[Federal Register Volume 77, Number 111 (Friday, June 8, 2012)]
[Notices]
[Pages 34117-34121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-13892]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67100; File No. SR-NYSEArca-2012-49]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Allow the Use of
Swap Agreements Under Limited Circumstances by the ProShares VIX Short-
Term Futures ETF and the ProShares VIX Mid-Term Futures ETF, Which Are
Listed and Traded on the Exchange Under NYSE Arca Equities Rule 8.200,
Commentary .02
June 4, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on May 22, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to accommodate the use of swap agreements
under limited circumstances by the ProShares VIX Short-Term Futures ETF
and the ProShares VIX Mid-Term Futures ETF, which are listed and traded
on the Exchange under NYSE Arca Equities Rule 8.200, Commentary .02.
The text of the proposed rule change is available on the Exchange's Web
site at www.nyse.com, at the principal office of the Exchange, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included
[[Page 34118]]
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 those statements may be examined at the places
specified in Item IV below. The Exchange has prepared summaries, set
forth in sections A, B, and C below, of the most significant parts of
such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NYSE Arca Equities Rule 8.200, Commentary .02 permits the trading
of Trust Issued Receipts (``TIRs'') either by listing or pursuant to
unlisted trading privileges (``UTP'').\3\ The Commission has approved
listing and trading on the Exchange of shares (``Shares'') of the
ProShares VIX Short-Term Futures ETF and the ProShares VIX Mid-Term
Futures ETF (``Funds'') under NYSE Arca Equities Rule 8.200, Commentary
.02,\4\ and the Shares have commenced listing and trading on the
Exchange.
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\3\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to
TIRs that invest in ``Financial Instruments.'' The term ``Financial
Instruments,'' as defined in Commentary .02(b)(4) to NYSE Arca
Equities Rule 8.200, means 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.
\4\ See Securities Exchange Act Release No. 63610 (December 27,
2010), 76 FR 199 (January 3, 2011) (SR-NYSEArca-2010-101) (``Prior
Order''). The notice with respect to the Prior Order was published
in Securities Exchange Act Release No. 63317 (November 16, 2010), 75
FR 71158 (November 22, 2010) (``Prior Notice'' and, together with
the Prior Order, ``Prior Release'').
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The Funds seek to provide investment results (before fees and
expenses) that match the performance of a benchmark that seeks to offer
exposure to market volatility through publicly traded futures markets.
The benchmark for ProShares VIX Short-Term Futures ETF is the S&P 500
VIX Short-Term Futures Index, and the benchmark for ProShares VIX Mid-
Term Futures ETF is the S&P 500 VIX Mid-Term Futures Index (each, an
``Index,'' and collectively, ``Indexes'').\5\ To pursue their
respective investment objectives, the Funds invest in futures contracts
that comprise their respective Index and that are based on the Chicago
Board Options Exchange (``CBOE'') Volatility Index or ``VIX'' (``VIX
Futures Contracts''). VIX Futures Contracts are traded on the CBOE
Futures Exchange (``CFE''). Each Fund also may invest in cash or cash
equivalents such as U.S. Treasury securities or other high credit
quality, short-term fixed-income or similar securities (including
shares of money market funds, bank deposits, bank money market
accounts, certain variable rate-demand notes, and repurchase agreements
collateralized by government securities) that may serve as collateral
for the futures contracts.
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\5\ Standard & Poor's Financial Services LLC, the index sponsor
with respect to the Indexes, is not a broker-dealer or affiliated
with a broker-dealer, and has implemented procedures designed to
prevent the use and dissemination of material, non-public
information regarding the Indexes.
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ProShare Capital Management LLC (``Sponsor''), a Maryland limited
liability company, serves as the Sponsor of ProShares Trust II
(``Trust'').\6\ The Sponsor is a commodity pool operator and commodity
trading advisor. Brown Brothers Harriman & Co. serves as the
administrator (``Administrator''), custodian, and transfer agent of the
Funds and their respective Shares. SEI Investments Distribution Co.
(``Distributor'') serves as Distributor of the Shares. Wilmington Trust
Company, a Delaware banking corporation, is the sole trustee of the
Trust.
