[Federal Register Volume 79, Number 146 (Wednesday, July 30, 2014)]
[Notices]
[Pages 44224-44229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17880]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72666; File No. SR-NYSEArca-2013-122]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of Proposed Rule Change as Modified by Amendment No. 2 Thereto
Relating to the Use of Derivative Instruments by PIMCO Total Return
Exchange Traded Fund
July 24, 2014.
I. Introduction
On November 6, 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 amend the description of the means of achieving
the investment objective applicable to the PIMCO Total Return Exchange
Traded Fund (``Fund'') relating to its use of derivative instruments.
The proposed rule change was published for comment in the Federal
Register on November 26, 2013.\3\ On January 9, 2014, 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.\4\ On
February 24, 2014, the Commission instituted proceedings to determine
whether to approve or disapprove the proposed rule change.\5\ On April
15, 2014, the Exchange submitted Amendments No. 1 and 2 to the proposed
rule change.\6\ On May 21, 2014, pursuant to Section 19(b)(2) of the
Act,\7\ the Commission designated a longer period within which to issue
an order approving or disapproving the proposed rule change.\8\ The
Commission received no comments
[[Page 44225]]
on the proposal. 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. 70905 (November 20,
2013), 78 FR 70610 (``Notice'').
\4\ See Securities Exchange Act Release No. 71271 (January 9,
2014), 79 FR 2736 (January 15, 2014). The Commission determined that
it was appropriate to designate a longer period within which to take
action on the proposed rule change so that it has sufficient time to
consider the proposed rule change. Accordingly, the Commission
designated February 24, 2014 as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
\5\ See Securities Exchange Act Release No. 71606, 79 FR 11486
(February 28, 2014).
\6\ The Exchange submitted and subsequently withdrew Amendment
No. 1 to the proposed rule change. In Amendment No. 2, the Exchange
provided additional details describing how the contents of the
portfolio composition of the Fund would be disclosed on a daily
basis. Specifically, the Fund will disclose on the Fund's Web site
the following information regarding each portfolio holding, as
applicable to the type of holding: ticker symbol, CUSIP number or
other identifier, if any; a description of the holding (including
the type of holding, such as the type of swap); the identity of the
security, commodity, index or other asset or instrument underlying
the holding, if any; for options, the option strike price; quantity
held (as measured by, for example, par value, notional value or
number of shares, contracts or units); maturity date, if any; coupon
rate, if any; effective date, if any; market value of the holding;
and the percentage weighting of the holding in the Fund's portfolio.
It also confirms that all other facts and representations made in
the Prior Release remain unchanged. See infra, note 9. Amendment No.
2 provides clarification to the proposed rule change, and because it
does not materially affect the substance of the proposed rule
change, Amendment No. 2 does not require notice and comment.
\7\ 15 U.S.C. 78s(b)(1).
\8\ See Securities Exchange Act Release No. 72216, 79 FR 30680
(May 28, 2014).
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II. Description of the Proposed Rule Change
The Commission previously approved the listing and trading of
shares (``Shares'') of the Fund under NYSE Arca Equities Rule 8.600,
which governs the listing and trading of Managed Fund Shares on the
Exchange.\9\ The Shares are offered by PIMCO ETF Trust (``Trust''), a
statutory trust organized under the laws of the State of Delaware and
registered with the Commission as an open-end management investment
company.\10\ The investment manager to the Fund is Pacific Investment
Management Company LLC (``PIMCO'' or ``Adviser'').
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\9\ See Securities Exchange Act Release No. 66321 (February 3,
2012), 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011-95) (``Prior
Order''). See also Securities Exchange Act Release No. 65988
(December 16, 2011), 76 FR 79741 (December 22, 2011) (SR-NYSEArca-
2011-95) (``Prior Notice,'' and together with the Prior Order,
collectively, ``Prior Release'').
\10\ The Exchange represents that the Trust is registered under
the Investment Company Act of 1940 (``1940 Act''). On October 29,
2012 the Trust filed with the Commission the most recent post-
effective amendment to its registration statement under the
Securities Act of 1933 and under the 1940 Act relating to the Fund
(File Nos. 333-155395 and 811-22250) (``Registration Statement'').
