Document ID: SEC-2011-0003-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2011-01-03T05:00Z

[Federal Register Volume 76, Number 1 (Monday, January 3, 2011)]
[Notices]
[Pages 199-201]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32984]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63610; File No. SR-NYSEArca-2010-10]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to the Listing and Trading of 
the ProShares VIX Short-Term Futures ETF and the ProShares VIX Mid-Term 
Futures ETF

December 27, 2010.

I. Introduction

    On November 5, 2010, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to list and trade 
shares (``Shares'') of the ProShares VIX Short-Term Futures ETF and the 
ProShares VIX Mid-Term Futures ETF (``Funds'') of the ProShares Trust 
II (``Trust'') under NYSE Arca Equities Rule 8.200, Commentary .02.

[[Page 200]]

The proposed rule change was published for comment in the Federal 
Register on November 22, 2010.\3\ The Commission received no comments 
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. 63317 (November 16, 
2010), 75 FR 71158 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares of the Funds 
under NYSE Arca Equities Rule 8.200, Commentary .02.\4\ The Funds will 
seek to provide investment results (before fees and expenses) that 
match the performance of a benchmark that seeks to offer exposure to 
market volatility through publicly traded futures markets. The 
benchmark for ProShares VIX Short-Term Futures ETF is the S&P 500 VIX 
Short-Term Futures Index and the benchmark for ProShares VIX Mid-Term 
Futures ETF is the S&P 500 VIX Mid-Term Futures Index (each, an 
``Index,'' and, collectively, ``Indexes'').\5\ The Funds will invest in 
futures contracts based on the Chicago Board Options Exchange 
(``CBOE'') Volatility Index (``VIX'') to pursue their respective 
investment objectives. Each Fund also may invest in cash or cash 
equivalents such as U.S. Treasury securities or other high credit 
quality short-term fixed-income or similar securities (including shares 
of money market funds, bank deposits, bank money market accounts, 
certain variable-rate demand notes, and repurchase agreements 
collateralized by government securities) that may serve as collateral 
for the futures contracts.
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    \4\ Commentary .02 to NYSE Arca Equities Rule 8.200 applies to 
Trust Issued Receipts that invest in ``Financial Instruments.'' The 
term ``Financial Instruments,'' as defined in Commentary .02(b)(4) 
to NYSE Arca Equities Rule 8.200, means any combination of 
investments, including cash; securities; options on securities and 
indices; futures contracts; options on futures contracts; forward 
contracts; equity caps, collars and floors; and swap agreements.
    \5\ Standard & Poor's Financial Services LLC is the index 
sponsor with respect to the Indexes.
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    ProShare Capital Management LLC, a Maryland limited liability 
company, serves as the Sponsor of the Trust and is a commodity pool 
operator and commodity trading advisor.\6\ Brown Brothers Harriman & 
Co. serves as the administrator (``Administrator''), custodian and 
transfer agent of the Funds and their respective Shares. SEI 
Investments Distribution Co. serves as distributor of the Shares. 
Wilmington Trust Company, a Delaware banking corporation, is the sole 
trustee of the Trust.
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    \6\ The Funds have filed a Registration Statement on Form S-3 
under the Securities Act of 1933, dated November 5, 2010 (File No. 
333-163511) (``Registration Statement'').
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    If a Fund is successful in meeting its objective, its value (before 
fees and expenses) should gain approximately as much on a percentage 
basis as the level of its corresponding Index when it rises. 
Conversely, its value (before fees and expenses) should lose 
approximately as much on a percentage basis as the level of its 
corresponding Index when it declines. Each Fund will acquire exposure 
through VIX futures contracts traded on the CBOE Futures Exchange 
