Document ID: SEC-2017-0731-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2017-05-08T04:00Z

[Federal Register Volume 82, Number 87 (Monday, May 8, 2017)]
[Notices]
[Pages 21443-21446]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09196]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80579; File No. SR-NYSEArca-2016-120]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a 
Proposed Rule Change, as Modified by Amendment No. 3, To List and Trade 
Shares of the ForceShares Daily 4X US Market Futures Long Fund and 
ForceShares Daily 4X US Market Futures Short Fund Under Commentary .02 
to NYSE Arca Equities Rule 8.200

May 2, 2017.

I. Introduction

    On October 17, 2016, NYSE Arca, Inc. (``NYSE Arca'' or 
``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 
ForceShares Daily 4X US Market Futures Long Fund (``Fund'' or ``Long 
Fund'') and ForceShares Daily 4X US Market Futures Short Fund (``Fund'' 
or ``Short Fund'' and, together with the Long Fund, the ``Funds'') 
under Commentary .02 to NYSE Arca Equities Rule 8.200. The proposed 
rule change was published for comment in the Federal Register on 
November 4, 2016.\3\ On December 14, 2016, pursuant to Section 19(b)(2) 
of the Act,\4\ the Commission designated a longer period within which 
to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On December 22, 2016, the Exchange filed 
Amendment No. 1 to the proposed rule change, which replaced and 
superseded the proposed rule change as originally filed. On February 1, 
2017, the Commission instituted proceedings to determine whether to 
approve or disapprove the proposed rule change.\6\ On February 15, 
2017, the Exchange filed Amendment No. 2 to the proposed rule change, 
which replaced and superseded the proposed rule change as modified by 
Amendment No. 1. On April 20, 2017, the Exchange filed Amendment No. 3 
to the proposed rule change, which replaced and superseded the proposed 
rule change as modified by Amendment No. 2.\7\ The Commission received 
no comments on the proposed rule change. This order approves the 
proposed rule change, as modified by Amendment No. 3.
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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. 79201 (October 31, 
2016), 81 FR 76977.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 79550, 81 FR 92892 
(December 20, 2016). The Commission designated February 2, 2017 as 
the date by which it shall approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.
    \6\ See Securities Exchange Act Release No. 79914, 82 FR 9625 
(February 7, 2017).
    \7\ In Amendment No. 3, the Exchange: (1) Clarified the 
permissible investments of the Funds; (2) clarified the prices that 
will be used to calculate the net asset value (``NAV'') for each 
Fund; (3) stated that the indicative fund value (``IFV'') will be 
calculated and disseminated throughout the Exchange Core Trading 
Session; (4) amended and clarified the description of the creation 
and redemption process for the Shares; (5) added a discussion 
regarding the impact on the arbitrage mechanism as a result of the 
use of derivatives; (6) amended and supplemented the description of 
the information that will be provided to ETP Holders through the 
Information Bulletin; (7) provided information regarding the 
obligations of ETP Holders to follow FINRA guidance relating to 
increased sales practice and customer margin requirements applicable 
to inverse, leveraged, and inverse leveraged securities; and (8) 
made various technical changes. Amendment No. 3 is not subject to 
notice and comment because it does not materially alter the 
substance of the proposed rule change or raise unique or novel 
regulatory issues. All of the amendments to the proposed rule change 
are available at: https://www.sec.gov/comments/sr-nysearca-2016-120/nysearca2016120.shtml.

II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 3 \8\
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    \8\ The Commission notes that additional information regarding 
the Trust (defined below), the Funds, their investments, and the 
Shares, including investment strategies, risks, creation and 
redemption procedures, fees, portfolio holdings disclosure policies, 
and taxes, among other information, can be found in Amendment No. 3, 
supra note 7, and the Registration Statement, infra note 9.