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\6\ The Trust has filed a registration statement on Form S-3
under the Securities Act of 1933 (15 U.S.C. 77a), dated November 5,
2010, relating to the Funds (File No. 333-163511) (``Registration
Statement''). The description of the Funds and the Shares contained
in the Prior Release were based, in part, on the Registration
Statement. The changes described herein will become effective upon
filing with the Commission of an amendment to the Trust's
Registration Statement. The Sponsor represents that the Sponsor has
managed and will continue to manage the Funds in the manner
described in the Prior Release, and will not implement the changes
described herein until the instant proposed rule change becomes
operative and an amendment to the Registration Statement has become
effective.
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According to the Registration Statement, if a Fund is successful in
meeting its objective, its value (before fees and expenses) should gain
approximately as much on a percentage basis as the level of its
corresponding Index when it rises. Conversely, its value (before fees
and expenses) should lose approximately as much on a percentage basis
as the level of its corresponding Index when it declines. Each Fund
acquires exposure through VIX Futures Contracts such that each Fund has
exposure intended to approximate the benchmark at the time of the net
asset value (``NAV'') calculation.\7\
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\7\ Terms relating to the Funds, the Shares, and the Indexes
referred to, but not defined, herein are defined in the Registration
Statement.
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Under the current proposal, the Funds seek to utilize swap
agreements and futures contracts other than VIX Futures Contracts (as
further described herein) to pursue their respective investment
objectives.\8\
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\8\ The Commission previously has approved listing and trading
on the Exchange of issues of TIRs under NYSE Arca Equities Rule
8.200, Commentary .02 that may hold swaps under limited
circumstances. See, e.g., Securities Exchange Act Release Nos. 62527
(July 19, 2010), 75 FR 43606 (July 26, 2010) (SR-NYSEArca-2010-44)
(order approving Exchange listing and trading of United States
Commodity Index Fund); 63869 (February 8, 2011), 76 FR 8799
(February 15, 2011) (SR-NYSEArca-2010-119) (order approving Exchange
listing and trading of Teucrium WTI Crude Oil Fund); and 65134
(August 15, 2011), 76 FR 52034 (August 19, 2011) (SR-NYSEArca-2011-
23) (order approving Exchange listing and trading of ProShares Short
VIX Short-Term Futures ETF, ProShares Short VIX Mid-Term Futures
ETF, ProShares Ultra VIX Short-Term Futures ETF, ProShares Ultra VIX
Mid-Term Futures ETF, ProShares UltraShort VIX Short-Term Futures
ETF, and ProShares UltraShort VIX Mid-Term Futures ETF).
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Going forward, in the event position accountability rules are
reached with respect to VIX Futures Contracts, the Sponsor, may, in its
commercially reasonable judgment, cause the Funds to obtain exposure
through swaps referencing the relevant Index or particular VIX Futures
Contracts, or invest in other futures contracts or swaps not based on
the particular VIX Futures Contracts if such instruments tend to
exhibit trading prices or returns that correlate with the Indexes or
any VIX Futures Contract and will further the investment objective of
the Funds.\9\ The Funds may also invest in swaps if the market for a
specific futures contract experiences emergencies (e.g., natural
disaster, terrorist attack, or an act of God) or disruptions (e.g., a
trading halt or a flash crash) that prevent the Funds from obtaining
the appropriate amount of investment exposure to the affected VIX
Futures Contracts directly or other futures contract.\10\
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\9\ To the extent practicable, the Funds will invest in swaps
cleared through the facilities of a centralized clearing house. Each
Fund also may invest in cash or cash equivalents, such as U.S.
Treasury securities or other high credit quality, short-term fixed-
income or similar securities (including shares of money market
funds, bank deposits, bank money market accounts, certain variable
rate-demand notes, and repurchase agreements collateralized by
government securities) that may serve as collateral for the futures
contracts and swap agreements.
\10\ The Sponsor will also attempt to mitigate the Funds' credit
risk by transacting only with large, well-capitalized institutions
using measures designed to determine the creditworthiness of a
counterparty. The Sponsor will take various steps to limit
counterparty credit risk, which will be described in the
Registration Statement. The Funds will enter into swap agreements
only with financial institutions that meet certain credit quality
standards and monitoring policies. The Funds may use various
techniques to minimize credit risk including early termination or
reset and payment, using different counterparties, and limiting the
net amount due from any individual counterparty. The Funds generally
will collateralize swap agreements with cash and/or certain
securities. Such collateral will generally be 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
Funds. In the event of a default by the counterparty, and the Funds
are owed money in the swap transaction, the Funds will seek
withdrawal of this collateral from the segregated account and may
incur certain costs exercising its right with respect to the
collateral.
