest rates, and volatility) or a basket or index of any of the foregoing.\48\ There would be no limitation to the percentage of the portfolio invested in such holdings; provided, however, that, in the aggregate, at least 90% of the weight of such holdings invested in futures, exchange-traded options, and listed swaps shall, on both an initial and continuing basis, consist of futures, options, and swaps for which the Exchange may obtain information via the ISG from other members or affiliates or for which the principal market is a market with which the Exchange has a CSSA, calculated using the aggregate gross notional value of such holdings.\49\ In addition, the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets shall not exceed 65% of the weight of the portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset shall not exceed 30% of the weight of the portfolio (including gross notional exposures). The Exchange notes that, for purposes of calculating this limitation, a portfolio's investment in listed derivatives will be calculated as the gross notional value of the listed derivatives.
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\48\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly included the ability for such Managed Fund Share holdings to include listed derivatives. See, e.g., Securities Exchange Act Release Nos. 75 FR 13616 (March 22, 2010) (SR-NYSEArca-2010-04) at 13617; and 67054 (May 24, 2012), 77 FR 32161 (May 31, 2012) (SR-NYSEArca-2012-25) at 32163.
\49\ See supra note 40.
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Proposed Rule 14.11(i)(4)(C)(v) describes the standards for a Managed Fund Share portfolio that holds over the counter (``OTC'') derivatives, including forwards, options and swaps on commodities, currencies and financial instruments (e.g., stocks, fixed income, interest rates, and volatility) or a basket or index of any of the foregoing.\50\ Proposed Rule 14.11(i)(4)(C)(v) also provides that the aggregate gross notional value of OTC Derivatives shall not exceed 20% of the weight of the portfolio (including gross notional exposures).
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\50\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly included the ability for such Managed Fund Shares to include OTC derivatives, specifically OTC down-and-in put options, which are not NMS Stocks as defined in Rule 600 of Regulation NMS and therefore would not satisfy the requirements of Rule 14.11(c)(3)(A)(i) or the analogous rule on another listing exchange. See, e.g., Securities Exchange Act Release No. 69373 (April 15, 2013), 78 FR 23601 (April 19, 2013) (SR-
NYSEArca-2012-108) at 23602.
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Proposed Rule 14.11(i)(4)(C)(vi) provides that, to the extent that listed or OTC derivatives are used to gain exposure to individual equities and/or fixed income securities, or to indexes of equities and/
or fixed income securities, the aggregate gross notional value of such exposure shall meet the criteria set forth in Rule 14.11(i)(4)(C)(i) and 14.11(i)(4)(C)(ii) (including gross notional exposures), respectively. The Exchange notes that, for purposes of this proposal, a portfolio's investment in OTC derivatives will be calculated as the gross notional value of the OTC derivatives.
The Exchange believes that the proposed standards would continue to ensure transparency surrounding the listing process for Managed Fund Shares. Additionally, the Exchange believes that the proposed portfolio standards for listing and trading Managed Fund Shares, many of which track existing Exchange rules relating to Index Fund Shares, are reasonably designed to promote a fair and orderly market for such Managed Fund Shares. These proposed standards would also work in conjunction with the existing initial and continued listing criteria related to surveillance procedures and trading guidelines.
As an example of how the Exchange would determine whether a series of Managed Fund Shares meets these proposed portfolio exposure requirements, see the following examples based on a hypothetical portfolio. For purposes of these examples, it will be assumed that the portfolio meets proposed Rules 14.11(i)(4)(C)(i)(a)(1), (2), (4), (5), and (6), 14.11(i)(4)(C)(i)(b)(1), (2), (4), and (5), and 14.11(i)(4)(C)(ii)(a), (c), and (d).
