Document ID: SEC-2018-1686-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2018-10-31T04:00Z

[Federal Register Volume 83, Number 211 (Wednesday, October 31, 2018)]
[Notices]
[Pages 54793-54796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23730]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84486; File No. SR-NYSEArca-2018-75]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change Regarding Certain Investments of the PGIM Ultra 
Short Bond ETF

October 25, 2018.
    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 October 12, 2018, 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 and II 
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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes certain changes regarding investments of the 
PGIM Ultra Short Bond ETF (the ``Fund''), a series of PGIM ETF Trust 
(the ``Trust''), and shares of which are currently listed and traded on 
the Exchange under NYSE Arca Rule 8.600-E (``Managed Fund Shares''). 
The proposed change is available on the Exchange's website 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, 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
    The Exchange proposes certain changes, described below under 
``Application of Generic Listing Requirements,'' regarding investments 
of the Fund. The shares (``Shares'') of the Fund are currently listed 
and traded on the Exchange under Commentary .01 to NYSE Arca Rule 
8.600-E,\4\ which provides generic criteria applicable to the listing 
and trading of Managed Fund Shares.\5\ The Commission has previously 
approved a proposed rule change regarding certain changes that would 
result in the portfolio for the Fund not meeting all of the ``generic'' 
listing requirements of Commentary .01 to NYSE Arca Rule 8.600-E 
applicable to the listing of Managed Fund Shares.\6\
---------------------------------------------------------------------------

    \4\ Shares of the Fund commenced trading on the Exchange on 
April 10, 2018 pursuant to Commentary .01 to NYSE Arca Rule 8.600-E.
    \5\ A Managed Fund Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (the ``1940 Act'') organized 
as an open-end investment company or similar entity that invests in 
a portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Investment Company Units, 
listed and traded on the Exchange under NYSE Arca Rule 5.2-E(j)(3), 
seeks to provide investment results that correspond generally to the 
price and yield performance of a specific foreign or domestic stock 
index, fixed income securities index or combination thereof.
    \6\ See Amendment No. 1 to SR-NYSEArca-2018-15, available at 
https://www.sec.gov/comments/sr-nysearca-2018-15/nysearca201815-3510337-162292.pdf (``Prior Amendment''); Securities Exchange Act 
Release No. 83319 (May 24, 2018), 83 FR 25097 (May 31, 2018) (SR-
NYSEArca-2018-15), (Order Approving a Proposed Rule Change, as 
Modified by Amendment No. 1 Thereto, to Continue Listing and Trading 
Shares of the PGIM Ultra Short Bond ETF Under NYSE Arca Rule 8.600-
E) (``Approval Order'' and, together with the Prior Amendment, the 
``Prior Releases''). The Prior Releases stated that the Fund's 
portfolio would meet all requirements of Commentary .01 to NYSE Arca 
Rule 8.600-E except for those set forth in Commentary .01(a)(1), 
Commentary .01(b)(4) and Commentary .01(b)(5).
---------------------------------------------------------------------------

    PGIM Investments LLC (the ``Adviser'') is the investment adviser 
for the Fund. PGIM Fixed Income (the ``Subadviser''), a unit of PGIM, 
Inc., is the subadviser to the Fund. The Adviser and the Subadviser are 
indirect wholly-owned subsidiaries of Prudential Financial, Inc.\7\
---------------------------------------------------------------------------

    \7\ The Trust is registered under the 1940 Act. On March 26, 
2018, the Trust filed with the Commission Pre-Effective Amendment 
No. 1 to the Trust's registration statement on Form N-1A under the 
Securities Act of 1933 (15 U.S.C. 77a) (``Securities Act''), and 
under the 1940 Act relating to the Fund (File Nos. 333-222469 and 
811-23324) (``Registration Statement''). The Trust will file an 
amendment to the Registration Statement as necessary to conform to 
the representations in this filing. The description of the operation 
of the Trust and the Fund herein is based, in part, on the 
Registration Statement. In addition, the Commission has issued an 
order granting certain exemptive relief to the Trust under the1940 
Act. See Investment Company Act Release No. 31095 (June 24, 2014) 
(File No. 812-14267).
---------------------------------------------------------------------------