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[[Page 34119]]
The above representations regarding the Funds' prospective use of
swaps and other futures contracts are substantially the same as those
made with respect to other funds of the Trust that utilize VIX Futures
Contracts and that have been approved by the Commission for listing and
trading on the Exchange.\11\ The Sponsor believes it is necessary and
appropriate to have additional flexibility to utilize swaps and futures
contracts other than VIX Futures Contracts in a manner that will
further the investment objective of the Funds, in the event position
accountability rules are reached with respect to VIX Futures Contracts.
Such procedures would be the same as those applicable to other funds of
the Trust based on VIX Futures Contracts that are currently listed on
the Exchange. The Sponsor believes application by the Sponsor of
consistent investment procedures among funds of the Trust that hold VIX
Futures Contracts, including the Funds, with respect to utilization of
swaps and futures contracts other than VIX Futures Contracts, will
promote efficient operation of the Funds in furtherance of each Fund's
investment objective.
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\11\ See note 9, supra, regarding Commission approval of SR-
NYSEArca-2011-23.
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In addition, with respect to any Fund's holdings of futures
contracts traded on exchanges, not more than 10% of the weight of such
futures contracts in the aggregate shall consist of components whose
principal trading market is not a member of the Intermarket
Surveillance Group (``ISG'') or is a market with which the Exchange
does not have a comprehensive surveillance sharing agreement.
The intra-day futures prices, closing price, and settlement prices
of the VIX Futures Contracts or other futures contracts, as applicable,
held by the Funds will be available from the CFE, other futures
exchanges, automated quotation systems, published or other public
sources, or on-line information services. Information relating to
cleared swaps will be available from major market data vendors. The
value of swaps and futures contracts other than VIX Futures Contracts,
as applicable, will be included in: (1) The calculation of the NAV for
the Shares, which is disseminated daily; and (2) the Indicative
Optimized Portfolio Value (``IOPV'') for the Shares, which is widely
disseminated at least every 15 seconds during the Core Trading Session
by one or more major market data vendors.\12\ The portfolio disclosure
for the Funds, which is disseminated daily, will include swaps and
futures contracts other than VIX Futures Contracts, if any, in addition
to VIX Futures Contracts.
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\12\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available IOPVs
taken from the Consolidated Tape Association or other data feeds.
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All other representations in the Prior Release remain as stated
therein and no other changes are being made.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \13\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market,
and, in general, to protect investors and the public interest.
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\13\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule 8.200
and Commentary .02 thereto. The Exchange has in place surveillance
procedures that are adequate to properly monitor trading in the Shares
in all trading sessions and to deter and detect violations of Exchange
rules and applicable federal securities laws. The Exchange may obtain
information via the ISG from other exchanges that are members of ISG or
with which the Exchange has entered into a comprehensive surveillance
sharing agreement. Under normal market conditions, the Funds invest in
VIX Futures Contracts, which are traded on CFE, an ISG member. Going
forward, in the event position accountability rules are reached with
respect to VIX Futures Contracts, the Sponsor, may, in its commercially
reasonable judgment, cause the Funds to obtain exposure through swaps
or other futures contracts, as described above. To the extent
practicable, the Funds will invest in swaps cleared through the
facilities of a centralized clearing house. The Sponsor will attempt to
mitigate the Funds' credit risk by transacting only with large, well-
capitalized institutions using measures designed to determine the
creditworthiness of a counterparty. The intra-day futures prices,
closing price, and settlement prices of the VIX Futures Contracts or
other futures contracts, as applicable, held by the Funds will also be
available from the CFE, other futures exchanges, automated quotation
systems, published or other public sources, or on-line information
services. Information relating to cleared swaps and futures contracts
other than VIX Futures Contracts, as applicable, held by the Funds will
be available from major market data vendors. The value of swaps and
futures contracts other than VIX Futures Contracts, as applicable, will
be included in: (1) The calculation of NAV for the Shares, which is
disseminated daily, and (2) the IOPV for the Shares. The portfolio
disclosure for the Funds, which is disseminated daily, will include
swaps and futures contracts other than VIX Futures Contracts, if any,
in addition to VIX Futures Contracts. Quotation and last-sale
information for the Shares will be available via the Consolidated Tape
Association. Each Fund's total portfolio composition will be disclosed
on the Funds' Web site or another relevant Web site. The Exchange
represents that the Exchange may halt trading during the day in which
the interruption to the dissemination of the IOPV, the value of the
Indexes, the VIX, or the value of the underlying VIX Futures Contracts
occurs. If the interruption to the dissemination of the IOPV, the value
of the Indexes, the VIX, or the value of the underlying VIX Futures
Contracts persists past the trading day in which it occurred, the
Exchange will halt trading no later than the beginning of the trading
day following the interruption. In addition, if the Exchange becomes
aware that the NAV with respect to the Shares is not disseminated to
all market participants at the same time, it will halt trading in the
Shares until such time as the NAV is available to all market
participants. With respect to any Fund's holdings of futures contracts
traded on exchanges, not more than 10% of the weight of such futures
contracts in the aggregate shall consist of components whose principal
trading market is not a member of the ISG or is a market with which the
Exchange does not have a comprehensive surveillance sharing agreement.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that a large amount of information is publicly available regarding the
Funds and the Shares, thereby promoting market transparency. One or
more major market data vendors will disseminate the level of each Index
at least every 15 seconds both in real time from 9:30 a.m. to 4:15 p.m.
