[Federal Register Volume 78, Number 162 (Wednesday, August 21, 2013)]
[Notices]
[Pages 51769-51775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-20336]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70209; File No. SR-NYSEArca-2013-60]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change To List and Trade Shares of Market
Vectors Low Volatility Commodity ETF and Market Vectors Long/Short
Commodity ETF Under NYSE Arca Equities Rule 8.200
August 15, 2013.
I. Introduction
On June 12, 2013, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
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 Market Vectors Low Volatility
Commodity ETF (``Low Volatility ETF'') and Market Vectors Long/Short
Commodity ETF (``Long/Short ETF'' and, together with the Low Volatility
ETF, ``Funds'') under NYSE Arca Equities Rule 8.200. The proposed rule
change was published for comment in the Federal Register on July 2,
2013.\3\ The Commission received no comments on the proposed rule
change. This order grants approval of 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. 69862 (June 26,
2013), 78 FR 39810 (``Notice'').
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II. Description of Proposed Rule Change
The Exchange proposes to list and trade Shares of the Funds
pursuant to NYSE Arca Equities Rule 8.200, Commentary .02.\4\ Each Fund
is a series of the Market Vectors Commodity Trust (``Trust''), a
Delaware statutory trust.\5\ Van Eck Absolute Return Advisers Corp. is
the managing owner of the Funds (``Managing Owner'').\6\ The Managing
Owner also serves as the commodity pool operator and commodity trading
advisor of the Funds. The Managing Owner is registered as a commodity
pool operator and commodity trading advisor with the Commodity Futures
Trading Commission (``CFTC'') and is a member of National Futures
Association. Wilmington Trust, National Association (``Trustee''), a
national bank with its principal place of business in Delaware, is the
sole trustee of the Trust. The Bank of New York Mellon will be the
custodian, administrator, and transfer agent for the Funds.
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\4\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to
Trust Issued Receipts 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.
\5\ The Trust filed a pre-effective amendment to its
registration statements with respect to the Funds on Form S-1 under
the Securities Act of 1933 (``1933 Act'') on December 7, 2012 (File
No. 333-179435 for the Low Volatility ETF (``Low Volatility
Registration Statement'')) and File No. 333-179432 for the Long/
Short ETF (``Long/Short Registration Statement'' and, together with
the Low Volatility Registration Statement, ``Registration
Statements'').
\6\ The Managing Owner is affiliated with a broker-dealer and
has implemented a ``fire wall'' with respect to such broker-dealer
and has policies and procedures in place regarding access to
information concerning the composition and/or changes to the Funds'
portfolio composition.
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Overview of the Funds
The Low Volatility ETF will seek to track changes, whether positive
or negative, in the performance of the Morningstar[supreg] Long/Flat
Commodity Index\SM\ (``Long/Flat Index'') over time. The Long/Short ETF
will seek to track changes, whether positive or negative, in the
performance of the Morningstar[supreg] Long/Short Commodity Index\SM\
(``Long/Short Index'' and, together with the Long/Flat Index,
``Indexes'') over time.
Each Fund will seek to achieve its respective investment objective
by investing principally in exchange-traded futures contracts on
commodities (``Index Commodity Contracts'') comprising the Long/Flat
Index and the Long/Short Index, respectively, and U.S. Treasury bills
maturing in eight weeks or less to reflect ``flat'' positions and, in
certain circumstances (as described below), futures contracts other
than Index Commodity Contracts traded on
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U.S. or foreign exchanges (``Other Commodity Contracts'').\7\ In
addition, to a limited extent, the Funds may also invest in swap
agreements on Index Commodity Contracts or Other Commodity Contracts
cleared through a central clearing house or the clearing house's
affiliate (``Cleared Swaps''), forward contracts, exchange-traded cash-
settled options (including options on one or more Index Commodity
Contracts, Other Commodity Contracts, or indexes that include any Index
Commodity Contracts or Other Commodity Contracts), swaps other than
Cleared Swaps, and other over-the-counter (``OTC'') transactions that
provide economic exposure to the investment returns of the commodities
markets, as represented by the Indexes and their constituents
(collectively, ``Other Commodity Instruments,'' and, together with
Other Commodity Contracts and Cleared Swaps, ``Other Instruments''), as
described below. The Funds also may invest in U.S. Treasury bonds,
other U.S. Treasury bills, and other U.S. government securities and
related securities, money market funds, certificates of deposit, time
deposits, and other high credit quality short-term fixed income
securities, as described in the Registration Statements (collectively,
``Cash Instruments''). The Cash Instruments used to track flat
positions in the Indexes will be U.S. Treasury bills.