The Exchange further represents that the Trust has obtained certain
exemptive relief under the 1940 Act. See Investment Company Act
Release No. 28993 (November 10, 2009) (File No. 812-13571)
(``Exemptive Order'').
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In the Prior Release, the Exchange stated that, consistent with the
Trust's Exemptive Order, the Fund would not invest in options
contracts, futures contracts, or swap agreements.\11\ In view of the
No-Action Letter issued by staff in the Commission's Division of
Investment Management on December 6, 2012, the Exchange proposes to
change this representation to permit the Fund to use derivative
instruments, as described below, and makes the following
representations and statements.\12\
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\11\ On December 6, 2012, the staff of the Commission's Division
of Investment Management (``IM'') issued a no-action letter (``No-
Action Letter'') relating to the use of derivatives by actively-
managed exchange traded funds (``ETFs''). See No-Action Letter dated
December 6, 2012 from Elizabeth G. Osterman, Associate Director,
Office of Exemptive Applications, IM. The No-Action Letter stated
that IM staff would no longer defer consideration of exemptive
requests under the 1940 Act relating to actively-managed ETFs that
make use of derivatives provided that they include representations
to address some of the concerns expressed in the Commission's March
2010 press release. These representations are: (i) That the ETF's
board periodically will review and approve the ETF's use of
derivatives and how the ETF's investment adviser assesses and
manages risk with respect to the ETF's use of derivatives; and (ii)
that the ETF's disclosure of its use of derivatives in its offering
documents and periodic reports is consistent with relevant
Commission and staff guidance. The No-Action Letter stated that IM
would not recommend enforcement action to the Commission under
sections 2(a)(32), 5(a)(1), 17(a), 22(d), and 22(e) of the 1940 Act,
or rule 22c-1 under the 1940 Act if actively-managed ETFs operating
in reliance on specified orders (which include the Trust's Exemptive
Order) invest in options contracts, futures contracts, or swap
agreements; provided that they comply with the representations
stated in the No-Action Letter, as noted above.
\12\ The Adviser represents that the Fund, in connection with
its use of derivative instruments, will comply with the
representations stated in the No-Action Letter, as noted above. See
id.
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The Prior Release stated that the Fund will invest under normal
market circumstances at least 65% of its total assets in a diversified
portfolio of Fixed Income Instruments of varying maturities.\13\
``Fixed Income Instruments'' include bonds, debt securities and other
similar instruments issued by various U.S. and non-U.S. public- or
private-sector entities.\14\ The Exchange proposes to revise this
statement to provide that the Fund will invest under normal market
circumstances at least 65% of its total assets in a diversified
portfolio of Fixed Income Instruments of varying maturities, which may
be represented by derivatives related to Fixed Income Instruments
(``65% policy'').
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\13\ As stated in the Prior Release, the term ``under normal
market circumstances'' includes, but is not limited to, the absence
of extreme volatility or trading halts in the fixed income markets
or the financial markets generally; operational issues causing
dissemination of inaccurate market information; or force majeure
type events such as systems failure, natural or man-made disaster,
act of God, armed conflict, act of terrorism, riot or labor
disruption, or any similar intervening circumstance.
\14\ As noted in the Prior Release, ``Fixed Income
Instruments,'' as such term is used generally in the Registration
Statement, include: Debt securities issued or guaranteed by the U.S.
Government, its agencies or government-sponsored enterprises;
corporate debt securities of U.S. and non-U.S. issuers, including
convertible securities and corporate commercial paper; mortgage-
backed and other asset-backed securities; inflation-indexed bonds
issued both by governments and corporations; structured notes,
including hybrid or ``indexed'' securities and event-linked bonds;
bank capital and trust preferred securities; loan participations and
assignments; delayed funding loans and revolving credit facilities;
bank certificates of deposit, fixed time deposits and bankers'
acceptances; repurchase agreements on Fixed Income Instruments and
reverse repurchase agreements on Fixed Income Instruments; debt
securities issued by states or local governments and their agencies,
authorities and other government-sponsored enterprises; obligations
of non-U.S. governments or their subdivisions, agencies and
government-sponsored enterprises; and obligations of international
agencies or supranational entities. Securities issued by U.S.
