[Federal Register Volume 81, Number 140 (Thursday, July 21, 2016)]
[Notices]
[Pages 47447-47457]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17198]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78345; File No. SR-NYSEArca-2016-96]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Amend NYSE Arca Equities Rule 8.700 and To
List and Trade Shares of the Managed Emerging Markets Trust Under
Proposed Amended NYSE Arca Equities Rule 8.700
July 15, 2016.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on July 1, 2016, NYSE Arca, Inc. (the ``Exchange'' or
``NYSE Arca'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. 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\ 15 U.S.C. 78a.
\3\ 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 amend NYSE Arca Equities Rule 8.700 to
permit the use of swaps on equity indices, fixed income indices,
commodity indices, commodities or interest rates, and to list and trade
shares of the Managed Emerging Markets Trust under proposed amended
NYSE Arca Equities Rule 8.700. 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 statements concerning the purpose of,
[[Page 47448]]
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
NYSE Arca Equities Rule 8.700 permits the trading of Managed Trust
Securities either by listing or pursuant to unlisted trading privileges
(``UTP'').\4\ The Exchange proposes to amend NYSE Arca Equities Rule
8.700 to permit the use of swaps on equity indices, fixed income
indices, commodity indices, commodities or interest rates. In addition,
the Exchange proposes to list and trade the shares (the ``Shares'') of
the Managed Emerging Markets Trust (the ``Trust'') under proposed
amended NYSE Arca Equities Rule 8.700.
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\4\ Managed Trust Security means a security that is registered
under the Securities Act of 1933 (15 U.S.C. 77a), as amended (the
``Securities Act''), is issued by a trust that (1) is a commodity
pool as defined in the Commodity Exchange Act (7 U.S.C. 1) (the
``CEA''), and that is managed by a commodity pool operator
registered with the Commodity Futures Trading Commission (the
``CFTC''), and (2) holds long and/or short positions in exchange-
traded futures contracts and/or certain currency forward contracts
selected by the trust's advisor consistent with the trust's
investment objectives, which will only include, exchange-traded
futures contracts involving commodities, currencies, stock indices,
fixed income indices, interest rates and sovereign, private and
mortgage or asset backed debt instruments, and/or forward contracts
on specified currencies, each as disclosed in the trust's
prospectus; and (ii) [sic] is issued and redeemed continuously in
specified aggregate amounts at the next applicable net asset value.
See NYSE Arca Equities Rule 8.700(c)(1).
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Proposed Amendments to NYSE Arca Equities Rule 8.700
The Exchange proposes to amend NYSE Arca Equities Rule 8.700(c)(1)
to permit the use of swaps on equity indices, fixed income indices,
commodity indices, commodities or interest rates. Permitting the use of
such swaps would provide additional flexibility to an issuer of Managed
Trust Securities seeking to achieve a trust's investment objective. For
example, because the markets for certain futures contracts may be
unavailable or cost prohibitive as compared to derivative instruments,
suitable derivative transactions may be an efficient alternative for an
issuer of Managed Trust Securities to obtain the desired asset
exposure. Additionally, swaps would allow parties to replicate desired
returns while eliminating the costs associated with acquiring or
holding the underlying asset. As such, the increased flexibility
afforded by the ability of an issuer of Managed Trust Securities to use
derivatives may enhance investor returns by facilitating the ability to
more economically seek its investment objective, thereby reducing the
costs incurred by such issuer.
The Exchange notes that swaps are currently permitted investments
for issues of Trust Issued Receipts under Commentary .02 to NYSE Arca
Equities Rule 8.200. In addition, the Commission has previously
permitted investments in swaps for issues of Managed Fund Shares under
NYSE Arca Equities Rule 8.600.\5\
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\5\ See, e.g., Securities Exchange Act Release No. 71938 (April
14, 2014), 79 FR 21981 (April 18, 2014) (SR-NYSEArca-2013-144)
(order approving proposed rule change permit listing and trading of
shares of the ETSpreads HY Long Credit Fund, the ETSpreads HY Short
Credit Fund, the ETSpreads IG Long Credit Fund, and the ETSpreads IG
Short Credit Fund under NYSE Arca Equities Rule 8.600).
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Managed Emerging Markets Trust
The Trust is a Delaware statutory trust that will issue Shares
representing fractional undivided beneficial interests in the Trust.\6\
According to the Registration Statement, the Trust will not be an
investment company registered under the Investment Company Act of 1940
(15 U.S.C. 80a-1), as amended (the ``1940 Act''), and will not be
required to register under the 1940 Act.
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\6\ See Pre-Effective Amendment No. 5, dated [sic] See Pre-
Effective Amendment No. 5, dated August 18, 2015, to the Trust's
Registration Statement on Form S-1 (File No. 333-182772) (the
``Registration Statement'') under the Securities Act. The
descriptions of the Trust and the Shares contained herein are based,
in part, on the Registration Statement.
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The Trust is a commodity pool as defined in the CEA and the
regulations of the CFTC. The Trust will be operated by Artivest
Advisors LLC, a Delaware limited liability company (the ``Sponsor''),
that is also the Trust's adviser (the ``Adviser'') and will be
registered under the CEA as a commodity pool operator. The sole member
of the Sponsor is Artivest Holdings, Inc., a Delaware corporation. The
Adviser is the commodity trading advisor of the Trust and will at all
times be either registered as a commodity trading advisor or properly
exempt from such registration under the CEA. The Adviser is not a
broker-dealer and is not affiliated with a broker-dealer. In the event
(a) the Adviser or any sub-adviser becomes registered as a broker-
dealer or newly affiliated with a broker-dealer, or (b) any new adviser
or sub-adviser becomes affiliated with a broker-dealer, it will
implement a fire wall with respect to such broker-dealer regarding
access to information concerning the composition and/or changes to the
Trust's portfolio, and will be subject to procedures designed to
prevent the use and dissemination of material non-public information
regarding such portfolio.\7\
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\7\ The activities of the Trust will be limited to (1) issuing
Baskets (as described below) in exchange for cash, (2) paying out of
Trust assets any Trust expenses and liabilities not assumed by the
Sponsor, (3) delivering proceeds consisting of cash in exchange for
Baskets surrendered for redemption, (4) depositing any required
margin in the form of cash or other eligible assets with domestic
futures commission merchants, foreign futures brokers or other
financial intermediaries or dealers, and (5) investing its cash, at
the direction of the Adviser, in a portfolio of futures contracts,
forward contracts and swaps.
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The Bank of New York Mellon, a New York banking corporation, is the
trustee of the Trust (the ``Trustee''). Wilmington Trust, National
Association, a national banking association, is the Delaware trustee of
the Trust.
The Bank of New York Mellon also is the administrator of the Trust
(the ``Trust Administrator''), the custodian of the Trust (the
``Custodian''), the processing agent of the Trust (the ``Processing
Agent''), and the settlement agent of the Trust (the ``Settlement
Agent''). The Trust has engaged Foreside Fund Services, LLC to act as a
distributor on its behalf.