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\7\ According to the Exchange, the Managing Owner expects that
Other Commodity Contracts in which a Fund may invest in the
circumstances described below would include futures contracts of
different expirations, on different commodities, or traded on
different exchanges than Index Commodity Contracts.
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Each Fund intends to invest first in Index Commodity Contracts.
Thereafter, if a Fund reaches the position limits applicable to one or
more Index Commodity Contracts or a ``Futures Exchange'' \8\ imposes
limitations on the Fund's ability to maintain or increase its positions
in an Index Commodity Contract after reaching accountability levels or
a price limit is in effect on an Index Commodity Contract during the
last 30 minutes of its regular trading session, the Fund's intention is
to invest first in Cleared Swaps, to the extent permitted under the
position limits applicable to Cleared Swaps and appropriate in light of
the liquidity in the Cleared Swaps market, and then, using its
commercially reasonable judgment, in Other Commodity Contracts or in
Other Commodity Instruments. By using certain or all of these
investments, the Managing Owner will endeavor to cause a Fund's
performance to closely track that of the Long/Flat Index or Long/Short
Index, respectively, over time. The specific circumstances under which
investments in Other Commodity Contracts and Other Commodity
Instruments may be used are discussed below.
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\8\ The Futures Exchanges are the exchanges on which the Index
Commodity Contracts are traded and include the following: the
Chicago Mercantile Exchange, Inc. (``CME''), Chicago Board of Trade
(``CBOT'', a division of CME), NYMEX (a division of CME), ICE
Futures US (``ICE-US''), and ICE Futures Europe (``ICE-UK''). Some
of a Fund's futures trading may be conducted on commodity futures
exchanges outside the United States. Trading on such exchanges is
not regulated by any U.S. governmental agency and may involve
certain risks not applicable to trading on U.S. exchanges, including
different or diminished investor protections.
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Consistent with seeking to achieve each Fund's investment
objective, if a Fund reaches position limits applicable to one or more
Index Commodity Contracts or when a Futures Exchange has imposed
limitations on a Fund's ability to maintain or increase its positions
in an Index Commodity Contract, the Managing Owner may cause a Fund to
first enter into or hold Cleared Swaps and then, if applicable, enter
into and hold Other Commodity Contracts or Other Commodity Instruments.
For example, certain Cleared Swaps have standardized terms similar, and
are priced by reference, to a corresponding Index Commodity Contract or
Other Commodity Contract. Additionally, certain Other Commodity
Instruments can generally be structured as the parties to the contract
desire. Therefore, a Fund might enter into multiple Cleared Swaps and/
or certain Other Commodity Instruments intended to exactly replicate
the performance of one or more Index Commodity Contracts or Other
Commodity Contracts, or a single Other Commodity Instrument designed to
replicate the performance of the applicable Index as a whole.\9\
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\9\ Assuming that there is no default by a counterparty to an
Other Commodity Instrument, the performance of the Other Commodity
Instrument should positively correlate with the performance of the
Long/Flat Index or Long/Short Index, as applicable, or the
applicable Index Commodity Contract.
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After reaching position limits or when a Futures Exchange has
imposed limitations on the Fund's ability to maintain or increase its
positions in an Index Commodity Contract as described above, and after
entering into or holding Cleared Swaps, a Fund might also enter into or
hold Other Commodity Contracts or Other Commodity Instruments that
would (1) facilitate effective trading, consistent with a Fund's long/
flat or long/short strategy, as applicable; or (2) be expected to
alleviate overall deviation between a Fund's performance and that of
the Long/Flat Index or Long/Short Index, as applicable, that may result
from certain market and trading inefficiencies or other reasons.