Government agencies or government-sponsored enterprises may not be
guaranteed by the U.S. Treasury.
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The Prior Release stated that the Fund's investment would not be
used to enhance leverage. In view of the Exchange's proposal to permit
the Fund to use derivative instruments, as described below, the Fund's
investments in derivative instruments may be used to enhance leverage.
However, as noted in the Prior Release, the Fund's investments will not
be used to seek performance that is the multiple or inverse multiple
(e.g., 2Xs and 3Xs) of the Fund's broad-based securities market index.
The Fund's Use of Derivatives
The Exchange states that, with respect to the Fund, derivative
instruments primarily will include forwards, exchange-traded and over-
the-counter (``OTC'') options contracts, exchange-traded futures
contracts, options on futures contracts, and swap agreements.
Generally, derivatives are financial contracts whose values depend
upon, or are derived from, the values of an underlying asset, reference
rate, or index, and may relate to stocks, bonds, interest rates,
currencies or currency exchange rates, commodities, and related
indexes. The Fund may, but is not required to, use derivative
instruments for risk management purposes or as part of its investment
strategies.\15\
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\15\ The Exchange represents that the Fund will seek, where
possible, to use counterparties whose financial status is such that
the risk of default is reduced; however, the risk of losses
resulting from default is still possible. PIMCO's Counterparty Risk
Committee evaluates the creditworthiness of counterparties on an
ongoing basis. In addition to information provided by credit
agencies, PIMCO credit analysts evaluate each approved counterparty
using various methods of analysis, including company visits,
earnings updates, the broker-dealer's reputation, PIMCO's past
experience with the broker-dealer, market levels for the
counterparty's debt and equity, the counterparty's liquidity, and
its share of market participation.
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The Exchange represents that the Fund's investments in derivative
instruments will be made in accordance with the 1940 Act and consistent
with the Fund's investment objective and policies. As described further
below, the Fund will typically use derivative instruments as a
substitute for taking a position in the underlying asset or as part of
a strategy designed to reduce exposure to other risks, such as interest
rate or currency risk. The Fund may also use derivative instruments to
enhance returns. To limit the potential risk associated with such
transactions, the Fund will segregate or ``earmark'' assets determined
to be liquid by PIMCO in accordance with procedures established by the
Trust's Board of Trustees and in accordance with the 1940 Act (or, as
permitted by applicable regulation, enter into certain offsetting
positions) to cover its obligations under derivative instruments. These
procedures have been adopted consistent with Section 18 of the 1940 Act
and related Commission guidance. In addition, the Fund will
[[Page 44226]]
include appropriate risk disclosure in its offering documents,
including leveraging risk. Leveraging risk is the risk that certain
transactions of the Fund, including the Fund's use of derivatives, may
give rise to leverage, causing the Fund to be more volatile than if it
had not been leveraged.\16\ Because the markets for certain securities,
or the securities themselves, may be unavailable or cost prohibitive as
compared to derivative instruments, suitable derivative transactions
may be an efficient alternative for the Fund to obtain the desired
asset exposure.
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\16\ To mitigate leveraging risk, the Adviser will segregate or
``earmark'' liquid assets or otherwise cover the transactions that
may give rise to such risk.
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The Exchange states that the Adviser believes derivatives can be an
economically attractive substitute for an underlying physical security
that the Fund would otherwise purchase. For example, the Fund could
purchase Treasury futures contracts instead of physical Treasuries or
could sell credit default protection on a corporate bond instead of
buying a physical bond. Economic benefits include potentially lower
transaction costs or attractive relative valuation of a derivative
versus a physical bond (e.g., differences in yields).