The Exchange notes that the Commission has previously approved the
listing and trading of another issue of Managed Trust Securities on the
Exchange.\8\
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\8\ See Securities Exchange Act Release No. 60064 (June 8,
2009), 74 FR 28315 (June 15, 2009) (SR-NYSEArca-2009-30) (order
approving the adoption of listing standards for Managed Trust
Securities and the listing and trading of shares of the
iShares[supreg] Diversified Alternatives Trust).
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Managed Emerging Markets Trust
According to the Registration Statement, the Trust will pursue
long-term total returns by seeking to provide both (1) a long-only
exposure to one or more emerging markets equity indices (the ``index
exposure'') and (2) ``alpha'' returns that are additive to, and are not
correlated with, the index exposure (measured over rolling 5-year
periods), while seeking to control overall downside risk and
volatility. Total return refers to the combined income and capital
appreciation generated by a portfolio.
According to the Registration Statement, the assets of the Trust
(the ``Portfolio'') will consist of positions in futures contracts on
emerging market equity indices, foreign currency forward
[[Page 47449]]
contracts, swaps providing exposure to such futures contracts and
forward contracts, and cash and other financial instruments which may
be used, as needed, to secure the Trust's trading obligations with
respect to those trading positions. The Adviser will pursue the Trust's
investment objective by utilizing a discretionary portfolio
construction approach that is designed to provide (i) the index
exposure, and (ii) exposure to an ``alpha'' portfolio with returns
likely to be independent of, and uncorrelated to, the index exposure.
The Adviser will seek to provide the index exposure by holding long
emerging markets equity index futures positions. The Adviser will seek
to provide alpha exposure by actively trading and investing a portfolio
primarily composed of futures contracts and forward contracts using its
discretion to make investment choices based on fundamental analysis of
various macroeconomic factors.
The Trust may hold cash necessary to cover its ordinary and
extraordinary expenses.
Alpha Strategy
According to the Registration Statement, the alpha strategy will
seek to provide returns that are independent of, and uncorrelated to,
the index exposure, by trading and investing primarily in futures
contracts and forward contracts relating to emerging markets. The
Adviser will pursue a strategy based on fundamental analysis and will
make investment decisions based on its view of the fundamental value of
various financial instruments relative to market prices and
expectations. In certain limited circumstances, the Trust may invest in
exchange-traded swaps, swaps accepted for central clearing (``cleared
swaps'') and swaps which are not accepted for central clearing
(``uncleared swaps''), as described below. The Trust will only invest
in cleared swaps if an investment in exchange-traded swaps is
unavailable, and the Trust will only invest in uncleared swaps if an
investment in cleared swaps is unavailable. No more than 20% of the
Portfolio may be invested, on both an initial and an ongoing basis, in
over-the-counter (``OTC'') swaps.
To construct the alpha portfolio, the Adviser will apply both
quantitative and qualitative analysis to market and economic data to
generate investment ideas, to trade and invest on a discretionary
basis, and to manage portfolio risk.
The Adviser's investment process will reflect its belief that
macroeconomic factors drive investment returns over the medium and long
term. These macroeconomic factors include fundamental economic and
fundamental market factors. Examples of fundamental economic factors
include monetary and fiscal policy, growth conditions, inflation, and
the quality and stability of governmental and civic institutions.
Examples of fundamental market factors include matters such as
valuation and pricing metrics, interest rates, momentum, liquidity, and
ease of capital formation.
The Adviser will form conclusions regarding future economic
conditions and future financial instruments pricing based on its review
and analysis of macroeconomic factors. The Adviser's investment process
will be driven by its understanding of the underlying relationships
between asset class pricing and macroeconomic forces. The Adviser will
evaluate markets based on both the current state of various
macroeconomic factors (i.e., current conditions) as well as anticipated
changes to those conditions, and will seek to understand what
expectations regarding those changes are embedded in current market
pricing. From time to time, the Adviser will form thematic,
macroeconomic-based ``alpha views'' regarding its desired exposures to
investment themes.
The Adviser will utilize both quantitative and qualitative analysis
in its investment process. With respect to quantitative analysis, the
Adviser will apply a range of mathematical and statistical techniques
to historical and real-time market and economic data that relates to
the various macroeconomic factors, as part of an ongoing research
process. The Adviser will analyze this historical data in an effort to
identify how changes to current conditions and expectations about
future conditions will affect the prices of various financial
instruments. The quantitative analysis used by the Adviser will
particularly focus on the volatility and correlation characteristics of
financial instruments, as the Adviser will seek to build a diversified
portfolio in the alpha strategy. The Adviser will seek to develop
predictive models based on its quantitative analysis to generate and
evaluate investment ideas. However, the Trust will trade purely on a
discretionary basis and the Adviser will engage in a qualitative
analysis of any investment ideas generated utilizing quantitative
analysis.
The Adviser also will utilize qualitative analysis which relies on
the investment experience and views of its principals, as well as
internally-developed frameworks for evaluating and generating
investment ideas. The Adviser's qualitative analysis will focus on
research relating to the subjective conditions of macroeconomic factors
in emerging markets, the perception and expectations of market
participants, and the risk characteristics of investment ideas.
Emerging Markets
According to the Registration Statement, emerging markets are
generally considered to be nations with social or business activity in
the process of rapid growth and industrialization, typically
characterized by increasingly liquid and broad capital markets,
strengthening civil institutions, improving governance, strengthening
infrastructure and increasing quality of life for citizens. Emerging
markets are also often marked by increasingly educated and competitive
labor forces and rapid growth in industrialization, combined with
relatively lower consumption per capita than in more developed
economies. These countries are often engaged in a transition from an
underdeveloped economy into a well-capitalized, developed economy
similar to those of the advanced industrialized countries like the
United States, Japan or much of Western Europe.
The Adviser will look at a variety of factors to determine whether
a country is an ``emerging market.'' Currently, the Adviser views
countries as ``emerging markets'' if they are considered to be
developing, emerging or frontier by sources such as MSCI, the
International Monetary Fund, the World Bank, the International Finance
Corporation, the United Nations, The Economist magazine, Standard &
Poor's and Dow Jones, or if they are countries with a stock market
capitalization of less than 5% of the MSCI World Index.
Emerging market countries typically are located in the following
regions: Asia-Pacific; Eastern Europe; the Middle East; Central and
South America; and Africa.
Within these regions, the Trust will likely invest in financial
instruments relating to countries such as: Argentina, Brazil, Chile,
China, Colombia, Czech Republic, Egypt, Greece, Hong Kong, Hungary,
India, Indonesia, Israel, Jordan, Kenya, Lebanon, Malaysia, Mexico,
Morocco, Nigeria, Peru, Philippines, Poland, Qatar, Russia, Singapore,
South Africa, South Korea, Taiwan, Thailand, Turkey, United Arab
Emirates, Ukraine and Vietnam.
This list will change from time to time based on market
developments. The percentage of Trust assets invested in a specific
region or country will change from time to time. The Trust will not be
subject to any limitations on the
[[Page 47450]]
percentage of its assets that may be exposed to a single region or
country.