(``CFE'') (``VIX Futures Contracts''), such that each Fund has exposure 
intended to approximate the benchmark at the time of the net asset 
value (``NAV'') calculation.
    Each Fund will not be actively managed by traditional methods, 
which typically involve effecting changes in the composition of a 
portfolio on the basis of judgments relating to economic, financial, 
and market considerations with a view toward obtaining positive results 
under all market conditions. Rather, the Sponsor will seek to cause the 
NAV to track the performance of an Index, even during periods in which 
that benchmark is flat or moving in a manner which causes the NAV of a 
Fund to decline.
    The Indexes act as a measure of volatility as reflected by the 
price of certain VIX Futures Contracts (``Index Components''), with the 
price of each VIX Futures Contract reflecting the market's expectation 
of future volatility. Each Index seeks to reflect the returns that are 
potentially available from holding an unleveraged long position in 
certain VIX Futures Contracts. Unlike the Indexes, the VIX, which is 
not a benchmark for either Fund, is calculated based on the prices of 
put and call options on the S&P 500, which are traded on the CBOE.
    The S&P 500 VIX Short-Term Futures Index employs rules for 
selecting the Index Components and a formula to calculate a level for 
the Index from the prices of these components. Specifically, the Index 
Components represent the prices of the two near-term VIX futures 
months, replicating a position that rolls the nearest month VIX Futures 
Contract to the next month VIX Futures Contract on a daily basis in 
equal fractional amounts. This results in a constant weighted average 
maturity of one month. The roll period begins on the Tuesday prior to 
the monthly CFE VIX Futures Contracts settlement date and runs through 
the Tuesday prior to the subsequent month's CFE VIX Futures Contract 
settlement date.
    The S&P 500 VIX Mid-Term Futures Index also employs rules for 
selecting the Index Components and a formula to calculate the level of 
the Index from the prices of these components. Specifically, the Index 
Components represent the prices for four contract months of VIX Futures 
Contracts, representing a market-based estimation of constant maturity, 
five-month forward implied VIX values. The S&P 500 VIX Mid-Term Futures 
Index measures the return from a rolling long position in the fourth, 
fifth, sixth, and seventh month VIX Futures Contracts, and rolls 
continuously throughout each month while maintaining positions in the 
fifth and sixth month contracts. This results in a constant weighted 
average maturity of five months.
    Additional information regarding the Funds and the Shares, the 
Indexes and calculation of Index values, investment strategies, risks, 
creation and redemption procedures, fees, portfolio holdings and 
disclosure policies, distributions and taxes, availability of 
information, trading rules and halts, and surveillance procedures, 
among other things, can be found in the Registration Statement and in 
the Notice, as applicable.\7\
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    \7\ See Notice and Registration Statement, supra notes 3 and 6.
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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 \8\ and the rules and regulations thereunder applicable to a 
national securities exchange.\9\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\10\ 
which requires, among other things, that the Exchange's rules be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Commission notes that the Shares must comply with 
the requirements of NYSE Arca Equities Rule 8.200, Commentary .02 to be 
listed and traded on the Exchange.
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    \8\ 15 U.S.C. 78f.
    \9\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \10\ 17 U.S.C. 78f(b)(5).
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    The Commission finds that the proposal to list and trade the Shares 
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\11\ which sets forth Congress' finding that it is in the