By using certain or all of these investments, the Managing Owner
will endeavor to cause a Fund's performance to closely track that of
the Long/Flat Index or Long/Short Index, as applicable, over time. Each
Fund will invest to the fullest extent possible in Index Commodity
Contracts and Other Instruments without being leveraged (i.e., without
seeking performance that is a multiple (e.g., 2X or 3X) or inverse
multiple of the Fund's respective Index) or unable to satisfy its
expected current or potential margin or collateral obligations with
respect to its investments in Index Commodity Contracts and Other
Commodity Contracts or Other Instruments.\10\
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\10\ The Managing Owner will attempt to minimize these market
and credit risks by requiring the Funds to abide by various trading
limitations and policies, which will include limiting margin
accounts and trading only in liquid markets. The Managing Owner will
implement procedures which will include, but will not be limited to:
Executing and clearing trades with creditworthy counterparties;
limiting the amount of margin or premium required for any Index
Commodity Contract or Other Commodity Contract or all Index
Commodity Contracts or Other Commodity Contracts combined; and
generally limiting transactions to Index Commodity Contracts or
Other Commodity Contracts which will be traded in sufficient volume
to permit the taking and liquidating of positions. The Funds will
enter into Other Commodity Instruments traded OTC (if any) with
counterparties selected by the Managing Owner. The Managing Owner
will select such Other Commodity Instrument (if any) counterparties
giving due consideration to such factors as it deems appropriate,
including, without limitation, creditworthiness, familiarity with
the applicable Index, and price. Under no circumstances will the
Funds enter into an Other Commodity Instrument traded OTC (if any)
with any counterparty whose credit rating is lower than investment-
grade at the time a contract is entered into. The Funds expect that
investments in OTC Other Commodity Instruments (if any) will be made
on terms that are standard in the market for such OTC Other
Commodity Instruments. In connection with such OTC Other Commodity
Instruments, the Funds may post or receive collateral in the form of
Cash Instruments, which will be marked to market daily.
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Each of the Indexes is currently composed of long, flat, or short
(as applicable) positions in Index Commodity Contracts, each of which
is subject to speculative position limits and other position
limitations, as applicable, which are imposed by either the CFTC or the
rules of the Futures Exchanges on which the Index Commodity Contracts
are traded. These position limits prohibit any person from holding a
position of more than a specific number of such Index Commodity
Contracts.
Futures Exchanges may establish daily price fluctuation limits on
futures contracts. The daily price fluctuation
[[Page 51771]]
limit establishes the maximum amount that the price of futures
contracts may vary either up or down from the previous day's settlement
price. Once the daily price fluctuation limit has been reached in a
particular futures contract, no trades may be made at a price beyond
that limit. Futures Exchanges may also establish accountability levels
applicable to futures contracts. A Futures Exchange may order a person
who holds or controls aggregate positions in excess of specified
position accountability levels not to further increase the positions,
to comply with any prospective limit which exceeds the size of the
position owned or controlled, or to reduce any open position which
exceeds position accountability levels if the Futures Exchange
determines that such action is necessary to maintain an orderly market.
Position limits, accountability levels, and daily price fluctuation
limits set by the Futures Exchanges have the potential to cause
tracking error, which could cause changes in the net asset value
(``NAV'') per Share to substantially vary from changes in the level of
the Index and prevent an investor from being able to effectively use
the Fund as a way to indirectly invest in the global commodity markets.
According to the Exchange, although the Managing Owner does not
expect the Funds to have a significant exposure to Other Commodity
Instruments that trade OTC, the Trust's Declaration of Trust does not
limit the amount of funds that the Funds may invest in such Other
Commodity Instruments. Therefore, as the amount of funds invested in
Other Commodity Instruments that trade OTC increase, the applicable
risks described in the Registration Statements increase
correspondingly.\11\
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\11\ Markets in which a Fund may effect a transaction in certain
Other Commodity Instruments may be in the OTC markets. The
participants and dealers in such markets are typically not subject
to the same level of credit evaluation and regulatory oversight as
are members of the exchange-based markets. This exposes a Fund to
the risk that a counterparty will not settle a transaction in
accordance with its terms and conditions because of a credit or
liquidity problem or a dispute over the terms of the contract
(whether or not bona fide), thus causing the Fund to suffer a loss.
See note 10, supra.
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The Long/Flat Index
The Long/Flat Index is a rules-based, fully collateralized
commodity futures index that employs a momentum rule to determine if
exposure to a particular commodity should be maintained with its
prescribed weighting (``long position'') or moved to cash (``flat
position'').\12\ For each Index Commodity Contract represented by the
Long/Flat Index, Morningstar[supreg], Inc. (``Morningstar'') \13\
calculates a ``linked price'' \14\ that incorporates both price changes
and roll yield.\15\ Whether a position will be long or flat is
determined, at the time of a monthly repositioning, by comparing the
linked price of each Index Commodity Contract to its 12-month moving
average. For example, if, at a monthly repositioning, the linked price
for an Index Commodity Contract exceeds its 12-month moving average,
the Long/Flat Index takes the long position in the subsequent month.
Conversely, if the linked price for an Index Commodity Contract is
below its 12-month moving average, the Long/Flat Index moves the
position to cash, i.e., flat.
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\12\ According to the Exchange, a long position is a position
that will increase in market price if the price of the commodities
comprising the Long/Flat Index, in the aggregate, are rising during
the period when the position is open. A flat position is a position
that will not increase in market price whether the price of the
commodities comprising the Long/Flat Index, in the aggregate, is
rising or falling.