The Exchange states the Adviser further believes that derivatives
can be used as a more liquid means of adjusting portfolio duration as
well as targeting specific areas of yield curve exposure, with
potentially lower transaction costs than the underlying securities
(e.g., interest rate swaps may have lower transaction costs than
physical bonds). Similarly, money market futures can be used to gain
exposure to short-term interest rates in order to express views on
anticipated changes in central bank policy rates. In addition,
derivatives can be used to protect client assets through selectively
hedging downside (or ``tail risks'') in the Fund.
The Exchange states that the Fund also can use derivatives to
increase or decrease credit exposure. Index credit default swaps (CDX)
can be used to gain exposure to a basket of credit risk by ``selling
protection'' against default or other credit events, or to hedge broad
market credit risk by ``buying protection.'' Single name credit default
swaps (CDS) can be used to allow the Fund to increase or decrease
exposure to specific issuers, saving investor capital through lower
trading costs. The Fund can use total return swap contracts to obtain
the total return of a reference asset or index in exchange for paying a
financing cost. A total return swap may be much more efficient than
buying underlying securities of an index, potentially lowering
transaction costs.
The Exchange states that the Adviser believes that the use of
derivatives will allow the Fund to selectively add diversifying sources
of return from selling options. Options purchases and sales can also be
used to hedge specific exposures in the portfolio, and can provide
access to return streams available to long-term investors such as the
persistent difference between implied and realized volatility. Options
strategies can generate income or improve execution prices (i.e.,
covered calls).
Other Investments
In addition to the Fund's use of derivatives in connection with the
65% policy, under the proposal, the Fund would seek to invest in
derivative instruments not based on Fixed Income Instruments,
consistent with the Fund's investment restrictions relating to exposure
to those asset classes.
The Prior Release stated that the Fund may invest in debt
securities and instruments that are economically tied to foreign (non-
U.S.) countries. The Prior Release stated further that PIMCO generally
considers an instrument to be economically tied to a non-U.S. country
if the issuer is a foreign government (or any political subdivision,
agency, authority or instrumentality of such government), or if the
issuer is organized under the laws of a non-U.S. country. In the case
of applicable money market instruments, such instruments will be
considered economically tied to a non-U.S. country if either the issuer
or the guarantor of such money market instrument is organized under the
laws of a non-U.S. country.
The Exchange proposes to add to this representation that, with
respect to derivative instruments, as proposed to be used, PIMCO
generally will consider such instruments to be economically tied to
non-U.S. countries if the underlying assets are foreign currencies (or
baskets or indexes of such currencies), or instruments or securities
that are issued by foreign governments (or any political subdivision,
agency, authority, or instrumentality of such governments) or issuers
organized under the laws of a non-U.S. country (or if the underlying
assets are money market instruments, as applicable, if either the
issuer or the guarantor of such money market instruments is organized
under the laws of a non-U.S. country).
The Fund's investments, including investments in derivative
instruments, are subject to all of the restrictions under the 1940 Act,
including restrictions with respect to illiquid securities. The Fund
may hold up to an aggregate amount of 15% of its net assets in illiquid
securities (calculated at the time of investment), including Rule 144A
securities deemed illiquid by the Adviser, consistent with Commission
guidance. The Fund will monitor its portfolio liquidity on an ongoing
basis to determine whether, in light of current circumstances, an
adequate level of liquidity is being maintained, and will consider
taking appropriate steps in order to maintain adequate liquidity if,
through a change in values, net assets, or other circumstances, more
than 15% of the Fund's net assets are held in illiquid securities.
Illiquid securities include securities subject to contractual or other
restrictions on resale and other instruments that lack readily
available markets as determined in accordance with Commission staff
guidance.
The Exchange states that this proposal would become effective upon
(i) the effectiveness of an amendment to the Trust's Registration
Statement disclosing the Fund's intended use of derivative instruments
and (ii) when this proposed rule change has become operative. The
Exchange further states that the Adviser has managed and will continue
to manage the Fund in the manner described in the Prior Release, and
will not implement the proposed changes until this proposed rule change
has become operative. In addition, the Exchange represents that there
is no change to the Fund's investment objective and that the Fund will
continue to comply with all initial and continued listing requirements
under NYSE Arca Equities Rule 8.600. Except for the changes noted
above, the Exchange represents that all other facts presented and
representations made in the Prior Release remain unchanged.