    As stated in the Prior Releases, the Fund may invest in derivatives 
to (i) provide exposure to the ``Principal Investment Instruments'' (as 
defined in the Prior Releases), and (ii) enhance returns, manage 
portfolio duration, or manage the risk of securities price 
fluctuations. Derivatives that the Fund may enter into include only: 
Over-the-counter (``OTC'') deliverable and non-deliverable foreign 
exchange forward contracts; listed futures contracts on one

[[Page 54794]]

or more Principal Investment Instruments securities (including Treasury 
securities and foreign government securities), indices relating to one 
or more Principal Investment Instruments, interest rates, financial 
rates and currencies; listed or OTC options (including puts or calls) 
or swaptions (i.e., options to enter into a swap) on one or more 
Principal Investment Instruments, indices relating to one or more 
Principal Investment Instruments, interest rates, financial rates, 
currencies and futures contracts on one or more Principal Investment 
Instruments; and listed or OTC swaps (including total return swaps) on 
securities, indices relating to one or more Principal Investment 
Instruments, interest rates, financial rates, currencies and debt and 
credit default swaps on single names, baskets and indices on one or 
more Principal Investment Instruments (both as protection seller and as 
protection buyer).\8\
---------------------------------------------------------------------------

    \8\ Because the markets for the Principal Investment 
Instruments, or the Principal Investment Instruments themselves, may 
be unavailable or cost prohibitive as compared to derivative 
instruments, suitable derivative transactions may be an efficient 
alternative for the Fund to obtain the desired asset exposure to 
Principal Investment Instruments.
---------------------------------------------------------------------------

    Investments in derivative instruments will be made in accordance 
with the 1940 Act and consistent with the Fund's investment objective 
and policies.

Application of Generic Listing Requirements

    The Exchange proposes that up to 50% of the Fund's assets 
(calculated as the aggregate gross notional value) may be invested in 
OTC derivatives, including forwards, OTC options and OTC swaps, that 
are used to reduce currency, interest rate, credit or duration risk 
arising from the Fund's investments (that is, ``hedge''). The Fund's 
investments in OTC derivatives, other than OTC derivatives used to 
hedge the Fund's portfolio against currency, interest rate, credit or 
duration risk will be limited to 20% of the assets in the Fund's 
portfolio, calculated as the aggregate gross notional value of such OTC 
derivatives.
    The Exchange is submitting this proposed rule change because the 
change described in the preceding paragraph would not conform to the 
Exchange's representations regarding the Fund's portfolio in the Prior 
Amendment. In the Prior Amendment, the Exchange stated that, other than 
Commentary .01(a)(1), Commentary .01(b)(4) and Commentary .01(b)(5), 
the Shares of the Fund will conform to the initial and continued 
listing criteria under NYSE Arca Rule 8.600-E. However, the proposed 
change described in the preceding paragraph would not meet the 
requirements set forth in Commentary .01(e).\9\ Specifically, the 
aggregate gross notional value of the Fund's investments in OTC 
derivatives may exceed 20% of Fund assets, calculated as the aggregate 
gross notional value of such OTC derivatives.
---------------------------------------------------------------------------

    \9\ Commentary .01(e) to NYSE Arca Rule 8.600-E provides that a 
portfolio may hold OTC derivatives, including forwards, options and 
swaps on commodities, currencies and financial instruments (e.g., 
stocks, fixed income, interest rates, and volatility) or a basket or 
index of any of the foregoing; however, on both an initial and 
continuing basis, no more than 20% of the assets in the portfolio 
may be invested in OTC derivatives. For purposes of calculating this 
limitation, a portfolio's investment in OTC derivatives will be 
calculated as the aggregate gross notional value of the OTC 
derivatives.
---------------------------------------------------------------------------