\13\ Morningstar, Inc. is the index provider (``Index Provider''
or ``Morningstar'') with respect to the Indexes. Morningstar is not
registered as a broker-dealer. Morningstar Investment Services
(``MIS''), a wholly-owned subsidiary of the Index Provider, is a
broker-dealer and a registered investment adviser under the
Investment Advisers Act of 1940. Morningstar has implemented
procedures designed to prevent the illicit use and dissemination of
material, non-public information regarding the Indexes and has
implemented a ``fire wall'' with respect to its affiliated broker-
dealer regarding the Indexes.
\14\ A ``linking'' factor is defined for each commodity that
converts the price of the contract in effect at each point in time
to a value that accounts for contract rolls, i.e., the ``linked
price.'' Each time a contract is rolled, the ``linking'' factor is
adjusted by the ratio of the closing price of the current contract
to the closing price of the new contract.
\15\ Roll yield is the amount of return generated (either
positive or negative) by rolling a short-term contract into a
longer-term contract and profiting or losing money from the
convergence toward a higher or lower spot price. The linked price is
determined on the basis of price changes and roll yields. Rolling a
futures contract means closing out a position on near-dated (i.e.,
commodity futures contracts that are nearing expiration) commodity
futures contracts before they expire and establishing an equivalent
position in a longer-dated futures contract (i.e., commodity futures
contracts that have an expiration date further in the future) on the
same commodity. Futures contacts can be in ``backwardation,'' which
means that futures contracts with longer-term expirations are priced
lower than those with shorter-term expirations, or can exhibit
``contango,'' which means that futures contacts with longer-term
expirations are priced higher than those with shorter-term
expirations. In backwardation, market roll yields are positive. In
contango, market roll yields are negative.
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To be considered for inclusion in the Long/Flat Index, a commodity
future must be listed on a U.S. futures exchange, be denominated in
U.S. dollars and rank in the top 95% by total U.S. dollar value of the
total open interest pool of all eligible commodities. The weight of
each Index Commodity Contract is the product of two factors: magnitude
and the direction of the momentum signal (i.e., 1 for long, 0 for flat,
or -1 for short). On the annual reconstitution date, the magnitude is
the open interest weight of the Index Commodity Contract, calculated on
the second Friday of December, using data through the last trading day
of November. Individual contract weights are capped at 10%. Between
reconstitution dates, the weights vary based on the performance of the
individual commodity positions. The Long/Flat Index is reconstituted
annually and directions (i.e., whether long or flat) of each Index
Commodity Contract are determined monthly on the second Friday of each
month, which is one week prior to the monthly repositioning. As of
February 28, 2013, the sector weightings of the Long/Flat Index were
Agriculture (29.44%), Energy (50.37%), Livestock (4.48%), and Metals
(15.71%).
The Long/Short Index
The Long/Short Index is a rules-based, fully collateralized
commodity futures index that employs a momentum rule to determine if
exposure to a particular Index Commodity Contract should be maintained
with its prescribed weighting (``long position'') or moved to a short
weighting (``short position'').\16\ For each Index Commodity Contract
represented by the Long/Short Index, Morningstar calculates a ``linked
price''\17\ that incorporates both price
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changes and roll yield.\18\ Whether a position will be long or short
(or cash, i.e., flat in the case of energy futures contracts, as
described below) is determined, at the time of a monthly repositioning,
by comparing the linked price of each Index Commodity Contract to its
12-month moving average. For example, if, at a monthly repositioning,
the linked price for an Index Commodity Contract exceeds its 12-month
moving average, the Long/Short Index takes a long position in the
subsequent month. Conversely, if the linked price for an Index
Commodity Contract is below its 12-month moving average, the Long/Short
Index takes a short position. An exception is made for commodities in
the energy sector. If the signal for an Index Commodity Contract in the
energy sector is short, the weight of that Index Commodity Contract is
moved to cash (i.e., flat). According to the Long/Short Registration
Statement, energy is unique in that its price is extremely sensitive to
geopolitical events and not necessarily driven purely by demand-supply
imbalances.