    The Exchange proposes to list and trade the Shares under Commentary 
.02 to NYSE Arca Equities Rule 8.200, which governs the listing and 
trading of Trust Issued Receipts on the Exchange. Each Fund is a 
commodity pool that is a series of the ForceShares Trust 
(``Trust'').\9\ ForceShares LLC will be the sponsor of the Funds 
(``Sponsor''). ALPS Distributors, Inc. will be the marketing agent for 
the Shares. U.S. Bank National Association will be the Funds' custodian 
(``Custodian''). The Custodian will also be the registrar and transfer 
agent for the Shares.
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    \9\ The Trust is registered under the Securities Act of 1933. On 
September 30, 2016, the Trust filed with the Commission a 
registration statement on Form S-1 under the Securities Act of 1933 
relating to the Funds (File No. 333-213911) (``Registration 
Statement'').
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    The Long Fund's primary investment objective is to seek daily 
investment results, before fees and expenses, that correspond to 
approximately four times (400%) the daily performance of the

[[Page 21444]]

closing settlement price for lead month (i.e., the ``near month'' or 
next-to-expire) Standard & Poor's 500 Stock Price Index Futures 
contracts (``Big S&P Contracts'') that are traded on the Chicago 
Mercantile Exchange (``CME''). This closing settlement price is 
referred to as the ``Benchmark.''\10\ The Short Fund's primary 
investment objective is to seek daily investment results, before fees 
and expenses, that correspond to approximately four times the inverse 
(-400%) of the daily performance of the Benchmark. Each Fund will not 
seek to achieve its primary investment objective over a period of time 
greater than a single day.\11\
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    \10\ The design of the Funds' Benchmark is such that it will 
change four times per year in connection with the expiration of the 
lead month Big S&P Contracts, and each Fund's positions in S&P 
Interests (defined below) will be rolled on a regular basis in order 
to track the changing nature of the Benchmark.
    \11\ The Exchange states that the return of each Fund for 
periods longer than a single day will be the result of each day's 
returns compounded over the period, which will very likely differ 
from four times the total performance, in the case of the Long Fund, 
or four times the inverse of the total performance, in the case of 
the Short Fund, of the Benchmark over the same period.
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    Under normal market conditions, each Fund will seek to achieve its 
primary investment objective primarily by investing in Big S&P 
Contracts. Each Fund will also invest in E-Mini S&P 500 Futures 
contracts (``E-Minis'' and, together with Big S&P Contracts, ``Primary 
S&P Interests'') to seek to achieve its primary investment objective 
where position limits prevent further purchases of Big S&P Contracts. 
Each Fund expects to apply approximately 10-25% of its portfolio toward 
obtaining exposure to futures contracts, all of which will be lead 
month or deferred month Primary S&P Interests. Subsequently, each Fund 
may also invest in swap agreements (cleared and over-the-counter) 
referencing Primary S&P Interests or the S&P 500 Index, and over-the-
counter forward contracts referencing Primary S&P Interests (``Other 
S&P Interests'' and, together with Primary S&P Interests, ``S&P 
Interests'').\12\ Each Fund may invest in Other S&P Interests in an 
amount up to 25% of its net assets.
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    \12\ The Sponsor will assess or review, as appropriate, the 
creditworthiness of each potential or existing counterparty to an 
over-the-counter contract.
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    Each Fund may acquire or dispose of Stop Options, which will be 
options on Primary S&P Interests, in pursuing its secondary investment 
objective of recouping a small amount of a Fund's losses from an 
extreme, short term movement in the Benchmark.\13\ Stop Options are 
expected to average less than approximately 5% of each Fund's 
portfolio.
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    \13\ The Long Fund will hold put options, and the Short Fund 
will hold call options, with respect to all or substantially all of 
its S&P Interests with strike prices at approximately 75%, in the 
case of the Long Fund, or 125%, in the case of the Short Fund, of 