Derivatives Valuation Methodology for Purposes of Determining Net Asset
Value
According to the Exchange, the net asset value (``NAV'') of the
Fund's Shares is determined by dividing the total value of the Fund's
portfolio investments and other assets, less any liabilities, by the
total number of Shares outstanding. Fund Shares are valued as of the
close of regular trading (normally 4:00 p.m. Eastern time (``E.T.''))
(``NYSE Close'') on each day NYSE Arca is open (``Business Day'').
Information that becomes known to the Fund or its agents after the NAV
has been calculated on a particular day will not generally be used to
retroactively adjust
[[Page 44227]]
the price of a portfolio asset or the NAV determined earlier that day.
The Fund reserves the right to change the time its NAV is calculated if
the Fund closes earlier, or as permitted by the Commission.
The Exchange states that for purposes of calculating NAV, portfolio
securities and other assets for which market quotes are readily
available are valued at market value. Market value is generally
determined on the basis of last reported sales prices, or if no sales
are reported, based on quotes obtained from a quotation reporting
system, established market makers, or pricing services. Domestic and
foreign fixed income securities and non-exchange-traded derivatives
will normally be valued on the basis of quotes obtained from brokers
and dealers or pricing services using data reflecting the earlier
closing of the principal markets for those assets. Prices obtained from
independent pricing services use information provided by market makers
or estimates of market values obtained from yield data relating to
investments or securities with similar characteristics. Exchange-traded
options, futures, and options on futures will generally be valued at
the settlement price determined by the applicable exchange. Derivatives
for which market quotes are readily available will be valued at market
value. Local closing prices will be used for all instrument valuation
purposes. For the Fund's 4:00 p.m. E.T. futures holdings, estimated
prices from Reuters will be used if any cumulative futures margin
impact is greater than $0.005 to the NAV due to futures movement after
the fixed income futures market closes (3:00 p.m. E.T.) and up to the
NYSE Close (generally 4:00 p.m. E.T.). Swaps traded on exchanges such
as the Chicago Mercantile Exchange or the Intercontinental Exchange
will use the applicable exchange closing price where available.
Derivatives Valuation Methodology for Purposes of Determining Intra-Day
Indicative Value
According to the Exchange, on each Business Day, before
commencement of trading in Fund Shares on NYSE Arca, the Fund discloses
on its Web site the identities and quantities of the portfolio
instruments and other assets held by the Fund that will form the basis
for the Fund's calculation of NAV at the end of the Business Day.
In order to provide additional information regarding the intra-day
value of Shares of the Fund, NYSE Arca or a market data vendor
disseminates every 15 seconds through the facilities of the
Consolidated Tape Association or other widely disseminated means an
updated Intra-day Indicative Value (``IIV'') for the Fund as calculated
by an information provider or market data vendor.
The Exchange states that a third party market data provider is
currently calculating the IIV for the Fund. For the purposes of
determining the IIV, the third party market data provider's valuation
of derivatives is expected to be similar to their valuation of all
securities. The third party market data provider may use market quotes
if available or may fair value securities against proxies (such as swap
or yield curves).
According to the Exchange, with respect to specific derivatives:
Foreign currency derivatives may be valued intraday using
market quotes, or another proxy as determined to be appropriate by the
third party market data provider.
Futures may be valued intraday using the relevant futures
exchange data, or another proxy as determined to be appropriate by the
third party market data provider.
Interest rate swaps may be mapped to a swap curve and
valued intraday based on changes of the swap curve, or another proxy as
determined to be appropriate by the third party market data provider.
CDX/CDS may be valued using intraday data from market
vendors, or based on underlying asset price, or another proxy as
determined to be appropriate by the third party market data provider.
Total return swaps may be valued intraday using the
underlying asset price, or another proxy as determined to be
appropriate by the third party market data provider.
Exchange listed options may be valued intraday using the
relevant exchange data, or another proxy as determined to be
appropriate by the third party market data provider.