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\16\ A short position is a position that will increase in market
price if the price of the Index Commodity Contracts comprising the
Long/Short Index, in the aggregate, are falling during the period
when the position is open. The Long/Short Index includes short
positions in Index Commodity Contracts. The Long/Short ETF may also
obtain a short position relative to certain Index Commodity
Contracts by establishing a short position with a counterparty by
investing in Other Instruments. According to the Long/Short
Registration Statement, the Long/Short ETF will profit if the price
of a short position in an Index Commodity Contract or Other
Instrument that provides exposure to a short position in such Index
Commodity Contract falls while the position is open, and the Long/
Short ETF will suffer loss if the price of a short position in an
Index Commodity Contract or Other Instrument that provides exposure
to a short position in such Index Commodity Contract rises while the
position is open. Because the value of the Index Commodity Contract
or Other Instrument could rise an unlimited amount, a short position
in an Index Commodity Contract or Other Instrument that provides
exposure to a short position in such Index Commodity Contract
theoretically will expose the Long/Short ETF to unlimited losses. In
circumstances where a market has reached its maximum price limits
imposed by the applicable exchange, the Long/Short ETF may be unable
to offset its short position until the next trading day, when prices
could expand again in rapid trading.
\17\ See note 14, supra.
\18\ See note 15, supra.
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To be considered for inclusion in the Long/Short Index, a commodity
future must be listed on a U.S. futures exchange, be denominated in
U.S. dollars and rank in the top 95% by total U.S. dollar value of the
total open interest pool of all eligible commodities. The weight of
each individual Index Commodity Contract is the product of two factors:
magnitude and the direction of the momentum signal (i.e., 1 for long, 0
for flat, or -1 for short). On the annual reconstitution date, the
magnitude is the open interest weight of the Index Commodity Contract,
calculated on the second Friday of December, using data through the
last trading day of November. Individual contract weights are capped at
10%. Between reconstitution dates, the weights vary based on the
performance of the individual Index Commodity Contract positions. The
Long/Short Index is reconstituted annually and directions (i.e.,
whether long, flat, or short) of each Index Commodity Contract are
determined monthly on the second Friday of each month, which is one
week prior to the monthly repositioning. As of February 28, 2013, the
sector weightings of the Long/Short Index were Agriculture (29.40%),
Energy (49.57%), Livestock (4.69%), and Metals (16.34%). The inception
date of the Long/Short Index was December 21, 1979.
Composition of the Indexes
Information on the composition of the Indexes as of February 28,
2013, including the Index Commodity Contracts, percentage weightings
and signals, as well as the Futures Exchanges on which the Index
Commodity Contracts trade, is set forth in the Notice.\19\
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\19\ See Notice, supra note 3, at 39814-5.
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With respect to each of the Indexes, the following are excluded:
(1) Financial futures contracts (e.g., securities, currencies,
interest rates, etc.).
(2) Commodity futures contracts not denominated in U.S. dollars.
(3) Commodity futures contracts with less than twelve months of
pricing.
Morningstar sorts all commodity futures contracts that meet the
above eligibility requirements in descending order by the total U.S.
dollar value of open interest. All commodity futures contracts that
make up the top 95% of the total open interest pool of all eligible
commodity futures contracts, starting with the one with the largest
open interest value, will be included in each of the Indexes.
The weight of each Index Commodity Contract in the Indexes is the
product of two factors: magnitude and the direction of the momentum
signal. Morningstar initially sets the magnitude based on the 12-month
average of the dollar value of open interest of each Index Commodity
Contract. Morningstar then caps the top magnitude at 10%,
redistributing any overage to the magnitudes of the remaining Index
Commodity Contracts. Morningstar chooses this capped open-interest
weighting system in order to reflect the importance of each Index
Commodity Contract in a global economy and to keep the Indexes
diversified across commodities.
Each of the Indexes is reconstituted and rebalanced (i.e., the
Indexes' membership and constituent weights are reset) annually, on the
third Friday of December after the day's closing values of the Indexes
have been determined. The reconstitution is effective at the open of
trading on first trading day after the third Friday of December.
Morningstar implements all futures contract rolls on the third
Friday of each month to coincide with portfolio repositioning and the
rolling of the U.S. Treasury bills used for collateral. If the third
Friday of the month is a trading holiday, Morningstar rolls and
rebalances or reconstitutes on the trading day prior to the third
Friday. To ensure that contracts are rolled before becoming committed
to receive physical delivery, contracts are selected so that the
delivery month is at least two months away from the upcoming month. On
each potential roll date, the delivery month of the current contract is
compared to the delivery month of the nearest contract whose delivery
month is at least two months away from the upcoming month. If the
latter is further into the future than the former, the contract is
rolled.
A more detailed description of the Funds and the Shares, the
Indexes and the Index Commodity Contracts, as well as investment risks,
creation and redemption procedures, NAV calculation, availability of
values and other information regarding the Funds' holdings, and fees,
among other things, is included in the Notice and the Registration
Statements, as applicable.\20\
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\20\ See supra notes 3 and 5, respectively.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \21\
and the rules and regulations thereunder applicable to a national
securities exchange.\22\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\23\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. The Commission notes that
the Shares must comply with the requirements of NYSE Arca Equities Rule
8.200 and Commentary .02 thereto to be listed and traded on the
Exchange.