    The Adviser and Subadviser believe that it is important to provide 
the Fund with additional flexibility to manage risk associated with its 
investments. Depending on market conditions, it may be critical that 
the Fund be able to utilize available OTC derivatives for this purpose 
to attempt to reduce impact of currency, interest rate, credit or 
duration fluctuations on Fund assets. OTC derivatives provide the Fund 
with additional flexibility as well as a more precise means to 
effectively attempt to reduce currency, interest rate, credit or 
duration fluctuations on Fund assets. Generally, OTC derivatives can be 
customized to a greater degree than exchange-traded derivatives and can 
provide a better hedge on Fund assets as well as allow for more control 
over the duration of the hedge which can also mitigate trading costs. 
Therefore, the Exchange believes it is appropriate to apply a limit of 
up to 50% of the Fund's assets to the Fund's investments in OTC 
derivatives (calculated as the aggregate gross notional value of such 
OTC derivatives), including forwards, options and swaps, that are used 
for hedging purposes, as described above.\10\
---------------------------------------------------------------------------

    \10\ The Commission has previously approved an exception from 
requirements set forth in Commentary .01(e) relating to investments 
in OTC derivatives similar to those proposed with respect to the 
Fund in Securities Exchange Act Release No. 80657 (May 11, 2017), 82 
FR 22702 (May 17, 2017) (SR-NYSEArca-2017-09) (Notice of Filing of 
Amendment No. 2 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 2, Regarding 
Investments of the Janus Short Duration Income ETF Listed Under NYSE 
Arca Equities Rule 8.600). See also, Securities Exchange Act Release 
No. 84047 (September 6, 2018), 83 FR 46200 (September 12, 2018) (SR-
NASDAQ-2017-128) (Notice of Filing of Amendment No. 3 and Order 
Granting Accelerated Approval of a Proposed Rule Change, as Modified 
by Amendment No. 3, to List and Trade Shares of the Western Asset 
Total Return ETF), in which the Nasdaq Stock Market LLC proposed 
that there would be no limit on the fund's investments in Interest 
Rate and Currency Derivatives, and that the aggregate weight of all 
OTC Derivatives other than Interest Rate and Currency Derivatives 
will not exceed 10% of the fund's assets).
---------------------------------------------------------------------------

    The Adviser and Subadviser represent that deviations from the 
generic requirements are necessary for the Fund to achieve its 
investment objective in a manner that is cost-effective and that 
maximizes investors' returns because OTC derivatives generally provide 
the Fund with more flexibility to negotiate the exact exposure and 
duration that the Fund requires, and minimize trading costs because OTC 
derivatives are not subject to costs of rolling that are associated 
with listed derivatives. Further, the proposed alternative requirements 
are narrowly tailored to allow the Fund to achieve its investment 
objective in manner that is consistent with the principles of Section 
6(b)(5) of the Act. As a result, it is in the public interest to 
approve listing and trading of Shares of the Fund on the Exchange 
pursuant to the requirements set forth herein.
    Because the Fund, in furtherance of its investment objective, may 
invest a substantial percentage of its investments in Principal 
Investment Instruments with a maturity of one year or more, the 20% 
limit in Commentary .01(e) to Rule 8.600 could result in the Fund being 
unable to fully pursue its investment objective while attempting to 
sufficiently mitigate investment risks. The inability of the Fund to 
adequately hedge its holdings would effectively limit the Fund's 
ability to invest in certain instruments, or could expose the Fund to 
additional investment risk. For example, if the Fund's assets (on a 
gross notional value basis) were $100 million and no listed derivative 
were suitable to hedge the Fund's risk, under the generic listing 
criteria, the Fund would be limited to holding up to $20 million gross 
notional value in OTC derivatives ($100 million * 20%). Accordingly, 
the maximum amount the Fund would be able to invest in Principal 
Investment Instruments with a maturity of one year or more while 
remaining adequately hedged would be $20 million. The Fund then would 
hold $60 million in assets that could not be hedged, other than with 
listed derivatives, which, as noted above, might not be sufficiently 
tailored to the specific instruments to be hedged.
    In addition, by applying the 20% limitation in Commentary .01(e) to 
Rule 8.600, the Fund would be less able to protect its holdings from 
more than one risk simultaneously. For example, if the Fund's assets 
(on a gross notional basis) were $100 million and the Fund held $20 
million in Principal Investment Instruments with a maturity of one year