Portfolio Construction
According to the Registration Statement, to construct the
Portfolio, the Adviser expects to devote a portion of the Trust
proceeds to establishing the emerging markets index exposure (generally
expected to be maintained at a level equal to 100% of the Trust's net
assets) and substantially all of the remainder to seek the alpha
exposure (generally not to exceed a level equal to 300% of the Trust's
net assets). The portion of Trust assets required to maintain these
exposures will fluctuate from time to time, in particular as the margin
requirements to maintain the Trust's futures contract positions
fluctuate.
According to the Registration Statement, futures contracts and
forward contracts have an inherent degree of leverage due to the
relatively small amounts of capital required to be deposited as margin
for such financial instrument positions (generally 2% to 5% of the
value of the contract). The Trust may at times trade with a significant
degree of leverage, and the Trust's use of leverage can be expected to
vary from time to time. The Adviser will seek to limit the notional
exposure of the overall Portfolio to no more than 400% of the Trust's
net assets. Notwithstanding the foregoing limitation on the Trust's use
of leverage, the Adviser will seek to mitigate leveraging risk if the
notional exposure of the overall Portfolio is approaching the leverage
limitation.
In addition, the Trust will include appropriate risk disclosure in
its offering documents, including leveraging risk. Leveraging risk is
the risk that certain transactions of the Trust, including the Trust's
use of derivatives, may give rise to leverage, causing the Trust to be
more volatile than if it had not been leveraged. 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 Trust to obtain the desired asset exposure. To mitigate leveraging
risk, the Adviser will segregate or ``earmark'' liquid assets or
otherwise cover the transactions that may give rise to such risk.
Index Exposure Portfolio Construction
According to the Registration Statement, the Trust will seek to
maintain constant exposure to one or more emerging markets equity
indices by holding long positions in emerging markets index futures
contracts.\9\ Generally, the Adviser will seek to maintain an emerging
markets index exposure to equal 100% of the Trust's net assets,
although this may vary from time to time depending on market
conditions. The Adviser expects the volatility for the Trust's index
portfolio to track the volatility of major emerging markets indices
(based on historical volatility, 20% to 25%).
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\9\ An index futures contract is a bilateral agreement pursuant
to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount multiplied by the difference
between the index value at the close of trading of the contract and
the price at which the futures contract is originally struck. No
physical delivery of the securities comprising the index will be
made; rather, the contract will be settled in cash at the
termination of the contract. The settlement will be equal to the
difference between the contract price and the actual level of the
stock index at the expiration of the contract. The Trust expects to
settle contracts prior to their expiration date.
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The MSCI Emerging Markets Index is the initial emerging market
equity index that the Trust will invest in (by holding long MSCI
Emerging Markets Index futures contracts as the index itself is not
investable) to achieve its index exposure. The Adviser may in the
future invest in additional or different emerging markets index futures
contracts.
The MSCI Emerging Markets Index is intended to measure equity
market performance in the global emerging markets. The MSCI Emerging
Markets Index is a free float-adjusted market capitalization index with
a base date of December 31, 1987 and an initial value of 100. The MSCI
Emerging Markets Index is calculated daily in U.S. dollars and
published in real time every 60 seconds during market trading hours.
The MSCI Emerging Markets Index spans large, mid and small cap
securities and currently consists of the following 21 emerging market
country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt,
Hungary, India, Indonesia, Malaysia, Mexico, Morocco, Peru,
Philippines, Poland, Russia, South Africa, South Korea, Taiwan,
Thailand, and Turkey. As of July 31, 2015, the five largest country
weights were China (23.93), South Korea (14.18%), Taiwan (12.48%),
India (8.37%), and South Africa (8.00%), and the five largest sector
weights were Financials (29.49%), Information Technology (17.49%),
Consumer Discretionary (9.03%), Consumer Staples (8.54%), and Energy
(8.09%). The MSCI Emerging Markets Index is part of the MSCI Regional
Equity Indices series and is an MSCI Global Investable Market Index,
which is a family within the MSCI International Equity Indices.
ICE Futures U.S. has been licensed to create futures contracts on
the MSCI Emerging Markets Index, and the Adviser expects to obtain its
emerging markets index exposure by holding long positions in these
futures contracts.\10\
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\10\ ICE Futures U.S. is a member of the Intermarket
Surveillance Group (``ISG'').
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Because the Trust's index exposure will be provided by futures
contracts which have dated expirations, the Trust will need to
periodically rebalance or ``roll'' its exposures by selling near-dated
futures contracts and buying longer-dated futures contracts to replace
them. The Adviser will rebalance the Trust's exposures on a
discretionary, rather than systematic basis, and will seek to roll its
index futures positions in a way that minimizes the Trust's transaction
costs. The Adviser also will seek to avoid rolling futures contracts
extremely close to expiry, and generally will refrain from holding
contracts through to expiration and settlement, as described in more
detail under ``Rebalancing'' below.
Alpha Portfolio Construction
According to the Registration Statement, the Adviser will construct
a portfolio of instruments for the Trust to hold by determining the
optimal way to express its alpha views in light of pragmatic
considerations associated with trading in financial instruments. The
Adviser will assess trading and investment risks in selecting both
which alpha views to express and in constructing an optimal portfolio
accordingly. The Adviser will seek to minimize both transaction costs
and exogenous trading risks such as liquidity or counterparty risks
while maximizing the clarity of expression of the Adviser's alpha
views. Some of the criteria included in this analysis for each
instrument or market will be: Liquidity or trading volume, margin
requirements, commission rates, bid-ask spreads and futures contracts
curve shape.
With respect to the alpha portfolio, the Adviser will take
directional positions where it believes prices will move favorably over
the medium- to long-term (i.e., over the next three months or more) as
a result of the anticipated gap between its perceptions and the market.
Because the alpha portfolio will seek to capture price movements
resulting from certain changes in markets resulting from changing
expectations about certain market fundamentals, the alpha strategy will
be directional and an investment in Shares should not be considered
market-neutral. The Adviser does not
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expect, however, that the alpha portfolio will over time favor any
particular market with either a long bias or a short bias.
The alpha portfolio primarily will be composed of futures contracts
on emerging market equity indices and foreign currency forward
contracts, as described in more detail below. The Trust may invest in
futures contracts and forward contracts of varying duration, from
shorter-term contracts of one to three months to longer-term contracts
of up to three years or more. The Trust will not use any particular
index or benchmark to construct the alpha portfolio. Except as
otherwise described herein, there will be no limitations on the
commodity interests that the Trust may trade to seek its alpha
exposure.
According to the Registration Statement, the Adviser anticipates
that as the Trust grows larger, it may also, in certain limited
circumstances, invest in exchange-traded swaps, cleared swaps and
uncleared swaps. These limited circumstances include the following:
When futures contracts are not available or market
conditions do not permit investing in futures contracts (for example, a
particular futures contract may not exist or may trade only on an
exchange that has not yet been approved by the Trust); and
When there are position limits, price limits or
accountability limits on futures contracts.
Therefore, swaps would only be used by the Trust as a substitute
for futures contracts in the limited circumstances described above when
the Adviser has determined that it is necessary to use swaps in order
for the Trust to remain consistent with the Trust's investment
objective. Further, the Adviser expects that the Trust's use of swaps,
if any, will be of a de minimis nature.