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\21\ 15 U.S.C. 78f.
\22\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\23\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\24\ which sets forth Congress's finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. According to
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the Exchange, quotation and last-sale information for the Shares will
be disseminated through the facilities of the Consolidated Tape
Association (``CTA''). Further, the prices of the Index Commodity
Contracts, Other Instruments (except as described below) and Cash
Instruments held by the Fund will be available from the applicable
exchanges and market data vendors. The closing prices and settlement
prices of Index Commodity Contracts or Other Commodity Contracts held
by the Funds are readily available from the Web sites of the applicable
Futures Exchanges, other futures exchanges, automated quotation
systems, published or other public sources, or on-line information
services such as Bloomberg or Reuters. Moreover, according to the
Exchange, the relevant futures exchanges on which the Index Commodity
Contracts or Other Commodity Contracts are listed also provide delayed
futures information on current and past trading sessions and market
news free of charge on their respective Web sites. The specific
contract specifications for the Index Commodity Contracts or Other
Commodity Contracts are also available on such Web sites, as well as
other financial informational sources. The prices of forward
agreements, swaps, and other OTC transactions held by the Funds are not
available from the exchanges, but will be available from major market
data vendors and financial information service providers such as
Reuters and Bloomberg and will be included in the calculation of the
NAV and the intra-day indicative value (``IIV'') for the Shares.
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\24\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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Each Fund will disseminate its respective holdings on a daily basis
on the Funds' Web site, which will include, as applicable, the names,
quantity, price and market value of Index Commodity Contracts, Other
Instruments (including forward contracts, OTC swaps, and other OTC
transactions), and Cash Instruments. This Web site disclosure of the
portfolio composition of the Funds will occur at the same time as the
disclosure by the Managing Owner of the portfolio composition to
authorized participants so that all market participants are provided
portfolio composition information at the same time.\25\
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\25\ Disclosure regarding the components of each Index, the
percentage weightings of the components of each Index and the long,
short, or flat positions therein is available at http://corporate.morningstar.com/US/asp/subject.aspx?page=2649&filter=Commodity&xmlfile=2738.xml.
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The intra-day level and the most recent end-of-day closing level of
each Index will be published by the Exchange once every 15 seconds
throughout the Exchange's Core Trading Session and as of the close of
business for the Exchange, respectively. Any adjustments made to an
Index will be published on Morningstar's Web site. The IIV \26\ per
Share of each Fund will be widely disseminated by one or more major
market data vendors at least every 15 seconds during the NYSE Arca Core
Trading Session.\27\ The NAV per Share of each Fund will be calculated
as of the closing time of NYSE Arca Core Trading Session or the last to
close of the Futures Exchanges on which the Index Commodity Contracts
or Other Commodity Contracts (which are listed on futures exchanges
other than Futures Exchanges) are traded, whichever is later.\28\ The
NAV for each Fund will be disseminated to all market participants at
the same time. The Exchange will make available on its Web site daily
trading volume of the Shares, closing prices of the Shares, and the
corresponding NAV.
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\26\ The IIV will be based on the prior day's final NAV per
Share, adjusted every 15 seconds during the NYSE Arca Core Trading
Session to reflect the continuous price changes of a Fund's Index
Commodity Contracts and other holdings. The Exchange represents that
the normal trading hours for Index Commodity Contracts may begin
after 9:30 a.m. and end before 4:00 p.m., Eastern Time, and that
there will be a gap in time at the beginning and the end of each day
during which the Funds' Shares will be traded on the Exchange, but
real-time trading prices for at least some of the Index Commodity
Contracts held by the Funds are not available. As a result, during
those gaps the IIVs of the Funds will be updated but will reflect
the closing prices for such Index Commodity Contracts that have
stopped trading before the NAV is calculated.
\27\ According to the Exchange, several major market data
vendors display and/or make widely available IIVs taken from the CTA
or other data feeds.