[[Page 54795]]

or more with two types of risks (e.g., duration and credit risk) which 
could not be hedged using listed derivatives, the Fund would be faced 
with the choice of either holding $20 million aggregate gross notional 
value in OTC derivatives to mitigate one of the risks while passing the 
other risk to its shareholders, or, for example, holding $10 million 
aggregate gross notional value in OTC derivatives on each of the risks 
while passing the remaining portion of each risk to the Fund's 
shareholders.
    The Exchange accordingly believes that it is appropriate and in the 
public interest to approve continued listing and trading of Shares of 
the Fund on the Exchange notwithstanding that the Fund would not meet 
the requirements of Commentary .01(e) to Rule 8.600-E. The Exchange 
notes that, other than Commentary .01(e) and, as described in the Prior 
Releases, with the exception of the requirements of Commentary 
.01(a)(1), Commentary .01(b)(4) and Commentary .01(b)(5), the Shares of 
the Fund will conform to the initial and continued listing criteria 
under NYSE Arca Rule 8.600-E.
    The Adviser and Subadviser represent that the proposed change 
described above is consistent with the Fund's investment objective, and 
will further assist the Adviser and Subadviser to achieve such 
investment objective. Except for the changes noted above, all other 
representations made in the Prior Releases remain unchanged. All terms 
referenced but not defined in this proposed rule change are defined in 
the Prior Releases.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) of the Act 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.
    The Exchange believes that it is appropriate and in the public 
interest to allow the Fund, for hedging purposes only, to exceed the 
20% limit in Commentary .01(e) to Rule 8.600 of portfolio assets that 
may be invested in OTC derivatives to a maximum of 50% of Fund assets 
(calculated as the gross notional value). As noted above, the Adviser 
and Subadviser believe that it is in the best interests of the Fund's 
shareholders for the Fund to be allowed to reduce the currency, 
interest rate, credit or duration risk arising from the Fund's 
investments using the most efficient financial instruments. While 
certain risks can be hedged via listed derivatives, OTC derivatives 
(such as forwards, options and swaps) can be customized to hedge 
against precise risks. Accordingly, the Adviser and Subadviser believe 
that OTC derivatives may frequently be a more efficient hedging vehicle 
than listed derivatives. Depending on market conditions, it may be 
critical that the Fund be able to utilize available OTC derivatives for 
this purpose to attempt to reduce impact of currency, interest rate, 
credit or duration fluctuations on Fund assets. Therefore, the Exchange 
believes that increasing the percentage limit in Commentary .01(e), as 
described above, to the Fund's investments in OTC derivatives, 
including forwards, options and swaps, that are used specifically for 
hedging purposes would help protect investors and the public interest.
    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 in that it will facilitate the continued listing and 
trading of an actively-managed exchange-traded product that, through 
permitted use of an increased level of OTC derivatives above that 
currently permitted by the generic listing requirements of Commentary 
.01 to NYSE Arca Rule 8.600-E, will enhance competition among market 
participants, to the benefit of investors and the marketplace.

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 purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate a change to the Fund's investments 
similar to investments of another actively managed ETF, shares of which 
have been approved for Exchange listing and trading,\11\ that 
principally holds fixed income securities, and that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace.
---------------------------------------------------------------------------

    \11\ See note 10, supra.
---------------------------------------------------------------------------

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 within such longer period 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-2018-75 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-2018-75. 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 website (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 website 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

[[Page 54796]]

inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2018-75, and should 
be submitted on or before November 21, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-23730 Filed 10-30-18; 8:45 am]
 BILLING CODE 8011-01-P