[[Page 201]]

public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities. Quotation and last-sale 
information regarding the Shares will be disseminated through the 
facilities of the Consolidated Tape Association. The level of each 
Index will be published at least every 15 seconds both in real-time 
from 9:30 a.m. to 4:15 p.m. Eastern Time and at the close of trading on 
each Business Day \12\ by Bloomberg L.P. and Reuters.\13\ The closing 
prices and settlement prices of the Index Components are available from 
the Web sites of the CFE, automated quotation systems, published or 
other public sources, and on-line information services such as 
Bloomberg or Reuters. The specific contract specifications for the 
component futures underlying the Indexes are also available on those 
Web sites, as well as on other financial informational sources. The CFE 
also provides delayed futures information on current and past trading 
sessions and market news free of charge on its Web site. In addition, 
the Funds will provide Web site disclosure of portfolio holdings daily 
and will include, as applicable, the notional value (in U.S. dollars) 
of VIX Futures Contracts and characteristics of such instruments and 
cash equivalents, and amount of cash held in the portfolio of the 
Funds. Further, NYSE Arca will calculate and disseminate every 15 
seconds throughout the trading day an updated Indicative Optimized 
Portfolio Value (``IOPV''), which is an indicator of the value of the 
VIX Futures Contracts and cash and/or cash equivalents less liabilities 
of a Fund.\14\ The NAV for the Funds' Shares will be calculated by the 
Administrator once a day,\15\ and the Exchange will make available on 
its Web site daily trading volume of the Shares, closing prices of the 
Shares, and number of Shares outstanding.
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    \11\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \12\ A ``Business Day'' means any day other than a day when any 
of the NYSE, the NYSE Arca, the CBOE, or the CFE or other exchange 
material to the valuation or operation of the Funds, or the 
calculation of the VIX, options contracts underlying the VIX, VIX 
Futures Contracts or the Indexes is closed for regular trading.
    \13\ Complete real-time data for component futures underlying 
the Indexes is available by subscription from Reuters and Bloomberg. 
In addition, the Funds' Web site at http://www.proshares.com will 
display the end of day closing Index levels and NAV.
    \14\ The IOPV is published on NYSE Arca's Web site and is 
available through on-line information services such as Bloomberg and 
Reuters.
    \15\ Each Fund's NAV will be calculated at 4:15 p.m. Eastern 
Time.
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    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Commission notes that the Web site disclosure of the 
portfolio composition of the Funds will occur at the same time as the 
disclosure by the Funds of the portfolio composition to Authorized 
Participants so that all market participants are provided portfolio 
composition information at the same time. In addition, if the Exchange 
becomes aware that the NAV with respect to the Shares is not 
disseminated to all market participants at the same time, the Exchange 
will halt trading in the Shares until such time as the NAV is available 
to all market participants. Further, the Exchange may halt trading 
during the day in which an interruption to the dissemination to the 
IOPV, the value of the Index, the VIX, or the value of the underlying 
VIX Futures Contracts occurs. If such interruption persists past the 
trading day in which it occurred, the Exchange will halt trading no 
later than the beginning of the trading day following the 
interruption.\16\ Trading in the Shares will be subject to NYSE Arca 
Equities Rule 8.200, Commentary .02(e), which sets forth certain 
restrictions on ETP Holders acting as registered Market Makers in Trust 
Issued Receipts to facilitate surveillance. The Exchange represents 
that Standard & Poor's Financial Services LLC, the index sponsor with 
respect to the Indexes, has implemented procedures designed to prevent 
the use and dissemination of material, non-public information regarding 
the Indexes.
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    \16\ 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; or (2) 
whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.
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    The Exchange has represented that the Shares are deemed to be 
equity securities subject to the Exchange's existing rules governing 
the trading of equity securities. In support of this proposal, the 
Exchange has made representations, including:
    (1) The Funds will meet the initial and continued listing 
requirements applicable to Trust Issued Receipts in NYSE Arca Equities 
Rule 8.200 and Commentary .02 thereto.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) The Exchange's surveillance procedures are adequate to properly 
monitor Exchange trading of the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable Federal 
securities laws.
    (4) Prior to the commencement of trading, the Exchange will inform 
its ETP Holders in an Information Bulletin of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss the following: (a) 
The risks involved in trading the Shares during the Opening and Late 
Trading Sessions when an updated IOPV will not be calculated or 
publicly disseminated; (b) the procedures for purchases and redemptions 
of Shares in Creation Baskets and Redemption Baskets (and that Shares 
are not individually redeemable); (c) NYSE Arca Equities Rule 9.2(a), 
which imposes a duty of due diligence on its ETP Holders to learn the 
essential facts relating to every customer prior to trading the Shares; 
(d) the requirement that ETP Holders deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (e) trading information.
    (5) The Shares must be in compliance with NYSE Arca Equities Rule 
5.3 and Rule 10A-3 under the Act.\17\
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    \17\ 17 CFR 240.10A-3.
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    (6) A minimum of 100,000 Shares of each of the Funds will be 
outstanding as of the start of trading on the Exchange.

This approval order is based on the Exchange's representations.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \18\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \18\ 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,\19\ that the proposed rule change (SR-NYSEArca-2010-101), be, and 
it hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-32984 Filed 12-30-10; 8:45 am]
BILLING CODE 8011-01-P