\28\ All open commodity futures contracts traded on a U.S. or
non-U.S. exchange will be calculated at their then current market
value, which will be based upon the settlement price for that
particular commodity futures contract traded on the applicable U.S.
or non-U.S. exchange on the date with respect to which NAV is being
determined; provided, that if a commodity futures contract traded on
a U.S. or on a non-U.S. exchange could not be liquidated on such
day, due to the operation of daily limits (if applicable) or other
rules of the exchange upon which that position is traded or
otherwise, the settlement price on the most recent day on which the
position could have been liquidated will be the basis for
determining the market value of such position for such day. The
value of Cleared Swaps will be determined based on the value of the
Index Commodity Contract in connection with each specific Cleared
Swap. In calculating the NAV of a Fund, the settlement value of a
Cleared Swap (if any) and an OTC Other Commodity Instrument (if any)
will be determined by either applying the then-current disseminated
value for the related Index Commodity Contracts or the terms as
provided under the applicable Cleared Swap or OTC Other Commodity
Instrument, as applicable. However, in the event that one or more of
the related Index Commodity Contracts are not trading due to the
operation of daily limits or otherwise, the Managing Owner may in
its sole discretion choose to value the applicable Fund's Cleared
Swaps or OTC Other Commodity Instruments (if any) on a fair value
basis in order to calculate such Fund's NAV. These fair value prices
would be generally determined based on available inputs about the
current value of the Index Commodity Contract to which the Cleared
Swap or OTC Other Commodity Instrument relates and would be based on
principles that the Managing Owner deems fair and equitable so long
as such principles are consistent with normal industry standards.
Exchange-traded Other Commodity Instruments will be valued at their
market prices on the exchanges on which such instruments trade.
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The Commission believes that the proposal to list and trade the
Shares is reasonably designed to promote fair disclosure of information
that may be necessary to price the Shares appropriately and to prevent
trading when a reasonable degree of transparency cannot be assured. 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. Further, the Exchange represents that it may
halt trading during the day in which an interruption to the
dissemination of the IIV, an Index value, or the value of the Index
Commodity Contracts or Other Instruments occurs. If the interruption
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. The Exchange may halt trading in the Shares if
trading is not occurring in the Index Commodity Contracts or Other
Instruments, or if other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present.\29\ The Exchange states that it has a general policy
prohibiting the distribution of material, non-public information by its
employees. Moreover, the trading of the Shares will be subject to NYSE
Arca Equities Rule 8.200, Commentary .02(e), which sets forth certain
restrictions on Equity Trading Permit (``ETP'') Holders \30\ acting as
registered Market Makers \31\ in Trust Issued Receipts to facilitate
surveillance.
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\29\ With respect to trading halts, the Exchange may consider
all relevant factors in exercising its discretion to halt or suspend
trading in the Shares. Trading in the Shares will be subject to
trading halts caused by extraordinary market volatility pursuant to
the Exchange's ``circuit breaker'' rule in NYSE Arca Equities Rule
7.12. Trading also may be halted because of market conditions or for
reasons that, in the view of the Exchange, make trading in the
Shares inadvisable.
\30\ See NYSE Arca Equities Rule 1.1(n) (defining ETP Holder).
\31\ See NYSE Arca Equities Rule 1.1(v) (defining Market Maker).
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[[Page 51774]]
The Commission notes that the Financial Industry Regulatory
Authority (``FINRA''), on behalf of the Exchange,\32\ will communicate
as needed regarding trading in the Shares with other markets and other
entities that are members of the Intermarket Surveillance Group
(``ISG'') and FINRA may obtain trading information regarding trading in
the Shares, futures contracts, and exchange-traded options from such
markets and other entities. In addition, the Exchange may obtain
information regarding trading in the Shares, futures contracts, and
exchange-traded options from markets and other entities that are
members of ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement.\33\ The Managing Owner is affiliated
with a broker-dealer and has implemented a ``fire wall'' with respect
to such broker-dealer, and has policies and procedures in place
regarding access to information concerning the composition and/or
changes to the Funds' portfolio composition. The Index provider is not
registered as a broker-dealer but is affiliated with a broker-dealer
and has implemented procedures designed to prevent the illicit use and
dissemination of material, non-public information regarding the Indexes
and has implemented a ``fire wall'' with respect to its affiliated
broker-dealer regarding the Indexes.
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\32\ The Exchange states that, while FINRA surveils trading on
the Exchange pursuant to a regulatory services agreement, the
Exchange is responsible for FINRA's performance under this
regulatory services agreement.
\33\ The Exchange states that CME Group, Inc., (which includes
CME, CBOT, and NYMEX), and ICE-US are members of ISG. In addition,
the Exchange states that it has entered into a comprehensive
surveillance sharing agreement with ICE-UK that applies with respect
to trading in Index Commodity Contracts.