Eastern time and at the close of trading on each
[[Page 34120]]
business day. The NAV per Share is calculated daily and made available
to all market participants at the same time. One or more major market
data vendors will disseminate for the Funds on a daily basis
information with respect to the recent NAV per Share and Shares
outstanding. The IOPV will be widely disseminated by one or more major
market data vendors at least every 15 seconds during the Core Trading
Session. Trading in Shares of the Funds will be halted if the circuit
breaker parameters in NYSE Arca Equities Rule 7.12 have been reached or
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
additional types of actively-managed exchange-traded products that will
enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG from other exchanges that are members of ISG
or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. In addition, as noted above, investors
will have ready access to information regarding the Funds' holdings,
IOPV, and quotation and last-sale information for the Shares.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) thereunder.\15\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder.
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\14\ 15 U.S.C. 78s(b)(3)(A).
\15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative prior to 30 days after the date of the filing.
However, pursuant to Rule 19b-4(f)(6)(iii),\16\ the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. NYSE Arca has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Commission notes that
waiver of the operative delay would permit the Funds to utilize, under
certain limited circumstances, swap agreements and futures contracts
other than VIX Futures Contracts to pursue their respective investment
objectives.
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\16\ 17 CFR 240.19b-4(f)(6)(iii).
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The Funds may invest in swaps and futures contracts other than VIX
Futures Contracts in the event position accountability rules are
reached with respect to VIX Futures Contracts, and may also invest in
swaps if the market for a specific futures contract experiences certain
emergencies or disruptions. NYSE Arca represents that any investments
in swaps or futures contracts other than VIX Futures Contracts would be
consistent with the Funds' respective investment objectives. To the
extent practicable, the Funds will invest in swaps cleared through the
facilities of a centralized clearinghouse. In addition, the Sponsor
will attempt to mitigate swap counterparty credit risk by transacting
only with large, well-capitalized institutions. The value of swaps and
futures contracts other than VIX Futures Contracts will be included in
the calculation of the NAV and IOPV for the Shares. Each Fund's total
portfolio composition, including any swaps and futures contracts other
than VIX Futures Contracts held by the Funds, will be disclosed on the
Funds' Web site or another relevant Web site. In addition, not more
than 10% of the weight of futures contracts traded on exchanges held by
each Fund in the aggregate shall consist of components whose principal
trading market is not a member of the ISG or is a market with which
NYSE Arca does not have a comprehensive surveillance sharing agreement.
Further, NYSE Arca represents that the Funds' respective investment
objectives are not changing, all other representations made in the
Prior Release remain unchanged, and the Funds will continue to comply
with initial and continued listing requirements under NYSE Arca
Equities Rule 8.200 and Commentary .02 thereto. For the foregoing
reasons, the Commission believes that the proposed change does not
raise novel or unique regulatory issues that should delay the
implementation of the Funds' proposed investments in swaps and futures
contracts other than VIX Futures Contracts. Accordingly, the Commission
waives the 30-day operative delay requirement because the proposed rule
change is consistent with the protection of investors and the public
interest.\17\
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\17\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2012-49 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission,
[[Page 34121]]
100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2012-49. 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
a.m. and 3 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; 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-NYSEArca-2012-49 and should
be submitted on or before June 29, 2012.
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\18\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13892 Filed 6-7-12; 8:45 am]
BILLING CODE 8011-01-P