To the extent that the Trust invests in swaps, it would first make
use of exchange-traded swaps if such swaps are available with respect
to futures contracts on emerging market equity indices or foreign
currency forward contracts. If an investment in exchange-traded swaps
is unavailable, then the Trust would invest in cleared swaps that clear
through derivatives clearing organizations that satisfy the Trust's
criteria if such swaps are available with respect to futures on
emerging market equity indices or foreign currency forward contracts.
If an investment in cleared swaps is unavailable, then the Trust would
invest in other swaps, including uncleared swaps in the OTC market.\11\
However, no more than 20% of the Portfolio may be invested, on both an
initial and an ongoing basis, in OTC swaps.
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\11\ According to the Registration Statement, swap transactions
generally involve contracts between two parties to exchange a stream
of payments computed by reference to a notional amount and the price
of the asset that is the subject of the swap. Swap contracts are
principally traded off-exchange, although certain swap contracts are
also being traded in electronic trading facilities and cleared
through clearing organizations. Swaps are usually entered into on a
net basis, that is, the two payment streams are netted out in a cash
settlement on the payment date or dates specified in the agreement,
with the parties receiving or paying, as the case may be, only the
net amount of the two payments. Swaps do not generally involve the
delivery of underlying assets or principal. Accordingly, the risk of
loss with respect to swaps is generally limited to the net amount of
payments that the party is contractually obligated to make. In some
swap transactions one or both parties may require collateral
deposits from the counterparty to support that counterparty's
obligation under the swap agreement. If the counterparty to such a
swap defaults, the risk of loss consists of the net amount of
payments that the party is contractually entitled to receive less
any collateral deposits it is holding. Some swap transactions are
cleared through central counterparties. These transactions, known as
cleared swaps, involve two counterparties first agreeing to the
terms of a swap transaction, then submitting the transaction to a
clearing house that acts as the central counterparty. Once accepted
by the clearing house, the original swap transaction is novated and
the central counterparty becomes the counterparty to a trade with
each of the original parties based upon the trade terms determined
in the original transaction. In this manner each individual swap
counterparty reduces its risk of loss due to counterparty
nonperformance because the clearing house acts as the counterparty
to each transaction.
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The Adviser generally will seek to maintain an annualized
volatility ranging from 15% to 20% for the Trust's alpha portfolio.
Alpha Futures Contracts
According to the Registration Statement, the Adviser expects that
75% to 90% of the Portfolio's alpha exposure will be obtained via
futures contracts, which can vary from time to time in the sole
discretion of the Adviser. The Trust expects to take long or short
positions in a wide variety of commodity futures contracts and
financial futures contracts, as discussed in more detail below. The
Trust expects to trade in commodity futures contracts, including
metals, agriculturals, energies, and softs. The Trust expects to trade
in a wide variety of financial futures contracts, including interest
rates, currencies and currency indices, U.S. and non-U.S. equity
indices and government bond futures contracts. With respect to futures
contracts on emerging market equity indices, the alpha portfolio may be
exposed to stock index futures contracts and other indices composed of
corporate equities issued in local markets.
If the Trust purchases or sells a listed commodity or currency
futures contract, it will agree to purchase or sell, respectively, the
specified commodity or currency at a specified future date. The price
at which the purchase and sale takes place will be fixed when the Trust
enters the contract. Margin deposits will be posted as performance
bonds with the Trust's clearing broker and then ultimately with the
exchange clearing corporation who ultimately serves as the counterparty
for the listed contract (thus limiting counterparty credit risk to the
exchange itself).
Alpha Forward Contracts
The Trust may enter into forward contracts, which will be limited
solely to foreign currency forward contracts,\12\ which the Adviser
expects may comprise 10% to 25% of the Portfolio's alpha exposure
(although this will fluctuate from time to time in the discretion of
the Adviser). In particular, the Trust may trade foreign currency
forward contracts (a) to gain exposure to currencies that are not
easily or efficiently traded in futures contracts or (b) if the Adviser
believes that a relevant forward has more favorable terms than an
available futures contract, such as more favorable liquidity. The
Adviser also does not currently expect to engage in any transactions
that would be considered ``retail forex'' transactions for purposes of
the CEA. The Trust will only enter into foreign currency forward
contracts related to foreign currencies that have significant foreign
exchange turnover and are included in the Bank for International
Settlements Triennial Central Bank Survey, September 2013 (``BIS
Survey''). Specifically, the Trust may enter into foreign currency
forward contracts that provide exposure to such currencies, selected
from the top 40 currencies (as measured by percentage share of average
daily turnover for the applicable month and year) included in the BIS
Survey.
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\12\ A forward currency contract is a privately negotiated
contract to purchase or sell a specific currency at a future date
(usually less than one year) at a price set at the time of the
contract. The Trust may enter into forward currency contracts to
``lock in'' the exchange rate between the currency it will deliver
and the currency it will receive for the duration of the contract.
Forward currency contracts are traded over-the-counter and not on
exchanges.
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The Trust may enter into deliverable forward contracts, in which
there is physical delivery of a specified amount of currency equivalent
to the market value of the contract. Alternatively, the Trust may
invest in non-deliverable forward contracts where there is no physical
delivery of the currency at the maturity of the contract. Instead, one
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party will agree to make periodic payments to its counterparty based on
the change in market value or level of a specified currency. In return,
the counterparty will make periodic payments to the first party based
on the return of a different specified currency. Generally, these non-
deliverable forward contracts will be entered into on a net basis,
whereby the Trust will receive or pay only the net amount of the two
payments, representing the excess, if any, of the Trust's obligations
over its entitlements with respect to each non-deliverable forward
contract. These net amounts will be accrued on a daily basis and an
amount of cash or highly liquid securities having an aggregate value at
least equal to the accrued excess will be maintained in an account at
the Trust's custodian. The risk of loss with respect to non-deliverable
forward contracts generally will be limited to the net amount of
payments that the Trust is contractually obligated to make or receive.
The Trust's forward contracts will be collateralized to the extent
required by the relevant counterparties. The counterparties to the
Trust's forward contracts are expected to be brokers, dealers and other
financial institutions. The Adviser will seek to diversify the Trust's
counterparty exposure, but may from time to time have concentrated
exposure to one or more counterparties. However, the Adviser represents
that it will not concentrate risks with a single counterparty and will
establish polices and procedures to manage counterparty concentration
and monitor counterparty creditworthiness. The policies and procedures
to monitor counterparty creditworthiness will consider the credit
rating of the counterparty and any past experience with the
counterpary.
Rebalancing
According to the Registration Statement, the Adviser will rebalance
the Portfolio on a discretionary basis, as described in more detail
below.
Rebalancing of the Alpha Portfolio
According to the Registration Statement, the Adviser will determine
whether to maintain particular exposures, close out positions, or
resize positions, in its discretion and in accordance with its
investment strategy and analysis of market conditions. The Adviser will
seek to make any such adjustments to the Portfolio in a manner that
minimizes transaction costs and Portfolio exposure to variations in
price that do not reflect the Adviser's intended investment exposure.
