Document ID: SEC-2017-0363-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Bats BZX Exchange, Inc.
Posted Date: 2017-03-07T05:00Z

[Federal Register Volume 82, Number 43 (Tuesday, March 7, 2017)]
[Notices]
[Pages 12860-12862]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-04351]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80136; File No. SR-BatsBZX-2017-14]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To List and Trade Shares of the 
Amplify YieldShares Oil Hedged MLP Fund, a Series of the Amplify ETF 
Trust, Under Rule 14.11(i), Managed Fund Shares

March 1, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 17, 2017, Bats BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. 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\ 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 filed a proposal to list and trade shares of the 
Amplify YieldShares Oil Hedged MLP Fund (the ``Fund''), a series of the 
Amplify ETF Trust (the ``Trust''), under Rule 14.11(i) (``Managed Fund 
Shares''). The shares of the Fund are referred to herein as the 
``Shares.''
    The text of the proposed rule change is available at the Exchange's 
Web site at www.bats.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 Exchange 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 these 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade the Shares under Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange.\3\ The Fund will be an actively managed exchange-
traded fund that invests in equity securities of energy master limited 
partnerships (``MLPs'') and will selectively hedge these positions to 
limit the correlation of its performance to the price of West Texas 
Intermediate Crude Oil (``WTI Crude Oil'').\4\ The Exchange submits 
this proposal in order to allow the Fund to hold listed derivatives, in 
particular WTI Crude Oil futures, in a manner that does not comply with 
Rule 14.11(i)(4)(C)(iv)(b).\5\
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    \3\ The Commission originally approved BZX Rule 14.11(i) in 
Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 
55148 (September 6, 2011) (SR-BATS-2011-018) and subsequently 
approved generic listing standards for Managed Fund Shares under 
Rule 14.11(i) in Securities Exchange Act Release No. 78396 (July 22, 
2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100).
    \4\ The Trust plans to list the Fund on the Exchange pursuant to 
the generic listing rules for Managed Fund Shares under Rule 
14.11(i)(4)(C) (the ``Generic Listing Rules'') regardless of the 
timing and posture of this proposal. As noted further below, the 
Fund can achieve its investment objective by meeting the Generic 
Listing Rules, but the Exchange is submitting this proposal in order 
to allow the Fund to hold listed derivatives in a manner that does 
not comply with Rule 14.11(i)(4)(C).
    \5\ Rule 14.11(i)(4)(C)(iv)(b) provides that ``the aggregate 
gross notional value of listed derivatives based on any five or 
fewer underlying reference assets shall not exceed 65% of the weight 
of the portfolio (including gross notional exposures), and the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset shall not exceed 30% of the weight 
of the portfolio (including gross notional exposures).''
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    The Shares are offered by the Trust, which was established as a 
Massachusetts business trust on January 6, 2015.\6\ The Trust is 
registered with the Commission as an investment company and has filed a 
registration statement on Form N-1A (``Registration Statement'') with 
the Commission.\7\ The Fund is a series of the Trust.
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    \6\ The Commission has issued an order, upon which the Trust may 
rely, granting certain exemptive relief under the 1940 Act. See 
Investment Company Act Release No. 31582 (April 28, 2015) (File No. 
812-14423) (the ``Exemptive Relief'').
    \7\ See Post-Effective Amendment No. 27 to Registration 
Statement on Form N-1A for the Trust, dated January 6, 2017 (File 
Nos. 333-207937 and 811-23108). The descriptions of the Fund and the 
Shares contained herein are based, in part, on information in the 
Registration Statement.
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    The Commodity Futures Trading Commission (``CFTC'') has recently 
adopted substantial amendments to CFTC Rule 4.5 relating to the 
permissible exemptions and conditions for reliance on exemptions from 
registration as a commodity pool operator. The Trust, on behalf of the 
Fund, has filed a notice of eligibility for exclusion from the 
definition of the term ``commodity pool operator'' in accordance with 
CFTC Rule 4.5, and, therefore, the Fund would not be subject to 
registration or regulation as a commodity pool operator under the 
Commodity Exchange Act (``CEA'') to the extent that it complies with 
the requirements of the rule. To the extent that the Fund makes 
investments regulated by the CFTC, it will do so in accordance with 
Rule 4.5 under the CEA.
    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code of 1986, as 
amended.

[[Page 12861]]