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The Exchange represents that the Shares are deemed to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including:
(1) Each Fund will meet the initial and continued listing
requirements applicable to Trust Issued Receipts in NYSE Arca Equities
Rule 8.200 and Commentary .02 thereto.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The trading in the Shares will be subject to the existing
trading surveillances, administered by FINRA on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws, and that these procedures are
adequate to properly monitor Exchange trading of the Shares in all
trading sessions and to deter and detect violations of Exchange rules
and applicable federal securities laws.
(4) Prior to the commencement of trading, the Exchange will inform
its ETP Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (a)
The risks involved in trading the Shares during the Opening and Late
Trading Sessions when an updated IIV will not be calculated or publicly
disseminated, as well as during the Core Trading Session where the IIV
may be based in part on static underlying values; (b) the procedures
for purchases and redemptions of Shares in creation baskets and
redemption baskets (and that Shares are not individually redeemable);
(c) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due
diligence on its ETP Holders to learn the essential facts relating to
every customer prior to trading the Shares; (d) how information
regarding the IIV is disseminated; (e) the requirement that ETP Holders
deliver a prospectus to investors purchasing newly issued Shares prior
to or concurrently with the confirmation of a transaction; and (f)
trading information.
(5) With respect to application of Rule 10A-3 under the Act,\34\
the Funds rely on the exception contained in Rule 10A-3(c)(7).\35\
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\34\ 17 CFR 240.10A-3.
\35\ 17 CFR 240.10A-3(c)(7).
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(6) Each Fund intends to invest first in Index Commodity Contracts.
Thereafter, if a Fund reaches the position limits applicable to one or
more Index Commodity Contracts or a Futures Exchange imposes
limitations on the Fund's ability to maintain or increase its positions
in an Index Commodity Contract after reaching accountability levels or
a price limit is in effect on an Index Commodity Contract during the
last 30 minutes of its regular trading session, each Fund's intention
is to invest first in Cleared Swaps to the extent permitted under the
position limits applicable to Cleared Swaps and appropriate in light of
the liquidity in the Cleared Swaps market, and then, using its
commercially reasonable judgment, in Other Commodity Contracts or in
Other Commodity Instruments. Each Fund's investments will be consistent
with such Fund's investment objective and will not be used to enhance
leverage.
(7) With respect to the Funds' assets traded on exchanges, not more
than 10% of the weight of such assets in the aggregate shall consist of
components whose principal trading market is not a member of ISG or is
a market with which the Exchange does not have a comprehensive
surveillance sharing agreement.
(8) The Managing Owner will attempt to minimize market and credit
risks by requiring the Funds to abide by various trading limitations
and policies, which will include limiting margin accounts and trading
only in liquid markets. The Managing Owner will implement procedures
which will include, but will not be limited to: executing and clearing
trades with creditworthy counterparties; limiting the amount of margin
or premium required for any Index Commodity Contract or Other Commodity
Contract or all Index Commodity Contracts or Other Commodity Contracts
combined; and generally limiting transactions to Index Commodity
Contracts or Other Commodity Contracts which will be traded in
sufficient volume to permit the taking and liquidating of positions.
(9) The Funds will enter into Other Commodity Instruments traded
OTC (if any) with counterparties selected by the Managing Owner. The
Managing Owner will select such Other Commodity Instrument
counterparties giving due consideration to such factors as it deems
appropriate, including, without limitation, creditworthiness,
familiarity with the applicable Index, and price. Under no
circumstances will the Funds enter into an OTC Other Commodity
Instrument with any counterparty whose credit rating is lower than
investment-grade at the time a contract is entered into. The Funds
expect that investments in OTC Other Commodity Instruments (if any)
will be made on terms that are standard in the market for such OTC
Other Commodity Instruments. In connection with such OTC Other
Commodity Instruments, the Funds may post or receive collateral in the
form of Cash Instruments, which will be marked to market daily.
(10) A minimum of 100,000 Shares of each Fund will be outstanding
at the commencement of trading on the Exchange.
This approval order is based on all of the Exchange's
representations and description of the Funds, including those set forth
above and in the Notice.\36\
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\36\ The Commission notes that it does not regulate the market
for U.S.-traded futures in which the Funds plans to take positions,
which is the responsibility of the CFTC. The CFTC has the authority
to set limits on the positions that any person may take in such
futures. These limits may be directly set by the CFTC or by the
markets on which such futures are traded. The Commission has no role
in establishing position limits on such futures even though such
limits could impact an exchange-traded product that is under the
jurisdiction of the Commission.
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[[Page 51775]]
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \37\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\37\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\38\ that the proposed rule change (SR-NYSEArca-2013-60) be, and it
hereby is, approved.
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\38\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20336 Filed 8-20-13; 8:45 am]
BILLING CODE 8011-01-P