To do so, the Adviser will analyze transaction costs, liquidity and
margin concerns, and financial instrument pricing. The Adviser does not
expect, under normal market conditions, to settle any futures
contracts.
Rebalancing of the Index Portfolio
According to the Registration Statement, with respect to the index
exposure, the Adviser will seek to invest in longer-dated contracts to
maintain constant exposure and minimize transaction costs. The Adviser
will ``roll'' (i.e., regularly purchase and subsequently sell) its
contract positions throughout the year. As a particular futures
contract nears its expiration date (or earlier), the Adviser will roll
the position into a new contract. The Adviser will actively manage the
implementation of this roll process. As a result, the roll dates, terms
and contract prices selected by the Adviser may vary based upon factors
such as contract liquidity and duration, pricing and market risk. This
active management of the roll process is intended to minimize the
Trust's exposure to costs associated with market or trading
inefficiencies.
Costs Associated With Rebalancing
According to the Registration Statement, if futures contracts are
trading at a lower or higher price than their expected spot price, and
it is time for the Trust to roll its exposure by reinvesting the
proceeds of a maturing contract in a new contract, the Trust may do so
at higher or lower futures contracts prices, or it may determine not to
reinvest such proceeds. When longer-dated contracts are priced lower
than nearer-dated contracts and spot prices, the market is in
``backwardation,'' and positive roll yield may be generated when higher
priced nearer-dated contracts are sold to buy and hold lower priced
longer-dated contracts. When the opposite is true and longer-dated
contracts are priced higher than nearer-dated contracts and spot
prices, the market is in ``contango,'' and negative roll yields may
result from the sale of lower priced nearer-dated contracts to buy and
hold higher priced longer-dated contracts. If the Trust invests at a
higher price than the spot price, the Trust will bear the associated
``roll cost'' or negative roll yield in addition to the brokerage
transaction costs, such as commissions and clearing charges, to effect
such roll transactions. To the extent that the Adviser determines to
rebalance more frequently, the Portfolio will incur more substantial
transaction charges and possible roll costs, depending on market
conditions.
Risk Management
The Adviser will determine the Trust's asset allocation which seeks
to achieve a target excess return at a targeted risk level, as
described in more detail below.
The Adviser will have the discretion to adjust the index exposure
above or below 100%, and may do so from time to time based on market
conditions. The Adviser also may determine to allocate Portfolio assets
to additional or different emerging market indices. The Adviser does
not generally expect to hedge the index exposure.
The Adviser will construct the alpha portfolio using a ``risk
budget'' whereby the desired alpha views are framed as desired
quantities of risk units. The portfolio construction process then will
translate these desired risk unit quantities into specific financial
instruments for the Trust to hold. The Portfolio will be assessed on at
least a weekly basis to determine whether market movements have caused
the Trust's actual risk exposures to drift from its desired risk
exposures. If there is a sizeable drift that exceeds thresholds where
it is efficient for the Adviser to rebalance the alpha portfolio
(taking into account transaction costs and other trading frictions)
then the Adviser will rebalance the alpha portfolio to move closer to
the desired risk budget. However, if there is a drift that exceeds
thresholds but it is not efficient for the Adviser to rebalance the
alpha portfolio, then the Adviser may choose not to rebalance the alpha
portfolio. Once purchased, instruments held by the Trust may from time
to time be subject to stop-losses or other contingent trading orders in
an attempt to hedge certain risks, including event or liquidity risks.
Description of the Shares and Principal Trust Investments
According to the Registration Statement, and as noted above, in
pursuit of the Trust's investment objective, the Trust will primarily
trade and invest in futures on emerging market equity indices and
foreign currency forward contracts. For more information regarding the
types of futures contracts and forward contracts that the Trust will
invest in, see ``Portfolio Construction'' above.
The Trust expects to trade futures contracts on U.S. exchanges and
non-U.S. exchanges. The U.S. exchanges on which the Trust may trade
futures contracts include ICE Futures U.S. and other exchanges that are
members of the ISG.\13\ In addition, the Trust may hold
[[Page 47453]]
futures traded on the Kansas City Board of Trade (``KBT''). The non-
U.S. exchanges on which the Trust may trade futures contracts include,
but are not limited to, the following: The London Metal Exchange
(``LME''), ASX Limited, Dubai Mercantile Exchange Limited, Euronext
Amsterdam NV, and Osaka Securities Exchange Co., Ltd.\14\
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\13\ See ``Surveillance,'' infra.
\14\ The Exchange has entered into a comprehensive surveillance
agreement with KBT and LME relating to applicable futures contracts.
ASX Limited is regulated by the Australian Securities and
Investments Commission, which is a member of ISG. Japan Exchange
Regulation (``JPX-R''), an affiliate of the Osaka Securities
Exchange that conducts self-regulatory functions on behalf of the
Osaka Securities Exchange, is a member of the Intermarket
Surveillance Group and information relating to transactions in
futures contracts traded on the Osaka Securities Exchange is
available through JPX-R. See ``Surveillance,'' infra.
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Other Trust Investments
The Trust's Portfolio may contain cash which may be used, as
needed, to secure the Trust's trading obligations with respect to its
trading positions. Although the Trust's investment objective is not
primarily to hold significant amounts of cash, cash may comprise a
significant portion of the net asset value (``NAV'') of the Trust.
In order to collateralize futures contracts and forward contracts,
the Trust may invest in U.S. government debt instruments, which are
U.S. Treasury bills, notes and bonds of varying maturities that are
backed by the full faith and credit of the United States government, or
other short-term securities (in each case that are eligible as margin
deposits under the rules of the Exchange), which may include money
market instruments (``Short-Term Securities''). Although the Trust's
investment objective is not primarily to trade and invest in Short-Term
Securities, Short-Term Securities may comprise a significant portion of
the NAV of the Trust.\15\
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\15\ ``NAV of the Trust'' means the total assets of the Trust
including all cash and cash equivalents or other debt securities
less total liabilities of the Trust, each determined on the basis of
United States generally accepted accounting principles, consistently
applied under the accrual method of accounting. In particular, NAV
of the Trust includes any unrealized profit or loss on open forward
contracts and futures contracts, and any other credit or debit
accruing to the Trust but unpaid or not received by the Trust. ``NAV
per Share'' means the Trust's NAV per Share.
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Issuance and Redemption of the Shares
According to the Registration Statement, the Trust intends to issue
and redeem Shares on a continuous basis only in one or more blocks of
100,000 Shares (``Baskets''). Baskets will be issued and redeemed only
in exchange for consideration in cash equal to the ``Basket Amount''
\16\ announced by the Trust on the first ``Business Day'' \17\after the
purchase or redemption order is received by the Trust. Baskets may be
created and redeemed only by ``Authorized Participants''. Only
institutions that enter into an agreement with the Trust to become
Authorized Participants may purchase or redeem Baskets.
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\16\ ``Basket Amount'' means, as of any date, an amount equal to
the product of the NAV per Share on such date and the number of
Shares constituting a Basket on such date.