Amplify YieldShares Oil Hedged MLP Fund
    According to the Registration Statement, the Fund will be an 
actively managed exchange-traded fund that invests in equity securities 
of MLPs and will selectively hedge these positions to limit the 
correlation of its performance to the price of WTI Crude Oil. WTI Crude 
Oil, also known as Texas light sweet, is a grade of crude oil used as a 
benchmark in oil futures contracts pricing. The Fund will use a 
benchmark, the Oil Hedged MLP Index (the ``Benchmark''), which is 
developed, maintained and sponsored by ETP Ventures LLC. The Fund will 
seek to exceed the performance of the Benchmark by actively selecting 
investments for the Fund from the underlying components of the 
Benchmark. The Fund is not an index tracking exchange-traded fund and 
is not required to invest in all of the components of the Benchmark. 
However, the Fund will generally seek to hold similar instruments to 
those included in the Benchmark with investments in MLPs and short 
exposure oil futures contracts included in the Benchmark.
    In order to achieve its investment objective, under Normal Market 
Conditions,\8\ the Fund will invest at least 80% of its total assets in 
equity securities of MLPs.\9\ As noted above, the Fund plans to hedge 
its positions in MLPs in order to limit the correlation of its 
performance to the price of WTI Crude Oil and achieves this hedge by 
holding listed and/or OTC derivative instruments in a manner that 
complies with Rule 14.11(i)(4)(C)(4)(iv) and (v). Rule 
14.11(i)(4)(C)(4)(iv) prevents the Fund from holding listed derivatives 
based on any single underlying reference asset in excess of 30% of the 
weight of its portfolio (including gross notional exposures). The 
Exchange is proposing to allow the Fund to hold up to 50% of the weight 
of its portfolio (including gross notional exposures) in WTI Crude Oil 
futures contracts traded on the New York Mercantile Exchange and ICE 
Futures Europe (``WTI Crude Oil Futures''). Allowing the Fund to hold a 
greater portion of its portfolio in WTI Crude Oil Futures would 
mitigate the Fund's dependency on holding OTC instruments, which would 
reduce the Fund's operational burden by allowing the Fund to primarily 
use listed futures contracts to achieve its investment objective and 
would further reduce counter-party risk associated with holding OTC 
instruments. The Fund would continue to meet all other requirements of 
the Generic Listing Rules and other applicable requirements for Managed 
Fund Shares under Rule 14.11(i) including Rule 14.11(i)(4)(C)(iv)(a), 
because all of the futures contracts held by the Fund will trade on 
markets that are a member of Intermarket Surveillance Group (``ISG'') 
or affiliated with a member of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.\10\
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    \8\ As defined in Rule 14.11(i)(3)(E), the term ``Normal Market 
Conditions'' includes, but is not limited to, the absence of trading 
halts in the applicable financial markets generally; operational 
issues causing dissemination of inaccurate market information or 
system failures; or force majeure type events such as natural or 
man-made disaster, act of God, armed conflict, act of terrorism, 
riot or labor disruption, or any similar intervening circumstance.
    \9\ To qualify as an MLP, and not to be taxed as a corporation, 
a partnership must receive at least 90% of its income from 
qualifying sources as set forth in Section 7704(d) of the Internal 
Revenue Code of 1986, as amended (the ``Code''). These qualifying 
sources include natural resource-based activities such as the 
exploration, development, mining, production, processing, refining, 
transportation, storage and marketing of mineral or natural 
resources.
    \10\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com. 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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    The Exchange notes that the Fund may also hold certain fixed income 
securities and cash and cash equivalents in compliance with Rules 
14.11(i)(4)(C)(ii) and (iii) in order to collateralize its derivatives 
positions.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \11\ in general and Section 6(b)(5) of the Act \12\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest in that the Shares will meet 
each of the initial and continued listing criteria in BZX Rule 14.11(i) 
with the exception Rule 14.11(i)(4)(C)(iv)(b), which requires that the 
aggregate gross notional value of listed derivatives based on any five 
or fewer underlying reference assets shall not exceed 65% of the weight 
of the portfolio (including gross notional exposures), and the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset shall not exceed 30% of the weight of 
the portfolio (including gross notional exposures). The Exchange 
believes that the liquidity in the WTI Crude Oil Futures markets 
mitigates the concerns that Rule 14.11(i)(4)(C)(iv)(b) is intended to 
address and that such liquidity would prevent the Shares from being 
susceptible to manipulation.\13\ Further, allowing the Fund to hold a 
greater portion of its portfolio in WTI Crude Oil Futures would 
mitigate the Fund's dependency on holding OTC instruments, which would 
reduce the Fund's operational burden by allowing the Fund to primarily 
use listed futures contracts to achieve its investment objective and 
would further reduce counter-party risk associated with holding OTC 
instruments. The Exchange believes that its surveillance procedures are 
adequate to properly monitor the trading of the Shares on the Exchange 
during all trading sessions and to deter and detect violations of 
Exchange rules and the applicable federal securities laws. All of the 
futures contracts held by the Fund will trade on markets that are a 
member of ISG or affiliated with a member of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing agreement. 
The Exchange may obtain information regarding trading in the Shares and 
the underlying futures contracts held by the Fund via the ISG from 
other exchanges who are members or affiliates of the ISG or with which 
the Exchange has entered into a comprehensive surveillance sharing 
agreement.\14\ The Exchange further notes that the Fund will continue 
to meet and be subject to all other requirements of the Generic Listing 
Rules and other applicable continued listing requirements for Managed 
Fund

[[Page 12862]]

Shares under Rule 14.11(i), including those requirements regarding the 
Disclosed Portfolio,\15\ Intraday Indicative Value,\16\ suspension of 
trading or removal,\17\ trading halts,\18\ disclosure,\19\ and 
firewalls.\20\
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    \13\ As of 1/31/2017 the average daily contract volume over the 
last year was 558,353, 307,289 and 110,208 respectively for the 
front, second and third month contracts. For the third month 
contract, at today's price levels, that equates to an average daily 
traded notional of approximately $5.9 billion.
    \14\ See note 9, supra. [sic]
    \15\ See Rule 14.11(i)(4)(B)(i).
    \16\ See Rule 14.11(i)(4)(B)(ii).
    \17\ See Rule 14.11(i)(4)(B)(iii).
    \18\ See Rule 14.11(i)(4)(B)(iv).
    \19\ See Rule 14.11(i)(6).
    \20\ See Rule 14.11(i)(7).
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    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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, rather will facilitate the listing and trading of 
an additional actively-managed exchange-traded product that will 
enhance competition among both market participants and listing venues, 
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

    The Exchange has neither solicited nor received written comments on 
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 of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such 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 rule-comments@sec.gov. Please include 
File Number SR-BatsBZX-2017-14 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-BatsBZX-2017-14. 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-BatsBZX-2017-14 and should 
be submitted on or before March 28, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-04351 Filed 3-6-17; 8:45 am]
 BILLING CODE 8011-01-P