OTC options may be valued intraday through option
valuation models (e.g., Black-Scholes) or using exchange traded options
as a proxy, or another proxy as determined to be appropriate by the
third party market data provider.
Disclosed Portfolio
The Exchange states that the Fund's disclosure of derivative
positions in the Disclosed Portfolio will include information that
market participants can use to value these positions intraday. On a
daily basis, the Fund will disclose on the Fund's Web site the
following information regarding each portfolio holding, as applicable
to the type of holding: Ticker symbol, CUSIP number or other
identifier, if any; a description of the holding (including the type of
holding, such as the type of swap); the identity of the security,
commodity, index or other asset or instrument underlying the holding,
if any; for options, the option strike price; quantity held (as
measured by, for example, par value, notional value or number of
shares, contracts or units); maturity date, if any; coupon rate, if
any; effective date, if any; market value of the holding; and the
percentage weighting of the holding in the Fund's portfolio.
Impact on Arbitrage Mechanism
The Exchange states that the Adviser believes there will be
minimal, if any, impact to the arbitrage mechanism as a result of the
use of derivatives. Market makers and participants should be able to
value derivatives as long as the positions are disclosed with relevant
information. The Exchange states that the Adviser believes that the
price at which Shares trade will continue to be disciplined by
arbitrage opportunities created by the ability to purchase or redeem
creation Shares at their NAV, which should ensure that Shares will not
trade at a material discount or premium in relation to their NAV.
The Exchange states that, according to the Adviser, there will not
be any significant impacts to the settlement or operational aspects of
the Fund's arbitrage mechanism due to the use of derivatives. Because
derivatives generally are not eligible for in-kind transfer, they will
typically be substituted with a ``cash in lieu'' amount when the Fund
processes purchases or redemptions of creation units in-kind.
Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws.\17\ The Exchange represents 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.
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\17\ 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.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns,
[[Page 44228]]
which could be indicative of manipulative or other violative activity.
When such situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, exchange traded options, futures, and
options on futures with other markets or other entities that are
members of the Intermarket Surveillance Group (``ISG''), and FINRA may
obtain trading information regarding trading in the Shares, exchange
traded options, futures, and options on futures from such markets or
entities. In addition, the Exchange may obtain information regarding
trading in the Shares, exchange traded options, futures, and options on
futures from markets or other entities that are members of ISG or with
which the Exchange has in place a comprehensive surveillance sharing
agreement.\18\ In addition, FINRA, on behalf of the Exchange, is able
to access, as needed, trade information for certain fixed income
securities held by the Fund reported to FINRA's Trade Reporting and
Compliance Engine (``TRACE''). The Exchange also states that it has a
general policy prohibiting the distribution of material, non-public
information by its employees.
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\18\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for the Fund may trade on markets that are
members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
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Additional information regarding the Trust, the Fund, and the
Shares, including investment strategies, risks, NAV calculation,
creation and redemption procedures, fees, portfolio holdings,
disclosure policies, distributions and taxes is included in the Prior
Release, Notice, and the Registration Statement, as applicable.\19\
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\19\ See supra notes 9, 3, and 10.
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III. Discussion and Commission's Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of Section 6 of the
Act \20\ and the rules and regulations thereunder applicable to a
national securities exchange.\21\ In particular, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\22\
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 Fund and the Shares must comply with the requirements of NYSE Arca
Equities Rule 8.600 to continue to be listed and traded on the
Exchange.
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\20\ 15 U.S.C. 78f.
\21\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78f(b)(5).
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The Commission notes that, with respect to its proposed investments
in derivatives, the Fund will seek, where possible, to use
counterparties whose financial status is such that the risk of default
is reduced. The Exchange states that PIMCO's Counterparty Risk
Committee will evaluate the creditworthiness of counterparties on an
ongoing basis. In addition to information provided by credit agencies,
PIMCO credit analysts will evaluate each approved counterparty using
various methods of analysis, including company visits, earnings
updates, the broker-dealer's reputation, PIMCO's past experience with
the broker-dealer, market levels for the counterparty's debt and
equity, the counterparty's liquidity, and its share of market
participation.