\17\ ``Business Day'' means any day other than (a) a Saturday or
Sunday; (b) a day on which the Exchange is closed for regular
trading; (c) a day on which any of he [sic] Adviser, the Processing
Agent, the Settlement Agent, the Trust Administrator, the Sponsor or
the Trustee is authorized or required by law or regulation to remain
closed; or (d) a day on which the Federal Reserve wire transfer
system is closed for cash wire transfers.
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Creation of Baskets
On any ``Eligible Business Day'',\18\ an Authorized Participant may
place a purchase order with the Processing Agent to create one or more
Baskets. Purchase orders must be placed by 1:15 p.m. (E.T.) or the
close of regular trading on the New York Stock Exchange, whichever is
earlier (``Purchase Order Cutoff Time''). Purchase orders received
after the Purchase Order Cutoff Time on an Eligible Business Day, or on
a day that is not an Eligible Business Day will be treated as received
on the next following Eligible Business Day. The day on which the
Processing Agent receives a valid purchase order is referred to as the
purchase order date. By placing a purchase order, an Authorized
Participant agrees to deposit cash with the Trust, as described below.
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\18\ ``Eligible Business Day'' means any Business Day other than
a Business Day which immediately precedes two or more days on which
there is no scheduled exchange trading session for one or more of
the futures contracts purchased or sold, or that may be purchased or
sold, by the Trust on such day.
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Determination of the Creation Deposit Amount
The total deposit required to create each Basket (``Creation
Deposit Amount'') will be the amount of cash that is in the same
proportion to the NAV of the Trust (net of estimated accrued but unpaid
fees, expenses and other liabilities) on the purchase order date as the
number of Shares to be created under the purchase order is in
proportion to the total number of Shares outstanding on the purchase
order date.
Delivery of the Creation Deposit Amount
An Authorized Participant who places a purchase order will be
responsible for transferring to the Settlement Agent the required
amount of cash by 6:00 p.m. (E.T.) on the next Business Day following
the purchase order date or by the end of such later Business Day, not
to exceed three Business Days after the purchase order date, as agreed
to between the Authorized Participant and the Settlement Agent when the
purchase order is placed (the ``Purchase Settlement Date''), and give
notice of such deposit to the Settlement Agent via facsimile or
electronic mail message. Upon receipt of the Creation Deposit Amount,
the Settlement Agent will direct the Depository Trust Company (''
DTC'') to credit the number of Baskets ordered to the Authorized
Participant's DTC account on the Purchase Settlement Date. If the
Settlement Agent does not receive the Creation Deposit Amount on a
timely basis, the purchase order will be automatically cancelled.
Rejection of Purchase Orders
The Sponsor will have the absolute right to reject any purchase
order, including, without limitation, (1) purchase orders that the
Processing Agent determines are not in proper form, (2) purchase orders
that the Sponsor determines would have adverse tax or other
consequences to the Trust, (3) purchase orders the acceptance of which
would, in the opinion of counsel to the Sponsor, result in a violation
of law, (4) purchase orders in respect of which the Settlement Agent
has not received the corresponding Creation Deposit Amount by 6:00 p.m.
(E.T.) on the Purchase Settlement Date, or (5) during any period in
which circumstances make transactions in, or settlement or delivery of,
Shares or components of the Portfolio impossible or impractical. The
Sponsor may suspend the creation of Baskets, or postpone the issuance
date, for as long as it considers necessary for any reason. None of the
Sponsor, the Processing Agent, the Settlement Agent or the Trustee, the
Trust or any of their agents are liable to any person for such
suspension or postponement.
Redemption of Baskets
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets. On any
Eligible Business Day, an Authorized Participant may place an order
with the Processing Agent to redeem one or more Baskets. Redemption
orders must be placed by 1:15 p.m. (E.T.) or the close of regular
trading on the New York Stock Exchange, whichever is earlier
(``Redemption Order Cutoff Time''). Redemption orders received after
the Redemption Order Cutoff Time on an
[[Page 47454]]
Eligible Business Day, or on a day that is not an Eligible Business Day
will be treated as received on the next following Eligible Business
Day. A redemption order so received will be effective on the date it is
received in satisfactory form by the Processing Agent. The day on which
the Processing Agent receives a valid redemption order is referred to
as the redemption order date.
Determination of the Redemption Deposit Amount
The Redemption Deposit Amount from the Trust will consist of a
transfer to the redeeming Authorized Participant of an amount of cash
that is in the same proportion to the NAV of the Trust (net of
estimated accrued but unpaid fees, expenses and other liabilities) on
the redemption order date as the number of Shares to be redeemed under
the redemption order is in proportion to the total number of Shares
outstanding on the redemption order date.
Delivery of the Redemption Deposit Amount
The redemption distribution due from the Trust will be delivered to
the Authorized Participant on the Redemption Settlement Date if the
Trust's DTC account has been credited with the Baskets to be redeemed.
If the Trust's DTC account has not been credited with all of the
Baskets to be redeemed by 6:00 p.m. (E.T.) of such date, the redemption
distribution will be delivered to the extent of whole Baskets received.
Computation of the Trust's NAV
According to the Registration Statement, on each Business Day, as
soon as practicable after the close of regular trading of the Shares on
the Exchange (normally 4:00 p.m. E.T.), the Sponsor will determine the
NAV of the Trust, the NAV per Share and the Basket Amount as of that
date.
On each day on which the Sponsor must determine the NAV of the
Trust, the NAV per Share and the Basket Amount, the Trust Administrator
will value all assets in the Portfolio and communicate that valuation
to the Sponsor for use by the Sponsor in the determination of the
Trust's NAV. The Sponsor will subtract the Trust's accrued fees (other
than fees computed by reference to the value of the Trust or its
assets), accrued expenses and other liabilities on that day from the
value of the Trust's assets as of the time of calculation on that
Business Day. The result is the Trust's ``Adjusted Net Asset Value.''
Fees computed by reference to the value of the Trust or its assets
(including the Sponsor's Fee \19\) will be calculated on the Adjusted
Net Asset Value. The Sponsor will subtract the fees so calculated from
the Adjusted Net Asset Value of the Trust to determine the Trust's NAV.
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\19\ ``Sponsor's Fee'' means an allocation to be paid by the
Trust to the Sponsor monthly in arrears and will accrue daily at an
annualized rate equal to a certain percentage of the Adjusted Net
Asset Value of the Trust.
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The Sponsor will determine the NAV per Share by dividing the NAV of
the Trust on a given day by the number of Shares outstanding at the
time the calculation is made. The Sponsor will then determine the
Basket Amount corresponding to that date by multiplying the NAV by the
number of Shares in a Basket (i.e., 100,000). The NAV and NAV per Share
for each Business Day will be distributed through major market data
vendors and published online at www.artivestfunds.com, or any successor
thereto. The Sponsor will update the NAV and NAV per Share as soon as
practicable after each subsequent NAV per Share is calculated.
The current market value of an open futures contract, whether
traded on a U.S. exchange or a non-U.S. exchange, will be determined by
the Trust Administrator based upon the settlement price for such
futures contract traded on the applicable exchange on the date with
respect to which NAV is being determined; provided that if such futures
contract could not be liquidated on such day, due to the operation of
daily limits (if applicable) or other rules, procedures or actions 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 may be the basis for determining the market value
of the position for that day.