the value of the applicable underlying S&P Interest as of the end of 
the preceding business day. These Stop Options will serve primarily 
to (a) prevent the Fund's NAV from going to zero in the event of a 
25% adverse move in the Benchmark, and (b) recoup a small portion of 
substantial losses of a Fund that may result from large movements in 
the Benchmark.
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    On a day-to-day basis, each Fund will invest the remainder of its 
assets in money market funds, depository accounts with institutions 
with high quality credit ratings, or short-term debt instruments that 
have terms-to-maturity of less than 397 days and exhibit high quality 
credit profiles, including U.S. government securities and repurchase 
agreements (collectively, ``Cash Equivalents''). Cash Equivalents are 
expected to comprise approximately 70-85% of each Fund's portfolio.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 3, is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\14\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment No. 3, is consistent 
with Section 6(b)(5) of the Act,\15\ which requires, among other 
things, that the Exchange's rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to 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.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission also 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,\16\ which sets forth Congress's finding that it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities.
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    \16\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    Quotation and last-sale information for the Shares will be 
disseminated through the facilities of the Consolidated Tape 
Association (``CTA''). The indicative fund value (``IFV'') will be 
disseminated every 15 seconds during the Exchange's Core Trading 
Session.\17\ The Exchange will make available on its Web site daily 
trading volume, closing prices, and the NAV of the Shares.\18\ The 
Exchange will also disseminate on a daily basis via the CTA information 
with respect to the NAV and Shares outstanding. Intraday and closing 
price information from brokers and dealers or independent pricing 
services, among other sources, will be available for S&P Interests, 
Stop Options, and Cash Equivalents. The Benchmark will be disseminated 
by one or more major market data vendors every 15 seconds during the 
NYSE Arca Core Trading Session.
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    \17\ The Exchange will disseminate the IFV through the 
facilities of the CTA high speed line. In addition, the IFV will be 
published on the Exchange's Web site and will be available through 
on-line information services.
    \18\ Each Fund's NAV will be calculated as of the earlier of 
4:00 p.m. E.T. or the close of the Exchange each day. The NAV for a 
particular trading day will be released after 4:15 p.m. E.T. The NAV 
for the Funds will be disseminated daily to all market participants 
at the same time.
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    On a daily basis, the Sponsor will disclose on the Funds' Web site 
the following information regarding each portfolio holding, as 
applicable to the type of holding: Ticker symbol, CUSIP number or other 
identifier, if any; a description of the holding (including the type of 
holding, such as the type of swap); the identity of the security, index 
or other asset or instrument underlying the holding, if any; for 
options, the option strike price; quantity held (as measured by, for 
example, par value, notional value or number of shares, contracts or 
units); maturity date, if any; market value of the holding; and the 
percentage weighting of the holding in a Fund's portfolio.\19\ The 
Funds' Web site will also include the prospectus, data relating to the 
NAV, and other applicable quantitative information for each Fund.
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    \19\ The disclosure of the Funds' portfolio composition on the 
Funds' Web site will occur at the same time as the disclosure by the 
Sponsor of the portfolio composition to Authorized Purchasers so 
that all market participants are provided portfolio composition 
information at the same time.
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    The Commission also believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. If the Exchange becomes aware that the NAV with respect to the 
Shares is not disseminated to all market participants at the same time, 
it will halt trading in

[[Page 21445]]