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Percent of
Instrument type Units Price ($) Market value portfolio
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U.S. Equity 1................................... 15,000 25 375,000 7.50
U.S. Equity 2................................... 10,000 50 500,000 10.00
U.S. Equity 3................................... 5,000 100 500,000 10.00
U.S. Equity 4................................... 1,200 150 180,000 3.60
U.S. Equity 5................................... 1,000 250 250,000 5.00
Int'l Equity 1.................................. 9,000 25 225,000 4.50
Int'l Equity 2.................................. 5,000 50 250,000 5.00
Int'l Equity 3.................................. 5,000 100 500,000 10.00
Int'l Equity 4.................................. 10,000 75 750,000 15.00
Int'l Equity 5.................................. 2,000 75 150,000 3.00
Fixed Income 1.................................. 5,000 25 125,000 2.50
Fixed Income 2.................................. 6,400 50 320,000 6.40
Fixed Income 3 (Private label ABS).............. 2,000 75 150,000 3.00
TBill 1 (2 months).............................. 12,500 50 625,000 12.50
TBill 2 (6 months).............................. 2,000 50 100,000 2.00
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Total Equity................................ .............. .............. .............. 3,680,000
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Total Fixed Income.......................... .............. .............. .............. 1,320,000
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Total....................................... .............. .............. 5,000,000 100.00
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Page 38253
In this hypothetical portfolio, proposed Rule 14.11(i)(4)(C)(i)(a)(3) is met because the most heavily weighted single U.S. equity component stock (both U.S. Equity 2 and U.S. Equity 3) represents 13.6% of the equity weight of the portfolio (500,000/
3,680,000) and the five most heavily weighted U.S. equity component stocks represent 49% of the equity weight of the portfolio (1,805,000/
3,680,000) and proposed Rule 14.11(i)(4)(C)(i)(b)(3) is met because the most heavily weighted Non-U.S. Component Stock composes 20.4% of the equity weight of the portfolio (750,000/3,680,000) and the five most heavily weighted Non-U.S. Component Stocks compose 51% of the equity weight of the portfolio (1,875,000/3,680,000). Proposed Rules 14.11(i)(4)(C)(ii)(b) and (e) are met because the most heavily weighted fixed income security (excluding Treasury Securities) represents 24.2% of the fixed income weight of the portfolio (320,000/1,320,000), the five most heavily weighted fixed income securities (excluding Treasury Securities) represent 45% of the fixed income weight of the portfolio (595,000/1,320,000), and the non-agency, non-GSE, and privately-issued mortgage-related and other asset-backed securities components represent 11.4% of the fixed income weight of the portfolio (150,000/1,320,000). For purposes of this analysis, both TBill 1 and TBill 2 will be counted as fixed income securities even though TBill 1 would be included in the definition of cash and cash equivalents. There is no portfolio analysis specific to the cash and cash equivalents portion of the portfolio because there are no limitations to the percentage of the portfolio invested in instruments that qualify as cash and cash equivalents.
Suppose that the hypothetical portfolio laid out above added the following instruments:
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Precent of
Units of Price or face Absolute portfolio
Instrument type reference value of notional (including
asset in the reference exposure gross notional
contract(s) asset exposures)
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Listed Derivative 1 (Option on U.S. Equity 1)... 10,000 20 200,000 3.20
Listed Derivative 2 (Treasury Futures).......... 5 100,000 500,000 8.00
Listed Derivative 3 (Commodity Swap)............ 200 250 50,000 0.80
OTC Derivative 1 (Credit Default Swap).......... N/A 500,000 500,000 8.00
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Total Derivative............................ .............. .............. 1,250,000 ..............
Listed Derivative............................... .............. .............. 750,000 ..............
Derivative Equity............................... .............. .............. 200,000 ..............
Derivative FI................................... .............. .............. 500,000 ..............
Derivative Other................................ .............. .............. 550,000 ..............
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Total Equity................................ .............. .............. 3,880,000 ..............
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Total Fixed Income.......................... .............. .............. 1,820,000 ..............
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Total....................................... .............. .............. 6,250,000 ..............
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In this hypothetical portfolio, proposed Rule 14.11(i)(4)(C)(vi) provides that the calculations provided above related to Rules 14.11(i)(4)(C)(i) and (ii) would now need to include the aggregate gross notional value of Listed Derivative 1 and Listed Derivative 2, respectively. As such, the $200,000 absolute notional exposure from Listed Derivative 1 would be added to the existing exposure to U.S. Equity 1 and proposed Rule 14.11(i)(4)(C)(i)(a)(3) would be met because the most heavily weighted single U.S. equity component stock (now U.S. Equity 1) represents 14.8% of the equity weight of the portfolio (575,000/3,880,000) and the five most heavily weighted U.S. equity component stocks represent 51.7% of the equity weight of the portfolio (2,005,000/3,880,000). Similarly, proposed Rule 14.11(4)(C)(i)(b)(3) is met because the additional $500,000 in aggregate gross notional exposure to fixed income securities (in particular, Treasury Securities) gained through Listed Derivative 2 is added included in the calculation such that the most heavily weighted fixed income security (excluding Treasury Securities) represents 17.6% of the fixed income weight of the portfolio (320,000/1,820,000), the five most heavily weighted fixed income securities (excluding Treasury Securities) represent 32.7% of the fixed income weight of the portfolio (595,000/
1,820,000), and the non-agency, non-GSE, and privately-issued mortgage-
related and other asset-backed securities components represent 8.2% of the fixed income weight of the portfolio (150,000/1,820,000). Proposed Rule 14.11(4)(C)(iv)(a) would be met if both Listed Derivative 1 and Listed Derivative 2 are derivatives for which the Exchange may obtain information via the ISG, from other members or affiliates of the ISG or for which the principal market is a market with which the Exchange has a comprehensive surveillance sharing agreement ((500,000 + 200,000)/
750,000) = 93%>90%. However, if Listed Derivative 1 or Listed Derivative 2 did not meet that requirement, the portfolio would not meet proposed Rule 14.11(4)(C)(iv)(a) ((500,000 + 50,000)/750,000) = 73.3% Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include File Number SR-BATS-2015-100 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-BATS-2015-100. 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 Web site (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 Web site 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 such filing will also be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-BATS-2015-100 and should be submitted on or before June 28, 2016.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\72\
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\72\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
FR Doc. 2016-13825 Filed 6-10-16; 8:45 am
BILLING CODE 8011-01-P
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