The current market value of all Short-Term Securities that have not
yet matured will be determined by the Trust Administrator based upon
the current market prices for such securities; provided that if current
market prices are not available, then the current market value will be
based on the amortized value for such securities.
The current market value of all open forward contracts and swaps
will be based upon the prices determined by the Trust Administrator
utilizing data from an internationally recognized valuation service for
those types of assets.
The Sponsor may in its discretion (and, under extraordinary
circumstances, will) value any asset of the Trust pursuant to other
principles that it deems fair and equitable so long as those principles
are consistent with industry standards and are in compliance with all
applicable regulatory requirements. In this context, ``extraordinary
circumstances'' includes, for example, periods during which a valuation
price for a forward contract or a settlement price of a futures
contract is not available due to 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 or due to a trading disruption in the futures
markets or in forward contracts or swaps or a trading or other
restriction imposed by an exchange on which the forward contract,
futures contract or swap is traded.
Availability of Information Regarding the Shares
According to the Registration Statement, the Adviser's Web site,
which will be publicly accessible at no charge, will contain the
following information: (a) The daily NAV of the Trust, the daily NAV
per Share, the prior business day's NAV per Share and the reported
daily closing price; (b) the daily composition of the Disclosed
Portfolio, as defined in NYSE Arca Equities Rule 8.700(c)(2); \20\ (c)
the midpoint of the bid-ask price in relation to the NAV per Share as
of the time the NAV per Share is calculated (the ``Bid-Ask Price'');
(d) the calculation of the premium or discount of such price against
such NAV per Share; (e) the bid-ask price of Shares determined using
the highest bid and lowest offer as of the time of calculation of the
NAV; (f) data in chart form displaying the frequency distribution of
discounts and premiums of the Bid-Ask Price against the NAV, within
appropriate ranges for each of the four (4) previous calendar quarters;
(g) the current prospectus of the Trust, included in the Registration
Statement; and (h) other applicable quantitative information.
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\20\ NYSE Arca Equities Rule 8.700(c)(2) provides that the term
``Disclosed Portfolio'' means ``the identities and quantities of the
securities and other assets held by the Trust that will form the
basis for the Trust's calculation of net asset value at the end of
the business day''.
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On a daily basis, the Trust will disclose on its Web site
(www.artivestfunds.com) for each futures contract, forward contract,
swap or other financial instrument in the Disclosed Portfolio the
following information: name, ticker symbol (if applicable), number of
shares or dollar value, percentage weighting, the
[[Page 47455]]
underlying assets (if applicable), and the expiration date (if
applicable). The Web site information will be publicly available at no
charge. In addition, price information for the futures contracts,
forward contracts, swaps and other financial instruments held by the
Trust will be available through major market data vendors and/or the
exchange on which they are listed and traded, as applicable.
As noted above, the Trust's NAV and the NAV per Share will be
calculated and disseminated daily.\21\ The Exchange will disseminate
for the Trust on a daily basis by means of the Consolidated Tape
Association (the ``CTA'') high-speed line information with respect to
the recent NAV per Share, the number of Shares outstanding and the
Basket Amount. The Exchange also will make available on its Web site
daily trading volume, closing prices and the NAV per Share.
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\21\ The Exchange will obtain a representation from the Trust
that the NAV and the NAV per Share will be calculated daily and that
the NAV, the NAV per Share and the composition of the Disclosed
Portfolio will be made available to all market participants at the
same time.
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Pricing for futures contracts will be available from the relevant
exchange on which such futures contracts trade and pricing for forward
contracts and swaps will be available from major market data vendors.
Price information for Short-Term Securities will be available from
major market data vendors.
The Intraday Indicative Value (the ``IIV'') will be widely
disseminated by one or more major market data vendors at least every 15
seconds during the Exchange's Core Trading Session (as defined under
NYSE Arca Equities Rule 7.34).\22\
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\22\ Currently, it is the Exchange's understanding that several
major market data vendors widely disseminate IIVs taken from the CTA
high-speed line or other data feeds.
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Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. The
previous day's closing price and trading volume information for the
Shares will be published daily in the financial section of newspapers.
Quotation and last sale information for the Shares will be available
via the CTA high-speed line.
The current trading price per Share will be published continuously
as trades occur throughout each trading day through CTA, or through
major market data vendors.
Criteria for Initial and Continued Listing
The Trust will be subject to the criteria in NYSE Arca Equities
Rule 8.700 for initial and continued listing of the Shares.
The anticipated minimum number of Shares to be outstanding at the
start of trading will be 100,000 Shares. The Exchange believes that
this anticipated minimum number of Shares to be outstanding at the
start of trading is sufficient to provide adequate market liquidity and
to further the objectives of the Trust. The Exchange represents that,
for the initial and continued listing of the Shares, the Trust must be
in compliance with NYSE Arca Equities Rule 5.3 and Rule 10A-3 under the
Exchange Act.\23\
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\23\ 17 CFR 240.10A-3.
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Trading Rules
Under NYSE Arca Equities Rule 8.700(b), Managed Trust Securities
are included within the Exchange's definition of ``securities.'' The
Exchange deems the Shares to be equity securities, thus rendering
trading in the Shares subject to the Exchange's existing rules
governing the trading of equity securities. Commentary .02 to NYSE Arca
Equities Rule 8.700 provides that transactions in Managed Trust
Securities will occur during the trading hours specified in NYSE Arca
Equities Rule 7.34. Therefore, in accordance with NYSE Arca Equities
Rule 7.34, the Shares will trade on the NYSE Arca Marketplace from 4:00
a.m. to 8:00 p.m. E.T. The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Equities Rule 7.6, the minimum price variation (``MPV'') for
quoting and entry of orders in equity securities traded on the NYSE
Arca Marketplace is $0.01, with the exception of securities that are
priced less than $1.00 for which the MPV for order entry is $0.0001.
Trading Halts
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 halted if the
circuit breaker parameters under NYSE Arca Equities Rule 7.12 are
reached. Trading may also be halted because of market conditions or for
reasons that, in the view of the Exchange, make trading in the Shares
inadvisable. These may include: (1) The extent to which trading is not
occurring in the underlying futures contracts, forward contracts or
swaps, or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present. Trading in the Shares will be subject to NYSE Arca Equities
Rule 8.700(e)(2)(D), which sets forth circumstances under which trading
in the Shares may be halted.
In addition, if the Exchange becomes aware that the NAV, the NAV
per Share and/or the Disclosed Portfolio with respect to a series of
Managed Trust Securities is not disseminated to all market participants
at the same time, it will halt trading in such series until such time
as the NAV, the NAV per Share and/or the Disclosed Portfolio is
available to all market participants.
Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances administered by the Exchange, as
well as cross-market 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.\24\ 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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\24\ FINRA conducts cross-market surveillances on behalf of 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, 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.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares and certain
futures contracts with other markets or other entities that are members
of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or
both, [sic] may obtain trading information regarding trading in the
Shares and certain futures contracts from such markets or entities. In
addition, the Exchange may obtain information regarding trading in the
Shares and certain futures contracts from markets or other entities
that are members of ISG or with which the
[[Page 47456]]
Exchange has in place a comprehensive surveillance sharing
agreement.\25\
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\25\ 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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Not more than 10% of the net assets of the Fund in the aggregate
invested in futures contracts shall consist of futures contracts whose
principal market is not a member of ISG or is a market with which the
Exchange does not have a comprehensive surveillance sharing agreement.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the Portfolio, (b) limitations on portfolio
holdings or reference assets, or (c) the applicability of Exchange
rules and surveillance procedures shall constitute continued listing
requirements for listing the Shares on the Exchange.
The Trust has represented to the Exchange that it will advise the
Exchange of any failure by the Trust to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Exchange Act, the Exchange will monitor for compliance
with the continued listing requirements. If the Trust is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under NYSE Arca Equities Rule 5.5(m).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders (as defined under NYSE Arca Equities Rule 1.1(n)) in an
Information Bulletin (``Bulletin'') of the special characteristics and
risks associated with trading the Shares. Specifically, the Bulletin
will discuss the following: (1) The procedures for purchases and
redemptions of Shares in Baskets (and that Shares are not individually
redeemable); (2) 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; (3) the
requirement that ETP Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; (4) how information regarding the IIV
and the Disclosed Portfolio is disseminated; (5) 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; and (6)
trading information. In addition, the Bulletin will reference that the
Trust is subject to various fees and expenses described in the
Registration Statement.
The Bulletin also will reference the fact that there is no
regulated source of last sale information regarding physical
commodities and many of the asset classes that the Trust may hold and
that the Commission has no jurisdiction over the trading of certain
futures contracts.
The Bulletin also will discuss any exemptive, no-action and
interpretive relief granted by the Commission from any rules under the
Exchange Act. The Bulletin also will disclose that the NAV and NAV per
Share will be calculated after 4:00 p.m. E.T. each trading day.
2. Statutory Basis
The basis under the Exchange Act for this proposed rule change is
the requirement under Section 6(b)(5) \26\ 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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\26\ 15 U.S.C. 78f(b)(5).
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In permitting the use of specified swaps, the proposed amendment to
NYSE Arca Equities Rule 8.700 would provide additional flexibility to
an issuer of Managed Trust Securities seeking to achieve a trust's
investment objective. For example, because the markets for certain
futures contracts may be unavailable or cost prohibitive as compared to
derivative instruments, suitable derivative transactions may be an
efficient alternative for an issuer of Managed Trust Securities to
obtain the desired asset exposure. Additionally, swaps would allow
parties to replicate desired returns while eliminating the costs
associated with acquiring or holding the underlying asset. As such, the
increased flexibility afforded by the ability of an issuer of Managed
Trust Securities to use derivatives may enhance investor returns by
facilitating the ability to more economically seek its investment
objective, thereby reducing the costs incurred by such issuer.
The use of swaps by the Trust is consistent with the protection of
investors because swaps would only be used in certain limited
circumstances. Swaps would only be used by the Trust when (1) futures
contracts are not available or market conditions do not permit
investing in futures contracts (for example, a particular futures
contract may not exist or may trade only on an exchange that has not
yet been approved by the issuer); or (2) there are position limits,
price limits or accountability limits on futures contracts. In
addition, an issuer of Managed Trust Securities would invest in
exchange-traded swaps before investing in centrally cleared swaps and
would invest in centrally cleared swaps before investing in uncleared
swaps. The use of exchange-traded swaps and centrally cleared swaps
before uncleared swaps would protect investors because exchange-traded
swaps and centrally cleared swaps provide more transparency. More
importantly, swaps are subject to a strict regulatory framework,
including margin requirements (initial and variation) and record
keeping requirements. No more than 20% of the Trust's Portfolio may be
invested, on both an initial and an ongoing basis, in OTC swaps.
Furthermore, the Trust is a regulated entity subject to registration
requirements, ongoing compliance requirements and regulatory oversight
by the CFTC and the National Futures Association (NFA).
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices because the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Equities Rule
8.700. 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 the ISG or with
which the Exchange has entered into a comprehensive surveillance
sharing agreement. The Trust will only enter into foreign currency
forward contracts related to foreign currencies that have significant
foreign exchange turnover and are included in the BIS Survey.
Specifically, the Trust may enter into foreign currency forward
contracts that provide exposure to such currencies, selected from the
top 40 currencies (as measured by percentage share of average daily
turnover for the applicable month and year) included in the BIS Survey.
The NAV of the Trust, the NAV per Share and the Disclosed Portfolio
will be disseminated to all market participants at the same time. The
Trust will provide Web site disclosure of portfolio holdings daily. The
IIV per Share (quoted in U.S. dollars) will be widely disseminated at
[[Page 47457]]
least every 15 seconds during the Exchange's Core Trading Session by
major market data vendors. Pricing for futures contracts will be
available from the relevant exchange on which such futures contracts
trade and pricing for forward contracts and swaps will be available
from major market data vendors. Quotation and last-sale information
regarding the Shares will be disseminated through the CTA high-speed
line.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest
given that a large amount of information will be publicly available
regarding the Trust and the Shares, thereby promoting market
transparency. To the extent that the Trust invests in futures contracts
traded on foreign exchanges, not more than 10% of the weight of such
futures contracts in the aggregate shall consist of futures contracts
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. As provided in NYSE Arca Equities Rule
8.700(e)(2)(D), the Exchange may halt trading during the day in which
an interruption to the dissemination of the IIV occurs, or the value of
the underlying futures contracts occurs. If the interruption to the
dissemination of the IIV or the value of the underlying 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. If the Exchange becomes aware that the
NAV, the NAV per Share and/or the Disclosed Portfolio with respect to a
series of Managed Trust Securities is not disseminated to all market
participants at the same time, it will halt trading in such series
until such time as the NAV, the NAV per Share and/or the Disclosed
Portfolio is available to all market participants. Trading in Shares of
the Trust will be halted if the circuit breaker parameters under 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. Moreover, prior to the commencement
of trading, the Exchange will inform its ETP Holders in the Bulletin of
the special characteristics and risks associated with trading the
Shares.
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 given that it will facilitate the listing and trading
of an additional type of exchange-traded product 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 the ISG from other exchanges that are members of the 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 IIV 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 Exchange Act. The Exchange notes
that the proposed rule change will facilitate the listing and trading
of an additional type of actively-managed exchange-traded product that
will principally hold futures contracts, swaps and forward contracts,
and that will enhance competition among market participants, to the
benefit of investors and the marketplace.
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
Within 45 days of the date of publication of this notice in the
Federal Register or up to 90 days (i) as the Commission may designate
if it finds such longer period to be appropriate and publishes its
reasons for so finding or (ii) as to which the self-regulatory
organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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-2016-96 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2016-96. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of 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-2016-96 and should
be submitted on or before August 11, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-17198 Filed 7-20-16; 8:45 am]
BILLING CODE 8011-01-P