the Shares until such time as the NAV is available to all market 
participants. Trading in the Shares will also be subject to NYSE Arca 
Equities Rule 7.12, which sets forth circumstances under which trading 
in the Shares may be halted. In addition, trading may be halted because 
of market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable.\20\ Moreover, the Exchange may 
halt trading during the day in which an interruption to the 
dissemination of the IFV or the value of the underlying futures 
contracts occurs. If the interruption to the dissemination of the IFV 
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. 
The Exchange represents that it has a general policy prohibiting the 
distribution of material, non-public information by its employees.
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    \20\ 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 represents that it 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. 
In support of this proposal, the Exchange has made the following 
representations:
    (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) 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, and 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.\21\
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    \21\ The Exchange states that FINRA conducts cross-market 
surveillances on behalf of the Exchange pursuant to a regulatory 
services agreement, and that the Exchange is responsible for FINRA's 
performance under this regulatory services agreement.
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    (4) The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares, Primary S&P 
Interests, and options on futures with other markets or other entities 
that are members of the Intermarket Surveillance Group (``ISG''), and 
the Exchange or FINRA, on behalf of the Exchange, or both, may obtain 
trading information regarding trading in such securities and financial 
instruments from such markets or entities. In addition, the Exchange 
may obtain information regarding trading in such securities and 
financial instruments from markets or other entities that are members 
of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement (``CSSA'').
    (5) Not more than 10% of the net assets of a Fund in the aggregate 
invested in futures contracts or exchange-traded options contracts 
shall consist of futures contracts or exchange-traded options contracts 
whose principal market is not a member of ISG or is a market with which 
the Exchange does not have a CSSA.
    (6) 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 IFV 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) how information regarding the IFV and the portfolio is 
disseminated; (e) applicable prospectus delivery requirements; and (f) 
trading information.
    (7) Prior to the commencement of trading, the Exchange will inform 
its ETP Holders of the suitability requirements of NYSE Arca Equities 
Rule 9.2(a) in an Information Bulletin. Specifically, ETP Holders will 
be reminded in the Information Bulletin that, in recommending 
transactions in the Shares, they must have a reasonable basis to 
believe that (a) the recommendation is suitable for a customer given 
reasonable inquiry concerning the customer's investment objectives, 
financial situation, needs, and any other information known by such ETP 
Holder, and (b) the customer can evaluate the special characteristics, 
and is able to bear the financial risks, of an investment in the 
Shares. In connection with the suitability obligation, the Information 
Bulletin will also provide that ETP Holders must make reasonable 
efforts to obtain the following information: (a) The customer's 
financial status; (b) the customer's tax status; (c) the customer's 
investment objectives; and (d) such other information used or 
considered to be reasonable by such ETP Holder or registered 
representative in making recommendations to the customer.
    (8) A minimum of 100,000 Shares for each Fund will be outstanding 
at the start of trading on the Exchange.
    The Exchange represents that all statements and representations 
made in the filing regarding (a) the description of the portfolios; (b) 
limitations on portfolio holdings or reference assets; or (c) the 
applicability of Exchange listing rules specified in the rule filing 
constitute continued listing requirements for listing the Shares on the 
Exchange. In addition, the issuer has represented to the Exchange that 
it will advise the Exchange of any failure by a Fund to comply with the 
continued listing requirements and, pursuant to its obligations under 
Section 19(g)(1) of the Act, the Exchange will monitor \22\ for 
compliance with the continued listing requirements. If a Fund is not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under NYSE Arca Equities Rule 5.5(m).
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    \22\ The Commission notes that certain proposals for the listing 
and trading of exchange-traded products include a representation 
that the exchange will ``surveil'' for compliance with the continued 
listing requirements. See, e.g., Securities Exchange Act Release No. 
77499 (April 1, 2016), 81 FR 20428, 20432 (April 7, 2016) (SR-BATS-
2016-04). In the context of this representation, it is the 
Commission's view that ``monitor'' and ``surveil'' both mean ongoing 
oversight of compliance with the continued listing requirements. 
Therefore, the Commission does not view ``monitor'' as a more or 
less stringent obligation than ``surveil'' with respect to the 
continued listing requirements.
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    This approval order is based on all of the Exchange's statements 
and representations, including those set forth above and in Amendment 
No. 3.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 3, is consistent with Section 
6(b)(5) of the Act \23\ and Section 11A(a)(1)(C)(iii) of the Act \24\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.
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    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78k-1(a)(1)(C)(iii).

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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-NYSEArca-2016-120), as 
modified by Amendment No. 3, be, and it hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09196 Filed 5-5-17; 8:45 am]
BILLING CODE 8011-01-P