In addition, according to the Exchange, the proposed investments in
derivative instruments will be made in accordance with the 1940 Act and
consistent with the Fund's investment objective and policies. To
further limit the potential risk associated with such transactions, the
Fund will segregate or ``earmark'' assets determined to be liquid by
PIMCO in accordance with procedures established by the Trust's Board of
Trustees and in accordance with the 1940 Act (or, as permitted by
applicable regulation, enter into certain offsetting positions) to
cover its obligations under the proposed derivative instruments. The
Exchange represents that these procedures have been adopted consistent
with Section 18 of the 1940 Act and related Commission guidance. In
addition, with respect to the proposed investments in derivative
instruments, the Exchange states that appropriate risk disclosures will
be provided in the Fund's offering documents, including leveraging
risk. The Exchange further represents that the Fund's investments,
including the proposed investments in derivative instruments, are
subject to all of the restrictions under the 1940 Act, including
restrictions with respect to illiquid securities.
Further, the Commission notes that the Fund's disclosure of
derivative positions in the Disclosed Portfolio will include
information that market participants can use to value these positions
intraday. This information will include, as applicable to the type of
holding: Ticker symbol, CUSIP number or other identifier, if any; a
description of the holding (including the type of holding, such as the
type of swap); the identity of the security, commodity, index or other
asset or instrument underlying the holding, if any; for options, the
option strike price; quantity held (as measured by, for example, par
value, notional value or number of shares, contracts or units);
maturity date, if any; coupon rate, if any; effective date, if any;
market value of the holding; and the percentage weighting of the
holding in the Fund's portfolio.
The Exchange states that there will be minimal, if any, impact to
the arbitrage mechanism as a result of the use of derivatives. Market
makers and participants should be able to value derivatives as long as
the positions are disclosed with relevant information. The Exchange
notes that the price at which Shares trade will continue to be
disciplined by arbitrage opportunities created by the ability to
purchase or redeem creation Shares at their NAV, which should ensure
that Shares will not trade at a material discount or premium in
relation to their NAV. In addition, the Exchange notes that there will
not be any significant impacts to the settlement or operational aspects
of the Fund's arbitrage mechanism due to the use of derivatives.
In support of this proposal, the Exchange has made additional
representations, including:
(1) The Adviser has managed and will continue to manage the Fund in
the manner described in the Prior Release.
(2) There is no change to the Fund's investment objective.
(3) The Fund will continue to comply with all initial and continued
listing requirements under NYSE Arca Equities Rule 8.600.
(4) FINRA, on behalf of the Exchange, will communicate as needed
regarding trading in the Shares, exchange traded options, futures, and
options on futures with other markets or other entities that are
members of the ISG, and FINRA may obtain trading information regarding
trading in the Shares, exchange traded options, futures, and options on
futures from such markets or entities. In addition, the Exchange may
obtain information regarding trading in the
[[Page 44229]]
Shares, exchange traded options, futures, and options on futures from
markets or other entities that are members of ISG or with which the
Exchange has in place a comprehensive surveillance sharing agreement.
In addition, FINRA, on behalf of the Exchange, is able to access, as
needed, trade information for certain fixed income securities held by
the Fund reported to FINRA's TRACE.
(5) The Fund will comply with the representations as prescribed in
the No-Action Letter.
(6) Except for the proposed changes, all other facts presented and
representations made in the Prior Release remain unchanged.
This approval order is based on the Exchange's representations and
description of the Fund, including those set forth above and in the
Notice. For the foregoing reasons, the Commission finds that the
proposed rule change, as modified by Amendment No. 2, is consistent
with Section 6(b)(5) of the Act \23\ and the rules and regulations
thereunder applicable to a national securities exchange.
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\23\ 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,\24\ that the proposed rule change (SR-NYSEArca-2013-122) as
modified by Amendment No. 2 thereto be, and it hereby is, approved.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
Kevin M. O'Neill,
Deputy Secretary.
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\25\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-17880 Filed 7-29-14; 8:45 am]
BILLING CODE 8011-01-P